Delong Tip-toes Around the Rentier Issue

Via Thoma I see an article by Brad Delong that I would otherwise have missed.

Brad tells us that, "In 1950. finance and insurance in the United States accounted for 2.8% of GDP  . . .  Today, it is 8.4% of GDP, and it is not shrinking."

That is exactly a 3-fold increase, and correlates pretty well (as far as those two numbers take us) with the growth of the finance sector share of total corporate profits.  Brad references Justin Lahart of the WSJ, who opines that this has “not, by and large, been a bad thing....Deploying capital to the places where it can be best used helps the economy grow...”

Which would be true, except that it's not.  The finance sector share of profits has not been in a steady year-over-year increase.  Instead, as can be seen in the chart at my link above, it oscillated around an exponentially increasing trend line, with sequentially higher highs, and higher lows.  Notably, with only one exception (1986) every peak in finance sector grab lines up with a recession, all the way back to the start of the data set in 1947.  Given these facts, the notion that capital is being best deployed looks a lot like a god-damned lie.

Brad is more polite - and more numerical:

But if the US were getting good value from the extra 5.6% of GDP that it is now spending on finance and insurance – the extra $750 billion diverted annually from paying people who make directly useful goods and provide directly useful services – it would be obvious in the statistics. At a typical 5% annual real interest rate for risky cash flows, diverting that large a share of resources away from goods and services directly useful this year is a good bargain only if it boosts overall annual economic growth by 0.3% – or 6% per 25-year generation.

Besides which:

Finally, better finance should mean better corporate governance. Since shareholder democracy does not provide effective control over entrenched, runaway, self-indulgent management, finance has a potentially powerful role to play in ensuring that corporate managers work in the interest of shareholders. 

How well do you think that is working?

Overall, however, it remains disturbing that we do not see the obvious large benefits, at either the micro or macro level, in the US economy’s efficiency that would justify spending an extra 5.6% of GDP every year on finance and insurance. Lahart cites the conclusion of New York University’s Thomas Philippon that today’s US financial sector is outsized by two percentage points of GDP. And it is very possible that Philippon’s estimate of the size of the US financial sector’s hypertrophy is too small.

At this point Brad could have said something about the rentier activities of finance sucking the life blood from American capitalism.    But we get nothing - even a single subordinate clause - on that topic.

Despite this missed opportunity, the article is well worth reading.  Go check it out.