Christina Wang writes,

Making conservative assumptions, we show that the current official method overestimates the service output of the commercial banking industry by at least 21% (amounting to $116.8 billion in 2007:Q4 for example) and GDP by 0.3% ($52.9 billion in 2007:Q4 for example) between 1997 and 2007. The overstatement to GDP is mitigated because when the customer is another company, the official method simply re-assigns the firm’s value added to its bank, leaving GDP unchanged…the overstatement comes from counting term and credit risk premium earned by banks as part of their value added.

Pointer from Mark Thoma.

Tyler Cowen has been harping about the problem of measuring value added in financial services. He suggests that the economy is stagnating more than we think because we over-value financial services. The above paragraph says that, yes, on the one hand, we overstate the value of financial services, but on the other hand we under-estimate the value added in other sectors.

Quite apart from statistics, there is the issue of whether resources devoted to financial services produce commensurate increases in well-being, or whether instead they earn rents by writing out-of-the-money options. In the latter case, the managers who write the options may be able to get out before those options have to pay out. Or the institution can be bailed out altogether. Either way, you could get too many out-of-the-money options written, to much rent earned by managers who write them, and too few resources going to more productive uses.