Inequality, Part V: Predatory Financialization

How Wall Street increases disparities

My favorite line from the 1987 movie Wall Street comes when Gordon Gekko ridicules the Charlie Sheen character for his limited ambitions:

I'm not talking about some $400,000-a-year working Wall Street stiff, flying first class, and being comfortable.

Adjusted for inflation, 400K in 1987 would be around $1.1 million now.

What the line tells us that even in 1987, fairly early in the great post-1980 surge in inequality, many people in finance — working Wall Street stiffs — were already being paid very large sums, and a few people were acquiring extraordinary fortunes.

Last week I noted that the very biggest fortunes in America are now primarily based on technology quasi-monopolies. But go down the Forbes 400 list a bit and you see a number of plutocrats who made tens of billions in finance, especially hedge funds. These include people like Stephen Schwarzman, who compared efforts to close a Wall Street-friendly tax loophole to Hitler’s invasion of Poland, and Ken Griffin, a Republican megadonor.

The fact is that financialization of the U.S. economy has been a major driver of rising inequality. What do I mean by financialization? Actually I mean two different but related things. One aspect is the extraordinary rise in the share of the U.S. economy devoted to financial activities as opposed to production of goods and services. A second is the pervasive way in which financiers and financial institutions like hedge funds and private equity have changed how even nonfinancial business operates. These changes have almost always increased inequality.

Beyond the paywall I will discuss the following:

1. The growth of the financial sector and what explains it

2. How growth in finance directly increases income and wealth inequality

3. How the increased role of Wall Street has changed the way the rest of the economy operates