Did the financial sector profit at the expense of the rest of the economy? Evidence from the United States
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The crisis which originated in the US financial sector in 2007 and subsequently spread to the real economy caused severe economic and social damage around the world. Governments have responded by providing fiscal support to the economy, undertaking exceptional monetary policy measures and introducing programmes targeted to vulnerable groups. In addition, considerable efforts have been made to recapitalise banks. Important as they are, these measures do not tackle the deeper influence of financial markets and institutions in the operation of the real economy. The purpose of this paper is to highlight the need for reforms in this neglected area. The paper confirms the finding of the World of Work Report 2009 that the financial sector has grown beyond reasonable boundaries and its practices have spread to the nonfinancial economy. For example, in the last 20 years, financial sector’s share of total corporate profits doubled, reaching as high as 44 per cent in 2002. The study also demonstrates that in the United States, the growing influence of the financial sector has led to a reduction in the share of business investment as a percent of value added by as much as 2 percentage points in the last three decades. More research is needed to shed further light on the causal linkages and to identify the reforms that could help ensure that the financial sector encourages investment --thereby growth and employment-- rather than hurting it. However, the finding of this paper is suggestive and important for today’s debate on sustainable crisis responses.