It's all about the rents, part one million and twenty-one
Moving our economy into FIRE did not create lots of new high-paying middle-class jobs for the modern equivalent of past generations' engineers, technicians, and skilled blue-collar craft and assembly workers. Instead, we appear to have more-or-less doubled the profit margins and the pay of our financiers. The legions of bank clerks and back office workers did not see rapid pay increases nor achieve high incomes. It all went to the top.
Over 2004-6 fully 30% of corporate profits were in finance--a share that was double what it had been back in the 1960s. And the many of the most lucrative parts of finance were not structured as corporations: the growing fortunes of the partners in our investment firms come on top of that 30%.
When you think of it, for finance to collect 30% of corporate profits is terrifying. Finance collects savings from households and lends to younger Americans so that they can buy their houses. But mortgage finance is supposed to be [by whom? Academics?] a low-margin low-risk business, with the government providing a backstop. The interest payments on mortgages are supposed to flow through with very small subtractions to the interest earned on the savings accounts of other American households: they are not supposed to be profits.
Finance again collects savings from all over the world, underwrites the securities that corporations issue, makes them liquid, and so gives non-financial operating corporations their capital base. But it is the operating companies that make the profits. Finance is supposed to simply aggregate and slice the profits in various ways.
It is supposed to [by whom?] take a small commission as it serves as intermediary between the companies that make the money and the households that saved the capital by packaging the money flows to households in safe, convenient, and liquid forms--and keeping an eye on the managers of operating compnies as well.
But how did this provision of safety, convenience, and liquidity--which turned out, of course, to be none of the three in the fall of 2008--ever come to be valued at 30% of the total?
A question asked and not answered. (Political economists might have something to say.)
And it is not all finance. Our newly redrawn map of the U.S. economy shows another leading sector besides finance. The administration of our ill-designed [for whom?] health care system now costs us about 4% of GDP over and above the costs of administering health care in other comparable countries.
Do not get us wrong: we do not hate service industries [Then you don't work in one!]. But most service industries produce something of value in return for their profits. Health care administration simply produces denials of coverage. Finance as currently construed simply produces portfolios for individuals that involve them bearing extraordinarily large and idiosyncratic risks that they had no idea they were bearing. There are two ways to make money in health care: (i) by providing people with valuable treatments that they are willing to pay for, and (ii) by collecting insurance premiums and finding some excuse not to pay them out when people get sick. There are two ways to make money in finance: (i) to find people who are willing to bear risks that they understand, selling them risks that offer attractive risk-return tradeoffs, and collecting a commission; and (ii) by selling people risks that they don't understand. It looks to us very much as though our modern health-care administration and financial sectors are good at the second but not the first.
And so? I mean, that's it from DeLong. That's the end of the post!
No policy recommendations whatever.
And in a situation where 30% of profits go to a sector that DeLong characterizes as being completely unproductive.
So, even if Barry tacks left in 2011 - 2012, and has Elizabeth Warren -- whose focus is the "middle class," and most definitely NOT the poor, the foreclosed on, or the DISemployed -- go to work on making sure that people understand the risks, who wants to bet that this will be anything other than the most pathetic and obvious kabuki?