Idea in Brief
Over the past three decades, the U.S. financial sector has grown much faster than the overall economy. Along the way, it has seen big gains in employment and compensation. But the financial sector exists to serve the needs of U.S. households and firms, and by this standard its performance has been mixed.
The sector’s growth has been beneficial to U.S. corporations, which enjoy ready access to the deepest capital markets in the world, but there are also problems. First, the financial system is less stable than it was 30 years ago. Second, the financial sector has steered trillions of dollars into residential real estate and away from other, more productive investments. Third, the cost of professional investment management is simply too high. Fixing these flaws will require changes in regulation but also private-sector discipline and innovation.
The U.S. financial sector’s share of GDP grew from less than 5% in 1980 to more than 8% in 2007—the largest share in any advanced economy except Switzerland. With this growth came big increases in financial sector employment and compensation. The industry was transformed from a sleepy old boys’ club to a dynamic business that attracts the best and the brightest.
