The growth of inequality in the U.S. has been paralleled by the growth of the financial sector–not just in size but in power. This isn’t a coincidence, argues Mike Konczal of the Roosevelt Institute in the new issue of the Washington Monthly:
The financialization revolution over the past thirty-five years has moved us toward greater inequality in three distinct ways. The first involves moving a larger share of the total national wealth into the hands of the financial sector. The second involves concentrating on activities that are of questionable value, or even detrimental to the economy as a whole. And finally, finance has increased inequality by convincing corporate executives and asset managers that corporations must be judged not by the quality of their products and workforce but by one thing only: immediate income paid to shareholders.
And despite the heavy responsibility of the financial sector for the disaster of 2008, its fundamental problems have by no means gone away.
Financial profits in 2012 were 24 percent of total profits, while the financial sector’s share of GDP was 6.8 percent. These numbers are lower than the high points of the mid-2000s; but, compared to the years before 1980, they are remarkably high.
The most recent reforms wrung from Congress before 2010 aren’t enough, says Konczal. He lays out a more ambitious program for the future:
How can these changes be challenged? The first thing we must understand is the scope of the change. As [J.W.] Mason writes, the changes have been intellectual, legal, and institutional. At the intellectual level, academic research and conventional wisdom among economists and policymakers coalesced around the ideas that maximizing returns to shareholders is the only goal of a corporation, and that the financial markets were always right. At the legal level, laws regulating finance at the state level were overturned by the Supreme Court or preempted by federal regulators, and antitrust regulations were gutted by the Reagan administration and not taken up again.
At the institutional level, deregulation over several administrations led to a massive concentration of the financial sector into fewer, richer firms. As financial expertise became more prestigious than industry-specific knowledge, CEOs no longer came from within the firms they represented but instead from other firms or from Wall Street; their pay was aligned through stock options, which naturally turned their focus toward maximizing stock prices. The intellectual and institutional transformation was part of an overwhelming ideological change: the health and strength of the economy became identified solely with the profitability of the financial markets.
This was a bold revolution, and any program that seeks to change it has to be just as bold intellectually. Such a program will also require legal and institutional changes, ones that go beyond making sure that financial firms can fail without destroying the economy. Dodd-Frank can be thought of as a reaction against the worst excesses of the financial sector at the height of the housing bubble, and as a line of defense against future financial panics. Many parts of it are doing yeoman’s work in curtailing the financial sector’s abuses, especially in terms of protecting consumers from fraud and bringing some transparency to the Wild West of the derivatives markets. But the scope of the law is too limited to roll back these larger changes.
Konczal’s altar call is inspiring:
[W]e must come to understand our economy not as simply a vehicle for capital owners, but rather as the creation of all of us, a common endeavor that creates space for innovation, risk taking, and a stronger workforce. This change will be difficult, as we will have to alter how we approach the economy as a whole. Our wealth and companies can’t just be strip-mined for a small sliver of capital holders; we’ll need to bring the corporation back to the public realm. But without it, we will remain trapped inside an economy that only works for a select few.