Back when I was studying economics in college, I remember reading about the Resource Curse (or Curse of Resources or Paradox of Plenty), which observed that countries with abundant natural resources tended to have lower economic growth. From 1965 1998 in the OPEC countries, GNP per capita growth decreased on average by 1.3%, while in the rest of the developed world, per capita growth was positive 2.2% (for a difference of 3.5%).
There were a few explanations as to why this might be. One is that resource-rich countries had trouble diversifying their economies. Another is that natural resources were more volatile and price-dependent.
One particular explanation stuck with me though, which is that in many of these economies the resource industries tended to pay far higher salaries than were available elsewhere in the economy. As a result, those sectors tended to attract the best talent from both the private and government sectors, eroding the growth and efficacy of other institutions. For example, you can imagine that if youre a smart young person in Saudi Arabia, your goal might be to work in the oil industry and not much else.
What does this have to do with the U.S.? Today, the financial industry exerts a strong pull on many of our brightest college grads (e.g., 33% of Harvards employed graduating class of 2008 went into finance jobs). Compensation is customarily at much higher levels than is the case in other sectors of the economy. Its become a lot like our version of the oil industry in Saudi Arabia, serving as a talent magnet at the expense of other pursuits.
David Rubenstein of the Carlyle Group commented that he felt bad for the infirm of tomorrow, because all of the smart college graduates would be trying to get into alternative investments (e.g., private equity) rather than medicine. His plan was to avoid getting sick.
Perhaps the U.S financial industry can drive robust and sustainable growth on its own. But Id feel better if, as a society, we were heeding the advice that many financial pros themselves give diversify.
