The last couple of days have seen several commentators raise fundamental questions about the role and optimal size of the financial sector. Free Exchange very helpfully links to three pieces, including one discussing the extraordinary statements (given their provenance) by Lord Turner, chairman of the British FSA. Turner suggests that a lot of what the City does is socially useless, and that finance has gotten too large.
There are lots of issues to be discussed here, so let me just pick up on one for now. That is the argument that the UK (and arguably other Anglo-Saxon economies) is suffering from a form of Dutch Disease, with an expanding financial sector sucking in too many resources, and depriving other sectors of much-needed inputs.
A standard thing to say about the Dutch Disease is that it isn’t a disease at all. If workers flock into the booming sector (say natural gas) because of higher wages, that is efficient, since those higher wages reflect higher productivity in the booming sector. (The higher productivity is due not just to the physical productivity of the workers in that sector, but to the price of the sector’s output.)
The term ‘Dutch Disease’ is thus a misnomer.
On the other hand, you can clearly argue that high wages and bonuses in the City have reflected bubble conditions, and the relative prices guiding resource allocation have thus been ‘wrong’. There is therefore a much better case for regarding financial services expansion as a ‘disease’, and for government intervention of some sort to reduce the consequent misallocation of resources.
So: can anyone think of a nice alliterative label to replace ‘Dutch Disease’?