Wolves of Wall Street: Financialization and American Inequality

[marmar]

from Dissent magazine:


Wolves of Wall Street: Financialization and American Inequality
By Colin Gordon - April 17, 2014

This series is adapted from Growing Apart: A Political History of American Inequality, a resource developed for the Project on Inequality and the Common Good at the Institute for Policy Studies and inequality.org. It is presented in nine parts. The introduction laid out the basic dimensions of American inequality and examined some of the usual explanatory suspects. The political explanation for American inequality is developed through chapters looking in turn at labor relations, the minimum wage and labor standards, job-based benefits, social policy, taxes, financialization, executive pay, and macroeconomic policy. Previous installments in this series can be found here.

It’s no secret by now that the recent spike in American inequality, and the gains rapidly accruing to those at the upper end of the income distribution ladder, are driven in large part by “financialization”—the growing scale and profitability of the financial sector relative to the rest of the economy, and the shrinking regulation of its rules and returns. The success or failure of the financial sector has a disproportionate impact on the rest of the economy, especially when the combination of too much speculation and too little regulation starts inflating and bursting bubbles. And its returns flow almost exclusively to high earners. An overcharged finance sector, in other words, breeds inequality when it succeeds and when it fails.

A Short History of American Finance

Across the modern era, key moments of economic growth—the railroad and heavy industry development of the 1890s, the advent of electricity and automobiles in the 1920s and 1930s, and the IT boom of the 1980s—have been accompanied by parallel innovations in financial services. Each of these eras, in turn, was punctuated by a crisis in which speculation in new financial instruments, over-exuberance about their prospects, or outright chicanery turned boom into bust. The railroad boom of the nineteenth century yielded a wildly unregulated market for railroad securities and a series of market collapses. The emergence of a consumer-goods economy in the early decades of the twentieth century transformed both corporate finance and consumer credit and spilled the country into the Great Depression.

.......(snip).......

American Finance and American Inequality

The rise of the financial sector has fed inequality in a number of ways. First, the disproportionate growth of finance diverts incomes from labor (wages and salaries) to capital. Indeed, recent work by the International Labor Office suggests that financialization accounts for about half of the decline in labor’s share of national income (in the United States and elsewhere) since 1970.

But even more important than the slow siphoning off of labor’s share is the widening inequality within that share, as top earners pull away from the rest of the pack. Increased employment in finance has been accompanied by accelerating rates of compensation in the sector, from about $20,000 per year per employee (including secretaries and clerks) in 1980 to nearly $100,000 today. This is of course exaggerated at the top of the income spectrum. In 2004, by one estimate, the combined income of the top twenty-five hedge fund managers exceeded the combined income of all of the Standard and Poor top 500 CEOs. The number of Wall Street investors earning more than $100 million a year was nine times higher than the public company executives earning that amount. About 14 percent of the “1 percent” are employed in finance, a share that has doubled since 1979. ............................(more)

The complete piece is at: http://www.dissentmagazine.org/online_articles/wolves-of-wall-street-financialization-and-american-inequality