The pig is too fat

The misallocation of resources into the disastrously inept US finance sector is chronicled in this Harvard Magazine article.  Of 6500 selected Harvard graduates from 1969-1990 22% of those graduating in 1970 were in finance 15 years later.  But 38% of those who graduated in 1990 were in finance 15 years later.  Similar changes occurred for women though absolute numbers were smaller.   

The finance sector’s contribution to the US GDP swelled from 4.4% in 1977 to 7.7%, or $950 billion, in 2005. One of every $13 dollars of US employee income now goes to people working in finance. In 2004, the combined income of the top 25 hedge-fund managers exceeded the combined income of the CEOs of all Standard & Poor’s 500 companies. The rise in finance-sector salaries has fuelled income inequality in the US.

Profits accruing to the US finance sector peaked the year before the GFC at 41% of total corporate profits in 2006.  I guess some bright-spark graduate student from the University of Chicago can provide arguments as to why this is consistent with economic efficiency.

The finance sector is intended to provide services to the production sector but as it severely damaged this sector and the household sector as a consequence of the GFC.  A sector of the economy which draws on so much US talent, which distorts the distribution of incomes in a major way towards attracting this talent and which produces poor social outcomes should be reined in.

I don’t have comparable Australian data but like all academic economists in Australia I cannot help notice the flood of students into finance degrees, the uninteresting dead-end, non-policy relevant research they do, their limited horizons and the unfortunate impact that such preferences have on so-called ‘market driven’ academic curricula.  Finance, in the context of an economics degree, is an important sub-discipline but there are socially much more important parts of economics. And the finance that is taught should improve economic efficiency not lead to exhorbitant salaries for incompetents and spivs.