Wednesday, April 01, 2009

Chart of the Day

MIT prof Simon Johnson (a former IMF Chief Economist) has a forthcoming article in Atlantic magazine with this:

source: The Atlantic

Johnson says:
[E]lite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. . .

From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

The great wealth that the financial sector created and concentrated gave bankers enormous political weight—a weight not seen in the U.S. since the era of J.P. Morgan (the man).
Economist Arnold Kling at EconLog adds:
The one complaint that I would make is that Johnson focuses on examples of deregulation that enabled the financial sector to grow. I do not think those are as important as the risk-based capital regulations themselves, which took a complacent view of AAA-rated assets. I think it is important to recognize that regulation per se was as much a part of the problem as part of the solution. Having said that, Johnson's main prescription is to reduce the power of big banks, which I think is quite right.


elTaoseno said...

Since both profits and compensation approximately doubled, in lock step, what is the point aside from the fact that financial sector people acquired a great deal of money, and gave it primarily to Democrats?

Carl said...

The problem was the share of overall corporate profits derived from the financial sector (and capital gains), as opposed to activities that contribute to income (GDP).