Bruce Bartlett, a former senior official in the Reagan and George H.W. Bush administrations, has an interesting new column at The New York Times that concludes that the growing "financialization" of our economy has resulted in increased income inequality and slower economic growth.

According to Bartlett:

While all economists agree that the financial sector contributes significantly to economic growth, some now question whether that is still the case. According to Stephen G. Cecchetti and Enisse Kharroubi of the Bank for International Settlements, the impact of finance on economic growth is very positive in the early stages of development. But beyond a certain point it becomes negative, because the financial sector competes with other sectors for scarce resources.

Ozgur Orhangazi of Roosevelt University has found that investment in the real sector of the economy falls when financialization rises. Moreover, rising fees paid by nonfinancial corporations to financial markets have reduced internal funds available for investment, shortened their planning horizon and increased uncertainty.

He continues:

Another way that the financial sector leeches growth from other sectors is by attracting a rising share of the nation’s “best and brightest” workers, depriving other sectors like manufacturing of their skills.

The rising share of income going to financial assets also contributes to labor’s falling share ... The falling labor share results from various factors, including globalization, technology and institutional factors like declining unionization. But according to a new report from the International Labor Organization, a United Nations agency, financialization is by far the largest contributor in developed economies (see Page 52).

The report estimates that 46 percent of labor’s falling share resulted from financialization, 19 percent from globalization, 10 percent from technological change and 25 percent from institutional factors.

Hat tip to Dean Baker at the Center for Economic and Policy Research for flagging this interesting article. As Dean points out, one answer to this problem is to adopt a Financial Transaction Tax. A two-page backgrounder from the Center for Effective Government on this tax (sometimes called a Wall Street Sales Tax) can be found here.