I am going to attempt to contextualize the movie from my perspective on the current crisis:
The graph shows the difference between what we make for capital (productivity) and what we get paid (wages) in real terms (adjusted for inflation). The differential between the two is profit, which is income that goes to shareholders, executives. This excess capital is, in large part, reinvested into what Keynes called the 'casino' of finance capitalism. With the progressive deregulation of finance over the past 30 years, culminating in the elimination of Glass-Steagall Act in 1999, the stock market increasingly became the locus of business for global capital. The returns that could be made by 'beating the average' speculation on the markets was far in excess of what could be made in investing in productive investment. Therefore, the amount of capital invested in 'fixed investment'--investment that creates physical capital, and therefore employment--as a percentage of GDP has progressively gone down since the 1980s. Indeed, since the year 2000, the amount of jobs in the United States has not increased, but the amount of people who went onto the market increased by 12 million, which helped to depress wages further and helps explain why 'real unemployment' in the US is reaching 16 percent! Thus, the gap represents the income that goes to the top 1% of our society, which helps explain why inequality in the US is at the highest level since the 1920s, poverty is at alarmingly high levels, wages as a share of GDP is at near historic lows and where so much money came from to inflate the financial markets. The historic 'social compact' of capitalism, that the rich would be frugal and invest for the employment of the workers has obviously broken down. As Paul Krugman states: "Neither the administration, nor our political system in general, is ready to face up to the fact that we’ve become a society in which the big bucks go to bad actors, a society that lavishly rewards those who make us poorer."
Contrary to the explanations of neoclassical economists and other apologetics for neoliberal capitalism, this situation is a choice, a creation of political struggle between financial capital and labour not a 'natural' outcome of the 'free market'. The attack against the union movement in the 1980s by neoliberal governments like Thatcher (breaking the coal miners strike, 1983) and Reagan (breaking the air traffic controllers strike); and with the opening up of capital markets worldwide through free trade agreements and IMF enforced Structural Adjustment Policies (SAPS) that forced developing countries to adopt neoliberal policies at the pain of insolvency; workers in the West could no longer demand higher wages due to the internationalization of capital and the effective expansion of the labour market. What the graph shows is that the neoclassical defense of capitalism, that workers wages reflect their productivity is patently false. Workers get pay commensurate with their productivity by FIGHTING for it, there is nothing 'natural' about the market system.
The myth that 'increasing your skills' will lead to higher wages is to engage in an endless game of chasing your own tail. The fact is that, thanks to IT, skills are increasingly cheap and easy to acquire. This means that more and more people will acquire the skills internationally, undermining the position of a 'skilled' worker unless he goes onto to an even higher level of skills that eventually will not be sufficient, as persons in the Third-World can undercut his labour costs with the same skill set. The only way for workers to have wages to rise in line with their productivity is to threaten capital with strikes and stoppages, to support pro-labour governments, and to make transnational unions that make it increasingly difficult for capital to play one set of workers against other workers.
However, the top 1% have other ways of getting our money apart from pure exploitation. For instance, they have 401k accounts. The 401k is essentially a big swindle as most investors have the faintest idea of what they are investing in and with all those trillions of retirement funds sloshing around the markets, the losses of the average worker's retirement account is a gain for hedge funds and other 'insiders'. These elite group of investors and banks have the institutional power to determine where the markets go, the 'free market' at work. As Peter Gowan argues:
"the New Wall Street System was dominated by just five investment banks, holding over $4 trillion of assets, and able to call upon or move literally trillions more dollars from the institutions behind them, such as the commercial banks, the money-market funds, pension funds, and so on. The system was a far cry from the decentralized market with thousands of players, all slavish price-takers, depicted by neo-classical economics."
Thankfully, Bush's plan to privatize social security--a multi-trillion entitlement--was stopped. Bush's plan amounted to a taxpayer subsidy for the speculative players on the market, essentially the privatization of taxpayers. But, just imagine if it had been privatized; with the implosion of the stock market in the past years, millions of seniors would have been forced to work, or worse.
Another way that workers are being swindled is credit. This crisis is essentially a crisis of underconsumption, meaning that what is being produced is unable to bought by those who produce it. The graph is a visual representation of that crisis; however, this crisis of underconsumption had, until now, been avoided for three decades due to an ever expanding line of credit to consumers to the point where you could buy a house without having to present a name or income: the infamous NINJA loan. However, with the increase in interest rates in 2007, consumers were no longer able to afford the payments and the entire financial system was thrown under the bus. The banks, in order to lend more and reduce individual risk collateralized the debt, throwing good debt with bad into CDOs and other financial 'innovation'--the justification for the 'liberalization' of financial markets was so that 'innovation' would lead to greater access to credit and lower cost to consumers. In so doing, the financial industry essentially reduced individual risk and lower costs for consumers, but massively increased systemic risk, which in the end was the immediate cause of the crisis. The inability to determine the value of the financial asset, due to the mixing of good and bad debt, lead to the de facto insolvency of the banks. Therefore, the real cost to the average consumer is in the trillions,largely in the form of interest bearing debt that will have to be paid by future generations, due to the bank and shareholder bailouts.
Here is the problem that Michael Moore will probably deal with, that the bailouts did not come with any real strings. The result is that the financial industry is making profits again, but in the same way they made them before. As Paul Krugman stated in a recent op-ed;
"The American economy remains in dire straits, with one worker in six unemployed or underemployed. Yet Goldman Sachs just reported record quarterly profits — and it’s preparing to hand out huge bonuses, comparable to what it was paying before the crisis. What does this contrast tell us?...it shows that Wall Street’s bad habits — above all, the system of compensation that helped cause the financial crisis — have not gone away...it shows that by rescuing the financial system without reforming it, Washington has done nothing to protect us from a new crisis, and, in fact, has made another crisis more likely...What’s clear is that Wall Street in general, Goldman very much included, benefited hugely from the government’s provision of a financial backstop — an assurance that it will rescue major financial players whenever things go wrong...You can argue that such rescues are necessary if we’re to avoid a replay of the Great Depression. In fact, I agree. But the result is that the financial system’s liabilities are now backed by an implicit government guarantee.If these lobbying efforts succeed, we’ll have set the stage for an even bigger financial disaster a few years down the road. The next crisis could look something like the savings-and-loan mess of the 1980s, in which deregulated banks gambled with, or in some cases stole, taxpayers’ money — except that it would involve the financial industry as a whole."
Back to consumer credit. Credit amounts to another way that income is filtered back to the top 1%. The logic is simple, you are paid insufficient wages, therefore you require credit to maintain a decent standard of living. The payments you make go to who? The banks and credit card companies and those profits go to the owners of the institutions. But it gets even more perverse, banks and other financial institutions are increasingly making more and more of their profits BECAUSE workers are broke, as Jon Stewart said recently on The Daily Show, "they are making BECAUSE the customers are broke". They are making much of their profits on overdraft fees and other fees based on people's inability to pay!
How does one get trapped into the credit crunch? The credit is given to you at attractive rates, we all get those 'limited time offers' to induce you to get into the trap of debt. This has a historical parallel with the beginnings of capitalism with the 'wage advance'. As Stephen A. Marglin argues, "Wage advances were to the capitalist what free samples of heroin are to the pusher; a means of creating dependence...Wage advances legally bound the worker to his master" (79); and credit legally binds the consumer to finance capital in a embrace that can only be broken through self-imposed poverty--since, as we have seen, wages are insufficient to cover more than the most basic of costs--, bankruptcy or the accumulation of even more debt to pay off the older debt. A friend of mine who works for a credit card company once told me what her boss stated, and I paraphrase "we want them pay until they die". The intention is for an individual to basically only pay the interest and the fees, because if someone actually pays their principle, then they don't make money.
Peter Gowan puts it best:
"The stock-market bubble of the 1990s raised the paper value of the private pensions of the mass of Americans, thus giving them a sense that they were becoming richer and could spend (and indebt themselves) more. The housing bubble had a double effect: it not only made American consumers feel confident that the value of their house was rising, enabling them to spend more; it was reinforced by a strong campaign from the banks, as we have seen, urging them to take out second mortgages and use the new money for consumption spending...This Anglo-Saxon model was based upon the accumulation of consumer debt: it was growth today, paid for by hoped-for growth tomorrow. It was not based upon strengthening the means of value-generation in the economies concerned. In short, it was a bluff, buttressed by some creative national accounting practices which exaggerated the extent of the American boom and productivity gains in the us economy.36"
Trickle-up economics continues...
I agree on almost everything, but I think something is missing. Let's start from the beginning. What can happen in a free market economy if productivity grows?
ReplyDeleteThere are two scenarios: one where aggregate demand is low, but can increase; the second when aggregate demand is high, and can decrease.
In the second scenario -I won'analyze the first here-, productivity increases are seen by firms as a possibility to produce the same at lower unit costs. What you won't see under this scenario is an increase in 'real investment' because, apart from some niches, like R&D e IT, you don't need more fixed capital -you need less!
What happens to nominal wages, they won't rise. Let's even assume they won't fall for the employed, but some workers won't be needed anymore. In reality, nominal wages for the majority of workers have decreased, but prices have also fallen, so (as you see in the graph) real wages remains the same. However, the middle class is shrinking and it won't be there anymore: the distribution of income become more and more asymmetrical.
The consequences are huge -I mean the consequences even if real wages remain the same.
In the second scenario, the composition of aggregate demand is not like in the first one. You have less real investment and this means that, unless other components don't offset the decrease in real investment, aggregate demand will fall. At the same time, lower-income and middle class demand either falls or remains the same. But, at the end, this is not a problem, is the solution: thanks to productivity increases and falling cost of labour, FIRMS are making extra-profit with declining demand: they produce less at lower costs.
But extra-profits or extra-income need to be invested somewhere. But where? Not ifor financing real investment because firms have no intention to increase real investment, they are quite happy to cut real investment. Interest rates are falling because firms are not willing to pay higher interest rates for investment which are not willing to do -having a lower rate of return because aggregate demand is not rising.
All these profits are invested in the financial markets. Firms needs money because are indebted -they redistribute all 'real' profits they are making selling their products to shareholders, investors, managers... but basically they retake immediately the money back from the financial markets -from shareholders, investors, managers- making more debts to repay shareholders, investors, managers.
The logic is maybe tricky, but the point is the financial sector grows, more money is put in the financial markets, more money is put in the financial markets... until the financial sector becomes the biggest component of the GDP, in reality nominal GDP -outside the financial sector, GDP, that is, PxY is declining. The increase in the GDP of the financial sector is due to the fact that the financial system generates more money, higher prices (for bonds), more bonds, etc, etc.
However, what I find more striking and scaring is that such a system can go on forever, that is, I don't see how it could collapse. To say the truth, I haven't study if the system is stable or resilient, but I don't see any intuitive reason whay this system should eventually collpase. The only one is that there must be a limit for the financial sector to expand indefinitively, that is, as a percentage of the GDP.
But we must also remember that, assuming that productivity grows forever -as a result of constant technological progress- there is also a limit to the amount of goods that can be consumed. Alternatively, if productivity grows and real wages also grows, the world will be more equal, but probably even less stable.
@ anonymous
ReplyDeleteThank you for your very well thought out insights, very much appreciated. I particularly enjoyed your analysis on the logic behind falling fixed investment, that as productivity increases, more goods can be produced with existing capital stocks and, in the future, with even less. This leads to lower employment, particularly in the most productive sectors--the same sectors that tend to pay more--; higher unemployment leads to lower labour power in the market that leads to lower wages and thus, lower aggregate demand, which also puts pressure on firms to cut investment further. The way firms react is, within "free market" capitalism rational, that is, they react by further increasing productivity and cutting costs internally to increase their "differential" rates of accumulation and thus, they benefit. The problem is that at the macroeconomic level, this "rational" microeconomic response merely compounds the problem.
Nominal wages tend not to go down for workers, instead they are fired and the newly hired workers are paid less. A current debate is now being had, promoted by the IMF, that the Central Banks of the world have been to ardent in fighting inflation, which has made adjustment more difficult--since nominal wages tend not to go down--; ergo, have higher inflation to cut demand and the real wages of workers, EVEN MORE! This is intriguing, because we have seen real wages for people who make minimum wage go down to barely subsistence levels, from levels that were, at least, socially acceptable in real terms. Again, the problem is that we are focusing here on the wrong side of the problem, workers are not the one's who are causing the problem, we have a over-bloated FIRE sector that is distorting the economy.
On the inevitability of financialization, I disagree, everything is political. What this crisis has shown is that for all the hoopla, financial instruments are still dependent on what occurs in the "real" economy and the financial sector exists, today as in the past, on an implicit socialist base; that is to say, it will be bailed-out by the state, if it didn't have that, it would not have survived the numerous crises that have defined capitalism. Capitalism is a system premised on that basic lemon-socialist premise, it is not a "free market", by definition, it can never be. The hegemony of finance is only due to our political inability to question the system proper and limit ourselves to whether we should regulate the irrational beast. Unfortunately, we tried that in the aftermath of the Depression, and look how well that turned out. We should not forget Marx, Minksy, etc., that from stability comes the seeds of the next crisis--this is the contradiction of a class society.
Thank you for your answer. On inevitability, I agree. Nothing is inevitable because most critical decisions are made by vested interests.
ReplyDeleteBut I am even more 'realist'. If there are some mechanisms to let the system work in this way and there are enough interests at play, it's hard to imagine that something will change.
Under the scenario I delineated in the first post -productivity grows, more unemployment, less aggregate demand, but still higher profits- what is needed to understand is whether the evolution of the market economy towards financialization can go on forever or if the inner logic of the market economy will reinforce or offset from within the current evolution.
One of the main questions is related to the possibility that financial markets may play a bigger role in channeling increasing money supply in the 'right' direction.
As monetarists rightly understood, the strongest tool for macroeconomic management and, I would add, for exploitation, is monetary policy.
In the past, when exogenous shocks did not influence the monetary mechanis, higher money supply helped to generate either higher output or higher inflation in the real economy.
Well, I won't enter into this 'monetarist' debate, but let's take a short look at the Keynesian effect of decreasing interest rates on the real economy and then FORGET the role of 'real interest rates' on firms' investment decisions.
What if money supply generates, more decisively, a proliferation of financial assets (more financial output, supply) and, at the same time, an increase in the price of financial assets (financial inflation especially in the stock exchange markets, that is where real speculation and pure casinos are).
What if central banks pump 6% money supply growth in the financial markets, generating extra financial incomes -or, if the same financial-credit system generates endogeneously extra money.
Especially in advanced countries, the first 'positive effect' is that the middle class has already been able to defend its purchasing parity power even if nominal and real wages are falling due to the wealth accumulated in the past by their families and relatives -real estate plus invested money.
It looks like a comedy, but Marx wrote that history repeats itself, first like tragedy and then like a comedy. It may seem silly, but, because of capitalist exploitation, a big portion of the proletariate has been transformed into a class of rentiers. And if you remember from my other posts, productivity grows means more output with less workers.
But this is exactly well the story started. Instead of a reserve army which is not needed anymore given to technological progress, we may arrive with a class of slaves producing for a class of rentiers -among them, some 'good old' capitalists.
I let you imagine where I stand. I stand and I am ready to fight for the new slaves -but they may be the minority and often real minorities, that is, a big portion of the exploited workers in advanced countries are immigrants.
The final question is, then: can financial incomes increase at a steady rate of 6% in real terms through constant increases in money supply? I fear they can even if the system is more like a chaotic state of affairs then the stationary, steady state, perfect competitive, Pareto optimal world usually described by mainstream economists.
Financial bubbles will explode once in a while and a catastrophic breakdown will eventually happen -and if happens only one, nothing will be like before. But, in general -as this crisis seems to demonstrate- especially monetary authorities have enough instruments to reverse the bubble. They have basically to inflate the fiancial markets even more than before. Success is not to be taken for granted. If you play at the casino, sometimes also the casino can loose. And big. In the meanwhile, a lot of people out there will suffer the consequences, but even more may benefit from the rules of the game.
I think we shouldn't bifurcate politics from economics--reification--that is a liberal mechanism, which serves existing interests rather well. The market alone does not determine everything, the market is dependent on the political, because it is the political that determines the confines of the market--of course one can state, and I seriously looking into reflexivity. Anyways, I do not think that financialization can exist independent of politics, even if the economics exists for its continued expansion, nor do I believe that finance can separate itself from the "real economy". I don't agree with you that finance can just keep on growing ad infinitum, it is politically impossible and, I argue, economically as well. Finance, like I stated, is still dependent on debtors ability to pay to keep the value of the asset. For instance, why was housing, food, or oil such big targets for speculative capital? The answer: because demand for the goods are inelastic, people simply cannot not have food or oil--housing is less of a necessity, but once you own a home you fight your hardest to keep it-- and the bankers were betting on the suffering of the people to keep the asset's value. The problem is that this is socially unsustainable, there are political prices that are to be paid for this hubris. At some point, and I think that point is fast approaching, there won't be many entities that can be considered solvent. You cannot have debt piling on debt in a system that depends on goodwill and credit ratings.
ReplyDeleteAbout the "proletariat" becoming rentiers, objectively--in a sense--they have, but subjectively I am even less sure. In addition, many of the working class still have not moved from a "class in itself" towards a "class for itself", even if at some point they had, with flexible labour and the onslaught of debt-financed, post-modern, neoliberal consumerism the tensions of capitalism were delayed and obfuscated the essential class relation; only now, with the current economic crisis is the model collapsing. Many of them personally do not hold stocks, bonds, etc., their pensions do and therefore, consciously they aren't really conscious of their status. They also own property dependent on the decisions of others and can lose it all if they lose their jobs.
Anyways, keep in touch and new posts are coming!