After having been a tech executive for many years, I needed to take a break, and I wanted to give back to society. Duke University engineering dean Kristina Johnson gave me a great spiel about how the school’s Masters of Engineering Management program churns out great engineers, and how engineers solve the world’s problems. She said that I could make a big impact by teaching engineering students about the real world and encouraging them to become entrepreneurs. I felt so excited that I joined the university without even asking for a proper salary. That was in 2005.
I was shocked—and upset—when the majority of my students became investment bankers or management consultants after they graduated. Hardly any became engineers. Why would they, when they had huge student loans, and Goldman Sachs was offering them twice as much as engineering companies did?
So when the investment banks tanked in 2008, I cheered because engineering had become sexy again for engineering grads (read my BusinessWeek column).
But thanks to the hundred-billion-dollar taxpayer bailouts, investment banks recovered and went back to their old, greedy ways. And they began offering even more money to engineering grads (and themselves).
Kauffman Foundation’s Paul Kedrosky and Dane Stangler have just published a report that analyses the damage this has done to our economy.
They note that the finance sector today produces a greater percentage of GDP than at any time in history. In the mid-nineteenth century, its contribution was between 1 percent and 2.5 percent of GDP. It peaked at around six percent of GDP at the beginning of the Great Depression, and then fell sharply. Since 1945 it has been steadily increasing, to 8.4 percent over the last two years.
Historians will tell you that empires collapse when they become too dependent on finance, but I’m not so pessimistic. I do, though, share the concern that Kedrosky and Stangler expressed in their paper:
Financial sector as % of U.S. GDP (1850-2009)
Fewer people are being added to industry employment, but they are coming from new and narrower places. The financial services industry used to consider it a point of pride to hire hungry and eager young high school and college graduates, planning to train them on the job in sales, trading, research, and investment banking. While that practice continues, even if in smaller numbers, the difference now is that most of the industry’s profits come from the creation, sales, and trading of complex products, like the collateralized debt obligations (CDOs) that played a central role in the recent financial crisis. These new products require significant financial engineering, often entailing the recruitment of master’s- and doctoral-level new graduates of science, engineering, math, and physics programs. Their talents have made them well-suited to the design of these complex instruments, in return for which they often make starting salaries five times or more what their salaries would have been had they stayed in their own fields and pursued employment with more tangible societal benefits.
Entrepreneurship participation rates (1986-2009)
An analysis of MIT’s graduate-employment data shows that the financial sector increased its hiring from 18 percent of its graduates in 2003 to 25 percent in 2006. So not only are the investment banks siphoning off hundreds of billions of dollars from our economy with financial gimmicks like CDOs; they are using our best engineering graduates to help them do it. This is the talent that our country has invested so much resource in producing.
When most sectors of the economy grow, new companies are created. The authors found, however, that the finance sector is not driving firm formation; it is cannibalizing entrepreneurship in the U.S. economy by offering wage and skill premiums to individuals who might otherwise have started companies. It is also causing far greater volatility among publicly traded firms and a reduction in the quality of businesses started.
The report concludes that a shrinking finance sector will likely lead to a higher entrepreneurship rate and the creation of companies with greater social value, and still provide the financial intermediation services that are most important to young companies. So that’s what we need in order to save this empire: to tame this beast.
Paul Kedrosky says that the virus that infects scientists and engineers and causes them to go to Wall Street rather than create something of societal value is “economic Ebola”. He wants to be an “economic virus hunter”. Let’s all help him. Let’s save the world by keeping our engineers out of finance. We need them to, instead, develop new types of medical devices, renewable energy sources,and ways for sustaining the environment and purifying water, and to start companies that help America keep its innovative edge.
Cross-posted from Vivek Wadhwa’s blog on Tech Crunch.
“Corporations are so good at stripping the earth of resources and poisoning what’s left that many scientists believe there’s a greater than 50/50 chance now we’ll be driven extinct.”
Exponential population growth, emerging market consumerism, and mass migration of third world people into first world countries already with large carbon footprint lifestyles are the biggest drivers of environmental destruction.
American’s have been doing their environmental duty since 1970 by having smaller families, recycling, and driving smaller cars — but instead of being allowed to enjoy a less crowded, less polluted country with higher wages, their posterity are being crowded by post 1965 cheap labor immigrants. In the past decade our country acquired over 13 million new residents due to legal immigration but lost a net 1 million jobs. Immigration flows are controllable by public policy, so why do politicians deny the negative effects of mass immigration and pretend that there is nothing they can do?
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Some day the field of economics will be seen by historians to be as believing in a flat earth. If there are historians, that is. Corporations are so good at stripping the earth of resources and poisoning what’s left that many scientists believe there’s a greater than 50/50 chance now we’ll be driven extinct.
http://en.wikipedia.org/wiki/Planetary_boundaries
Economics pays no attention to the real world that sustains us — fresh water, at least six inches of good topsoil, forests, unpolluted air, water, and land, and so on. We’re like the cartoon character sawing off the limb we’re standing on.
Economics as practiced by banks and wall street relies on inventing complex financial instruments to fleece the middle class. That’s the main reason the gap between rich and poor is the greatest in the nation’s history.
But there is a field of economics that makes sense. It’s called “Biophysical economics” and draws on scientific principles such as the Laws of Thermodynamics and systems ecology.
NY Times Reports on Biophysical Economics Conference in Syracuse
http://www.theoildrum.com/node/5903
http://www.eoearth.org/article/Biophysical_economics
http://www.peakoil.net/files/the%20need%20for%20a%20new%20biophysical-based%20paradigm%20in%20economics%20….pdf
2011 Biophysical Economics Conference
Friday April 15th through Saturday April 16th
SUNY College of Environmental Science and Forestry, Syracuse, New York
Moon Library conference room
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I don’t see why you need to target the financial/legal sector specifically. Just increase tax rates on income over a few million to rates that were common from the 1930′s to the 1980′s (when real GDP grew at a healthy 4%). Sure, a few genuine entrepreneurs will be impacted. But in my experience, genuine entrepreneurs are driven by a passion to make the world a better place, not to make the world their private playground with billions in wealth.
Give somebody like Elon Musk the choice between making the world a better place through technology they’re created while having a personal net worth of $100 million…or not really change the world at all but have a personal net worth of $100 Billion from some financial derivative they created…and I’m pretty sure people like Musk would choose the former. As for the people who would choose the greater personal wealth over the benefit of society, do we really want those people in a position where their decisions can adversely affect society?
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I don’t see any way that this can be taxed or regualted away. What we need is a complete rebuilding of our national ethics, perhaps starting with the B-schools.
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@James R: I’m not sure the government can selectively tax individuals in certain sectors at a higher income tax rate just because we don’t like the effects mentioned in the above article. However, requiring that engineers repay the government for the subsidies that made their education possible if they opt to work in an unrelated field may be more viable.
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Why not just federally tax salaries in the financial and legal sector down to size? Robert Reich thinks the rich don’t pay enough. Fine. Go after predatory capitalists and ambulance chasing lawyers — this way, their lucre is forcibly directed into an IRS sinkhole where it might do some good funding NSF or DOE grants. It will also equalize the opportunity costs for choosing one profession over the other.
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