Income Dynamics, Economic Rents and the Financialization of the ...

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finance sector employees were not extended to all employees. In all four finance sector industries the post-1980 rise in industry rents went primarily to highly educated employees in managerial, professional and sales occupations. There were limited or no income benefits to lower level occupations and less educated workers. In addition, for each industry white men see income growth beyond their human capital and occupational positions in all four industries after 1980, while minority men and women and white women display flat income trajectories (analyses available upon request). Thus compared to national trends in income inequality (e.g. Morgan and McKer- row 2004) the finance sector is unusual in that there are increased earnings rents to white men, even net of their privileged occupational position. In order to gauge the aggregate income rents transferred to the finance sector during the period of financialization we explored a counterfactual analysis in which we ask what would current profit and compensation levels in the finance sector look like if their income claims and employment as a proportion of the national economy had stayed at the 1948-1980 historical levels? 20 We approach these estimates with two simple counterfactuals, both of which ask what if the regulatory institutional shifts in the finance field associated with increased concentration, 20 One can, of course, imagine much more elaborate counterfactuals. For example, if we assumed that financialization reduced real economic growth by diverting capital investment out of the real economy, than we might want to estimate how much income was lost by the rest of the economy because of financialization. On the other hand, some might argue that financialization attracted foreign investment to the US which otherwise would have gone elsewhere thus increasing aggregate income beyond what would have happened in its absence. We suspect that the truth lies closer to the former than the latter, but do not have any sound basis upon which to derive plausi- ble alternative GDP growth rates. 32
egulatory relaxation and a general belief by all actors that finance markets were smart and self- regulating had not happened? To do this we simply assume that the compensation per employee, employees as a share of total employment, and profit shares in the economy stayed at pre-1980 levels. In the first counterfactual we ask what if the longer term average income shares between 1948 and 1980 had prevailed after 1980. In the second we estimate a linear trend from 1948 to 1980 and use that trend to predict post-1980 expected income. Because compensation trends were so stable prior to 1980 there is little difference between the two estimates. Because there was already an upward slope to financial profits as a proportion of the economy before 1980, the trend counterfactual produces a somewhat smaller estimate of net profit flow into the industry as a result of financialization. Since the trends both before and after 1980 are different for each industry we estimate the counterfactuals separately for each industry and then sum to the sector level. 21 --Table 2 about here-- Table 2 displays estimates of the net additional income captured in the finance sector as profits and employee compensation since 1980. Our estimate is that financialization transferred somewhere between $4.5 and $5.1 trillion dollars in income into the finance sector between 1980 and 2008. The lion share, about 65%, of this increased income was earned by banks and bank holding companies and of that money up to 90% as bank profits. Although compensation rose 21 The compensation estimates in Table 1 include Holding Company income in the finance sector after 1998. This corresponds to shifts from SIC to NAICS coding and our visual inspection of shifts in income during the period of overlap in the two systems suggest most income was in fact earned in the finance sector. If not included compensation estimates would be only $34 million lower over the entire period. 33
Page 1 and 2: Income Dynamics, Economic Rents and
Page 3 and 4: “I think everybody a few years ag
Page 5 and 6: economic sociology and political ec
Page 7 and 8: tion but since the two trends are l
Page 9 and 10: their profits as taxable income. Th
Page 11 and 12: While we have established that the
Page 13 and 14: ployees, a lower capital share of i
Page 15 and 16: income dynamics, which should follo
Page 17 and 18: serve Bank, led by Paul Voker, foug
Page 19 and 20: anks profitability, the second and
Page 21 and 22: Together these shifts in the instit
Page 23 and 24: nancial engagement of non-financial
Page 25 and 26: count suggests a certain happenstan
Page 27 and 28: The other finance sector industries
Page 29 and 30: from the society overall. The emplo
Page 31: as dramatic. In the Security indust
Page 35 and 36: occurred if finance sector actors h
Page 37 and 38: of total national profits in the fi
Page 39 and 40: swaps. Clearly, the market and poli
Page 41 and 42: Our analysis points to the federal
Page 43 and 44: ents from other actors in the econo
Page 45 and 46: Krippner, Greta. 2005. “The Finan
Page 47 and 48: Stockhammer, Engelbert. 2004. “Fi
Page 49 and 50: %GDP 10 15 20 25 30 35 Figure 1. Fi
Page 51 and 52: Ratio 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1
Page 53 and 54: %Profits 0 5 10 15 20 Figure 5. Fin
Page 55 and 56: Ratio 1.0 1.5 2.0 2.5 3.0 Figure 7.
Page 57 and 58: Table 1. Summary of Institutional A
Page 59 and 60: Appendix A. Industry classification
Page 61 and 62: Appendix B. Sector and industry shi

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