According to the Commerce Department, the financial sector accounted for 8.4% of U.S. gross domestic product last year, higher than its previous peak in 2006. In 1950, the financial sector accounted for just 2.8% of GDP.
Taking money from one pot, skim some off the top, and put it into another pot — seems meaningless to some people. However, deploying capital to where it can be best used helps the economy grow, according to the WSJ. (Number of the Week: Finance’s Share of Economy Continues to Grow, 12/10/2011)
In Has the U.S. Finance Industry Become Less Eﬃcient?, economist Thomas Philippon finds the financial sector has become outsized.
The ﬁnance industry has become less eﬃcient: the unit cost of intermediation is higher today than it was a century ago. Improvements in information technology seem to have been cancelled out by increases in trading activities whose social value is diﬃcult to assess. The ﬁnance industry’s share of GDP is about 2 percentage points higher than the neoclassical growth model would suggest, based on historical evidence…
The ﬁnance industry’s share of GDP is about 2 percentage points higher than the neoclassical growth model would suggest, based on historical evidence.