Would America grow faster if its financial sector were smaller?
Yes, says Charles R. Morris, author of a new history called "Dawn of Innovation: The First American Industrial Revolution", which argues that the post-Civil War era that made Wall Street our financial capital was actually stealing value created by the pre-war growth of manufacturing.
Writing at Reuters, he argues that the same thing has been happening in our time. Financial manipulation is grabbing the value of America's post-war production boom and merely moving it into different hands, rather than spurring growth. At the same time companies with less-advanced financial sectors, like China, are booming.
The tipping point is reached when private credit reaches 90-100% of gross domestic product, he writes. Even four years after our financial crisis, the current ratio for the U.S. is 193%, according to Trading Economics. Morris' analysis indicates we're ripe for a fall.
Data from the Bank for International Settlements, Morris writes, indicates "an outsized financial sector can actually reduce economic growth," he writes, by putting talent behind desks that would be better put into factories and laboratories. An emphasis on finance also blurs ethical lines, he claims, eventually wiping them out altogether.
Morris also argues in Commonweal that the real problem with the current recovery is that only wealthy people engaged in finance have recovered, that manufacturing remains stagnant. In fact, since the bottom of this recession, at the end of 2009, about a half-million manufacturing jobs have been added, according to the Bureau of Labor Statistics.
That may even understate the case. The move of 3-D printing and the rise of the branded drugs sector has turned more factory jobs into computer software jobs. The number of software developers continues to rise faster than other work categories. Perhaps the definition of "making" and "manufacturing" need to change.
What Morris is arguing for is a full implementation of Dodd-Frank that will compress the size of the biggest banks and the size of the overall financial sector, alongside more investment in industries that actually make things, whether real or virtual goods.
Wall Street will argue that their work is essential to providing manufacturers the capital they need to do that hiring, that they are on the side of growth, and that what's good for Wall Street is good for America.
But let's make this personal. All of us at Seeking Alpha are engaged in the financial sector, or pretend to be so engaged. How much value are we adding to the economy as a result, against the value we may add from "real" jobs we do now or did before retirement?
Regardless of how you feel about Morris' thesis, it would seem that his experiment is being run, in that the heart of the financial industry is growing smaller. New York State authorities report securities industry employment is down, their contribution to the tax base is down, and that they expect this to continue.
And if, at the bottom of the recession in early 2009, you put $1,000 each into shares of Goldman Sachs (GS), JP Morgan Chase (JPM), and Ford (F), which investment would be doing better? Ford, whose shares have more than quadrupled in value since that time.