Discussion of Charles Steindel (2009) “Implications of the Financial Crisis for Potential

Growth: Past, Present and Future”

Angel Ubide*

Tudor Investment Corp,PIIE and CEPS

Rome, Sept 2009

* Views expressed here are my own and do not represent, in any way, those of Tudor Investment Corporation.

• Main message: – No overstatement of past real activity in

finance and real estate– Assumptions for overstatement would be

“extreme”, and impact would not be material– Thus, likely slower activity in finance and real

estate will not have substantial effects on future US potential growth

• Interesting methodological discussion: sector reallocation vs impact on overall growth => better past productivity performance in non-finance sectors

• But does size of finance sector matter for cost of capital? Could one consider spreads and risk premia, and thus cost of capital, would have been wider, and thus a net overall growth loss? Post-crisis experience seems to suggest so.

• Paper looks for alternatives, but finds them “extreme”.

• Are the alternative estimates “extreme”? The outcome would be material. – Real value added in financial services lower

by 0.25 percent (Table 2)– Contribution to real GDP growth in residential

construction lower by 0.2 percent (Table 3)– Would this “extreme” alternative scenario

imply potential growth lower by 0.45 percent?

Did the US financial sector add any value in the last 10 years?

• How “extreme” is the assumption that finance workers may not migrate to high wage jobs outside finance?

• Jacob Funk Kirkegaard (2009) Structural and Cyclical Trends in Net Employment over US Business Cycles, 1949–2009: Implications for the Next Recovery and Beyond, PIIE, WP 09/05

• FIRE has experienced structural job losses since 2001

Finance has experienced structural losses in this downturn

How to square results with Natalia, Estevao and Keim (2009)?

• Which sectors are likely to generate the increase in the Nairu? Finance, real estate and autos are likely candidates.

• Beveridge curve seems to be shifting, suggesting a higher Nairu

• Smaller finance sector will leave some marginal projects

unfunded and may contribute to longer term unemployment.

• It could also slow down spending in innovation. But it may force companies to increase productivity.

• Welfare impact of excessive allocation of resources to finance: Peak Finance? (Simon Johnson, PIIE)– Financial innovation not targeted at improving capital allocation –

how much do CDS really lower financing costs? See also Adam Posen and Marc Hinterschweiger, “How Useful Were Recent Financial Innovations? There Is Reason To Be Skeptical,”

– Too big to fail– High share of talent in finance (5->15 percent over 1970-1990)– High share of total profits in GDP (5-> almost 40 percent over

1982- 2008)– Compensation (100 –> 180 percent of all industries

compensation since 1982, flat at 100 before)– Likely to reverse – consumer protection

• Overall, a very interesting paper which makes an interesting methodological point about GDP accounting.

• However, there seems to be a small bias towards ruling out alternative scenarios – some additional discussion may be useful.

• And the research suggesting lower potential growth is large, the paper would perhaps benefit from a more comprehensive discussion.

Thank you

• Structural-losses sectors: sectors that show slower net employment growth rates than the total workforce during expansions and slower net employment growth (or faster relative net employment declines) during contractions. Structural-loss sectors create relatively few new jobs during expansions and often shed many more during recessions than the economy as a whole. These sectors gradually decline in employment importance in the economy. Groshen and Potter (2003)