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Socio-Economic Review, 2015, Vol. 13, No.

3, 525548
doi: 10.1093/ser/mwv009
Advance Access Publication Date: 13 May 2015

Did nancialization reduce economic


growth?

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Donald Tomaskovic-Devey1,*, Ken-Hou Lin2, and Nathan Meyers1
1
Department of Sociology, University of Massachusetts-Amherst, Amherst, MA, USA, and
2
Department of Sociology, University of TexasAustin, Austin, TX, USA

*Correspondence: tomaskovic-devey@soc.umass.edu

Abstract
We explore the consequences of increased nancial investment by non-nancial
rms, nding consistent evidence that nancialization in the non-nance sector
reduced economic growth in that sector. Employing an expanded conceptualization
of value added which identies internal (capital, labour) and external (creditors, gov-
ernment, charities) stakeholders with claims on the value generated in production and
exchange, we nd that the declining value added produced by nancialization was
born most strikingly by labour and the state, while increasing value was channelled
to corporate debt and equity holders. Corporate charities also had a net gain asso-
ciated with increased nancial investments by the non-nancial rms.

Key words: growth, corporate nance, income distribution, economic sociology, nancialization,
nancial economics
JEL classication: D24 production, E02 Institutions and the Macroeconomy, E25 aggregate factor
income distribution

1. Introduction
By nancialization we refer to the post 1980 expansion of both the nancial service sector and
increased investment in nancial instruments by the non-nancial sector (see Van der Zwan,
2014 for a review). After 2008 it became clear that nancialization had the capacity to intro-
duce instability into the US and other economies. When the US nancial sector collapsed so
did much of the global economy. It also seems to be the case that contemporary nancializa-
tion increases inequality, at least in advanced industrial societies. Instability and inequality are
not, however, evidence that nancialization has been harmful to general economic growth. In
a capitalist system shocks and cyclic destruction, as well as rising inequality are not inconsist-
ent with long-run growth in standards of living.

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526 D. Tomaskovic-Devey et al.

This paper asks if the increased nancial asset investments by US non-nancial rms were
associated with growth or decline in total production. It is possible that nancial investment
strategies, despite increasing inequality, lifted all boats. If this is what happened then the policy
case against nancialization is weakened. If nancialization of the assets of non-nancial rms
had no inuence on value added, then the case against it rests on the social costs associated with
increased income inequality and systemic risk. On the other hand, if nancialization of the non-
nance sector is associated with decreased total production, then contemporary movements
towards a nancialized non-nance sector are economically as well as socially destructive.
The social processes we are investigating happen at the level of rm investment and produc-
tion decisions. In the USA rm level data on value added are not available, so our empirical strat-

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egy is to estimate the inuence of nancial investment strategies on total value produced and its
distributional components (capital, dividends, creditor income, labour, taxes and charitable
giving) across US non-nancial industries. While this empirical approach moves us away from
the actual actorsrmsit is broadly consistent with national accounting practices that are used
to estimate economic growth. Since the non-nance sector produces more than 90% of the US
gross domestic product (GDP), a focus on non-nancial sector economic outputs is an appropri-
ate assessment of whether nancialization increased or reduced overall economic performance.
In theory, the non-nancial economy produces the goods and services which are consumed
by populations and the nance sector performs the secondary role of facilitating these pro-
ductive economic activities (King and Levine, 1993; Levine, 2001). It is well known that
after the US deregulation of nancial services in the 1980s and 1990s that nancial services
were able to absorb substantial economic rents from the rest of the economy (Tomaskovic-
Devey and Lin, 2011). During this same period US non-nancial rms increasingly pursued
nancial investment strategies (Krippner, 2011). It may be that the rise of nance oriented
investments by non-nance sector rms was simply the internalization of this function in
the face of a powerful and even predatory nance sector (Williamson, 1985) or perhaps
simply a diversication opportunity to move into protable nancial lines of business
(Davis, 2014). On the other hand, it is possible that nancial investment by non-nance
rms reected the emerging institutional preference for nancial activities (Davis, 2009),
rather than an economically productive investment decision. In this case nancialization
may have simply been a distraction from production goals as corporate leaders came to
think of their rms as bundles of assets rather than producers of goods and services.
Our analytical approach is fairly simple. We use industries as the unit of analysis and ask if
increased nancial investments in the non-nance sector are associated with growth or decline in
industry value added. Our core nding is that industries that pursued nancial oriented invest-
ment strategies subsequently generate less total income. This nding is robust across major
sectors of the economy. We then trace the associations between nancialization and various
components of value-added to examine how employees, owners, creditors, government and
charities were differentially impacted in the process. The analysis shows that in industries that
pursue nancial investment, labour and government lose. Corporate debt and equity holders
stand out as the stakeholders that captured additional value when rms pursue nancialization.

2. Financialization
It is well established that since 1980 the USA has undergone a fundamental transformation
from a manufacture-driven to a nance-orientated economy, during which increased shares
Did nancialization reduce economic growth? 527

of national income accrue through nancial channels (Krippner, 2005), corporate governance
is increasingly responsive to and disciplined by nancial rather than product markets
(Fligstein, 2001; Fligstein and Shin, 2004, 2007; Davis, 2009), and national economic
policy is oriented increasingly towards the well-being of large nancial service rms
(Hacker and Pierson, 2010; Krippner, 2011).
Correspondingly non-nancial corporations came to be seen as bundles of assets, rather
than rms with product centred identities (Fligstein, 1990). During the 1980s, as shareholder
value goals began to dominate corporate strategy, market share as the metric of CEO success
was displaced by goals of short-term protability and stock price gain (Dobbin and Zorn,
2005; Krier, 2005; Davis, 2009; Goldstein, 2012). These shareholder value norms encouraged

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executives to distribute earnings to equity holders rather than reinvest in production (Lazonick
and OSullivan, 2000; Davis, 2014). After 1982 it became legal for corporations to repurchase
their own stock and there has been a general substitution of corporate stock repurchase for
dividends to distribute income to shareholders (Grullon and Michaely, 2002). In 1993 the cor-
porate tax deductibility of executive compensation was capped at $1 000 000, unless add-
itional compensation qualied as performance-based. This made stock options a popular
component of executive compensation (Rose and Wolfram, 2002; Davis, 2014). These two
regulatory shifts encouraged corporate executives to manipulate stock prices, and executive
compensation via stock options exploded (DiPrete et al., 2010; Zheng and Zhou, 2012).
During this period many non-nancial rms increased the nancial portfolio component of
their investments. Krippner (2005) and Epstein and Jayadev (2005) were probably the rst to
point this out, but it has since been conrmed at the industry (Lin and Tomaskovic-Devey,
2013) and large rm level (Orhangazi, 2008; Lin, 2013; Davis, 2014). This shift into nancial
investments was probably started by the increased nancial protability produced by high inter-
est rates in the 1980s (Krippner, 2011) and the declining cost of corporate bonds as a source of
nancing for the non-nance sector (Davis, 2014). General Electric (GE), for instance, ballooned
its nancial assets in the late 1970s by redirecting prots from production towards nancial in-
vestments, a strategy that became popular among US corporations in the 1980s (Hyman, 2012).
During this period non-nance rms began to substitute debt for equity as their source of
external investment capital (Lin, 2013). Davis (2014) conrms this nding, but notes that this
shift in asset portfolios was largely found among the largest corporations. Smaller corpora-
tions actually reduced their debt leverage and increased their use of retained earnings to
nance investment.
Figure 1 displays nancial assets as a share of all assets for US non-nancial corporations
from 1970 to 2008. Following Davis (2014) we focus in this paper on corporate nancial in-
vestments, excluding cash holdings, as our core measure of nancial investments by non-
nancial rms. Although there was a small growth in nancial assets as a share of all assets
from 1970 to 1980, during the post-1980 period of nancialization the share grew rapidly
rising to as high as 29% of all assets held by non-nancial rms by the early 2000s.
Financial assets as a share of all investments declined across the 2000s, although levels
were still quite high by historical standards in 2008.

3. Why should we study value added?


In economics the problem of growth has taken precedence over the problem of distribution
(see Piketty, 2014 for a similar observation). As recently as 2004 Nobel Prize winner
528 D. Tomaskovic-Devey et al.

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Figure 1 Financial assets as a proportion of total assets, 19702008.

Robert C. Lucas warned that studying inequality was a distraction from the core goal of sound
economic analysis: studying economic growth (Lucas, 2004). Standard economic theory sees
the problem of inequality in the context of economic growth. Rising or falling inequality is less
important than rising or falling standards of living. Rising inequality accompanied by rising
standards of living or falling poverty is in this view not inherently problematic.
Current ndings that nancialization is associated with rising inequality in the USA
(Hacker and Pierson, 2010; Kaplan and Rauh, 2010; Nau, 2011; Philippon and Reshef,
2012; Lin and Tomaskovic-Devey, 2013) and in other high income countries (Zalewski
and Whalen, 2010; Dnhaupt, 2012, 2013; Godechot, 2012; Kus, 2012) does not address
the issue of whether nancial developments actually made anyone absolutely worse off.

4. Potential links between nancialization and value added


Most prior macroeconomic research nds that the national development of a nancial services
industry is a prerequisite for sustained economic growth (King and Levine, 1993). Positive
impacts of nancial service growth on GDP are not, however, automatic, but require institu-
tions that prevent fraud and excessive risk taking (Levine, 2005; Mishkin, 2007). Following
the work of King and Levine (1993), much of the research on more developed economies has
inherited the assumption that nancial service growth enhances economic development. For
example, Jayaratne and Strahan (1996) supports this linkage, nding that intrastate banking
deregulation beginning in the 1970s led to higher rates of growth in states pursuing deregu-
lation. More recently, some economists have questioned the nance-growth nexus, nding
that rapid nancialization erases the connection between increased nancial services and eco-
nomic growth (Rousseau and Wachtel, 2011). Philipon and Reshef (2012) argue that nancial
development can lead to increased rates of growth, but nancial investments eventually reach
a point of diminishing returns (see also Beck et al., 2014). In the case of the USA, Greenwood
and Scharfstein (2013) explain that the two main areas of growth within nancial services,
asset management and credit intermediation, led to increased instability of the nancial
system. Finally, Philippon (2012) demonstrates that the unit cost for nancial services has
Did nancialization reduce economic growth? 529

increased in the USA and several Western countries consistent with the rent-seeking behaviour
described in Tomaskovic-Devey and Lin (2011).
More direct evidence can be found in Cecchetti and Kharroubi (2012). They show that the
inuence of nance sector size on economic growth turns negative when nancial services
become too large a share of an economy and in those cases rapid growth in nancial services
is associated with declines in non-nance sector growth and that high levels of nancial activ-
ity crowd out investment and R&D in the non-nance sector. In a later paper, Cecchetti and
Kharroubi (2015) conclude that nancial sector growth competes with the real economy.
They nd for a sample of fteen OECD countries that increased rates of nancial sector
growth are associated with decreased productivity growth, particularly in R&D and capital

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intensive industries, conrming their prediction that nance sector growth crowds out new
investment in production innovation.
Similarly, Aizenman et al. (2013) conclude that expansion of the nancial sector in high
income countries is not associated with growth in value added in other sectors, but the con-
traction of the nancial sector adversely affects the real economy. Importantly rapid growth in
the nancial sector tends to be followed by a strong contraction, in a boom bust cycle. This
pattern was not present in the world economy until after 1980 and is more dramatic in coun-
tries whose nancial system is relatively open to the international nancial system. The USA is,
of course, one of these countries.
Stockhammer (2004) argues that nancialization reshaped managerial priorities in the non-
nance sector away from growth in production and towards short-term prots. He shows that
national nancial income is negatively associated with new investment in xed capital.
Orhangazi (2008) nds for a sample of large US rms that increasing payments to the nance
sector as well as nancial prots depress production-related investment. Davis (2014) focusing
on rm investment in xed assets nds for large non-nancial rms that industry level stock buy-
backs, which she interprets as reecting shareholder value norms, and increased debt-based -
nancing are associated with lower investments in direct production. If nancialization diverted
rms investment portfolio away from production, this suggests that the nancialization of the
non-nance sector might produce declines in total value added. On the other hand, if the
economy is becoming more knowledge intensive, or nancial assets yield greater returns than
xed assets, even a decline in xed investment might be compatible with growing value added.
In a brief appendix to a prior investigation we found that higher nancial assets relative to
investments in production assets were associated with lower growth in industry value added,
but that during the mid-1980s the value added returns to nancial investments approached
those of investments in production (Lin and Tomaskovic-Devey, 2013). That paper suggests
that we might nd a decline in value added associated with the nancialization trend, but that
the negative effect of nancialization on total value added might be weaker in the mid-1980s
than before or after. This expectation is consistent with historical narratives explaining the rise
of the nancial principle in the US economy. During this period interest rates were relatively
high, cheap capital from around the world owed into US investment opportunities, and new
nancial investment opportunities expanded (Krippner, 2011). Concurrently, the shareholder
value movement encouraged rms to increase returns through efciency, rather than market
share strategies, and to conceptualize the rm as a bundle of prot producing assets (Fligstein
and Shin, 2004, 2007; Davis, 2009).
Elsewhere we have argued that the extraordinary growth of income in the US nancial ser-
vices sector is a result of income rents taken from the rest of the society (Tomaskovic-Devey
530 D. Tomaskovic-Devey et al.

and Lin, 2011). In our prior work we did not ask where these rents came fromhouseholds,
the non-nancial sector, tax revenue, or elsewhere in the global economybut our argument
in that paper was consistent with an expectation that nancial investments in the non-nancial
sector might lead to a transfer of income out of the productive sector and into nancial service
rms. Philippon (2007) suggests that more than half of the rapid growth in the US nancial
sector is a result of non-nancial rms increased use of debt to nance investment (see also
Orhangazi, 2008). It seems plausible to suspect that the nancialization of non-nancial
rms has led to a transfer of income from the real economy to the nance economy, from
main-street to wall-street via dividends, stock buybacks and interest payments on increased
corporate debt nancing.

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A second possibility is that the increased nancial investment strategies on main-street
may have simply been attempts to avoid rent extraction by increasingly powerful nancial
service rms. If this is the case, the internalization of nance may have simply been a make
versus buy decision in Williamsons (1985) sense. The conventional nance economics litera-
ture focusses on nancial services as a source of growth in production, but assumes that nan-
cial services and nancial investments are external to the productive sector (Levine, 2005;
Mishkin, 2007). There is some suggestive evidence in this literature as to why non-nance
rms might internalize nance. Cetorelli and Gambera (2001) nd that concentration in the
banking industry depresses national growth (see also Claessens and Laeven, 2005). Financial
service concentration certainly has been the pattern in the post-1980 USA (Tomaskovic-Devey
and Lin, 2013); thus non-nance rms may have had an incentive to internalize these func-
tions. If this was the case nancial investments by non-nancial rms might be neutral or even
cost-saving market adjustments in the face of nance sector market power. This result would
be consistent with standard economic theory which does not distinguish between investment
in the real and nancial economy (Modigliani and Miller, 1958). Consistently, we nd no
effect of nancial revenue on total prots in a sample of large non-nance rms (Lin and
Tomaskovic-Devey, 2013).
A third possibility is that large non-nancial rms pursued nancial investments in order
to prot from those same rent taking opportunities produced by the concentration of political
and market power in the nancial service industry. In this case there was more money to be
made in commercial and investment banking than in retail sales, car or electric motor produc-
tion, so Sears, GM and GE simply switched sectors. It is also clear that during the period of
nancialization there was a strong ow of global investment capital into the USA. In 2008 the
USA accounted for 43% of all capital imports in the world (Guilln and Surez, 2010). Davis
(2014) observes that rms like GE could borrow capital at very low rates in the bond markets
and relend at higher rates in consumer debt markets. Thus, it is possible that nancial invest-
ment strategies by non-nance rms merely responded to the opportunities presented by this
explosion of cheap capital and that this particular rising tide lifted the entire economy
nance and non-nance alike.
Thus plausible arguments can be made that nancial investment strategies by non-nance
rms might be consistent with negative, neutral or even positive value added trajectories. We
think the weight of the prior evidence is more consistent, however, with the negative
hypothesis:

H1: Increased nancial investment strategies by non-nancial rms are associated with lower
total value added.
Did nancialization reduce economic growth? 531

5. Conceptualizing value added and its components


We examine the impact of nancial investment strategies on both value added, conventionally
dened, and an expanded conceptualization consistent with relational inequality theory
(RIT), which we refer to as an expanded income pool (for RIT, see Avent-Holt and
Tomaskovic-Devey, 2014; Tomaskovic-Devey, 2014).
The conventional notion of value added, embedded in national income and product ac-
counts and tax law, visualizes the rm as a production machine, in which inputs of materials,
capital and labour lead to outputs, and value added is the residual value after production
costs. This model assumed competition in product markets constrain rm income to match

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the actual new value generated in production. The conventional measure of industry-level
value added includes three components: (a) the value created by labour, which is measured
by total compensation; (b) the value created by capital, which is any operating surplus; and
(c) taxes paid in the production process.
The RIT framework also considers production at the rm level, but in this framework,
rms are constituted by social relationships both inside and outside formal organizational
boundaries (Tomaskovic-Devey, 2014). In this formulation rms do not add value so much
as accumulate it, from both internal production relations and external relationships with sup-
pliers, customers, and the state. Similarly the value accumulated by a rm is distributed to sta-
keholders inside the rm (labour, direct owners), those in a liminal position (e.g. equity
holders, sub-contractors, leased labour), and external stakeholders (e.g. the state, creditors,
charities).
If we think about rms as having both external and internal stakeholders, then the distri-
bution of income is embedded in a wider set of social, political and economic relationships.
We might then think of a rm as having porous boundaries, with stakeholders more or less
powerful in the distribution process. Labour and top management, being employees, are
clearly internal to production. Some capitalists might be as well, but others who own
equity stakes are external to the social relations of production. The shareholder value move-
ment might be interpreted as these previously marginal stakeholders making claims on a larger
share of the value accumulated by the rm (Jensen, 1986).
One aspect of nancialization has been the substitution of debt for equity nancing. In the
conventional value added account the distribution of prot to capital owners is a central des-
tination for the value accumulated by the rm. Interest on debt-based investment, however, is
typically counted as a cost of production. But clearly these are functionally equivalentboth
are forms of capital investment. Because debt is contractually a cost of production, debt
holders are actually paid prior to equity owners. In this way the shift from equity to debt -
nancing, moved capital claims on value added to a position equivalent to or even prior to
those of labour compensation.
If we switch our focus to downstream actors it is clear that rms also distribute surplus to
other external actors. Of course, when rms are weak relative to their customers the value they
accumulate is driven down, regardless of the efciency of internal production relations. The
classic notion that market competition drives prots towards zero reects this insight. The em-
pirical observation that market concentration allows rms to charge higher prices does as well.
But there are other external stakeholders, the most important of which is the state. Firms pay
taxes to local, state and national governments. These taxes are a result of the political struggle
between actors over claims on surplus. This struggle has two moments, the struggle between
532 D. Tomaskovic-Devey et al.

rms and the state over corporate tax rates and the struggle between the state, households, and
rms as to the distribution of tax burdens between rms and households. Taxes on both inter-
mediate production and prots are clearly part of the value stream distributed out of produc-
tion. In addition, rms can get subsidies from the state, so that their value stream includes
payments from the state. Finally, rms also have the opportunity to make charitable donations
and in a RIT framework these should be seen not as costs of production, but as distribution of
the pool of income accumulated in the rm.
In this paper we examine the impact of nancialization on value added as traditionally con-
ceived and an RIT conception of an expanded income pool, which adds to the conventional
measure income distributed to charities, interest payments on corporate debt, taxes, and state

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subsidies. Figure 2 shows the ination-adjusted time series for the two measures for the US
non-nancial economy. The general trend is well known; growth was relatively slow from
1970 until the mid-1980s, with large declines associated with the recessions of the
mid-1970s and early 1980s, accelerating growth in the late 1980s. The two series largely
move in tandem, suggesting that they are part of the same process of value accumulation,
as described in the RIT framework. Over time the gap between the two time-series widens
as the interest paid on expanding corporate debt increases as a destination for rms
income pool.
Our rst set of analyses focuses on the impact of nancial investment strategies by non-
nancial rms on value added under both conceptualizations. We follow this with a compos-
itional analysis which focuses on the volume of income distributed to capital as prots and
dividends, to debt holders as interest payments, to employees as compensation and benets,
to all levels of government as taxes, and to charities as gifts.
The prior literature on nancialization and inequality suggests that if nancialization has a
positive impact on the volume of income it will be for capital and its negative impact will
be born primarily by employees. In the RIT framework the rise of nancial investment strat-
egies by non-nance rms is seen as producing a declining corporate focus on production,
with concomitant declines on the bargaining power of production workers (Lin and
Tomaskovic-Devey, 2013). The literature on the increased power of nancial service industries
suggests that nancialization might be associated with increased value transferred to creditors
in the form of interest payments or to stockholders in the form of stock repurchases or

Figure 2 Value added by non-nancial goods and services 19702008.


Did nancialization reduce economic growth? 533

dividend payments. The literature on the increased political power of nancial services might
suggest that nancial investments by the non-nance sector might also act to reduce tax pay-
ments as they beneted from the political muscle of the nancial service sector. If nancializa-
tion reduced total production, this would lead to decreased tax revenue on intermediate
production and corporate prots as well.

6. Analysis strategy and measurement


We compiled integrated US time-series, cross-sectional data at the industry level for the years
19702008. The unit of analysis is industry-year. While rm level analyses would be more

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theoretically appropriate, value added data are not available at the rm level. Appendix A
provides a list of all industries included in the analysis. Most variables are drawn from the
National Income and Product Accounts published by the Bureau of Economic Analysis
(BEA) and the Corporate Tax Return Statistics published by the Internal Revenue Service
(IRS). Since both accounts are primarily estimated from tax reports and subject to auditing
and adjustment, they are more reliable than conventional survey or business press data.
Workforce educational and union characteristics are estimated by aggregating within indus-
tries individuals in the Current Population Survey (CPS). The Organization for Economic
Cooperation and Developments (OECD) Structural Analysis (STAN) statistics were used
to collect data on import penetration for extractive and manufacturing industries only.
Appendix B provides a discussion of all data sources and formal denitions of all variables.
We examine the connection between nancialization and value added with single-equation
error correction models (ECMs, see Beck, 1991; De Boef and Keele, 2008). The analytical ad-
vantage of such models is that they allow researchers to estimate the long-run, cumulative
effect of the explanatory variable. To absorb the interferences of time-constant industrial
trends and year-specic economy-wide shocks, we include xed effect terms for both industry
and year in the models. This procedure also ensures that the estimates are derived from within
industry variance in the rate of change instead of unobserved between-industry differences.
We report industry clustered standard errors.
The models are specied as

Yi;t 0 1;i 2;t  1 Yi;t1 2 Xi;t1 3 Xi;t i;t ;

where Yt denotes the rst difference YtYt1, 0 denotes the grand mean, 1,i denotes
industry-specic deviation in change, and 2,t denotes year-specic deviation, 1 denotes the
adjustment or error correction rate of Y, and 2 denotes that the direct effect of Xt1 on Yt.
3Xi,t is treated as a control for short run investment allocations. Conditional on other cov-
ariates, a unit increase in Yt1 leads to 1 unit decrease in Yt and therefore 11 unit increase
in Yt. Furthermore, because the dataset is unbalanced (the NAICS have more industrial cat-
egories), we equalize the importance across years by assigning a year-specic inverse probabil-
ity weight to each observation

1
Wi;t ;
Nt

where W denotes the weight of observation i, and N denotes the total number of observations
in year t.
534 D. Tomaskovic-Devey et al.

ECM models estimate both an instantaneous and long-run effect for all covariates. We take
a conservative approach focusing only on the long-run effects in our analysis. Interpreting the
contemporaneous coefcient as an instantaneous effect is only appropriate when the causal
direction is rmly established. Financialization, total assets and income distribution decisions
are all plausibly simultaneous. The interpretation of the long-run effect, by contrast, does not
require an implausible causal assumption and is consistent with our theoretical argument that
nancialization reshapes the long-term social relation between actors. To compute the
long-run effect 2 is divided by the error correction rate 1. We report these long-run effects
in Tables 2 and 4; standard errors are calculated via the Bewley transformation (see Lin and
Tomaskovic-Devey, 2013 for the precise calculation).

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Our basic hypothesis concerns the inuence of nancial investments on value added. We
measure nancial investments as the ratio of nancial assets to total assets for corporations.
The corporate reporting unit is appropriate as past research shows that nancial investments
by non-nance rms is primarily a large corporation behaviour (Davis, 2014). We focus on a
measure of nancial investment, corresponding to our theoretical account that nancializa-
tion is basically an investment strategy. Financial investments include loans to shareholders,
investment in government securities, investment in tax exempt securities, mortgage and real
estate loans, and a residual category other investments. While all categories of nancial in-
vestments by non-nancial corporations grew, the vast majority of growth was in other in-
vestments which includes investments in securities in other companies, derivatives,
consumer debt and foreign asset optionsthe kinds of assets we are looking to measure.1
Firms have some discretion to list their assets on the company balance sheet, as long as they
follow the Generally Accepted Accounting Principles (GAAP) created by the Financial
Accounting Standards Board. For example, an investment in a plot of land owned by
Corporation X can be classied as Land if the company intends to develop the property
or Other Investment if the sole purpose is speculation.
Lin and Tomaskovic-Devey (2013) used a revenue-based measure to explain growing
income inequality. Since revenue is an output measure, it would have a near-denitional as-
sociation with value added and is therefore not an appropriate alternative to the investment
measure we employ.
Our core hypothesis predicts a negative long-run effect of nancial investment on total
value added. In all models we also control for workforce human capital ( per cent college edu-
cated in industry), worker power ( per cent unionization), computer investment as per cent of
xed assets, total full-time equivalent employment and total asset investments (both tangible
and non-tangible). This model corresponds to a modied CobbDouglas production function
(see Sakamoto and Kim, 2010, 2014), in which total assets and employment are seen as the
primary sources of value added and additional compositional variables may lead to increased
or decreased productivity relative to these two main sources of value added. In a Cobb
Douglas framework the inuence of nancialization after controls for the volume of labour
and capital can be thought of as a measure of the efciency of nancial capital, in much
the same way that the per cent college educated in these models is interpreted to reect the
efciency of labour in production.

1 Corporate subsidiaries are aggregated into the parent companys balance sheet categories. Thus
nancial investments by subsidiaries appear in our nancialization measure. When a corporation
holds its own stock, on the other hand, it is not counted as a nancial investment.
Did nancialization reduce economic growth? 535

Table 1 Descriptive statistics

Variable Obs. Mean Std. Dev. Min. Max.

Conventional value added 1270 190 591.4 220 659.5 6568.6 1 202 941.0
Expanded income pool 1270 204 092.8 228 717.1 7469.2 1 221 185.0
Capital compensation 1270 58 474.0 61 948.8 1.3 413 821.1
Labour compensation 1270 115 823.9 141 491.8 3528.4 903 185.8
Dividends 1270 6678.7 9221.6 1.1 56 741.3
Interest paid 1270 13 134.7 14 568.5 310.4 116 003.6
Total taxes to all governments 1270 23 090.2 42 460.4 434.4 258 433.0

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Charities 1270 247.2 348.8 0.2 4189.6
Financialization 1270 0.20 0.10 0.03 0.83
Total assets 1270 33 354 39 335 705 285 312
Full-Time equivalent employees 1270 1970.3 2822.4 43.0 18 430.0
(thousands)
Union density 1270 0.21 0.16 0.01 0.79
College educated 1270 0.20 0.13 0.00 0.73
Computer investment 1270 0.12 0.13 0.00 0.68
Import penetration 768 0.15 0.14 0.00 0.84

Note: All amounts measured in millions of 2014 dollars unless otherwise specied.

To check the robustness of our results we estimate the same models separately for manu-
facturing and service sectors of the economy. Although nancialization grew to some extent in
all industries during our observation period, the growth was steepest in manufacturing. For
the extractive and manufacturing sectors we explore an additional control for global compe-
tition in the domestic market (import penetration). All variables measured in dollars are
ination-adjusted and logged. The employment measure is also logged. Variables are
dened formally in the Appendix B. Table 1 provides descriptive statistics for all variables
in the analysis.

7. Did nancial investment strategies decrease value added?


The rst two models in Table 2 report our estimates of the long-run effects of nancialization
of assets on conventional value added from the National Income and Product Account (NIPA)
and the RIT conceptualization of the expanded income pool.
Growth in nancial investments in non-nancial industries is associated with signicantly lower
value added conventionally dened. In contrast, the coefcient is positive and signicant for the
expanded income pool. Both of these results are replicated when we compare manufacturing
and service industries, and after controls for import penetration for manufacturing only.
Increased investments in computer-related technologies are associated with higher value
under both conceptualizations. Relative to other assets, investments in computer technologies
are production and productivity enhancing, while nancial investments are associated with
lower aggregate productivity across the observation period, but increased income transfers
to external stakeholders.
The models also show that unionization is associated with higher value added under both
conceptualizations. Thus declining unionization may have reduced total value added, presum-
ably because the absence of unions reduced employers investment in production efciencies
536 D. Tomaskovic-Devey et al.

Table 2 The long-run effect and error correction rate predicting value added, employment, and
assets, 1970-2008

Ln conventional Ln expanded
value added income pool Ln employment Ln assets
Variable COEF/SE COEF/SE COEF/SE COEF/SE

Financialization 0.347*** 0.361*** 6.313*** 0.581***


(0.050) (0.063) (0.070) (0.130)
Union density 0.235*** 0.452*** 3.483*** 1.579***
(0.038) (0.038) (0.073) (0.107)

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Computer investment 0.518*** 0.657*** 4.466*** 2.258***
(0.070) (0.058) (0.070) (0.122)
College educated 0.501*** 0.329* 9.049*** 0.103
(0.133) (0.129) (0.156) (0.171)
Ln number of employees 0.632*** 0.525***
(full-time equivalent) (0.023) (0.021)
Ln total assets 0.132*** 0.119***
(0.016) (0.013)
Error correction rate 0.154*** 0.124*** 0.017 0.152***
(0.028) (0.025) (0.014) (0.023)
Constant 4.932*** 5.793*** 6.338*** 15.667***
(0.129) (0.114)
R2 0.536 0.566 0.365 0.308
N 1226 1226 1226 1226

Note: The underlying estimate includes xed effects for year and industry, Yi,t1, Xi,t1, Xi,t and is weighted by
number of Industries present per year, with industry clustered standard errors. Long-term effects reported here are
computed by dividing the lag effect by the error correction coefcient; standard errors are calculated via the
Bewley transformation.
***P < 0.001, **P < 0.01, *P < 0.05.

and decreased employee commitment (see Freeman and Medoff, 1984, on unions efciency
enhancing inuence via labour effort and tenure, as well as technical and managerial innov-
ation). Increased college level employment is associated with higher value added, consistent
with conventional intuitions that more educated labour is more productive for a given level
of investment and employment. And, of course, increased total assets and employment are
associated with increased long-run growth in value added.
The third and fourth models in Table 2 report estimates of the relationship between the
shifting investment and employment composition and both total full-time equivalent employ-
ment and total xed assets. We treat these models as exploratory, since we do not have a strong
sense of what confounders that might drive employment and investment dynamics are missing
from the model. The key result is that nancialization is associated with sharply reduced em-
ployment, as one would expect as investment is shifted away from production, as well as some-
what reduced non-nancial asset investment. Firm level models have shown similar declines in
employment (Lin, 2013) and investment (Davis, 2014) strengthening our sense that non-
nancial corporate nancial investment is associated with lower employment and production
investment, although we are not convinced that these models are robust to omitted variable
bias. Unionization and computer investment are associated with more employment and xed
Did nancialization reduce economic growth? 537

asset investment, presumably because they are linked to commitments to production. An in-
creasingly college educated workforce is associated with lower total employment, plausibly
through an increased productivity mechanism.
In order to examine if the nancialization-value added link was temporally dynamic we
re-estimated the long-run effect of nancialization on value added using locally weighted re-
gressions (except 1970 which drops out because of the lag structure). To estimate the equation
for year q, we assign an exponential weight to each observation based on the distance between
the observation year t and q. That is

Wi;t;q jtqj Wi;t ;

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where denotes a smoothing factor between 1 and 0. We use 0.7 as the smoothing factor in
the following analysis to allow for temporal uctuations in the average inuence of nancia-
lization on value added.
Figure 3 reports these estimates for both value added measures. Estimates are net of total
assets and total employment and so inform our understanding of shifts in the relative product-
ivity of industries given capital and labour inputs. For conventional value added, nancial in-
vestments are associated with relatively higher productivity in the early 1970s, but coefcients
become increasingly negative through the early 2000s, with an uptick during the 2000s bubble.
The pattern for the RIT conceptualization of value added is the same, but for most of the period
the inuence of nancialization is not different from zero, although it was positive and signi-
cant in the early 1970s and again in the late 2000s. As we will see later in the paper, the positive
signicant effect of nancial investments on the RIT conceptualization of value added, is pro-
duced by strongly increased interest payments on corporate debt. Although there is a slight
uptick in the aggregate economic returns to nancial investments in the late 1980s, the shift
is small and not signicantly different from zero for both time series. The only sustained
uptick in nancial returns happens during the 2000s bubble period, but is still negative for con-
ventional value added and non-signicant for the expanded income pool conceptualization.

8. Did any stakeholder benet?


Internal stakeholders with claims on value added are typically thought of as capital and
labour. Capital realizes its claims through the distribution of prots to direct and equity

Figure 3 Locally weighted coefcients of nancialization predicting value added.


538 D. Tomaskovic-Devey et al.

owners. Labour realizes its claims via employment income and benets. In the RIT conceptu-
alization additional stakeholders have claims on rm income, including government claims on
income via taxation during production, taxes on corporate prots, interest paid to the owners
of corporate debt, and corporate contributions to charity. Table 3 reports these models.
Table 4 reports the long-term effect estimates. The estimate suggests that by 2008 increased
nancial investments by non-nancial rms are associated with around a 4% decline in total
value added. Thus, for these rms, nancial investment strategies appear to have been in the
aggregate economically destructive compared to foregone investments in production.
Over the observation period increased nancial investments were, however, highly select-
ive in their consequences. Increased nancial investment by non-nance rms was strongly

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tied to increased interest paid to corporate debt holders, but all forms of capital compensation
have positive estimated effects, with gains of 2.7% in total capital compensation, 7% in divi-
dend payouts, and an impressive 35.3% in interest payments. While total capital compensa-
tion and dividend payouts were not signicant in the statistical models, it is important to
recognize that stock repurchases are not accounted for in these estimates. Stock repurchases
are counted in national accounts as costs of production similar to debt repayments, rather than
distributions to capital. Taken together these estimates and the missing data on stock re-
purchases suggest that stock and debt holders both beneted from the shift away from pro-
duction and towards nancial investment strategies. Contributions to charities increased with
nancial investment strategies, as well.
Financial investment strategies were negative in terms of total labour compensation and
taxes paid. The very large nancial investment effect on employment reported in Table 2, sug-
gests that a 1.5% decline in the total volume of labour compensation is severely underesti-
mated. Our calculations, based on the indirect effect through declining employment suggest
that the trend towards nancial investments by non-nance corporations may have reduced
total labour income by as much as 60% over the 38-year observation period. While this may
seem like a high number it represented a compounded decline in labour income growth of only
about 1.5% a year. The estimated impact on the total volume of taxes paid in production and
on corporate prots is a decline of almost 6%. Lost taxes on labour compensation are likely to
be much higher as well because of foregone employment.

9. Discussion
Our estimate is that the nancialization of the non-nance sector of the economy depressed
non-nance sector value added by 3.9%, roughly the equivalent of 3 years of lost economic
growth. For the expanded income pool economic growth is positive and the benets went to
corporate stock and debt holders. Thus from the point of view of the non-nance sector nan-
cial investments appear to have been economically destructive. From the point of view of -
nancial capital, these shifts have been a source of increased income.
Estimates are only as good as the underlying data and models. We believe that, with the
lagged variables and xed effects for both industry and year, our core estimates are likely to be
conservative and robust to omitted variable bias. More concerning is our use of industry data
to proxy a rm level process. Davis (2014) and Lin (2013) both point to the largest corpora-
tions as the primary non-nancial rms pursuing nancial investment strategies. Since indus-
try estimates are averaged over all enterprises in an industry our results probably
underestimate the impact on larger rms and tell us nothing about the relative productivity
Did nancialization reduce economic growth?
Table 3 The long-run effect and error correction rate predicting value added components, 19702008

Ln capital Ln dividend Ln labour Ln charitable


compensation payment Ln interest paid compensation Ln total taxes contributions
Variable COEF/SE COEF/SE COEF/SE COEF/SE COEF/SE COEF/SE

Financialization 0.232 0.508 2.636*** 0.136*** 0.503*** 0.920***


(0.429) (0.678) (0.174) 0.017 (0.091) (0.263)
Union density 0.615 2.532** 0.530*** 0.729*** 0.092 0.262
(0.377) (0.884) (0.119) 0.024 (0.157) (0.321)
Computer investment 0.911 0.075 0.964*** 0.184*** 0.934*** 0.552
(0.478) (0.635) (0.067) 0.018 (0.140) (0.392)
College educated 3.014* 1.443 0.512** 0.726*** 0.944*** 2.022***
(1.201) (1.893) (0.157) 0.029 (0.253) (0.467)
Ln number of employees 0.357** 1.014** 0.085* 0.848*** 0.706*** 0.509***
(full-time equivalent) (0.134) (0.390) (0.038) 0.008 (0.029) (0.096)
Ln total assets 0.293** 0.305 0.622*** 0.102*** 0.075** 0.085
(0.110) (0.183) (0.028) 0.005 (0.024) (0.067)
Error correction rate 0.491*** 0.641*** 0.135*** 0.121*** 0.198*** 0.497***
(0.060) (0.081) (0.033) 0.022 (0.019) (0.075)
Constant 2.568* 2.790 3.106*** 3.255*** 5.483*** 0.361
(1.261) (2.091) (0.328) 0.064 (0.311) (0.827)
R2 0.289 0.378 0.483 0.886 0.373 0.345
N 1226 1226 1226 1226 1226 1226

Note: The underlying estimate includes xed effects for year and industry, Yi,t1, Xi,t1, Xi,t and is weighted by number of Industries present per year, with industry clustered standard
errors. Long-term effects reported here are computed by dividing the lag effect by the error correction coefcient; standard errors are calculated via the Bewley transformation.
***P < 0.001, **P < 0.01, *P < 0.05.

539
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540 D. Tomaskovic-Devey et al.

Table 4 Cumulative percentage change in value added and stakeholder value components as a
function of estimated long-run effect of nancialization, 19702008

Effect size estimate Per cent change in total value

Value added 0.040 0.039


Capital compensation 0.027 0.027
Dividend payouts 0.058 0.060
Interest paid 0.302 0.353
Labour compensation 0.016 0.015
Taxes paid 0.058 0.056

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Charitable compensation 0.105 0.111

Note: Effect estimates calculated by the change in nancial investments 19702008 (0.1146) multiplied by the
long-run coefcient estimates in Tables 2 and 3. Per cent change calculated as the exponent of this estimate
minus 1.

of rms in the same industry with different investment strategies. Measurement at the level of
the rm would clearly be preferable if appropriate measures of value added and distribution to
stakeholders were available.
We are less condent in the estimates of the impact of nancial investments on employment
and xed asset investment. We simply do not know how accurate these estimates are. On the
other hand, other researchers have documented decreased xed investment (Stockhammer
2004; Orhangazi, 2008; Davis, 2014) and employment (Lin, 2013) with increased non-
nancial corporate nancial investment. So while we are unsure of the magnitude of the
effect, we are fairly condent that both xed investment and total employment, as well as
value added net of both, are undermined by the trend towards nancialization among non-
nance corporations.
One concern about these results might be that the counterfactual world in which more
money had been invested in production and as a result more value would have been produced
is somewhat difcult to imagine in an era of increased global competition. The results for com-
puter investment, however, show that increased investment in production technologies was
associated, for the same industries and the same time period, with increased value added.
Thus, these models suggest that productive investment during this period was possible and
effective. The same can be said for human capital investments via college education.
The contrast in results for the conventional notion of value added and the expanded RIT
conceptualization is worth exploring. The difference in results reects that the expanded def-
inition includes creditors. Firms that pursued internal nancial investment strategies also paid
increased shares of their total production value to creditors. The conventional measure of
value added overstates the negative effect of nancial investments on total outputs, because
it overlooks the growing interest payments associated with corporate debt. The period of -
nancialization was one in which nancial asset holders became increasingly powerful in their
claims on the income of the non-nancial sector.
Wall Street harvested an increase share of the outputs from Main Street. Since we do not
observe equity buybacks in these data, which were also rising during this period (Davis, 2014),
it is probably safe to conclude that the increased capital returns to debt and equity holders
reduced the volume of retained earnings available for new investment and as a result squeezed
out investment in new production. At the same time, employees compensation dropped as a
Did nancialization reduce economic growth? 541

result of nancialization of the non-nance sector. While our estimates focus on income drops
net of employment, nancialization is also associated with decreased employment.
Government revenue in the form of taxes on production and corporate prots dropped as
well. Financialization was economically destructive for labour and society more generally,
and benecial for nancial capital.

10. Conclusions
The shifting of non-nancial rms investment towards nancial instruments and away from
production decreased total value added in the non-nance economy. This negative effect on

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total production is visited on labour and the state as lower total income. The hypothesis that
nancialization of the non-nance sector reduces overall economic growth is supported by
these analyses, but capital both as equity and debt holders were shielded from these negative
consequences.
The speculation that nancial investment strategies by non-nance rms may have been
economically protable during the late 1980s was not supported. The coefcients for nancial
investments on value added were uniformly negative in the 1980s and 1990s. There was evi-
dence, however, that they became slightly less negative in the late 1980s. This may have ap-
peared to corporate executives as a marginal gain, but from the point of view of long-term
economic growth, it seems to have been merely less destructive. Since Wall Street was reward-
ing corporations for declining employment and these strategies were economically positive for
capital, the substitution of nancial for production investments was likely quite attractive for
CEOs. This would be even more the case as CEO pay was increasingly tied to the price of their
corporate stock instead of product market share.
The results in this paper lead to some pretty simple, but distressing conclusions. The shift
from production and market share to nancial and shareholder value investment strategies on
main-street has most likely reduced total economic growth in the USA. The cost of this tran-
sition has been born largely by workers via forgone employment and wage stagnation, and by
local and federal governments via forgone tax revenues. Since this has happened during a
period of rapid increases in income inequality, it is safe to say that for the vast majority of
the US population nancialization has led to lower standards of living as well as weaker
state investment capacity for both the population and infrastructure than what would have
been possible under a more production-focused regime.
This paper also sheds new light on the macroeconomic literature on the nance-growth
nexus. We reinforce the ndings in recent papers that increased nancialization in developed
economies can harm economic growth. Since the pursuit of nancial investment strategies by
non-nancial rms leads to lower growth in value added, it appears to be an irrational invest-
ment strategy. This conclusion is only true if looked at from a macroeconomic perspective.
From the viewpoint of the rm with multiple stakeholders, nancialization has beneted
capital at the expense of labour and the state. Charities have beneted given the level of eco-
nomic activity, but probably suffer along with the rest of society from slower economic growth
and reduced economic capacity among households and governments.
Financialization, the shareholder value movement and perhaps neoliberalism more gener-
ally can all be interpreted through the lens of competition over the distribution of surplus in
the society. The maximization of value is not the goal at the rm level, rather the goal increas-
ingly became the maximization of income to capital. That labour was further weakened by
542 D. Tomaskovic-Devey et al.

these investment strategies produced a positive feedback loop for the owners of corporate
equity and debt, in which slack labour markets caused by reduced production investment
further strengthened their bargaining power over economic surpluses.
There is also substantial evidence of nancial services extracting increased resources from
the non-nancial sector via interest payments. This is consistent with the well documented
movement from equity to debt nancing in the productive sector. This result is also consistent
with the nding that there has been a large transfer of income into the nancial services indus-
try (Krippner, 2011; Tomaskovic-Devey and Lin, 2011; Philippon and Reshef, 2012) but no
increase in nancial service productivity (Philippon, 2012). That is, the nance sector prots
mostly from the increases in intermediated volume, not from innovative nancial devices

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which enhance economy-wide efciency.
The shareholder value movement encouraged rms to replace equity with debt and to reduce
employment. Reductions in employment were taken as signals of managerial seriousness and re-
warded with surges in stock prices. By replacing equity with debt to nance production and to
purchase outstanding stocks, rms immediately boosted their return on equity, the prime indica-
tor stock analysts follow in evaluating rm performance. Thus the shareholder value movement
produced a perverse set of incentives to reduce total production and perhaps in the long-run total
prot, while boosting stock prices and dividend payments on the remaining equity. Our results
suggest that nancial investment strategies, in concert with the shareholder value movement and
CEO compensation strategies reduced the long-term value of the non-nance corporate sector
and transferred income to nancial service rms and rentier capital in general. This income
shift is consistent with the well-documented rise in income shares among top earners and
wealth holders in the USA (Piketty, 2014). Even though nancialization represents a diversica-
tion of investment strategies, and so is inconsistent with shareholder value proscriptions for cor-
porations to focus on core competencies, the outcomes seem quite compatible with the goal of
this movement to increase the claims of capital investors on corporate income.
We introduced an expanded notion of value added in this paper derived from RIT
(Avent-Holt and Tomaskovic-Devey, 2014; Tomaskovic-Devey, 2014). We see value added
not as the simple result of investment and production decisions by independent production
functions, but as embedded in the network of producers, suppliers, customers and states.
The value realized at the level of rms (or industries) reects these upstream, downstream
and institutional relationships, as well as the relations in production between labour,
capital, management and both material and social technologies. This conceptualization
allowed us to show investors in corporate debt were clear winners from the nancialization
of the non-nance sector. The state, on the other hand, and the collective investments made
by local and national governments, were clear losers.
Our analyses end in 2008 and so do not document changes in non-nancial rms invest-
ment behaviours since the nancial crash of that year. It should be apparent that an extension
of this analysis into the post-crash period would be important for both theoretical and policy
development. We make no claims in this paper that our results are generalizable beyond the
US economy in the period studied and would welcome comparisons with other countries
and times.
Given what we have learned in this paper, tax and scal policies should distinguish
between xed and nancial investment, and should target incentives towards investment in
production and employment over nancial strategies by non-nance rms. The current prac-
tice of low marginal tax rates on capital gains probably encourages nancial speculation over
Did nancialization reduce economic growth? 543

production investment, and as a result growing income shares to capital and declining employ-
ment and tax revenue.
Since prior literature has made clear that both the increased rent taking by the nancial
services rms and nancial behaviour on main-street have exacerbated both instability and in-
equality, it seems plausible to conclude that the newest phase of capitalismnancializationis
both socially and economically problematic. Workers and the society (via state capacity) have
been harmed, shareholders of non-nance rms have beneted and income streams to debt-
based securities have increased. A smaller, less equal, more unstable, but more Wall-Street
friendly economy has been the result.

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Acknowledgements
The research reported here has been supported by the U.S. National Science Foundation and the
Institute for New Economic Thinking. This paper beneted from comments at two conferences:
Financialization and Its Consequences, Juan March Institute, Madrid, Spain June 2014 and the
CAFCA/PERI Workshop on Financialization, Amherst, Massachusetts December 2014. Dustin
Avent-Holt, Leila Davis and two Anonymous SER reviewers provided additional formative com-
ments as well.

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Appendix A

Table A1 Industry matching used in analysis

Standard Industrial Classication, North American Industry Classication


19701997 System, 19982008

Mining
Metal mining
Coal mining
Oil and gas extraction

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Nonmetallic minerals, except fuels
Electric, gas and sanitary services Utilities
Construction Construction
Food and kindred products Food, Beverage and Tobacco manufacturing
Tobacco manufactures
Apparel and other textile products Apparel, Leather and other textile products
Leather and leather products
Lumber and wood products Lumber and wood products
Paper and allied products Paper and allied products
Printing and publishing Printing and publishing
Chemicals and allied products Chemicals and allied products
Rubber and miscellaneous plastics products Rubber and miscellaneous plastics products
Petroleum (including integrated) and coal Petroleum (including integrated) and coal
products products
Primary metal industries Primary metal industries
Furniture and xtures Furniture and related product
Textile mill products Textile mill products
Primary metal industries Primary metal industries
Fabricated metal products Fabricated metal products
Machinery, except electrical Machinery, except electrical
Electrical and electronic equipment Electrical equipment, appliance and component
manufacturing
Transportation equipment, except motor vehicles Transportation equipment
Motor vehicles and equipment
Stone, clay and glass products
Computer and electronic product manufacturing
Nonmetallic mineral product manufacturing
Instruments and related products
Wholesale (total) Wholesale (total)
Retail (total) Retail (total)
Transportation Air, rail and water transportation
Truck transportation
Transit and ground passenger transportation
Pipeline transportation
Other transportation and support activities
warehousing and storage
Communication
Broadcasting and telecommunications
Information services and data processing services
Motion picture and sound recording industries

Continued
Did nancialization reduce economic growth? 547

Table A1 Continued

Standard Industrial Classication, North American Industry Classication


19701997 System, 19982008

Business services
Personal services
Auto repair, miscellaneous repair services
Professional, scientic and technical services
Administrative and support services
Waste management and remediation services

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Health care and social assistance (total)
Education services
Amusement and recreation services Amusement, gambling and recreation industries
Other arts, entertainment and recreation
Hotels and other lodging places Accommodation
Food services and drinking places

As displayed in the table for Appendix A, Standard Industrial Classication (SIC) coding for years 19701997 was
combined with coding from North American Industrial Classication System (NAICS), years 19982008. Since
industrial categories are not entirely congruent across the two classication systems, the combination strategy
involved matching or combining industries when easily accomplished, and leaving industries separate from one
another in cases where the industrial classication of rms changed or became more detailed. The table is shaded
to indicate which industries match, are components of each other, or are unique to each classication system across
the two periods. In the data, this produced the effect of some industries spanning the entire period, while some
ended in 1997 and others began in 1998.

Appendix B

Table B1 Variables and data sources

Variable Technical denition Additional information Sources

Conventional value NIPA value added Measure includes labour NIPA


added compensation, gross operating
surplus, and taxes on
production and imports less
subsidies
Expanded Income NIPA value added + NIPA Value added and subsidies are NIPA and IRS
pool subsidies + IRS interest NIPA, Interest paid and
paid + IRS charities charities are IRS
Capital NIPA gross operating Negative values bottom-coded at NIPA
compensation surplus one
Labour NIPA compensation Measure includes wages, salaries NIPA
compensation and supplements for both
workers and management
Dividend payment NIPA net corporate Do not include reinvested earnings NIPA
dividends payments
Interest paid IRS interest paid Interest paid on debt IRS
Total taxes NIPA total taxes on Taxes on income and expenses NIPA
income + taxes on
production and income
less subsidies

Continued
548 D. Tomaskovic-Devey et al.

Table B1 Continued

Variable Technical denition Additional information Sources

Charities IRS charitable Charitable contributions IRS


contributions
Financialization Financial assets/IRS total Financial assets contains IRS IRS
( proportion) assets variables: Investments in
government obligations, loans
to shareholders, mortgage and
real estate loans, other

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investments, and other
securities
Computer NIPA computer investment/ Computer investment contains NIPA
investment investment in xed NIPA variables: Mainframes,
( proportion) assets PCs, DASDs, printers,
terminals, tape drives, storage
devices, system integrators,
prepackaged software, custom
software and own account
software
Total assets NIPA xed assets / Seeks to replicate total asset data NIPA
(1 Level of for entire economy
nancialization)
Full-time employees NIPA full-time equivalent Full- and part-time employee NIPA
(thousands) employees hours worked combined into
equivalency measure
Union density CPS union members/ Percentage of unionized CPS
( proportion) IPUMS workers employees within industry
% College IPUMS college graduates/ Percentage of employees with IPUMS-CPS
IPUMS workers 4-year degrees
Import penetration Value of imports as % of Only pertains to extractive and OECD-STAN
( proportion) GDP manufacturing sector

The Bureau of Economic Analysis (BEA) holds the National Income and Product Accounts (NIPA) variables.
NIPA variables are estimates for the entire US economy. Measures include value added, subsidies, gross
operating surplus, employee compensation, computer investment components, xed assets, full-time equivalent
employees, taxes on income, and taxes on production and imports less subsidies. Data is available at:
http://www.bea.gov/industry/index.htm.
Internal Revenue Service (IRS) variables are estimates of corporate economic output. Our IRS measures
included interest paid on debt, charitable contributions and nancial assets as a proportion of total assets
(nancialization). IRS data are available at: http://www.irs.gov/uac/SOI-Tax-Stats-Corporation-Complete-
Report. Years preceding 1994 are not available in digital format, but are available from the authors upon request.
Current Population Survey (CPS) variables were used as demographic employment controls. The rst of these
included union density, which is housed at the National Bureau of Economic Research (http://www.nber.org/),
collected through CPS May Extracts from 1970 until 1982 and through CPS Merged Outgoing Rotation
Group (MORG) in years 1983 onwards. The other variable, college educated workers and total workers, were
obtained through CPS Integrated Public Use Microdata Series (IPUMS), available at: https://cps.ipums.org/cps/
index.shtml. Union members and college educated workers are divided by IPUMS total workers to obtain
variables measured as proportions.
The Organization for Economic Cooperation and Developments (OECD) Structural Analysis (STAN) data
provide a measure for import penetration, which covers industries in the manufacturing sector. OECD-STAN data
can be obtained at: http://stats.oecd.org/Index.aspx?QueryId=22211.