Has the Financial Sector Become a Drag on the Real Economy?

An effective financial sector is vital to a well-functioning market economy, but in America the sector has metastasized. Its share of corporate value added has risen from 4% after WWII to 6% in the 1960s to 9% in the 1980s to a record 14% last year. Its share of corporate profits, once less than 10%, reached 40% in the early 2000s and has remained consistently above 25% since.

Top business talent has followed. In 2020, 34% of graduates from Harvard’s MBA program entered finance, as did 34% from Stanford’s. At both schools it was the most popular industry and offered the most generous compensation packages.

In theory, Americans might just love themselves some great financial services. A finance-dominated economy might deliver extraordinary value to consumers and businesses, drive investment and innovation, and shift upward the nation’s economic trajectory. In practice, this is obviously not the case.