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Research desk responds: The financialization of the economy

By Dylan Matthews

Msantow asks:

What percentage of the US economy is taken up with financial services? My sense is that it has gone from single digits in the early 80s, to somewhere between 20% and 25% presently ... but I can't for the life of me remember where I got that from.

The Bureau of Economic Analysis keeps data on the value added to the economy by each sector of the economy. While it provides breakdowns, it initially groups the financial sector along with real estate, which makes sense given the importance of mortgage lending to the financial industry. Here's the growth both in the financial sector alone and in the financial sector along with real estate, since World War II:

financial_services'_share_of_us_gdp,_1947-2009(4).png

While neither line shoots from single digits to 20-25, msantow is correct that 1980 marked a turning point. After the 1970s, in which the combined financial and real estate share hovered around 15 percent, the figure shot up until breaking 20 percent around 2000. It's also worth noting that this change is only in the combined line, while the financial sector measured alone continued growing at roughly the same pace. This is not exactly surprising, given how important mortgages and mortgage derivatives were to the rise of the financial industry in past decades, but it's still striking to see.

[I'd just add that financial-sector profits as a share of total corporate profits reached 45 percent shortly before the bust. -- Ezra]

By Ezra Klein  |  June 21, 2010; 3:31 PM ET
Categories:  Financial Regulation  
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Comments

A a few more tick marks on the graph would be helpful: I'd imagine the upswing takes flight around December 1986 (the time of the Banker's Trust [now Deutsche Bank] decision).

The fade-to-black language of a PBS Frontline broadcast [http://www.pbs.org/wgbh/pages/frontline/shows/wallstreet/weill/demise.html] goes as follows: "Just days after the administration (including the Treasury Department) agrees to support the repeal, [President Clinton's] Treasury Secretary Robert Rubin, the former co-chairman of a major Wall Street investment bank, Goldman Sachs, raises eyebrows by accepting a top job at Citigroup as Weill's chief lieutenant. [...] When Weill told Rubin he had some important news, the secretary reportedly quipped, 'You're buying the government?'"

Posted by: rmgregory | June 21, 2010 3:57 PM | Report abuse

As to the upwards inflection point in the "includes real estate" line just before 1980, I would add that it coincides with the point at which people born during the peak baby-boom years (late '50s) were graduating from college and entering their peak home buying years, which as you would expect lasted for the following two decades. Interesting how this line flattens out after 2002 despite the large volume of crap RE loans we know were being made.

Posted by: tomjf | June 21, 2010 7:58 PM | Report abuse

The best recent work on this is by Greta Krippner at the Univ. of Michgan. See:

http://tinyurl.com/273epkd

Posted by: Fanon | June 22, 2010 3:47 AM | Report abuse

Kevin Phillips has been writing about this transformation of the US economy for over a decade. The historical examples of like transfigurations suggests a future with decidedly undesirable outcomes.

Posted by: wphurley | June 22, 2010 5:54 AM | Report abuse

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