Tuesday, November 22, 2011

Overstating the Financial Sector Contribution to the Economy

Haldane and Madoures summarize their research in this VoxEU.org post. As expected, it's not only the real estate industry that was artificially inflating the potential output of many countries, the financial sector was overstating the real size of the economy too. As they conclude:
If risk-making were a value-adding activity, Russian roulette players would contribute disproportionately to global welfare. And if government subsidies were the route to improved well-being, today’s growth problems could be solved at a stroke. Typically, this is not the way societies keep score. But it was those very misconceptions which caused the measured contribution of the financial sector to be over-estimated ahead of the crisis.

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