Bruce Bartlett, in the awesomely named but unrelated Economix blog over at the Times, has a piece that makes a point that I’ve been thinking for years: Finance is a drag on the economy.
This goes against all sorts of economic orthodoxy; in this view, if we’re paying banks, stockbrokers, and real estate agents more than we used to, it *must* be because they’re providing us more services we want. They must be finding us more appropriate housing, giving us better insurance products, and investing our savings more alertly. Otherwise, we wouldn’t pay them so much, would we? Thus, if FIRE (finance, insurance, and real estate) has risen from 4% to 8% of GDP, that’s pure gain, just as it would be if, say, computer sales rose in the same proportion. More financial services for all! Isn’t that great?
Well, no. This is one of those assumptions that starts to dissolve as soon as you state it clearly. Nobody *wants* investment analysis, or real estate advice. We want homes, and incomes from our savings, and loans for our businesses, but we don’t want the services that bring them to us any more than we want the trucks that bring us our Cheetos; the trucking is a cost of getting what we want (and, unlike finance, is treated as such in GDP). If the cost of transportation doubled–especially if that happened because a few giant trucking companies just started raising their prices and fuck you, which is exactly what’s happened with banks–that wouldn’t be seen as a good thing.
Another way to look at it–we’re very used to thinking of health care as a drag on the economy. I don’t agree with that, but it does raise the question: In what possible universe is health care a drag and finance not?
Anyway, Bartlett’s column is worth reading. I don’t always agree with the guy, but when he’s right he’s right.
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