How the Finance Industry Fueled Four Decades of Inequality in America
Starting in the ’80s, the rise of finance set forces in motion that have reshaped the economy
Coauthored with Megan Tobias Neely, Postdoctoral Fellow in Sociology at The Clayman Institute for Gender Research at Stanford University.
These days, finance is so fundamental to our everyday lives that it is difficult to imagine a world without it. But until the 1970s, the financial sector accounted for a mere 15 percent of all corporate profits in the US economy. Back then, most of what the financial sector did was simple credit intermediation and risk management: banks took deposits from households and corporations and loaned those funds to homebuyers and business. They issued and collected checks to facilitate payment. For important or paying customers, they provided space in their vaults to safeguard valuable items. Insurance companies received premiums from their customers and paid out when a costly incident occurred.
By 2002, the financial sector had tripled, coming to account for 43% of all the corporate profits generated in the U.S. economy. These profits grew alongside increasingly complex intermediations such as securitization, derivatives trading, and fund management, most of which take place not between individuals or companies, but between financial institutions. What the financial sector does has become opaque to the public, even as its functions have become crucial to every level of the economy.
And as American finance expanded, inequality soared. Capital’s share of national income rose alongside compensation for corporate executives and those working on Wall Street. Meanwhile, among full-time workers, the Gini index (a measure of earnings inequality) increased 26%, and mass layoffs became a common business practice instead of a last resort. All these developments amplified wealth inequality, with the top 0.1% of U.S. households coming to own more than 20% of the entire nation’s wealth — a distribution that rivals the dominance of the robber barons of the Gilded Age. When the financial crisis of 2008 temporarily narrowed the wealth divide, monetary policies adopted to address it quickly resuscitated banks’ and affluent households’ assets but left employment…