Here are some graphs for a post I'm working on for Bloomberg.
The graph above shows that the financial industry now makes roughly half of all nonfarm corporate profits in the U.S., a share which has risen five-fold since the end of World War II.
Other things to note from this graph: (1) there is clearly a secular component to the rise; (2) the variance around the secular trend seems somewhat cyclical, but not enormously so; and (3) the financial sector's share of total profits has continued to increase through the recession and financial crisis.
Part of this is the expansion of the financial sector within the American economy. Employment in the broadly-defined financial industry has risen from roughly 4 percent of payroll employment to 6 percent.
But most of it is a huge increase in the profit per man-hour worked in the financial industry. Making some rough approximations about the financial industry's share of payroll employment, I can estimate that the average hour worked in the financial industry generates nearly 30 times the average per-man-hour profit in the rest of the economy. That's up from six times the average in 1964.
This could very well be a question of global comparative advantage, but I find that hard to believe on the basis of the employment figures. It seems substantially more likely, rather, that the financial sector's profitability comes from the implicit and explicit subsidies of a market with high barriers to entry.
Let's run though the explicit subsidies: the mortgage-interest deduction and other homebuyer credits, student loan aid, federal guarantees on debt, the preferential tax rates on capital gains and dividends, interest on reserves at the Fed, and the FDIC guarantee. The financial industry also benefits from substantial implicit regulatory subsidies such as "too-big-too-fail."
I worry that our response to the financial crisis and the recession -- providing a "backstop" for the financial industry -- has amounted to little more than an increase in both forms of subsidy. That doesn't do very much for financial stability.