The rise of the unproductive economy


The Great Recession of 2008 and 2009 started with a bottoming out of the stock market, which eventually led to the loss of millions of jobs, and trillions of dollars of wealth throughout the country. This devastating crash was the risky gambling brought by a severely under-regulated financial system, and the entire country suffered as a consequence.

Although it lost about 50 percent of its value during the recession, the S&P 500 rose 166 percent during Obama’s presidency. Since Donald Trump’s election on November 8, the Dow Jones has had a record rise of almost 3,000 points, topping the 21,000 mark for the first time in history. The U.S. stock market gained $1.4 trillion alone between the election and inauguration day.

These figures represent a trend in the U.S. economy for decades: incomes for the average American remains stagnant, while the financial industry continues to , even as it crashes the entire economy every now and then.

In a perfectly functioning economy, this growth of the financial sector should be correlated with growth in a wide array of industries, and thus a rise in wages for the average worker. In fact, every robust economy requires a prosperous financial industry. This is because the intended purpose of the industry is to collect savings and funnel them toward productive investments.

However, today’s financial sector has a much different objective: quick gains from gambling and inflating asset prices within the financial industry itself, in areas such as real estate and equities. Today, only 15 percent of the money flowing from banks is used for business investment. This money makes its way into the real economy where most of the country operates, while the other 85 percent circulates through a closed financial loop that only benefits a small percentage of the country.

In other words, our financial sector has become mostly unproductive. Indeed, this phenomenon has been broadly on display in the past decade especially. The average productivity growth, which measures the growth in output per worker, has been hovering close to zero percent for the last few years.

It’s very hard to get meaningful productivity growth without significant capital investment in business. Without it, most productivity growth just comes from employees working harder, which can’t happen with much frequency when wages have been stagnant for forty years.

This vicious cycle is bound to continue until the financial industry is more strongly regulated, like it was during the days of Glass-Steagall. After all, why would we expect bankers to make the productive and less risky investment that the economy needs them to make when their counterparts are raking in millions on risky and unproductive investments? The banker bucking the trend would be fired immediately.

Indeed, the financial industry as a whole is very much incentivized to think in the short-term and not worry about the risks entailed. As we saw in the Great Recession, when the banks go broke due to their risky investments going south, they get bailed out. No one goes to jail, and maybe one bank goes under (in 2008, it was Lehman Brothers), but overall no one in the financial sector gets hurt for very long.

This sweet deal for the unproductive economy has a lot of social costs. As the financial industry has grown beyond its societally optimal size, it has begun to attract an ever-growing number of very smart and educated workers. Instead of using their innovative skills to make advances in productive industry or scientific breakthroughs, these workers have taken their talents to the unproductive side of the economy, and have made a ton of money doing so. In 2010, economists Nouriel Roubini and Stephen Mihm noted “in a curious paradox, the United States now has too many financial engineers and not enough medical or computer engineers” in their book Crisis Economics.

These factors have led to a financial sector that is so big it has become unhealthy for the real economy. Indeed, finance now creates only four percent of American jobs, but rakes in a quarter of all corporate profits. This kind of unproductive growth is unhealthy and chokes out other, more productive industries.

According to research from economists Stephen Cecchetti and Enisse Kharroubi, “when the financial sector grows more quickly, productivity tends to grow disproportionately slower in…industries with higher research and development intensity.” Unfortunately, these are the industries that tend to produce big technological breakthroughs and maintain the kind of productivity growth that capitalist economies rely on.

Reining in the financial industry and rerouting capital into productive investment for the real economy is imperative to achieving the goals of full employment, rising wages and growth that reaches all Americans, not just a few at the top.


Matt Heffler is Collegian columnist and can be reached at

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