15 September 2009

The Rise of Finance

This article is excerpted from the book Outline of the U.S. Economy, published by the Bureau of International Information Programs. View the entire book (PDF, 3.26 MB).

The first decade of the 21st century marked the “ascendancy of finance,” in the words of Joseph E. Stiglitz, chairman of President Bill Clinton’s Council of Economic Advisers. The finance, insurance, and real estate industry category of gross domestic product, which includes giant securities funds, small regional banks, and insurance companies, contributed $2.7 trillion to the economy in 2006, or 21 percent of the total. Its share in 1980 was 16 percent. Between 1998 and 2006, the revenues of U.S. finance and insurance companies shot up by 71 percent, capitalizing on the U.S. leadership in rapidly growing global financial markets.

The growth in international credit markets in the 2000s decade showed both the sophistication and dynamism of the U.S. investment industry. The crash that followed in 2008 revealed a lack of restraint that led many in the industry to assume dangerous risk by accumulating too much debt, much of it not clearly visible to their shareholders.

A category of industry called “business and professional services” added about $1.5 trillion in output to the economy in 2006, or 12 percent, compared to 7 percent in 1980. This encompasses the growing economic role played by lawyers and consultants. The American Bar Association reported that more than 1.1 million lawyers were practicing in the United States in 2008, or one out every 300 Americans, a far higher proportion than in any other country.

Health care came to $900 billion, or just under 7 percent of economic output, reflecting the expansion of high-priced health care technologies and the medical needs of an aging U.S. population. In 1980, health care accounted for 4 percent of the economy.

Americans today travel more for business and pleasure than a generation ago, and this has fed the growth of the hotel and restaurant industries, whose output totaled $350 billion in 2006, or 2.7 percent of the gross domestic product. This is slightly higher than in 1980.