Real Time Economics (WSJ Blog) – Number of the Week: Finance’s Share of Economy Continues to Grow

8.4%: The financial sector’s share of gross domestic product. Given everything that’s happened, surely the financial sector’s role in the economy is smaller now than it was before the recession hit, right? Wrong. Combined, finance and insurance firms accounted for 8.4% of U.S. gross domestic product last year, according to the Commerce Department, eclipsing the peak it hit in 2006. In 1950, the financial sector accounted for just 2.8% of GDP…New research by New York University economist Thomas Philippon suggests that the financial sector is enormously outsized. He finds that, despite all the advances in information technology since the 1980s, the financial sector has become steadily less efficient: All that it has been gained from increased computing power and vast communications networks has been taken away, and then some, “by increases in trading activities whose social value is difficult to assess.” The upshot, says Mr. Philippon, is that finance’s share of GDP really ought to be about two percentage points lower than it is now. The industry’s travails may be far from over.

Comment

Below are a couple of our favorite charts that help put the financial sector into perspective.

Click to enlarge:

˜˜˜

Source: Arbor Research

Category: Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

16 Responses to “Measuring The Financial Sector”

  1. GeorgeBurnsWasRight says:

    I suspect I’m among the many investors who no longer trust the profit numbers from the financial sector. I’m an accountant, and I can’t make sense of their annual reports.

  2. Marc P says:

    Does the chart include credit card and debit card fees? A friend the other day reminded me of the toll these take from business, especially smaller business. A lumberyard owner might make 6% or 8% profit on gross revenues, and banks will take 2-3% just for processing the transactions. I marveled at the thought: the entrepreneur raises capital, buys or leases property, buys inventory, stocks the shelves, creates jobs, works 80 hour weeks, and a third of his profit goes just to the payment system. Plus the banks make money on the lumberyard’s line of credit for inventory. The banks might make more than the entrepreneur. What a tax on the economy.

    Does anyone know the total of credit and debit card fees in the US?

  3. wally says:

    Survivor’s bias maybe? Having wrecked other people’s industries, the financial sector gains percentage because it is still standing, thanks to tribute paid by the rest of us.

  4. Moe says:

    As I read the headline the scene from Blazing Saddles came to mind where Cleavon (Bart) says:
    “Excuse me while I whip this out..”

  5. Yossarian says:

    If the REAL growth rate of an economy is 3% then profits from the process of facilitating real growth by connecting capital with entrepreneurs- generally, finance- should be less than 3% and substantially so. It seems to me that 1% would be a healthy level of financial sector profits as % of GDP. Perhaps that number should be higher as US financial sector profits also reflect international financial operations in regions where US financial firms are particularly advanced relative to the local competition. That being said, the dirty little secret that isn’t so much of a secret anymore is that much of modern finance is more parasitic in nature than value-enhancing. It seems that we are seeing the violent end to that phenomena play out over many years, past and present.

  6. Bill Wilson says:

    I wonder much of the Finance Sector can actually be viewed as an export? If we are exporting financial services to the rest of the world that makes that 8.4% a healthier number.

  7. Moss says:

    I wonder what they would be if the ‘assets’ they hold were marked to reality and not maturity. They are mostly parasites, gaming the tax system, the exchanges, the regulatory system, their customers, and the taxpayers all the while being aided and abetted by Congress and the Fed. The real Troika.

  8. Through the Looking Glass says:

    When you own the government, whats a little game of “Heads we win -Tails you lose ” between friends?

    You people all have your “vote” to keep you in line.. that “empowers” you you have the “control”.

    We in the banking services are here working for you.

  9. AHodge says:

    travails far from over”?
    certainly hope so more share of pie for the rest of us..

  10. Frilton Miedman says:

    Through the Looking Glass Says:
    December 20th, 2011 at 1:12 pm
    “…You people all have your “vote” to keep you in line.. that “empowers” you you have the “control”….”

    Yes, we go through the motions to choose between a handful of candidates that are preselected by the highet bidder.

    Buddy Roemer, case in point. more qualified than the combined total of GOP candidates, more experienced, owns a bank that’s successful without involving itself in the MBS scam….actually engages in real world “job creation”.

    His campaign platform – campaign finance reform – go figure, he hasn’t even been invited to a single debate to date.

  11. DrungoHazewood says:

    Frilton

    Can’t have that nutjob running around. And how many ‘debates’ have there been? 150? What are they debating by now? Cooking recipes? All that dancing around what really matters must be exhausting.

  12. Lyle says:

    Let me ask a question based upon Mark P’ s comment: How much does handling cash cost, you have to count it multiple times, secure it with a drop safe, possibly suffer armed robbery of the cash, as well as take it to the bank. The credit card machine, gives you a daily log of what business you have done, and eliminates all the costs of cash. Or how much do checks cost, I see that beyond some number a check can cost .29 from bank fees, plus you do need to prepare a deposit slip, and of course there are bounced check fees and the like. Unfortunately I have not seen a direct comparison of the costs of the various payment methods, but one does need to recall that cash and checks are not free of cost either.

  13. 873450 says:

    50 years from now economists, professors and historians will be scratching their heads looking at those graphs and asking, “WTF did that den of thieves think they were doing?”

  14. Greg0658 says:

    good one Lyle .. when was the last bank transfer / pirate ship sunk at sea with a pile of gold, silver & coins … I do recall a briefcase big with bearer bonds caught in an Italy airport a few years back

  15. Al Bergette says:

    When I hear the 1% pay 40% of the taxes, I’m skeptical. I just can’t buy that if for the most part the 1% is taxed 15% on the money that isn’t taxed thru accounting fuckery they pay that much more then the 99%.

    Even if it’s true, the 1% has made sooooo much money and are so obscenely compensated where they can destroy markets & companies and walk away with millions, the 15% they are taxed dwarfs the tax contribution of the 99%. No, they ain’t payin there fair share. That’s not new in the history of the world but the amouts they are making thru TBTF and monopolization is.

  16. escapeartist says:

    Al,

    Sometimes I think we’ve thrown so many numbers around for so long they’re starting to lose meaning. 1%, 99%, 15%. . . makes a head spin.

    They may well pay 40% of the taxes (if we restrict the discussion to federal income taxes). But then the talking heads on the designer news programs will tell you that 47% pay no taxes at all. So 52% pays 60% of the taxes, if I can do remedial math in my head correctly. . .

    Of course, this neglects an examination of state and local taxes, sales taxes, FICA, Soc Sec, Medicare taxes. Everyone who is not paid under the table pays those, no?

    Be skeptical: the argument disguises the larger truth that, restricting the discussion to federal income taxes 47% of our nations taxpayers are either unemployed or so under-employed that they have fallen off the tax tables. This is the problem state and local governments are facing with their own budget crises. . . tax revenues that have dropped so low that they can no longer bridge the shortfall.

    This is part of the European problem as well: government backstop of debt driven by future estimations based on stale data.

    Come to think of it, wasn’t this also a problem in the mortgage securitization industry? Risk modeling using historic 30 year mortgage foreclosure rate data?

    Past performance and future results, indeed.