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Friday, December 30, 2011

Brad DeLong: America’s Financial Leviathan

Brad DeLong:

America’s Financial Leviathan, by J. Bradford DeLong, Commentary, Project Syndicate: 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. The Wall Street Journal’s Justin Lahart reports that the 2010 share was higher than the previous peak share in 2006.
Lahart goes on to say that growth in the finance-and-insurance share of the economy has “not, by and large, been a bad thing....Deploying capital to the places where it can be best used helps the economy grow...”
But ... the extra 5.6% of GDP that it is now spending on finance and insurance ... is a good bargain only if it boosts overall annual economic growth by ... 6% per 25-year generation. ... But it is not obvious that the US economy today would be 6% less productive if it had had the finance-insurance system of 1950 rather than the one that prevailed during the past 20 years.
There are five ways that an economy gains from a well-functioning finance-insurance system. ...[discussion of each]...
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. ...
Why has the devotion of a great deal of skill and enterprise to finance and insurance sector not paid obvious economic dividends? There are two sustainable ways to make money in finance: find people with risks that need to be carried and match them with people with unused risk-bearing capacity, or find people with such risks and match them with people who are clueless but who have money. Are we sure that most of the growth in finance stems from a rising share of financial professionals who undertake the former rather than the latter?

The ratings agencies are supposed to solve this problem, i.e. provide the clueless the information about risks that they need to avoid getting taken to the cleaners. We know how well that worked out.

    Posted by on Friday, December 30, 2011 at 10:03 AM in Economics, Financial System, Market Failure | Permalink  Comments (66)


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