Dolts for Better Theory

So let us not talk falsely now, The hour is getting late.

- Bob Dylan

The Washington Post: A black hole for our best and brightest, Jim Tankersley, 2014.

Subtitle/Topic: "Wall Street is expanding, and the economy is worse off for it."

Wall Street is bigger and richer than ever, the research shows, and the economy and the middle class are worse off for it.

Yes. But get a load of the next few sentences:

There’s a prominent theory among some economists and policymakers that says the big problem with the American economy is that a lot of Americans don’t have the talent to compete in today’s global marketplace...

Wait a minute -- That's damned insulting! We don't have the talent? We're dolts?

While it’s true that the country would be better off if more workers had more training — particularly low-skilled, low-income workers — that theory misses a crucial, damaging development of the past several decades.

It misses how much the economy has suffered at the hands of some of its most skilled, most talented workers, who followed escalating pay onto Wall Street — and away from more economically and socially valuable uses of their talents.

It's not that America has no talent, they argue. America has a lot of talented people, but they all went into finance.

Wow. That's just as insulting as the "prominent" theory. I'm a dolt either way.

The non-prominent theory is that talent was drained away from "more economically and socially valuable uses", and absorbed into finance. Really? Morality in hindsight? That's all they got?

And who gets to decide what's "economically and socially valuable"? Then, who gets to decide how the decision-makers are doing? And who watches the watchers? It's all nonsense and drivel and moralistic crap. Worse, it reeks of Big Brother.

The problem is that the demand for finance is overstimulated, largely by policy. The dolts who went into finance made a lot more money than the dolts who didn't. But if the problem is excessive finance, then the dolts who did are part of the problem. And the dolts who didn't, aren't.

But now we revere the finance guys, who made their money by screwing the rest of us. I guess we really are dolts.

The financial industry has doubled in size as a share of the economy in the past 50 years, but it hasn’t gotten any better at its core job: getting money from investors who have it to companies that will use it to generate growth, profit and jobs.

The focus is wrong. I've heard before that finance has doubled in size, and I think that's right. But I think the assertion is wrong, that finance "hasn’t gotten any better at its core job".

My god man, do they really want finance to get better at its job than it already is? Wouldn't it be better to shrink finance back down to the size it was 50 years ago? Of course finance got "better" at its job over the past 50 years. Of course it did. The WaPo article is nonsense.

Why is it hard to understand that simply "being too big" can be a problem? The baby boom is said to have created many problems for the economy. And you can't turn a page these days without reading that increasing the minimum wage creates problems for the economy. But finance? The problem is not that finance is too big, WaPo says, but that it "hasn’t gotten any better". It's a crock.

In 2012, economists at the International Monetary Fund analyzed data across years and countries and concluded that in some countries, including America, the financial sector had grown so large that it was slowing economic growth.

See? Finance is too big. And it's Big Finance that says it. WaPo repeats it, but doesn't listen to itself.

And this:

It’s not that finance is inherently bad — on the contrary, a well-functioning financial system is critical to a market economy. The problem is, America’s financial system has grown much larger than it should have, based on how well the industry performs.

"Not inherently bad". That's morality again. Moral superiority. We're trying to do econ here. Stop wagging your finger and start thinking about cost.

"A well-functioning financial system is critical to a market economy." The bleedin' obvious, Basil Fawlty would say.

"The problem is, America’s financial system has grown much larger than it should have". Yes, that's it exactly. And they should end the thought right there. But no; they put a condition on it:

"... larger than it should have, based on how well the industry performs."

Based on how well the financial industry performs ?

How about, based on how well the economy performs. Finance isn't free. Everything they do has a cost, regardless of how well the financial industry performs. Assume a best-case scenario: everything finance does is top-notch. It still has a cost. And the more finance does, the more is the cost of finance.

Here, let me dumb it down for you:

If finance has grown faster than GDP -- and the article says it has -- then the cost of finance has grown, relative to output. In other words, finance pushed prices up.

Holy crap: Cost-push inflation! And they said it couldn't happen.