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

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anking industry that we see longer term shifts in both profits following the 1980 deregulation of the industry and that profit accumulation accelerated after the final 1999 elimination of bans on multiple product finance activity we believe substantially strengthens the inference that the observed rent process is driven by deregulation produced financialization. The insurance and real estate industries show the same basic patterns but they are neither as strong nor as sustained. The security, commodity and investment industry stands out for being a case of employee, rather than employer, driven rent extraction. We think that rent theory is more plausible when the evidence includes accounts of actual institutional practices and political adjustments of market rules that produce (or destroy) income rents. The introduction of an institutional account is we think a useful contribution to market and political power based explanations of rent, since the actual bases of power are revealed rather than assumed. In presenting this institutional account we think we have discovered another mod- ification to rent theory, which we think of as a multi-actor path dependent alternative to simple power stories. Because rent theory has typically not observed the institutional process, it has been able to tell a simple single actor market power story such as banks control the government (Crotty 2009). What we observe is a more complex path dependent process, in which low bank profits in the high inflation 1970s coupled with consumer demands for higher interest rates led to the initial deregulation of the industry. In the 1980s and 1990s the rise of institutional investors fueled financial innovation in the deregulated industry. The 1999 repeal of Glass-Steagall con- straints on finance sector service coupling led to the creation of the giant multi-service bank holding companies that dominate US financial markets of all types. By the 2000s the search for ever expanding profits generated the real estate bubble to provide mortgages to feed a completely unregulated market in mortgage based securities and their risk hedging partners credit default 38
swaps. Clearly, the market and political power accounts in rent theory are present in this series of events. But so are other actors: consumers looking for interest rates better than inflation, institutional investors with cash to invest, corporate CEOs and shareholders seeking to maximize short- term profits for immediate rewards, and even the Federal Reserve Bank attempting to obscure its political role in producing unemployment and slowing wage growth. So, while we do not dispute the fundamental role of power in producing market rents, there is also a great deal of path depen- dency produced by multiple actors, attempting to solve multiple problems as they arise in real historical time. We also document that the industry rents produced by financialization went to some classes of labor as well as to capital. Manager, Professional and Sales occupations in each of these industries reaped growing above market earnings after 1980. In the security industry employee earnings grew most rapidly and preceded the onset of increased profitability. For the security industry growth in the compensation of powerful employees, rather than high profits seems to have characterized the period of financialization. Davis (2009) reports that investment banks historically were organized as partnerships rather than corporations, this may be the institutional precursor for the high returns to employees we observe. In addition, in both insurance and the security industry increased average employee pay preceded increased industry profitability. In both case it seems likely that performance based compensation schemes for managerial and sales personnel preceded and perhaps even helped create the profit surges associated with investment and real estate bubbles. Crotty (2009) agrees that these are economic rents and goes on to suggest that the very high compensation of “rainmakers” in the investment community was a source of the systemic risk taking that eventually led to the collapse of the world financial sys- tem. Populist anger at the size of bonuses at investment banks has clear roots in the current fi- 39
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 and 32: as dramatic. In the Security indust
Page 33 and 34: egulatory relaxation and a general
Page 35 and 36: occurred if finance sector actors h
Page 37: of total national profits in the fi
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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