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Tuesday, September 13, 2011

High Finance Sector Profits Kill the Economy

I was rereading this post today, and came across this statement, with reference to this graph.

"The times of those last three peaks in the quarterly data are Q1-86; Q1- 91; and Q3-01"

I suddenly realized that the last two of those dates occurred along with recessions.  So, I spent more time than I want to admit trying to put recession bands on the graph, using an old version of Excel.  It's complicated as hell, and I didn't get it quite right, but here you go.

Except for the Q1-86 anomaly, every peak in the finance sector's share of total corporate profits lines up with  recession.  I've also put an exponential trend line on the graph to illustrate that the finance SERVICE sector capture has been growing faster than the growth of total corporate profits - which has also had exponential growth.  I had already noted (and since forgotten) that the major peaks (ex-'86) corresponded with recessions.   Now we can see that even minor peaks line up with rcessions, as well.

This indicates the level to which the servant has become the master.  Beyond the point of supplying necessary financing for businesses and mortgages, financial manoeuvrings - speculation in particular, and most especially so with sophisticated derivatives that nobody knows how to rationally value - become rent seeking.  This is a massive misallocation of resources, diverting capital from real investment into totally non-value-added financial tail chasing.

This has given us every recession since WW II.  The cumulative effect is the Great Stagnation.  The most recent crisis is the Great Recession.  It's not clear we can ever hope to recover.  We're screwed.


The Arthurian said...

"So, I spent more time than I want to admit trying to put recession bands on the graph"

What it's all about :)

re: the 1986 peak.
No recession in 1987, I guess, but the date does ring a bell... Something about the stock market, maybe? And Savings and Loans??

Suzan said...

I've also spent lots of time looking at the economic data.




Stone Glasgow said...

Please create a graph of historical plagues and compare them to the income of health professionals. I'm sure you will find that doctors' income rises as illnesses kill ever more people, but you are unlikely to conclude that doctors are killing people.

In the same way, it is strange to blame finance professionals because their income is correlated to recessions; perhaps they are analogous to the doctors... perhaps they are improving the lives of the innocent even as many continue to die.

Jazzbumpa said...

Stone -

Get serious. Health care professionals react to the sicknesses, they don't cause them. At least not since hey stopped using leeches.

If you paid any attention, you'd realize that when finance sector profits were a small percentage of the corporate total, the economy had high growth rates. High Finance sector profits are from rent seeking, not investment, and that is the key point. The Finance Sector is bleeding wealth out of the economy, and into the hands of, frex, hedge find managers WHO GET THEIR INCOME TAXED AT FAVORABLE CAPITAL GAINS RATES.

And it's not just the peaks. Decades of bleeding the economy have left it frail, and led to the sorry condition we're now in. Corporate profits are sky high, finance profits even more so, yet the percentage of people below the poverty level just hit a multi-decade high.

While the recessions are going on, the lives of non-financiers are not improved. Nor are they improved in the long run by finance sector profit capture. Look at wealth and income distribution, for god's sake. Your analogy is lame and poorly thought through

I have a coherent narrative, and you bring a flip comment. You are also committing one of the classic conservative fallacies - false equivalence.

And, by the way, doctors do kill people. They just have a way of burying their mistakes . . .


Stone Glasgow said...

Many industries engage themselves in rent seeking. Finance is not unique in this regard. Even doctors earn high wages because of rent seeking (AMA monopoly on licensing).

How do you know that high-finance causes recessions? You seem to assume traders are harmful (I agree that their rent seeking surely is harmful) without considering the possibility that the correlation may not indicate causation.

Professional trading is a productive activity that benefits society. Please see my blog post "Speculators are Good for Society."

Jazzbumpa said...
This comment has been removed by the author.
Jazzbumpa said...

Stone -

I tried to make it clear in the post that the finance sector serves a vital function. I've also noted (somewhere) that speculators serve a function by providing liquidity to a market. No argument there.

So, yes, some rent-seeking is necessary, because it serves as an enabler for profit seeking activities.

The problem comes when these rent-seeking activities overpower the profit-seeking activities that they are supposed to serve. In that upside down world, rent seeking bleeds the economy of its vital force. It's really not much different from taxation. Imagine a quasi-Laffer curve.

The basic rent-seeking of the finance sector is inherent in their activity, and unavoidable in any case. Not so with monopolies, cartels, artificial barriers to entry, executive compensation hundreds or thudands of times that of laborers, etc. Those forms of rent seeking do not enable any productive activity, and have no redeeming feature.

It's all about balance and proportion. Vital nutrients become poison if taken in too large a quantity. However, non-nutrient poisons are poisons regardless


Stone Glasgow said...

I agree with most of what you said. Can you elaborate on what you mean by the following:

"The basic rent-seeking of the finance sector is inherent in their activity, and unavoidable in any case."