The Economy vs. The Financial Sector

From a NY Times op-ed by Casey Mulligan, a professor of economics at the University of Chicago:

"There are two faulty assumptions here. First, saving America’s banks won’t save the economy. And second, the economy doesn’t really need saving. It’s stronger than we think...The non-financial sectors of our economy will not suffer much from even a prolonged banking crisis, because the general economic importance of banks has been highly exaggerated."

Mulligan then states that an important indicator of health in non-financial sectors is marginal product of capital (how much profit each dollar of invested capital produces). Throughout 2007 and 2008, marginal product of capital has been over 10% per year, which is well above the historical average.

Mulligan concludes:

"So, if you are not employed by the financial industry (94 percent of you are not), don’t worry. The current unemployment rate of 6.1 percent is not alarming, and we should reconsider whether it is worth it to spend $700 billion to bring it down to 5.9 percent."

cf. Steven Landsburg's article questioning the primacy of banking institutions in the U.S. economy.

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