The status of the financial sector in developing countries is viewed with great interest and enthusiasm in the hope of growing the economy and decreasing poverty. It is a truism that a vibrant financial sector tends to (or should) mobilize savings, facilitate payments, increase trade in goods and services and promote more efficient allocation of resources (See: ADB -Asian Development Bank--working paper series #173). It should thus be a major factor in generating a vibrant national economy. But how does it function in an advanced and well-developed economy like the US?
Now after the debacle of the 2007-2008 Great Recession, some economists question aspects of the finance sector's role in the present US economy.In a recent paper entitled:”Reassessing the impact of finance on growth”, January 2012, Stephen G. Cecchetti and Enisse Kharroubi, investigated into how expansion of the financial sector in countries contributed to economic growth. Their findings indicate that such expansion is a generally positive force,but only up to a point. After that point, a rapidly expanding financial sector becomes a drag on growth. The authors reason that an unmodulated finance sector tends to draw funds away from other industries which are dependent on funding and/or research and development investment. In addition, an engorged financial sector competes for young talent, and draws innovative people-power from other industries,increasing the economic drag effect.
Evidence for this effect is found in our own US economy today. The US financial sector has grown rapidly in the last decades to something more than 8% of GDP. Historically it hit a peak of near 6% in 1929, then this part of our economy fell precipitously to little more than 2%, in response to the Great Depression. A slow recovery occurred after WWII. In the stable and generally affluent three decades between 1950 and 1980, the financial sector stabilized at about four percent (4%) of GDP (See:Wikipedia:”Financialization”) But in the last two decades of the last century, from 1980 to 2000 and on to the present time the industry exploded, doubling in size to about 8% of GDP and has remained at that level to the present time.
Besides being a drag on the economy, a bloated financial sector tends to encourage other economic disruptions and problems such as income inequality. Joseph Stiglitz, the Nobel laureate economist and Columbia University Professor, in a June 26, 2012 Salon interview on his new book: "The Price of Income Inequality", pointed out this problem stating: "...capitalism does have a lot of strengths, including producing things that are very innovative. But what drives capitalism is the profit motive. You can profit not only by making good things, but also by exploiting people, by exploiting the environment, by doing things that are not so good..a lot of the inequalities in the United States are not the result of creative activity, but of exploitive activity. And if you look at the people at the top (this author, would add here: the one-percenters), what is so striking is that the people who’ve made the most important creative contributions are not there.....”
The expansion of the financial sector in the 1980s is directly tied to government policy and deregulation. These practices led to the growth of the financial sector and, as well another problem: income inequality. According to Stiglitz: ”The most important aspect for deregulation was in the financial sector. And that deregulation led to this over-bloated financial sector, predatory lending, abusive credit card practices and so forth. That did double function. It lead to more wealth at the top. It took away wealth and income from the bottom." Stiglitz goes on to say that the process of deregulation and expansion of the financial sector encouraged American economic inequality, and was "Not good for American economic growth.".... ”So some of the forces that gave rise to deregulation gave rise to these other activities that also gave rise to inequality”.
Thus besides being a drag on the economy our ebullient financial sector also causes undesirable and debilitating increases in economic inequality. One interesting and innovative way to help remedy these two problems, --bloated FS and economic inequality--and also solve our chronic need for deficit spending has been proposed by Dean Baker.
Baker,(a macroeconomist and co-founder of the Center For Economic Policy Research) writes in a Huffington Post piece entitled: ”A Wall Street Gambling Tax:The Remedy to Inequality" posted July 2, 2012, warns us that the insiders in Washington are plotting to make major cuts to entitlement spending immediately post-election to try and ease the nation's deficit problem on the backs of the poor. Since both parties take money from the bloated financial sector and the bloated military-industrial complex it would take real political courage to address problems in those areas, both richly deserving of a 'marine style' haircut. The Republicans will not help to ehance the revenue stream by increasing taxes on the wealthy--their client base. So it appears they have no alternative, according to Baker, to solve the deficit problem but by slashing the meager social safety net for the weak, the infirm, elderly, the powerless and least-connected by cutting medicare, medicaid, social security and other similar programs.
But Baker proposes an alternative strategy: "For the 99 percent there are much better ways of dealing with whatever deficit problems may arise down the road. Most obviously, insofar as we need more revenue we can look to tax the sort of financial speculation through which the Wall Street gang makes its fortunes. A very small tax on trades of stocks, options, credit default swaps and other derivative instruments could raise a vast amount of money."
Baker points out that rather than taxing the wealthy directly (as Obama has proposed) a tiny tax of only three tenths of one percent (0.03%) on each Wall Street trade could raise more than one-third of a trillion dollars in less than a decade. The amount raised would be ten times what the "one percenter tax" or Buffett Rule would have raised over the same time. A higher rate of one-half of one percent (0.05%) as is charged in the UK for its traders could raise in the US economy as much as $1.5 trillion over a decade. Baker calls that "real money".
Furthermore, such a tax would be borne almost exclusively by the Wall Street gamblers. It would help to modulate the growth of the financial sector and its drag on the economy as well as the problem of income inequality. It would also address the problem of a bloated financial sector which in its present state sucks people-power and investment funds away from wealth-generating, job-creating and innovative industries.
Now if Baker and others can find a similar way to trim the bloated military, perhaps this nation could return to an even keel again with a prospering middle class and increased hope for all of us.
Get the picture?
rjk
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