October 13, 2016
Most sectors within manufacturing have seen serious downsizing and restructuring over the last four decades. Many have gone bankrupt. Much of this story was not pretty for the workers directly affected. Many lost the only good-paying jobs they ever held. Some also lost pensions and health care benefits.
Nonetheless, the conventional wisdom among economists was that this process was good. It was associated with growing efficiency in the manufacturing sector as the least productive firms went out of business, other firms became more productive in order to survive. The net effect was that we are able to buy a wide range of manufactured goods for much lower prices than would be the case if the manufacturing sector had not gone through this period of downsizing and transition.
With this as background, it was striking to see the Wall Street Journal bemoaning what appears to be a comparable period of adjustment in the banking industry. The central point is that the banking industry appears to be less profitable than it was before the crisis. Apparently tighter regulations are playing a major role in this decline in profitability.
This drop in profitability is presented as a bad thing, but it is hard to see why those of us outside of the banking industry should see it that way. If the sector had become badly bloated prior to the crisis then we should want to see it downsized. The workers who lose their jobs can be redeployed to sectors where they will be more productive. (The same argument that economists gave for manufacturing firms.) Declining profitability is a necessary part of this story.
Maybe the banks will also stop paying their CEOs tens of millions of dollars to issue phony accounts to customers. Lower pay for CEOs and other top executives will leave more money for shareholders.
There is a risk that the bankruptcy of a major bank could cause a serious disruption to the economy. Of course, that would imply that we still need to be concerned about “too big to fail” banks, in spite of the endless assurances to the contrary. If we have in fact fixed the too big to fail problem, then the rest of us should be celebrating the downsizing of the banking industry as the market working its magic. Too bad the WSJ doesn’t like the market.
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