Is there any way to stop the brain drain to Wall St.?

ASK THIS | April 115, 2011

A Kauffman Foundation study finds that the 'financialization' of the economy is luring too many would-be entrepreneurs to Wall Street, and reducing company creation. So what if anything can be done about it?

By Paul Kedrosky
paulk@kauffman.org

In a recent paper, my colleague Dane Stangler and I wrote about something we called “financialization.” It describes, in short, the increasing prominence of the financial sector in the U.S. economy, and the effect that growing importance has had. We describe how the financial sector had grown dramatically in terms of its percentage of U.S. GDP. Among other things, this has led to the financial sector being a disproportionate hirer of science, technology, engineering and mathematics (STEM) graduates.

Graduates should be free to pursue whatever careers they want to. Having said that, the propensity of STEM graduates to choose finance, driven by that sector’s outsized compensation and increasing need for more mathematically inclined hires, has had unintended consequences. We argue that this is one of the causes of rates of entrepreneurial company creation in the U.S. flat-lining in recent decades.

We also argue that the timing could hardly have been worse to lose so many of our best and brightest STEM graduates to finance. We have never faced as many complex and important technical problems requiring their entrepreneurial efforts, from the environment, to energy, to medicine. Losing these STEM graduates to finance has imposed material societal costs at a time when we can ill-afford them.

Financialization’s entrepreneurial consequences are important and too often overlooked. Here are some questions that reporters and politicians should be asking.

Q. Why is finance attracting such a large percentage of science, engineering and mathematics graduates?

It is in large part because of high salaries and high education costs. Faced with increasingly expensive higher education, and often outsized debts at graduation, STEM graduates can hardly be faulted for choosing a $170,000 finance position over a $70,000 salary in their own field. And the salaries are even lower if they choose an entrepreneurial option.

Q. What are we doing to make sure our best graduates aren’t pulled out of science and into finance?

Not very much. For the most part, this trend has been ignored, or even celebrated. We continually hear about careers offices at engineering schools that are more able to find financial positions for their graduates than positions in their field. That is in part a function of the way we create incentives for such offices, with higher starting salaries being a key indicator used to judge program success.

Q. Do we need regulations? What can and should be done about it?

We don’t need regulations. They would be impossible to implement, and it would be wrong to limit graduating STEM students’ options. We should, however, look at the causes: higher school costs, career office metrics, and an outsized financial system. The latter is contracting somewhat in the years after the 2008 financial crisis, but it will continue to create distortions of which we should remain aware. Career offices should pay attention to graduating students’ salaries -- but they should also be measured against how successful they are in placing STEM students in technical disciplines. Finally, higher education costs, and the frequent resulting debt burden, remain a major issue. We need to cut the cost of higher education to make an impact.

Paul Kedrosky is a senior fellow at the Ewing Marion Kauffman Foundation where he uses his experience as a technology entrepreneur, venture capitalist and academic to explore new programming opportunities for Kauffman in the areas of entrepreneurship, innovation and capital markets. He is a contributing editor at Bloomberg; the editor of Infectious Greed, one of the best known business blogs on the Internet; and a frequent blogger for Bloomberg.

Comments

Jump to bottom of list