Thursday, April 5, 2012

Keeping Finance Down

The bugbear of the Great Recession is the finance industry.

No matter how bad you think the finance industry has behaved, the scale of the good it does dwarfs the damages. Unless you’re innumerate.

Finance has gone from (about) 3.8% of GDP in 1960 to 8.3% in 2009. Over that period of time, real GDP has gone from $2,828B to $12,703B (both in constant 2005 dollars).

That means that in 1960, finance was delivering value worth $107B to the economy, while in 2009 it was delivering value worth $1,054B.

That’s an improvement in value delivered of $900B every single year (yes, it was lower in past years due to compounding).

And yet, the Great Recession — at its worst in 2009 II — knocked $685B off of real GDP. Even if you account for the more dubious deviation from a trend of 0.7% per quarter, the Great Recession only lost us $1,254B.

But, if we think about the reasoning behind something like OWS, the claim is along the lines that the missing output was stolen by the financial industry. If so, they did a really lousy job of it, since taking that much value would have doubled the industries share of GDP.

The preferred form of punishment appears to be paperwork:

… The government estimates that the 849-page Dodd-Frank measure produced rules that already have imposed 53 million more hours of paperwork on the industry … [emphasis added]

Read the whole thing, entitled “Bank Balance: Regulation and Innovation” in the April 5 issue or The Wall Street Journal. This piece is more or less positively disposed to reining in this industry.

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