Skip to main content

The financial sector and allocating capital

Image
By
Kevin Drum flags Ezra Klein talking about tech investment:
Eric Jackson, a former employee of PayPal and now the CEO of the online-investing platform CapLinked, worries that implementing the “Buffett rule” would hurt the pool of investment money available to tech start-ups. His logic on this point is unimpeachable: If the Buffett rule means taxing capital gains more like normal income, then it will, on the margin, hurt investment of all kinds, including investment in tech start-ups.
Drum has some good thoughts there, but this reminded me of something I read in 13 Bankers the other day.  I've often wondered why it is growth was so weak during the Aughts.  Interest rates were super-low for most of that period, and usually one would think that would light a fire under the economy's ass, so to speak.  If macroeconomics is to be believed, we should have had screaming growth, bordering on an inflationary spiral.  Why not?  In 13 Bankers, Kwak and Johnson argue, in a quick aside of sorts, that the reason we had such lame growth during the Aughts is that the financial sector was systematically misallocating capital:
The irony is that the flood of cheap money did not even have the healthy effect it should have had.  Ordinarily, businesses should take advantage of low interest rates to make capital investments, which contribute to overall economic growth.  In the 2000s, however, as Tim Duy notes, business investment in equipment and software grew more slowly than in the 1990s, despite the lower interest rates.  The problem was that the money was misallocated to the housing sector, resulting in anemic growth.
ECONned (which is that rarest of books about the financial crisis, an original) makes a similar argument at one point.  Ostensibly, the reason the financial sector exists is to allocate capital.  Whenever you ask Jamie Dimon or Lloyd Blankfein why their employees deserve umpteen zillion dollars in bonuses every year, that's the answer you'll get.  Gotta make sure America's throbbing entrepreneurial spirit isn't starved for cash.

Allocating capital is a critical function of the modern economy, it's true.  But if Johnson and Kwak (and Yves Smith) are right, not only is Wall Street mostly functioning as a giant casino, it is also actively hindering the economy where it is supposed to be performing its only key function.  This seems an under-discussed part of the financial crisis, or even things today.  Financial sector profits are back to stupendous heights—I see no reason not to assume they're not systematically misallocating capital again (and probably inflating the next bubble to boot).  Is anyone aware of research on this question?

Bringing it back to PayPal, I see no reason to worry all that much about raising capital gains taxes.  That part of the economy doesn't work anyway.
Labels:

Comments

Post a Comment

Popular posts from this blog

Why Did Reality Winner Leak to the Intercept?

By
So Reality Winner, former NSA contractor, is in federal prison for leaking classified information — for five years and three months, the longest sentence of any whistleblower in history. She gave documents on how Russia had attempted to hack vendors of election machinery and software to The Intercept , which completely bungled basic security procedures (according to a recent New York Times piece from Ben Smith, the main fault lay with Matthew Cole and Richard Esposito ), leading to her capture within hours. Winner recently contracted COVID-19 in prison, and is reportedly suffering some lingering aftereffects. Glenn Greenwald has been furiously denying that he had anything at all to do with the Winner clusterfuck, and I recently got in an argument with him about it on Twitter. I read a New York story about Winner, which clearly implies that she was listening to the Intercepted podcast of March 22, 2017 , where Greenwald and Jeremy Scahill expressed skepticism about Russia actually b
Post a Comment
Read more

Varanus albigularis albigularis

By
That is the Latin name for the white-throated monitor lizard , a large reptile native to southern Africa that can grow up to two meters long (see pictures of one at the Oakland Zoo here ). In Setswana, it's called a "gopane." I saw one of these in my village yesterday on the way back from my run. Some kids from school found it in the riverbed and tortured it to death, stabbing out its eyes, cutting off its tail, and gutting it which finally killed it. It seemed to be a female as there were a bunch of round white things I can only imagine were eggs amongst the guts. I only arrived after it was already dead, but they described what had happened with much hilarity and re-enactment. When I asked why they killed it, they said it was because it would eat their chickens and eggs, which is probably true, and because it sucks blood from people, which is completely ridiculous. It might bite a person, but not unless threatened. It seems roughly the same as killing wolves that
4 comments
Read more

The Conversational Downsides of Twitter's Structure

By
Over the past couple years, as I've had a steady writing job and ascended from "utter nobody" to "D-list pundit," I find it harder and harder to have discussions online. Twitter is the only social network I like and where I talk to people the most, but as your number of followers increases, the user experience becomes steadily more hostile to conversation. Here's my theory as to why this happens. First is Twitter's powerful tendency to create cliques and groupthink. Back in forum and blog comment section days, people would more often hang out in places where a certain interest or baseline understanding could be assumed. (Now, there were often epic fights, cliques, and gratuitous cruelty on forums too, particularly the joke or insult variety, but in my experience it was also much easier to just have a reasonable conversation.) On Twitter, people rather naturally form those same communities of like interest, but are trapped in the same space with differe
2 comments
Read more