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Reason Foundation

Wall Street's Resurgent Profits Are a Red Herring

David Godow
March 29, 2011, 6:44pm

Annie Lowrey and Matt Yglesias are concerned at the rising take of financial firms, whose share of corporate profits rose to about 30 percent of the total during Q4 2010. Lowrey suggests the decrease in competition resulting from the financial crisis -- plus the government's response to it -- to blame for the return of Wall Street to prosperity. The animus behind these worries is clear: progressive commentators are suspicious that Wall Street is regainining its former prominence as "Main Street" continues to suffer.

They needn't worry. The sharp uptick in returns to finance we've seen over the last two years simply marks their return to long-term levels. The financial sector's before-tax profits, according to data from the Bureau of Economic Analysis, have averaged 27.39 percent of the corporate total since 1987. While a level of 30 percent is high for, say, the late '90s, it's well below the heights seen during the build-up of the housing bubble in the mid-'00s.

The trend since 1987 (I chose the year for convenience's sake when wrestling with BEA tables) is displayed below. The black dotted line shows the long-term average.

It's true that financial profits didn't start to approach this level until the late '80s, but that's a separate story. If people want to argue that a return to the pre-80s era of (proportionally) low financial profits, that's fine. But the fact is that Wall Street took home around 30 percent of corporate profits even during the Great Moderation of the Clinton years, a time both progressives and fiscal conservatives are likely to look back on fondly. 30 percent is a level totally compatible with healthy, sustainable growth.


David Godow is Research Assistant


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