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_______________________________
Institute for Workplace Studies----------------- Professor Samuel B. Bacharach
School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies
Cornell University
16 East 34th Street, 4th floor---------------------- Stuart Basefsky
New York, NY 10016 -------------------------------Director, IWS News Bureau
________________________________________________________________________

 

Congressional Research Service (CRS)

 

Finance and the Economy: Occupy Wall Street in Historical Perspective

Mark Jickling, Specialist in Financial Economics

Sean M. Hoskins, Analyst in Financial Economics

November 14, 2011

http://www.fas.org/sgp/crs/misc/R42081.pdf

[full-text, 11 pages]

 

 

Summary

Wall Street and Main Street—the financial system and the real economy of goods and services—

are bound together. If businesses large and small had to fund investment projects out of their own

pockets, society would be significantly poorer. The financial system aggregates the savings of

millions of households and allocates them to the most productive uses. The importance and value

of this function are almost universally acknowledged and are axiomatic in market economics.

 

Nevertheless, the benefits of certain forms of financial intermediation to the real economy are not

always apparent. American politics has a demonstrated history of attacks on Wall Street and

financiers whose great personal fortunes appear disproportionate to their contribution to national

prosperity. This tradition, which goes back at least to Thomas Jefferson, accuses high finance of

siphoning off resources that could be better used elsewhere. A recurrent critique is that “swapping

pieces of paper” is not only less useful than, but morally inferior to, actual production of goods

and services, and that great concentrations of wealth represent a threat to democratic values. For

all their lack of a unified, coherent program, the Occupy Wall Street protestors can be seen as the

latest in a long series of anti-financial sector critiques.

 

This report presents examples of political statements about the fundamental costs and benefits of

finance and recent economic research that points to aspects of financial activity that may not be

advantageous to the real economy. The report does not attempt a comprehensive survey of either

literature, but provides a reminder of the breadth of the historical debates that have shaped

congressional oversight of financial institutions and markets. 

 

Some of the political remarks excerpted here strike the theme of conflict between the real

economy and the paper profits derived from financial speculation, and include claims that the

temptations of the latter draw resources away from the former, or that speculators misappropriate

the rewards that would otherwise accrue to hardworking businessmen, farmers, and wage earners.

 

Apart from the normative judgments of political and populist outcry, economists have expanded

on prior research that focused on finance’s contribution to economic development to study

whether an excessively large and complex financial system could be a drag on a country’s

economic growth. Among the questions raised are the following:

• When the volume of financial activity passes a certain threshold, does it have the

potential to lower the rate or destabilize the pattern of growth?

• Do incentives to ignore long-term risks in search of short-term profits produce

financial instability, leading to crises that may trigger deep recessions? 

• Do the complex products of financial innovation yield any significant benefits to

the real economy, or simply new opportunities for speculation? and

• Does growing income inequality, driven in part by financial sector compensation,

have negative implications for the economy?

 

The research summarized in this report may represent the beginning of a revaluation of the role of

finance in the economy, but much difficult work remains to be done before general statements can

be formulated. This report, which will not be updated, attempts to show that the basic questions

raised by Occupy Wall Street about the value of certain forms of financial activity are not new

 

 

Contents

Why Occupy Wall Street?................................................................................................................ 1

Views of Finance in U.S. History .................................................................................................... 1

Recent Economic Research ............................................................................................................. 4

Size of the Financial Industry.................................................................................................... 5

Compensation............................................................................................................................ 6

Income Inequality...................................................................................................................... 8

Less Stable Financial System .................................................................................................... 8

Costs of Financial Crises ........................................................................................................... 9

Conclusion ..................................................................................................................................... 10

 

Figures

Figure 1. Financial Sector Share of GDP and Total Corporate Profits, 1952-2010 ......................... 5

Figure 2. Financial Sector Share of Total Nonfarm Employment and Employee

Compensation, 1949-2010............................................................................................................ 7

 

Contacts

Author Contact Information........................................................................................................... 11

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This information is provided to subscribers, friends, faculty, students and alumni of the School of Industrial & Labor Relations (ILR). It is a service of the Institute for Workplace Studies (IWS) in New York City. Stuart Basefsky is responsible for the selection of the contents which is intended to keep researchers, companies, workers, and governments aware of the latest information related to ILR disciplines as it becomes available for the purposes of research, understanding and debate. The content does not reflect the opinions or positions of Cornell University, the School of Industrial & Labor Relations, or that of Mr. Basefsky and should not be construed as such. The service is unique in that it provides the original source documentation, via links, behind the news and research of the day. Use of the information provided is unrestricted. However, it is requested that users acknowledge that the information was found via the IWS Documented News Service.

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Stuart Basefsky                   
Director, IWS News Bureau                
Institute for Workplace Studies 
Cornell/ILR School                        
16 E. 34th Street, 4th Floor             
New York, NY 10016                        
                                   
Telephone: (607) 262-6041               
Fax: (607) 255-9641                       
E-mail: smb6@cornell.edu                  
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