How We Measure Financial Productivity Growth

Paul Krugman is rethinking everything he thought he knew about American productivity growth:

In their paper, van Ark etc. identify the service sector as the main source of America's pullaway -- which is the standard argument. Within services, roughly half they attribute to distribution -- roughly speaking, the Wal-Mart effect. OK.

But the other half is a surge in US productivity in financial and business services, not matched in Europe. And all I can say is, whoa!

First of all, how do we even measure output of financial services? If I read this BEA paper correctly, we more or less use "checks cashed" -- or, more broadly, the number of transactions undertaken. This may be the best we can do, but it's a pretty weak measure of actual work done by the financial system.

And given recent events, are we even sure that the expansion of the financial system was doing anything productive at all?

Now, he's the Nobelist, but is it not a huge leap to see productivity growth in "finance and business services" and conclude that it was all financial tomfoolery? Finance and business services includes a lot of the activities that have undergone a revolutionary change thanks to the increasing power and ubiquity of the desktop computer, and to improved communications technology. How much of this is structured financial products and how much is Excel and email? (And yes, diffusion of those technologies in European offices did lag).

Comments

[Moon Kil Woong:]

Actually the financial service grew under the assumption they were moderating risk. If it is a banks job to accumulate assets and distribute them to a broad base to moderate risk, for all their past profit, they were doing about the worst job of it in history.

Now you get 1.5% interest in savings and they loan out at 6%. And you wonder why the economy is in thew dumps. To reflect the strength and benefit of financial institutions it is easiest to see not how low rates go but how wide the spread between those that deposit and those that borrow. In that respect, every Fed has failed for the last 10 years including the current administration.

Banks are turning financing, the grease that oils the system, and are turning it rubbery and viscous. It is strange no one bothers to complain that holders of money aren't getting a fair shake for loaning it nor are borrowers which make up about 98% of the population.

Apr 17 08:02 AM

[Leftfield:]

Wall St: Heads they win, tails we lose. Then, mark-to-myth GDP accounting. There's that old standby, hedonic gdp accounting.

Service economy: Don't know where the money goes, but, wife works, so fast food and barber haircuts add to gdp. Daycare adds. That couple, magnified by tens of millions, is worse off than couples normally used to be, but add much more to gdp.

We've long served the government that was supposed to serve us, now it's Wall St. For that we get tomfoolery and skullduggery.

Apr 17 10:18 AM

[Chris White:]

Financial sector productivity: 1) increase in the rate of increase of total financial turn-over per total man-hours in the business, 2) increase in rate of increase of fees and bonusses per unit increase in total turnover per manhour

Apr 17 11:52 AM