Word: philippon
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Over the past decade, though, reality took a detour from Philippon's theory. Corporate America's need for outside financing fell, but the financial sector refused to shrink; it pumped out ever riskier products until the system nearly collapsed. Why the refusal? Maybe the pay was too good. Philippon and the University of Virginia's Ariell Reshef have found that, starting in the mid-1980s, financial-sector paychecks began to outstrip those for jobs in other sectors demanding similar skills and education levels. Since the late 1990s, Philippon and Reshef estimate, 30% to 50% of financial-sector pay has amounted...
Until recently, economists had done shockingly little work in this area. "Nobody had looked at the flip side, which is, Can there be costs?" says Thomas Philippon, a young Frenchman who teaches finance at New York University's Stern School of Business. "That is because it's harder to measure, and it's a bit more controversial." Philippon has begun trying to fill this research gap, and while he hasn't come up with definitive answers, he has made some very interesting discoveries. (See 25 people to blame for the financial crisis...
...there were a simple correlation between financial-sector growth and economic growth, Philippon reasons, finance's share of the economy would stay constant. But when he examined data back to 1860, he found that finance's share of GDP varied widely. It ballooned in the late 19th century, shrank, ballooned again in the 1920s, shrank and stayed low for decades, then began to grow again in the 1970s, reaching unprecedented levels earlier this decade. The measure Philippon uses is the economic value added of the financial sector as a percentage of GDP, which was at about 4% in the 1960s...
...best decade ever for growth and widening prosperity in the U.S.; the past decade has been a bust. Yet the financial sector was relatively tiny in the 1960s and huge in the 2000s. Could this mean that good times for finance are bad for the rest of us? Philippon says it isn't that simple. The 1990s, for example, were good for both Wall Street and Main Street. His theory, which fits the historical evidence well, is that the financial sector's share of the economy should increase when there are fast-growing companies needing outside funding, like railroads...
...probably be better off with a smaller, less-well-remunerated financial industry than the one we've had. Exactly how much smaller? "I've done what I could, but it's not like I've found the right formula, that finance should be 6.65% of GDP," jokes Philippon. As for Blankfein and Griffiths, they clearly need to come up with a better formula for defending their paychecks...