{"id":13842,"date":"2023-06-28T11:25:18","date_gmt":"2023-06-28T15:25:18","guid":{"rendered":"https:\/\/americancompass.org\/?p=13842"},"modified":"2023-06-28T11:25:19","modified_gmt":"2023-06-28T15:25:19","slug":"yes-financialization-is-real","status":"publish","type":"post","link":"https:\/\/americancompass.org\/yes-financialization-is-real\/","title":{"rendered":"Yes, Financialization Is Real"},"content":{"rendered":"\n

An article from the Cato Institute\u2019s Norbert Michel, titled \u201cAmerican Compass Points To Myths Not Facts<\/a>,\u201d is making the rounds. Having perused the Financialization chapter of Rebuilding American Capitalism: A Handbook for Conservative Policymakers<\/em><\/a>, he concludes that \u201cit\u2019s easier than ever to ignore American Compass\u201d and calls on conservatives to \u201cpay very close attention to the report\u2019s low quality of scholarship.\u201d Our \u201copinion-style propaganda is born out of necessity,\u201d he writes. \u201cThey must leave out supporting research and data because it doesn\u2019t exist.\u201d<\/p>\n\n\n\n

As a preliminary matter, I should note that American Compass publishes volumes of research and data\u2014the Rebuilding American Capitalism<\/em> handbook is a synthesis of our analysis and recommendations and provides copious references to further reading alongside each proposal. Norbert is not unaware of this research\u2014indeed, at one point he links to a prior debate<\/a> about one of those reports\u2014but pretending he just can\u2019t figure out where our data comes from is clearly important to his critique.<\/p>\n\n\n\n

So, let\u2019s take at face value the lament that the handbook \u201cprovides no supporting evidence whatsoever for these claims, and it\u2019s not difficult to figure out why\u2014the evidence simply doesn\u2019t support them\u201d and see how Norbert goes about attempting to prove us wrong. He focuses on three claims we make about financialization:<\/p>\n\n\n\n

A. Top Business Talent<\/strong><\/h3>\n\n\n\n

Norbert highlights our assertion that American finance is \u201cclaiming a disproportionate share of the nation\u2019s top business talent.\u201d That\u2019s wrong, he says, because \u201cthe number of people employed in the Finance and Insurance industry, as a share of total nonfarm employees, has barely budged.\u201d <\/p>\n\n\n\n

It doesn\u2019t take a quant hedge fund manager to see that share-of-total-employment has no bearing on our claim about top business talent. As far as I know, the evidence for our actual point isn\u2019t really disputed by anyone. As I wrote in Confronting Coin-Flip Capitalism<\/a>:<\/p>\n\n\n\n

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Graduates of America\u2019s top business schools provide a useful proxy for the attraction of various industries and, from 2015 to 2019, nearly 30%<\/a> of graduates from Harvard, Stanford, Wharton, Booth, Kellogg, Columbia, and Sloan went into finance. In 2020, the finance industry was the most popular and offered the most generous compensation packages for graduates of the MBA programs at both Harvard and Stanford. [See also, our Guide to Private Equity<\/a>.]<\/p>\n\n\n\n

Engineers have likewise flocked to Wall Street, as compensation at equivalent education levels surged in finance as compared to engineering<\/a> after 1980. The probability of an engineer switching to a finance career increased more than four-fold<\/a> from the 1980s to the 2010s; the share of \u201cSTEM\u201d jobs<\/a> in finance doubled over that period while the share in manufacturing fell by half. Lest one think these are the engineers who couldn\u2019t hack it in engineering, Nandini Gupta and Isaac Hacamo of Indiana University\u2019s Kelley School of Business find that \u201cfinancial sector growth attracts exceptionally talented engineers<\/a> from other sectors to finance.\u201d<\/p>\n<\/blockquote>\n\n\n\n

B. Profits<\/strong><\/h3>\n\n\n\n

Norbert next takes exception with our assertion that finance is \u201cclaiming a disproportionate share of \u2026 the economy\u2019s profits.\u201d He responds, \u201cthe National Income and Product Accounts provide financial and nonfinancial company profits dating back to 1998. (See Table 6.16D<\/a>, Corporate Profits by Industry.) While the annual share of total corporate profits in the NIPAs has varied, at the end of 2022 it was 18 percent for financial companies versus 82 percent for nonfinancial companies. In 1998 the share for financial firms was a touch higher (20 percent) compared to nonfinancial firms (80 percent).\u201d<\/p>\n\n\n\n

I must make three points here. <\/p>\n\n\n\n

First, I don\u2019t know whether to accuse Norbert of extreme bad faith or merely a novice\u2019s ignorance, but I will do him the courtesy of assuming the latter. The NIPA data does not start in 1998, it goes back to 1929\u2014it\u2019s just divided over four tables (parts A through D). They\u2019re right there, next to each other, in the list. <\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

Second, the thing about accessing the full dataset is that you quickly see the trend in financialization over time. Here is Norbert\u2019s data for financial company share of corporate profits, using the full data set and averaged by decade:<\/p>\n\n\n\n