In a report currently available online and scheduled for publication in the June edition of the journal Socio-Economic Review, lead author Donald Tomaskovic-Devey, professor of sociology at UMass Amherst, Ken-Hou Lin, assistant professor at the University of Texas, and UMass doctoral candidate Nathan Meyers examine the impact on GDP growth caused by increased investment in financial instruments by non-financial firms.
“The expansion of finance has not only failed to create economic growth, but has actually been socially destructive,” Tomaskovic-Devey says of his team’s findings. “The big winners from the financialization of the productive economy have been the owners of investment capital and corporate big shots, as they have taken increasingly large slices of a shrinking pie. The big losers have been American citizens, both as employees and as taxpayers.”
The researchers explain in the report that during the post-1980 period financial investments as a share of all investments by non-finance firms grew rapidly, with instruments such as mortgage-backed securities, other corporations’ stock and other speculative investments rising to as high as 29 percent of all assets held by non-financial firms by the early 2000s. While financial assets as a share of all investments declined during the 2000s, the levels were still quite high by historical standards in 2008 when the global economy collapsed.
They discovered that this increased investment in financial instruments – with the largest companies often using debt as their source of investment capital – created a substantial drag on production in the non-finance economy. This decrease in total production led to lower total income for workers and governments.
The researchers also found no evidence to support speculation that these investments were economically profitable. In fact, the researchers found that the impact the investments had on total value added was “uniformly negative in the 1980s and 1990s.”
“There was evidence, however, that they became slightly less negative in the late 1980s,” they write. “This may have appeared to corporate executives as a marginal gain, but from the point of view of long-term economic growth, it seems to have been merely less destructive. Since Wall Street was rewarding corporations for declining employment and these strategies were economically positive for capital, the substitution of financial investments for those of production and employment were likely quite attractive for CEOs. This would be even more the case as CEO pay was increasingly tied to the price of their corporate stock instead of product market share.”
“The results in this paper lead to some pretty simple, but distressing conclusions,” the researchers summarize. “The shift from production and market share to financial and shareholder value investment strategies on ‘main-street’ has most likely reduced total economic growth in the U.S. The cost of this transition has been born largely by workers via forgone employment, wage stagnation, and by local and federal governments via forgone tax revenues. Since this has happened during a period of rapid increases in income inequality, it is safe to say that for the vast majority of the U.S. population financialization has led to lower standards of living as well as weaker state investment capacity for both the population and infrastructure than what would have been possible under a more production-focused regime.”
“The research record is now quite clear,” Tomaskovic-Devey says. “Partly to satisfy the short-term pressure of the stock market, partly to line CEO’s pockets, non-financial firms have embraced a financialized conception of the firm. This growing financialization of the U.S. economy has led to macro-economic instability, the deepest recession since the 1930s, growing inequality, lower investment in production and employment and lower economic growth in the productive economy.”
The full study, “Did financialization reduce economic growth?” can be found online here.
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