The ascendancy of the US capital markets —including increasing depth of US stock, bond,and derivative markets — has improved theallocation of capital and of risk throughoutthe US economy. Evidence includes the higherreturns on capital in the US compared to else-where; the persistent, large inflows of capitalto the US from abroad; the enhanced stabilityof the US banking system; and the ability of new companies to raise funds. The same con-clusions apply to the United Kingdom, wherethe capital markets are also well-developed.The consequence has been improved macroeco-nomic performance. Over the last decade,US labor productivity has risen and the UnitedStates has outperformed economies dominatedby banking-based systems. Because marketprices adjust instantaneously to new informa-tion, the development of the capital markets hasintroduced new discipline into policymaking. Asa result, the quality of economic policymakinghas improved over the past few decades.The development of the capital markets hasprovided significant benefits to the averagecitizen. Most importantly, it has led to morejobs and higher wages.By raising the productivity growth rate, thedevelopment of the capital markets has enabledthe economy to operate at a lower unemploy-ment rate. In addition, higher productivitygrowth has led to faster gains in real wages.The capital markets have also acted to reducethe volatility of the economy. Recessions areless frequent and milder when they occur.As a result, upward spikes in the unemploy-ment rate have occurred less frequently andhave become less severe.The development of the capital markets hasalso facilitated a revolution in housing finance.As a result, the proportion of households inthe US that own their homes has risen substan-tially over the past decade.Effective capital markets require a firm founda-tion. This includes the enforcement of lawsand property rights, transparency and accuracyin accounting and financial reporting, and lawsand regulations that provide the proper incen-tives for good corporate governance. A well-developed financial system is a spur to growth,macroeconomic performance, and more rapidgrowth in living standards.
We thank Sandra Lawson for her work on
Section IV: What’s Required for Successful Capital Markets
, as well as for her expert editorialassistance; Themistoklis Fiotakis and Peter Stoute-King for their work in gathering and analyzing much of the data used in this paper; andthe many others in the Goldman Sachs Economics Group who helped with the data and provided thoughtful comments and guidance.