The Financial Crisis and the Measurement of Financial Sector Activity

The widespread expectation, forcefully posed by Reinhart and Rogoff (2009), that growth in the U.S. and the rest of the industrialized world will be subpar for a prolonged period following the financial crisis, raises issues for the measurement of the financial sector’s activity. According to the U.S. NIPA, finance and insurance accounts for roughly 8 percent of GDP, much of which consists of routine processing of transactions and maintenance of accounts. As noted in Steindel (2009), by normal growth accounting reasoning, even a marked contraction in the sector’s activity would not seem likely to be capable by itself to have a major prolonged negative impact on growth. One possible alternate way to account for the activity of the sector, building on the work of Corrado, Hulten, and Sichel (2005, 2009), is that the very high levels of employee compensation in finance partly reflect investments in market knowledge, a form of intangible capital. The increased growth in such market knowledge in the years leading up to the crisis may have helped to support growth in the economy outside of finance, while its diminution in the current environment (if not offset by increased growth of comparable knowledge elsewhere) could work to hold down growth. Altering the treatment of finance in the accounts in this fashion helps to bridge, if not fully close, the gap between the absolute size of the sector as gauged in the standard way and its generally acknowledged large and persistent effect on aggregate activity.