Financialization of the economy

Financialization refers to the increase in size and importance of the financial sector relative to the overall U.S. economy. Simply put, it is the wonky term used to describe the growing scale, profitability, and influence of the financial sector over the rest of the economy. Combine it with deregulation, less antitrust enforcement, and easy monetary policy from the 1980s onward and you get financial institutions that were too big and too speculative in the years leading up to the financial crisis in 2008.

Today, Wall Street buccaneers don’t just exert great influence over the economy; they are also a major influence in politics and government policy. The financial industry spends millions annually in Washington promoting the Panglossian view that the financial markets promote economic growth and contribute to economic well-being. It would be more accurate to say they contribute to economic inequality and the decline of U.S. manufacturing.

According to data from the Center for Responsive Politics, seven banks spent over $13 million on campaign contributions in the 2018 election cycle and over $38 million on lobbying during the 2017-2018 Congress. Not surprisingly, the top five campaign donors were Bank of America, Goldman Sachs, Morgan Stanley, JPMorgan Chase, and Citigroup.

Any wonder why the Washington crowd favors Wall Street over Main Street? Only the health care industry spends more.

For many Americans, the stock market acts as a barometer for the economy. U.S. financial markets are the largest and most liquid in the world. In 2018, the finance and insurance industries (excluding real estate) represented 7.4 percent or $1.5 trillion of the U.S. gross domestic product. In 1970 the finance and insurance industries accounted for 4.2 percent of GDP, up from 2.8 percent of GDP in 1950. In contrast, manufacturing fell from 30 percent of GDP in 1950 to 11 percent in 2019.

Prior to COVID-19, finance and insurance industry profits were equal to a quarter of the profits of all other sectors combined, even though it accounted for just 4 percent of jobs. These data are evidence of the industry’s growing weight within the American economy.

The figures do not reflect the extent to which non-financial firms derive revenues from financial activities, as opposed to productive investments in real assets. For instance, prior to the 2008 market crash and meltdown, GE Capital generated about half of General Electric’s total earnings. GE became an example of the financialization of American business. In the years leading up to the financial crisis, It became one of the world’s largest non-bank financial services companies, meaning it avoided the level of regulatory scrutiny official players like Wall Street banks face. After it crashed and burned in 2008, GE Capital got a whopping $139 billion taxpayer bailout.

Another example of corporate America moving to the rhythm of Wall Street is the case of Boeing’s 787 Dreamliner aircraft, which famously encountered delays and massive cost overruns due to its incredibly complex supply chain, which involved outsourcing 70 percent of the airplane’s component parts to multiple tiers of suppliers scattered around the world. The Dreamline supply chain reflects the pressure to maximize return on net assets. and was consistent with Wall Street’s approach.

Return on net assets is a key measure financial analysts use to evaluate how effectively management is deploying assets. The goal is to make the most money with the fewest possible assets. In the end, the Dreamliner became an embarrassing failure that cost billions more than it should have. In such instances, financialization reduces the dependence of corporate America on domestic workforces, which leads to offshoring manufacturing jobs.

The financial sector has amassed great power since the 1980s and contributed to the decline of U.S. manufacturing as well as income and wealth inequality. As Supreme Court Justice Brandeis allegedly said in 1941 with great foresight: “We can have democracy in this country, or we can have great wealth concentrated in the hands of a few, but we can’t have both.”

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