My previous argument in the Economist debate was that the 3% of GDP that was made up of financial services in 1965 was clearly sufficient to the task, the proof being that the decade was a strong candidate for the greatest economic decade of the 20th century. We should be suspicious, therefore, of the benefits derived from the extra 4.5% of the pie that went to pay for financial services by 2007, as the financial services share of GDP expanded to a remarkable 7.5%. This extra 4.5% would seem to be without material value except to the recipients. Yet it is a form of tax on the remaining real economy and should reduce by 4.5% a year its ability to save and invest, both of which did slow down. This, in turn, should eventually reduce the growth rate of the non-financial sector, which it indeed did: from 3.5% a year before 1965, this growth rate slowed to 2.4% between 1980 and 2007, even before the crisis.
Wednesday, July 21, 2010
on restructuring
Credit Writedowns has some extremely important comments by financier Jeremy Grantham on the financailization of the American economy. Restructuring the American economy begins with shrinking the financial sector by half at least. Mr. Grantham:
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For an interesting comparison, the Trustees of Social Security report (http://www.ssa.gov/OACT/TRSUM/index.html) that SS benefits in 2008 were 4.4% of the GDP and were projected 8.2% of the GDP by 2050 (a 3.8% increase) and then decline to 5.8% (1.4% over 2008 level) and remain about that level thereafter.
ReplyDeleteShrinking the financial services portion of the GDP to something resembling its 1965 level would nicely plug the gap.