Shrinking the Financial Sector Will Make Us All Richer

http://www.alternet.org/economy/shrinking-financial-sector-will-make-us-all-richer


If you want to know what happened to economic equality in this country, one word will explain a lot of it: financialization. That term refers to an increase in the size, scope, and power of the financial sector—the people and firms that manage money and underwrite stocks, bonds, derivatives, and other securities—relative to the rest of the economy.

The financialization revolution over the past thirty-five years has moved us toward greater inequality in three distinct ways. The first involves moving a larger share of the total national wealth into the hands of the financial sector. The second involves concentrating on activities that are of questionable value, or even detrimental to the economy as a whole. And finally, finance has increased inequality by convincing corporate executives and asset managers that corporations must be judged not by the quality of their products and workforce but by one thing only: immediate income paid to shareholders.

The financial system has grown rapidly since the early 1980s. In the 1950s, the financial sector accounted for about 3 percent of U.S. gross domestic product. Today, that figure has more than doubled, to 6.5 percent. The sector’s yearly rate of growth doubled after 1980, rising to a peak of 7.5 percent of GDP in 2006. As finance has grown in relative size it has also grown disproportionately more profitable. In 1950, financial-sector profits were about 8 percent of overall U.S. profits—meaning all the profit earned by any kind of business enterprise in the country. By the 2000s, they ranged between 20 and 40 percent. This isn’t just the decline of profits in other industries, either. Between 1980 and 2006, while GDP increased five times, financial-sector profits increased sixteen times over. While financial and nonfinancial profits grew at roughly the same rate before 1980, between 1980 and 2006 nonfinancial profits grew seven times while financial profits grew sixte en times .

This trend has continued even after the financial crisis of 2008 and subsequent financial reforms, including the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Financial profits in 2012 were 24 percent of total profits, while the financial sector’s share of GDP was 6.8 percent. These numbers are lower than the high points of the mid-2000s; but, compared to the years before 1980, they are remarkably high.