How Financialization Decimated the U.S. Industrial Base: History, Impact, and Future

07 Jul, 2025

Executive Summary

• Research suggests financialization, where financial motives dominate, has likely contributed to the decline of the U.S. industrial base by prioritizing shareholder profits over industrial investment.
• It seems likely that U.S. corporations have distributed a significant portion of profits to shareholders, potentially 90-95% over recent decades, though exact figures vary.
• The evidence leans toward financial practices like stock buybacks and private equity buyouts reducing long-term industrial competitiveness, though some argue this reflects a lack of viable investment options.

Understanding Financialization and Its Impact

What is Financialization?

Financialization refers to the growing dominance of financial markets, institutions, and motives in the economy, often at the expense of industrial activity. Think of it as a shift where making money from money—through stock buybacks, loans, or complex financial products—becomes more important than producing goods like cars or machinery. This trend has been noticeable in the U.S. since the 1980s, with deregulation and a focus on shareholder value driving the change.

How It Affected the U.S. Industrial Base

Research suggests that financialization has weakened the U.S. industrial base by diverting resources from manufacturing and innovation to financial gains. For example, companies have increasingly used profits for stock buybacks—buying their own shares to boost stock prices—rather than investing in new factories or research. From 2003 to 2012, S&P 500 companies used 91% of their earnings for buybacks and dividends, leaving less for industrial growth. This focus on short-term profits has led to deindustrialization, with manufacturing jobs declining and production moving overseas.

Consequences and Global Impact

The impact isn’t just local. In the U.S., financialization has contributed to rising inequality, with wealth concentrating among the top earners while wages stagnate. Globally, it has caused capital to flow to financial centers, creating currency volatility and debt burdens in developing countries. The 2008 financial crisis, rooted in U.S. financial practices, showed how these effects can ripple worldwide, affecting economies far beyond American borders.

Looking Ahead

The future is uncertain, but there’s potential for change. Policies to reindustrialize, like investing in green energy, and regulatory reforms could help balance finance and industry. Technological advancements, such as fintech and blockchain, might deepen financialization, but they also offer opportunities for innovation if managed well.

Detailed Analysis of Financialization and the U.S. Industrial Base

This section provides a comprehensive analysis of how financialization has decimated the U.S. industrial base, covering its historical development, impact, consequences, and future outlook.

Background and Context

Financialization, defined as the increasing dominance of financial motives, markets, and institutions in the economy, has been a significant economic trend since the late 20th century. Investopedia describes it as "the increase in size and importance of the financial sector relative to an overall economy, plus the growing diversity of financial transactions" (Investopedia - Financialization: Definition, Examples, Consequences, and Criticisms). This process is tied to the transition from an industrial to a service economy, with financial services belonging to the tertiary sector. Wikipedia notes that financialization has been particularly pronounced since the 1980s, marked by debt-to-equity ratios increasing and financial services accounting for a larger share of national income (Wikipedia - Financialization).

The U.S. economy, once a global leader in industrial production, has seen its manufacturing base erode, with financialization playing a central role. This note explores how this shift has occurred, its impacts, and what lies ahead.

History of Financialization in the U.S. Economy

The roots of financialization can be traced to the early 20th century, with Louis Brandeis discussing the concept of an American "financial oligarchy" in 1913, highlighting the concentration of economic power in a few financial sector firms (Wikipedia - Financialization). The Pujo Committee in 1912 found control of credit concentrated among a small group of Wall Street firms, setting the stage for concerns about financial dominance.

From the New Deal through the 1970s, known as the era of "boring banking," banks were prohibited from engaging in investment banking, limiting financial engineering (Wikipedia - Financialization). In 1970, trading in U.S. equity markets was $136.0 billion (13.1% of U.S. GDP), and futures trading was based solely on agricultural commodities until 1971. However, the 1980s marked a turning point with deregulation, including the repeal of the Glass-Steagall Act in 1999, allowing commercial banks to merge with investment banks, creating large financial conglomerates (Wikipedia - Financialization).

By 2007, the financial sector accounted for 5.9% of U.S. GDP, up from 3.5% in 1978, with profits growing by 800% (adjusted for inflation) from 1980 to 2005, compared to 250% for non-financial sectors (Wikipedia - Financialization). Financial instruments, such as derivatives, saw explosive growth, with trading reaching $1.2 quadrillion annually by 2006, compared to U.S. GDP of $12.456 trillion (Wikipedia - Financialization). This period also saw the rise of neoliberal policies, emphasizing free markets and shareholder value, which further entrenched financialization.

The 2008 financial crisis, triggered by the collapse of the housing market and mortgage-backed securities, highlighted the risks of unchecked financialization, with critics like William K. Black noting harm to the real economy (Wikipedia - Financialization). Bruce Bartlett (2013) linked financialization to economic malaise, income inequality, and wage stagnation, underscoring its broader impacts (Wikipedia - Financialization).

Impact on the U.S. Industrial Base

The rise of financialization has had a devastating effect on the U.S. industrial base. At its peak in the mid-20th century, manufacturing accounted for 40% of all profits and 29% of the nation’s jobs, according to IndustryWeek (IndustryWeek - How the Financialization of America Hurt Workers and the Economy). Today, finance captures 40% of profits with only 5% of jobs, illustrating a stark shift in economic priorities. The finance industry's share of GDP grew from 10% in 1950 to 22% by 2020, diverting resources from industrial investment to financial activities (IndustryWeek - How the Financialization of America Hurt Workers and the Economy).

This shift has fostered short-termism, where companies prioritize stock buybacks and dividends over long-term investments in research and development (R&D) and capital expenditure. Data from Harvard Business Review shows that from 2003 to 2012, S&P 500 companies used 54% of earnings for stock buybacks and 37% for dividends, totaling 91% (Harvard Business Review - Profits Without Prosperity). This focus on shareholder value has come at the expense of industrial competitiveness, as funds that could have been used for innovation and expansion are instead distributed to shareholders.

Deindustrialization has been a direct consequence, with manufacturing jobs declining and production outsourced to lower-cost countries. Companies like General Electric (GE) and General Motors (GM) exemplify this trend. GE derived 42% of its revenue from GE Capital in 2008, highlighting how even industrial firms have become financialized (Atlantic Council - Financialization has increased economic fragility). GM, similarly, derives one-third of its pre-tax profit from financing car sales and leases, diverting from its core manufacturing business (Atlantic Council - Financialization has increased economic fragility).

The decline in industrial investment has also weakened innovation. The National Science Foundation (NSF) reports that while U.S. R&D spending increased to $789 billion in 2021, there has been a shift from basic research, with Harvard Business Review noting a 65% decline in R&D returns over 30 years (NSF - U.S. R&D Trends); (HBR - 2017). This focus on short-term, applied R&D has reduced long-term technological advancement, further eroding the industrial base.

Consequences for the U.S. and the World

The consequences of financialization extend beyond the industrial sector. In the U.S., it has contributed to rising economic inequality, with wealth concentrating among the top earners while wages stagnate. Total household and business debt has ballooned from $2.4 trillion in 1974 to $54.3 trillion in 2019, reflecting a growing reliance on debt to sustain consumption and investment (IndustryWeek - How the Financialization of America Hurt Workers and the Economy). This debt burden, with a U.S. debt-to-GDP ratio of 128.1% in December 2020, has made the economy more fragile, increasing the risk of financial crises (IndustryWeek - How the Financialization of America Hurt Workers and the Economy).

Globally, U.S. financialization has had significant repercussions. Capital flight to financial centers like London and New York has led to currency volatility and increased debt burdens in developing economies, undermining their economic stability. Investopedia notes that financialization can lead to capital flight, currency volatility, and increased debt burdens, undermining a developing nation's economic growth and stability (Investopedia - Financialization: Definition, Examples, Consequences, and Criticisms). The 2008 financial crisis, rooted in the U.S. housing market but amplified by global financial interconnectedness, demonstrated the far-reaching effects, causing economic turmoil worldwide (Asian Development Bank - The US Financial Crisis, Global Financial Turmoil, and Developing Asia: Is the Era of High Growth at an End?).

Financialization has also reshaped global economic power dynamics. While the U.S. remains a dominant financial hub, the rise of other centers, such as London, has diversified global finance. Developing economies face challenges as financialization diverts resources from productive investments to speculative financial markets, exacerbating inequality and economic instability (Investopedia - Financialization: Definition, Examples, Consequences, and Criticisms).

What the Future Holds

The future of financialization is uncertain but likely to involve continued evolution. Technological advancements, such as fintech, blockchain, and digital currencies, could further integrate financial services into everyday life, potentially increasing financialization. The Bank of England’s Future of Finance project explores how financial services might evolve over the next decade, noting the role of digital money and asset tokenization (Bank of England - The Future of Finance - our response). However, these innovations also carry risks, including greater financial instability and privacy concerns.

Regulatory reforms, such as the Dodd-Frank Act in the U.S., have aimed to curb the excesses of financialization, but their effectiveness remains debated (Investopedia - Financialization: Definition, Examples, Consequences, and Criticisms). There is growing recognition of the need for policies that balance financial growth with industrial and social priorities. Efforts to reindustrialize, particularly in sectors like green energy, could counterbalance some effects of financialization. Investments in renewable energy and infrastructure could revitalize manufacturing and create jobs, while also addressing climate change (World Economic Forum - Global financial standards are key in a fragmented world).

The rise of China and other emerging economies could also shift global economic power, potentially reducing the dominance of U.S. financial markets. As geopolitical tensions and economic competition intensify, there may be a push toward reshoring manufacturing to ensure national security and economic resilience (Atlantic Council - Financialization has increased economic fragility).

Conclusion

Financialization has fundamentally altered the U.S. economy, decimating its industrial base while fostering a more financialized and unequal society. The shift from manufacturing to finance has diverted resources from productive investment to speculative activities, weakening industrial competitiveness and innovation. The consequences, both domestically and globally, are profound, including rising inequality, economic fragility, and global instability.

However, the future is not set in stone. With thoughtful policy interventions, technological advancements, and a renewed focus on industrial and social priorities, it is possible to mitigate the negative effects of financialization. Reindustrialization, regulatory reforms, and global cooperation can help restore a more balanced economy, ensuring that finance serves the real economy rather than dominating it.

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#Financialization #US Industries #US economy