Evan Soltas
Feb 27, 2013

5 More Graphs on Finance

As a follow-up on the last blog post, I've done a little more research into the financial sector, looking for characteristic and contrary evidence of economic rent. Obviously, there's no precise measure of rent, because we don't have a precise measure of opportunity costs.

Still, there is a lot we can look at. First, average compensation per full-time-equivalent employee in finance relative to all other sectors has soared since 1980. In fact, the graph looks so much like the famous Piketty and Saez graph of the income share of the top 1 percent, it's very possible that we are looking at, in effect, the same graph. The return of financial sector compensation may very well explain their findings.

Next, I looked at the share of GDP and corporate income which the financial industry yields. Note that these are not measures of profits -- which I apparently did wrong in my last post, so see here for an ostensibly accurate graph -- but rather income in two different senses. They come directly from NIPA, so as to avoid trouble. (Finance is defined narrowly here and in all cases as to exclude real estate and, where possible, the central bank.)

Compare this graph with the first graph. What we realize is that the increase in financial-sector compensation is not evenly distributed, but rather incredibly concentrated at the top end of the pay scale.

I think the next two graphs are strong evidence of financial-sector profit being rent. This first one is of the share of noninterest income for commercial banks. The idea is that commercial banks are making more margin off fees, financial services and products, etc. than they once did. Some of this may be financial innovation and change in the commercial-bank business model. But that only raises the question of why they are making so much off everything-but-lending.

I think you need a model where the financial sector became much less competitive to explain the origin of this income and the resulting profits. It seems that a very, very large share of the financial sector's income and profit growth can be explained by "non-core" functions and revenue sources, in general. It's not clear why they should be able to take in so much in fees, for instance, if there was a competitive market in banking.

I think changes in the banking industry itself also goes a long way towards an explanation of the financial sector's profits. In the U.S., at least, we've seen a massive consolidation of what had been a previously (i.e. pre-1980) highly dispersed banking industry.