Starving the Squid


J. Bradford DeLong in Project Syndicate:

Back in 2011, I noted that finance and insurance in the United States accounted for 2.8% of GDP in 1950 compared to 8.4% of GDP three years after the worst financial crisis in almost 80 years. “[I]f the US were getting good value from the extra…$750 billion diverted annually from paying people who make directly useful goods and provide directly useful services, it would be obvious in the statistics.”

Such a massive diversion of resources “away from goods and services directly useful this year,” I argued, “is a good bargain only if it boosts overall annual economic growth by 0.3% – or 6% per 25-year generation.” In other words, it is a good bargain only if it collectively has a substantial amount of what financiers call “alpha.”

That had not happened, so I asked why so much financial skill and enterprise had not yielded “obvious economic dividends.” The reason, I proposed, was that “[t]here 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.”

Over the past year and a half, in the wake of Thomas Philippon and Ariell Reshef’s estimate that 2% of US GDP has been wasted in the pointless hypertrophy of the financial sector, evidence that America’s financial system is less a device for efficiently sharing risk and more a device for separating rich people from their money – a Las Vegas without the glitz – has mounted.