Starving the Squid

BERKELEY – Is America’s financial sector slowly draining the lifeblood from its real economy? The journalist Matt Taibbi’s memorable description in 2009 of Goldman Sachs – “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money” – still resonates, and for good reason.

Back in 2011, I noted that finance and insurance in the United States accounted for 2.8% of GDP in 1950 compared to 8.4% of GDP three years after the worst financial crisis in almost 80 years. “[I]f the US were getting good value from the extra…$750 billion diverted annually from paying people who make directly useful goods and provide directly useful services, it would be obvious in the statistics.”

Such a massive diversion of resources “away from goods and services directly useful this year,” I argued, “is a good bargain only if it boosts overall annual economic growth by 0.3% – or 6% per 25-year generation.” In other words, it is a good bargain only if it collectively has a substantial amount of what financiers call “alpha.”