Financialization
There is a growing gap between the headline performance of the economy and what more and more people report as their own economic position and the financial stresses and worry they carry. The vast wealth of our economy is not being experienced as such by many if not most Americans. GDP may increase, the stock market may rise, but for many there is only the growing squeeze on incomes and the accumulating debt burden.
Part of the explanation for this gap is the somewhat hidden economic process of financialization, by which financial flows are diverted away from production and consumption toward asset markets in the pursuit of capital gains. Financialization is not yet widely enough understood, even as it becomes the increasingly damaging force behind the extractive economy and its consequences for workers, society, and the natural world. Our work seeks to make visible and quantify financialization as a powerful and system-shaping process behind the present crisis, and to propose democratic economy solutions that point in the direction of definancialization and decommodification – an escape from the new dead hand of rent-seeking in our political economy.
To tackle financialization we must first understand it. Working with an international team of economists – Michael Hudson, Dirk Bezemer, and Howard Reed – we have dug into the economic data in order to identify and quantify the flows by which financialization is occurring and to examine its impact on the economy as a whole. This involved an interrogation of how the data itself is organized, and has so far resulted in two academic papers, one on the United States and one (forthcoming) on the United Kingdom.
The Capital Gains Economy
A study of the National Income and Product Accounts (NIPA) by our team of economists concluded that the United States has become what they term a “capital gains economy” fueled by debt-financing, and that it is important to look at total returns (calculated by the addition of capital gains to ‘earned’ income) rather than GDP, as the former is concentrated in the hands of the richest 10 percent of Americans, the distinguishing feature of present-day U.S. finance capitalism: “asset price gains dwarf incomes in the real economy. This financial reality of how the U.S. economy works is no longer captured in GDP statistics.”
In almost every year they looked at, asset-price gains in the FIRE sector – Finance, Insurance, and Real Estate – far outpaced the gains (or shrinkage) in reported GDP. See Michael Hudson, “Rent-Seeking and Asset-Price Inflation: A Total-Returns Profile of Economic Polarization in America,” Review of Keynesian Economics, Vol. 9 No. 4, Winter 2021, pp. 435-460.
In current economic data, the growing wealth and income of the FIRE sector are added to GDP as economic growth, even though they in fact take the form of a steepening liability for households and businesses in the rest of the economy, leaving less income for consumption or productive investment. “This financialized overhead is not real growth,” Hudson argues. “It does not make the economy richer.” Instead it manifests as asset-price inflation (capital gains), and as the offsetting debt burden that must be paid back: a subtrahend from, rather than addition to, the wealth of the rest of the U.S. economy.
Much of the wealth of the 1 percent is debt owed by the rest of us, claims against our future income. Middle- and low-income households have experienced a buildup of debt simply to obtain basic necessities – homes, cars, education. These payments by ordinary people flow directly to the FIRE sector and to high-income households, where ownership of financial assets is concentrated.
In this context, what is counted as ‘growth’ matters a great deal. Every financial asset is at one and the same time someone else’s financial liability – and as the holdings of the financial sector have increased, so too has the debt held by households and businesses in the non-financial economy.This process helps explain the squeeze-play of recent years, whereby nominal economic growth has in reality been experienced as reduced income through increased extraction and indebtedness.
In the 1950s, U.S. GDP was about equal to the value of assets. Today assets are valued at five times GDP. To keep those assets growing, more and more wealth is transferred upwards to the top 1 percent.
For the latest data on financialization of the U.S. economy, see our Index of Systemic Trends.
The Locus of Inequality
In a forthcoming TDC working paper and academic journal article, our team also looked at the UK data on financialization. Financialization is a complex phenomenon, but has enormous explanatory power as to the causes of Britain’s highly unequal and dysfunctional economy of growing poverty in the midst of plenty. Far from boosting productivity and increasing efficiency in the non-financial economy, the growth of the financial sector functions as a subtraction from the real economy.
The data for the UK economy show the powerful effects of financialization. Between 1995 and 2020, nominal wages doubled, nominal UK GDP rose two and a half times, average house prices quadrupled, but the valuation of financial assets rose fivefold. The benefits of this capital gains economy flow primarily to the already wealthy, while for the rest of us there are lower earnings from work, lower income growth in the non-financial sector, lower productivity, and less innovation, all alongside sizable increases in debt and in financial and real estate wealth.
The financial sector, then, is extractive from the real economy. And given that all income groups are paying ever more into the finance sector in fees and interest charges and for underlying assets while the payouts from the sector are even more concentrated than those of the economy as a whole, the finance sector has also become the locus of the production of increased inequality in the UK economy.
This working paper on UK financialization will be available here shortly.
Driving Definancialization and Decommodification
Going forward, TDC will seek to develop and deepen understanding and action on financialization, translating the concept and evidence in more readily understandable ways and proposing democratic economy solutions that point in the direction of definancialization and decommodification.
We will also be pursuing sectoral analyses of financialization in areas such as health, manufacturing, food, and energy, as well as looking at the racialized impacts and at strategies for reversing it, including through the build up of a “next system of capital.”