Chapter 7: What Is Wall Street Good for, Anyway?

0.   .   On the roles of banking and finance in boosting growth in nineteenth-century America, see Bodenhorn 2016.

0.   .   On these and many other episodes, see Faust 2016.

0.   .   See Zauzmer 2013.

0.   .   See NVCA 2016; SSTI 2016.

0.   .   Gompers et al. 2016, 12–13. This is based on a survey of 889 institutional venture capitalists at 681 firms.

0.   .   Gompers et al. 2016.

0.   .   See Content First 2009; Kaplan and Lerner 2010; Gompers et al. 2016.

0.   .   Interestingly, some of the earliest venture capital in postwar America came from a Frenchman, Georges Doriot; on his life, see Ante 2008.

0.   .   For a discussion of where the 7 percent estimate comes from, see, for instance, Diamond 1999. Plenty of other estimates are possible—see Brightman 2012—but they are all pretty high.

0. .   See Egan, Matvos, and Seru 2016.

0. .   See Backpacker 2015.

0. .   For the poll results, see McCarthy 2015.

0. .   Greenwood and Scharfstein 2013, 13–14.

0. .   See Greenwood and Scharfstein 2007, 9.

0. .   Greenwood and Scharfstein 2013, 14.

0. .   See Hausmann and Sturzenegger 2006.

0. .   Jackson 2013 offers a survey of the subsequent debate on the dark matter effect. Gourinchas 2016 offers the most recent estimate of America’s gains from this investment differential. As he put it: “As financial globalization proceeded, U.S. investors concentrated their foreign holdings in risky and/or illiquid securities such as portfolio equity or direct investment, while foreign investors concentrated their U.S. asset purchases in portfolio debt, especially Treasuries and bonds issues by government-affiliated agencies in areas such as housing finance, and cross-border loans.” In other words, overall, Americans are more optimistic and more tolerant of risk, and our financial sector helps support those tendencies. Setser 2017 considers whether some of the dark matter effect comes from U.S. multinationals using accounting tricks to switch some of their earnings into lower-taxed foreign affiliates or subsidiaries.

0. .   By the way, if you’ve followed the academic literature, you may know that the research on the financial sector and economic growth is in some ways inconclusive. The most plausible specifications show a positive correlation between finance and growth for lower-income countries and an insignificant relationship for wealthier countries. I interpret this finding in two ways. First, past a certain stage of development the benefits of finance are typically what economists call “one-off” gains rather than increases in the rate of economic growth. But one-off gains are very important, especially if you can reap them for multiple years. For instance, as discussed earlier, the “dark matter” hypothesis means that finance brings Americans a lot of extra consumption each year, but it does not, say, boost the rate of growth from 1 percent to 2 percent. We are considerably better off nonetheless. This is a technical point, overlooked in many discussions, but in fact a lot of beneficial institutions raise consumption or yield other benefits but don’t boost growth rates looking forward. Second, wealthier economies naturally grow more slowly, because they cannot engage in catch-up growth. If finance makes an economy wealthier, it also may appear to lower its growth rate, but again that can obscure the very benefits that finance brings. On these points, see Cline 2015. The skeptical paper is Cournede and Denk 2015. For a general survey of finance and growth, see Arcand, Berkes, and Panizza 2015.

0. .   Scannell and Houlder 2016.

0. .   Scannell and Houlder 2016.

0. .   For data on finance as a share of GDP, see Philippon 2011 and 2015.

0. .   On this, see Philippon 2015.

0. .   On all this, see Philippon and Reshef 2012.

0. .   See Shu 2013 and 2016.

0. .   Kaplan and Rauh 2010, 1006. This paper is in general a very good source on financial sector compensation.

0. .   Greenwood and Scharfstein 2013.

0. .   See Balchunas 2016. For the 2004 figures, see Bergstresser, Chalmers, and Tufano 2009. One problem behind high remaining mutual fund fees is that fund trustees often identify more with the interests of management than the interests of investors. See Thomas 2017.

0. .   For a disaggregated look at this source of financial sector growth, see Antill, Hou, and Sarkar 2014, who show it occurred disproportionately through non-bank credit intermediation.

0. .   On the decline in Chinese debt holdings, see, for instance, Mullen 2016.

0. .   For those numbers, see Comoreanu 2017, drawing upon FDIC data.