Since 1980 there has been a vast expansion of the economic power and centrality of financial service sector. Less well known is the simultaneous shift in the investment strategies of non-financial firms, at least in the US, toward investing in financial instruments of various sorts. By the early 2000s financial investments had risen to almost 30 percent of total assets in the U.S. private sector. In our on-going research we have tried to figure out if this shift in corporate investment strategies has been economically destructive. Our answer is that it has and that economic growth and U.S. standards of living have suffered as a result.
We already know that the concentration of wealth and power in the financial service industry has introduced fragility into the world economy, reduced both fixed investment and R&D, and increased inequality in the advanced economies. Instability, sector shifts and inequality are not, however, evidence that financialization has been harmful to general economic growth. In a capitalist system shocks, sectoral shifts and cyclic destruction, even rising inequality are not inconsistent with long run growth in standards of living.
It is possible that financial investment strategies, despite increasing inequality, lifted all boats. If this is what happened then the policy case against financialization is weakened considerably. On the other hand, if financialization of the non-finance sector is associated with decreased total production then contemporary movements toward a financialized non-finance sector are economically as well as socially destructive.
Prior to 1980 firms like GE and GM used debt financing of their products to support growth in market share. During this period we find that financial investments by non-finance firms were much lower and encouraged economic growth..
After 1980 many non-financial firms moved in more speculative directions, into stock, credit, currency and even derivative markets. After 1980 we find that financial investment strategies by non-financial corporations are associated with reductions in value added, as Figure 2 shows. We estimate that since 1980 financial investments on Main Street stripped the US economy of at least 3.9 percent of aggregate growth, or about three years of lost growth in GNP. For comparison sakes, the great recession of 2008 produced aggregate negative growth of 2.9 percent.