Why Financial Jobs Have Fared Relatively Well

I’ve been watching the job numbers in financial services with some degree of surprise.  Considering that the crisis was centered in the financial sector, it’s actually a bit odd that  financial jobs didn’t do worse. Finance and insurance employment is down 8% over the past three years–but the real job crashes came in construction and manufacturing, down 27% and 17% respectively, not in finance.

Now, I can explain why construction went down. But manufacturing’s job loss would have been hard to predict. 

Suppose that I took a time machine back to early 2007.  I tell your 2007-self a recession is coming, and ask you to predict whether manufacturing or finance will have the deeper job decline, based on these three facts:  (a) The U.S. will have the worst financial crisis in the last 80 years (b) Bear Stearns and Lehman will close their doors and (c) mortgage lending will dry up.   I’m sure that very few of you would have expected manufacturing to have much bigger job losses than finance.  

Equally odd, the unemployment rate in finance and insurance, at 7.3%,  is substantially lower than the 10.1% for the economy as a whole. And yes, part of that reflects education, but that doesn’t explain why finance unemployment is substantially lower than the unemployment rate in the information sector, which is also a high-education sector.  

And banks have started hiring again.  JP Morgan CEO Jamie Dimon said a month ago that his bank plans to hire almost 9,000 new employees in the U.S. Citigroup, the most troubled of the large banks, basically kept its employment flat in the first quarter of 2010.

In addition, wages have been rising in the financial sector. Over the last year, hourly wages for all workers rose by 3% in financial services,  roughly double the 1.6% gain for the economy as a whole. And let’s not forget the big profits reported by Wall Street banks for the first quarter.

 What does this all mean?  My theory is that as long as the U.S. is running a big trade deficit,  financial sector jobs are going to do very well.  The rest of the world has to lend large amounts of money to the U.S. to keep the global economy going, and all of that money has to be funnelled through Wall Street, which creats wel page jobs.

In some sense, Wall Street’s gain is proportional to Main Street’s pain.  The big trade deficits means less production at home, but the deficits needs to be financed by  debt–and any debt issuance, including U.S. Treasuries, ends up going through Wall Street.

Are Trade Deficits Bad for Long-Term Growth?

Like most economists, I’ve been trained to believe that running a trade deficit is not an indication of economic sin, and running a trade surplus is not an indication of economic virtue. Indeed, I’ve written at various times about the virtue of running a trade deficit, if the foreign borrowing was used to fund investment.

Well, I’ve been changing my views about trade deficits, and the latest European financial crisis just brings me further along those lines. It’s not Greece that troubles me, it’s Spain and Germany.  A few years ago, Spain was the darling of investors and economists. Spain was running a trade deficit, yes, but it was vibrant and growing. From 1995 to 2005, real per capita GDP in Spain grew at an excellent 2.8% annual rate.

By contrast, real per capita GDP growth in Germany poked around at an annual 1.2% rate from 1995 to 2005. Wrote one 2006 paper from the Centre for European Policy Studies:

Germany and Italy have been the laggards in terms of growth since the start of EMU in 1999.

However,  Germany did have one advantage —it ran trade surpluses where Spain ran trade deficits. In fact, the gap between Germany’s surpluses and Spain’s deficits widened over time, even though Spain had stronger growth.

If it turns out that Spain runs into a financial crisis because of all its external debt–accumulated during the good years–then we will have to go back and ask whether that growth was sustainable and real.

And the same thing goes for the U.S. The U.S. had strong per capita GDP growth and a big trade deficit, and then was hit by a massive financial crisis. Score one for the trade deficit as a more accurate signal.

More to come on this topic.

Economics Statistics in an Alternative Universe

Suppose I told you about a wonderful country where :

–Domestic production of goods is at an all-time high.
–Domestic production of services is an all-time high.
–10-year productivity growth is nearly at the highest level in 40 years.
–Workers are one-third more productive than a decade ago.
–Exports have expanded over the four years of the crisis, while imports have shrunk.
–Exports have grown much faster over the past decade than imports.

Seems like a pipe dream, doesn’t it? Wouldn’t you like to live in that country?

But wait! You can live in that country…..(see below)

[Read more…]

The Trade Deficit: Why the Financial Sector is Thriving

Tyler Cowen writes:

There’s a different way to think about the bailouts, namely that the U.S. government stands at the center of a giant nexus of money raising, most of all to finance the U.S. government budget deficit and keep the whole show up and running.

<snip>

If you do wish to break or limit the power of the major banks, running a balanced budget is probably the most important step we could take.

I’ll make a similar but not identical argument. I think the reason why Wall Street is thriving, even today, is that it plays a critical role in financing the trade deficit.

Right now the trade deficit is running at an annual rate of $475 billion per year, and rising. It’s up almost 40% over the past year.  Virtually all that money has to flow in through Wall Street, directly or indirectly–Treasury bonds, corporate bonds, stocks, financing for consumer purchases. 

The trade deficit cannot be financed without Wall Street, which has a crucial role as a financial intermediary.

That’s not quite the same as saying, as Tyler does, that the financial sector has a key role in financing the budget deficit. During the beginning of the decade, the federal budget was in balance, but the size of the financial sector was growing along with the trade deficit.

Take a look at this chart:

Tthe finance sector steadily grew with the expansion of the trade deficit. The two peaked together around 2005 and 2006. 

Basically, in my view,  Wall Street has been making big profits serving as an intermediary between the U.S. and the rest of the world, sometimes in complicated ways. The big losers in the Goldman Sachs fraud case were European financial institutions. But remember that 80% of John Paulson’s assets came from foreign investors as well. In essence,  Goldman enabled  non-US investors to bet against other non-US investors, on the outcome of U.S. borrowing. 

More generally, the whole subprime debacle was about creating dollar assets that foreign investors, flush with dollars, could invest in.  Assuming that I’m right, the Chinese were conservative and smart here–they put their money into Treasuries and agencies, that were fully supported by the U.S. government.  The European banks, on the other hand, wanted better returns–they took the trade mammoth surpluses that  Europe was running with the U.S. ($700 billion between 2000 and 2008), and poured them back into higher yield but supposedly safe securities.  That flow of money fueled Wall Street prosperity.

As the trade deficit expands again, the need for savvy financial institutions to connect overseas funders with U.S. borrowers increases. 

So here’s the hell of it. Wall Street provides a socially useful function, facilitating the flow of money into the country. But it’s not money that’s good for us.  

 

Views on Goldman Sachs case

Simon Johnson wrote:

John Paulson obviously knew what he was doing in helping to create the “designed to fail” securities – and the consequences this would have.  If he cannot be convicted of conspiracy to commit fraud, then the law in this regard needs to be tightened significantly.

<snip>

Senator Ted Kaufman was right.  Just a few weeks ago, he argued strongly from the Senate floor that there is fraud at the heart of Wall Street.  Even some people who are generally sympathetic to his critique of modern financial practices thought perhaps that this specific notion was pushing the frontier.  But now they get it – and today Ted Kaufman is more than mainstream; he is the public figure who made everything crystal clear.

Megan McArdle writes:

I suspect this case will get a lot of public traction.  At this point, what galls people is not so much the stupid behavior that led to the bailouts, but the blatant self-dealing that seems to have gone on.  Unfortnately, much of that self-dealing is not actually illegal . . . so when we find an example that is legally actionable, the public and the court system are bound to jump on it with both feet.

Yves Smith of Naked Capitalism writes:

A number of journalists and commentators (yours truly included) have taken issue with the fact that some dealers (most notably Goldman and DeutscheBank) had programs of heavily subprime synthetic collateralized debt obligations which they used to take short positions. Needless to say, the firms have been presumed to have designed these CDOs so that their short would pay off, meaning that they designed the CDOs to fail. The reason this is problematic is that most investors would assume that a dealer selling a product it had underwritte was acting as a middleman, intermediating between the views of short and long investors.

She also points out an important part of the SEC complaint that I hadn’t seen mentioned elsewhere:

It is also interesting that the SEC is suing Goldman and one of its employees, and not the collateral manager, ACA Management:

Fabrice Tourre [a Goldman employee who is a party to the SEC suit] also misled ACA into believing that Paulson invested approximately $200 million in the equity of ABACUS 2007-AC1 (a long position) and, accordingly, that Paulson’s interests in the collateral section process were aligned with ACA’s when in reality Paulson’s interests were sharply conflicting

In the end, transparency will turn out to be essential.

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