Dodd-Frank Is Driving the Wrong Kind of Innovation

The federal government responded to the 2008 mortgage crisis by piling new regulations on the financial system, but lower-skilled finance employees were squeezed out of the job market.


As the federal government responded to the 2008 mortgage crisis by piling new regulations on the financial system, a new study reports, lower-skilled finance employees were replaced by workers with degrees in science, technology, engineering, and mathematics (STEM).

Christos Makridis and Alberto Rossi, researchers with George Mason University's Mercatus Center, found evidence that "financial services firms may have sought to 'escape' regulatory exposure by hiring STEM workers who could automate more tasks and pursue activities outside the scope of existing regulation." The influx of STEM workers and ensuing automation following the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act may have "productivity-enhancing effects," they note. But "this has come at the expense of low- and middle-skilled workers in the sector."

The tradeoff has not necessarily helped consumers. "It's just raising the costs," Makridis says.

According to the paper, the financial services sector saw a 50 percent increase in federal regulation from 2008 to 2017. For every 10 percent increase in regulation, STEM employment increased by 5.3 percent. Makridis and Rossi also reported that "a 10 percent rise in regulatory restrictions is associated with an 8.69 percent rise in employment among compliance officer occupations (even after controlling for STEM workers)."

The study found that increases in federal regulation caused average wages to increase as financial firms hired fewer people and paid them higher salaries, which implies that lower-skilled workers were squeezed out of the job market. Whether or not the banking system is more secure, a lot of former workers in the industry probably aren't.

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  3. I like to see a more detailed review of this topic and this study. Was the shift to more tech savvy employees a natural progression or was it really driven by the regulations. Movement to automate processes has been on going. There has been significant talk that with much of the manufacturing sector already automated the next area for automation was white collar clerical work. So the regulation may have had no effect or its effect could have been to accelerate a transition expected to happen. In either case I think that assuming no regulation would have stopped the process is wishful thinking.

    1. From the article:

      Makridis and Rossi also reported that “a 10 percent rise in regulatory restrictions is associated with an 8.69 percent rise in employment among compliance officer occupations (even after controlling for STEM workers).”

      “Compliance officer occupations” not-equal STEM workers.

      1. That’s what that sentence says, doesn’t it?

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    3. Not only that, but I don’t understand how such automation gets around regulations.

      1. Let’s take an example. You have sandwich shop making peanut butter and jelly sandwiches. You hire a couple high school kids to make the sandwiches. Life is good until someone complains that they didn’t get enough jelly on their sandwich. Regulators come to the rescue and mandate that the jelly layer on your sandwich must be no less than 0.15 inches thick. But you can’t overpower the flavor of the peanut butter so no more than 0.2 inches thick either. And just because someone thought it was a good idea, the rule must be applied at all points on the bread. It’s not enough to average within the range.

        Now, you could conduct extensive training of your staff on jelly spreading techniques. You could also hire a couple more kids to be the quality control inspectors. And you’d still be rolling the dice whenever the regulators show up with their calipers.

        Or you could hire one engineer to build a machine that will put exactly the required amount of jelly on the bread on an perfectly repeatable basis. Of course, you’ll have to abandon your entire model of personal interaction and service to customers. And no more ‘giving back to the community’ by giving youth a first opportunity to build some job experience. But the regulators will be happy.

        Automation isn’t about “getting around” regulations. Automation is about ensuring compliance. The fact that the regulations are petty and their putative benefits are vastly less than the things that get lost when complying – well, that’s not the regulator’s problem.

        1. Exactly!

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  5. Next article: “the horseless carriage created unemployment in the buggy whip sector, is innovation actually good?”

    1. Don’t get me wrong, Frank-Dodd is bad for the added complexity and compliance costs but automating out of repetitive, lower skill tasks isn’t part of that, it’s the cost containment brought to bear ahead of it’s natural time horizon.

    2. Blacksmiths, General. Don’t forget blacksmiths.

      1. And whale bone corset makers.

  6. Wait until you see the regulations they put on Wall Street after they bail them out from the stock market collapse. Since so many small investors are going to be hurt, they’re going to require that IRA’s and 401-K’s have at least half their investments in government bonds rather than mutual funds. For their own safety, of course, not that they’re forcing small investors to loan their money to the government.

    1. Loan?
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  8. Rather odd to see reason Koch arguing against automation and productivity. It’s caused loss of employment in far more areas than just financial.

    Anyway Dodd Frank was bad on other levels and named after two of the worst idiots in congress. Well until the progtard squad started showing up and proving how dumb the left could actually be.

  9. No link to the paper, so don’t understand. How did the STEM workers replace the previous financial services workers, and how did their presence help their employees avoid financial regulations?

    1. Boring details here… I didn’t read it, truth be told…

      Rise of the “Quants” in
      Financial Services
      Regulation and Crowding Out of Routine Jobs

      1. I just skimmed it, and it looks like a “quant” wrote it. No guess hazarded as to how the apparent cause they find produces that effect.

      2. Interesting despite the title, the term “quant” doesn’t ever appear in the body of the paper, not even to define it.

        1. Too-too strange! I just saw this same word in a totally unrelated article, so I looked it up… Here ya go…

          A quantitative analyst or “quant” is a specialist who applies mathematical and statistical methods to financial and risk management problems. S/he develops and implements complex models used by firms to make financial and business decisions about issues such as investments, pricing and so on.

    2. See above. It’s not about avoiding regulations – it’s about ensuring mindless compliance.

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  11. WTF are “low skill finance workers”? Why would we want ANY of them?

    1. Phil Murphy (asshole-NJ) was a Goldman Sachs executive. I think we can all agree that he’s a low skill finance worker.

    2. Tellers, accounts payable clerks, loan processors, filing clerks, underwriters, auditors, call center reps, the poor shmuck who has to fight with the DMV when processing background checks, etc. There are thousands of tasks that require some on-the-job training but no special skills or education.

      We want them because a) most of those tasks really do need to be done even though they are in the background and b) automation is only good when it’s cost-effective in its own right. Government regulation ought not to be putting a thumb on the scale.

  12. The only regulation that was needed was nothing. Allow the failures to fail. They pay the ultimate price. The better run banks pick up the pieces and the new customers.

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