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Home Publications Blogs Beat the Press Pro-Growth and Pro-Wall Street is an Oxymoron

Pro-Growth and Pro-Wall Street is an Oxymoron

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Thursday, 06 September 2012 05:00

A NYT piece contrasting the politics of Elizabeth Warren and Bill Clinton tells readers that:

"Mr. Clinton is the president who made the sustained case to Democrats that they had to be pro-growth and pro-Wall Street, not just to get elected, but also to build a more modern economy."

There is considerable evidence that these are contradictory positions. Our bloated financial sector is a drain on growth as shown in a recent paper from the Bank of International Settlements. Resources that could be deployed productively are instead applied to rent-seeking activity in the financial sector.

This paper found that a large financial sector posed the largest burden on sectors with more research and development and were heavily dependent on external financing. In the former case, finance apparently pulls away workers who might otherwise be employed as scientists and technicians elsewhere in the economy. In the latter case, finance driving up speculative bubbles could displace finance for new investment. 

President Clinton's policies set the country on a course of bubble driven growth. The prosperity of the last four years of his administration was driven by an unsustainable stock bubble. The collapse of the bubble was responsible for the recession of 2001 (and the deficits that get the Washington establishment types so excited). It was difficult for the economy to recover from this downturn which led to, at the time, the longest period without job growth since the Great Depression. When the economy finally did recover from this downturn and start to create jobs it was on the back of the housing bubble.

This is the economic model that President Clinton is associated with. By contrast, Elizabeth Warren is associated with a growth model that builds on broadly shared income gains. The track record suggests that the Warren model is far more effective.

 

Comments (7)Add Comment
Pro-Wall Street is Pro-Growth if we dramatically shrink Wall Street
written by Robert Salzberg, September 06, 2012 7:29
What would a very stable, very efficient Wall Street look like? Is there any fundamental reason why Wall Street's share of GDP needed to double over the past few decades? Shouldn't the increased computerization of transactions have done the opposite?

Looking forward into the 21st Century, it's easy to see a declining need for banks and brokers as more and more of our financial transactions eliminate the need for anything but a consumer and a computer.

An efficient banking and brokerage industry should consume a third or less of GDP than it does now.

A financial transactions tax, ending too big to fail banks and ending monopoly practices on credit card transactions would be a good start towards shrinking Wall Street and saving Wall Street from itself and from blowing up the economy for everyone in the future.

If we are really Pro-Wall Street than we must tear it down and relegate it back to it's proper place as the boring part of our economy.
Joe Weisenthal
written by Stephen, September 06, 2012 8:08
Joe's gone crazy over there at Business Insider. Here's a summary:http://www.forbes.com/sites/karlwhelan/2012/09/05/did-bill-clintons-budgets-really-destroy-the-american-economy/. Never mentions the value of the dollar once and trade deficits effects on saving.
...
written by skeptonomist, September 06, 2012 9:02
It's important to recognize that excess finance does produce what is usually considered growth, but it's only temporary. When finance dominates, there are exhilarating bubbles, but devastating crashes. The historical record from the Great Depression and before is clear, but New Deal regulations probably damped the cycles long enough that people forgot how bad a cyclic economy can be. As Dean says, deregulation during the Clinton administration probably facilitated the dot-com bubble (which luckily for Clinton broke after he left office), but it also was important in the housing bubble. A critical element in the housing bubble was unregulated credit-default swaps, and the decision not to regulate them was made mainly by an unholy alliance of Clinton advisors and Alan Greenspan.

Clinton is rather stupidly given credit by Democrats for the bubble of the late 90's, while escaping blame for its collapse. Republicans can't call out this myth because that would call attention to the necessity for regulation reining in Wall Street.
unproductive labor
written by pete, September 06, 2012 12:09
Lawyers and brokers and investment bankers are unproductive labor. They represent transactions costs. We want widgets...we want stuff, not bank accounts. We use lawyers and brokers and investment bankers to arrange the corporations and the financing. The more they take in a haircut, the less widgets, the less stuff, we have to consume. Clearly there is some optimal amount of "Wall Street" to get some efficient level of growth. But more is definitely not better all the time. And less could be bad too. It depends. Rent seeking by Wall Street may conflict easily with rent seeking by Main Street.
last night
written by David, September 06, 2012 12:47
My favorite part, watching the speeches on PBS, was to see David Brooks, who had been complaining since last night about a lack of addressing the deficit and debt issues 'that so concern the independent voter', lose his sanguine equanimity after the Clinton speech.
End derivatives Use all that sidebet money to invest in REAL ASSETS
written by grimsbyjohn, September 06, 2012 1:31
People do not create wealth the old fashion way (real estate , industry , commercial , institutional and of course the much needed infrastructure that would improve North American Productivity. They have become addicted to getting their wealth fix from derative trading to the detriment of Middle Class North America . With the decimation of the middle class all hope of the lower class with hard labour having a chance to move up to a better economic status has disappeared! Time to end the use of Derivatives so money can flow back into tangable assets so the People of North America can once again a fare share of the North American PIE!!!
Bring the middle Class End the use of Derivatives
written by grimsbyjohn, September 06, 2012 1:49
It is time profits were made the old fashioned way ---investing in REAL TANGABLE ASSETS! People today get their wealth fix by the use of Deravitive Trading , which is nothing more than side bets and employ a few well heeled money boys on Wallstreet . If this form of trading was eliminated money once again would flow back into , Industrial, Commercial , Institutional and the much needed Infrastructure to improve North American Productivity. Along with this we would revive the Middle Class which has been decimated with the increased use of Derivatives. It is time to give back some of the American pie to the Middle Class which in turn would allow people of the lower class , through hard labour , at least have the chance to better the economic status!

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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