Bruce Bartlett concedes something today that left-leaning economists have been saying for quite some time: The financialization of the economy is not healthy.
Bartlett buries his argument in a sea of studies and engages in a seemingly reasonable, if unnecessary, set of caveats. But he also puts several important claims on the table that, because of his history with the Reagan and Bush administrations and as advisers to libertarian leaning politicians, may finally get the kind of hearing they should have been getting all along.
Bartlett notes the growth in the financial services industry — which now exceeds 8.3 percent — up from 2.8 percent in 1950 and 4.9 percent in 1980. That may not seem like a huge amount, but as Bartlett points out, citing Ozgur Orhangazi of Roosevelt University,
investment in the real sector of the economy falls when financialization rises. Moreover, rising fees paid by nonfinancial corporations to financial markets have reduced internal funds available for investment, shortened their planning horizon and increased uncertainty.
He also quotes Adair Turner, a former top financial regulator in Great Britain, who said
“There is no clear evidence that the growth in the scale and complexity of the financial system in the rich developed world over the last 20 to 30 years has driven increased growth or stability.”
He suggests, rather, that the financial sector’s gains have been more in the form of economic rents — basically something for nothing — than the return to greater economic value.
This is essentially the argument that Kevin Phillips made in his 2008 book Bad Money and that William Greider has been making for years.
Bartlett goes on to say that, as finance sucks up more and more resources, labor gets less. Its share of income has “fallen 12 percentage points since its recent peak in early 2001 and even more from its historical level from the 1950s through the 1970s.” There are a number of factors in play, he says, “including globalization, technology and institutional factors like declining unionization.”
But according to a new report from the International Labor Organization, a United Nations agency, financialization is by far the largest contributor in developed economies (see Page 52).
The report estimates that 46 percent of labor’s falling share resulted from financialization, 19 percent from globalization, 10 percent from technological change and 25 percent from institutional factors.
The upshot? Bartlett acknowledges that financialization is “a major cause of rising income inequality, which itself is an important reason for inadequate growth.”
As the entrepreneur Nick Hanauer pointed out at a Senate Banking, Housing and Urban Affairs Committee hearing on June 6, the income of the middle class is critical to economic growth because of its buying power. Mr. Hanauer believes consumption is really what drives growth; business people like him invest and create jobs to take advantage of middle-class demands for goods and services, which must be supported by good-paying jobs and rising incomes.
Bartlett’s not sure what to do about it and it is hard to see why. We’ve spent the last 40 years dismantling the rules we had put in place to ensure some semblance of order in the economy and to protect workers and consumers. What this dangerous wave of bipartisan deregulation has wrought is a financial meltdown that wiped out billions in middle-class wealth and millions of jobs, followed by a stubborn stagnation that has hampered growth and directed what little improvement we’ve seen to the top 1 percent.
We need to be honest with ourselves. Deregulation was not an elimination of rules that acted as a brake on our economy, but a rewriting of rules designed to redistribute wealth upward and make it easy for those with cash to grab more of it.
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Hank Kalet 
The oligarchs, the libertarians, the right wingers have been screaming for an end to the regulations for decades. All the screaming, lobbying and corporate money succeeded in deregulation gone wild. The result was the great recession of 2008 and earlier the S&L collapse of the late 1980s and early 1990s. Then the elites and oligarchs have an excuse to kill off Social Security, Medicare, Medicaid or any social program that helps ordinary mortals. It's called the shock doctrine or disaster capitalism or laissez-faire predatory capitalism and social Darwinism. Mission accomplished.