Economic Growth: The United States (A)
What on Earth is economic "growth," anyway? I do not know. Even though I have been allegedly writing about it, I do not know. You see, the term economic "growth" bothers me. The anthropomorphism of something called a national "economy" bothers me.
By the way, what is a national "economy"? Is it a thing or a process or a series of processes? Is it the sum of all of a nation's economic activity? If so, what does that mean?
Can a nation's economy be generally conceived of as the breadth and depth of its commercial activities? Is "trade" a part of this? Again, if so, what does that mean?
Addendum To Previous Installment, "Economic Growth: The Cases of Sweden and Japan."
Because I want to furnish you with as much up-to-date, take-it-to-the-bank, relevant information as I can, I feel compelled to put in this addendum to a previous installment in this series essays on "economic growth."
One of the things I have been talking about is the dangers of a nation allowing the finance arm of its economy to get out of control --- the dangers of allowing finance to get further and further removed from the "real" economy of manufacturing production. I have suggested that Sweden, Japan, and the United States, as we shall see, offer representative case studies.
I have suggested that their stories tell the same basic story, with obvious differences in detail. I have suggested that these stories follow the same basic trajectory.
But its not just Sweden, Japan, and the United States that experienced economic fallout due to the "financialization" of their economies throughout the 1980s and 1990s through the 2000s. Actually the economic crisis of 2008 has its roots in thirty years of financialization of economies across the capitalist world --- a process that has been recreated even within individual corporate firms.
"Rich as it already was," wrote Dr. Ha-Joon Chang, who teaches economics at Cambridge, "the Icelandic economy got a turbo-charged boost in the late 1990s, thanks to the then government's decision to privatize and liberalize the financial sector" (1).
"For a while, the financial expansion seemed to work wonders for Iceland. Once a financial backwater with a reputation for excessive regulation (its stock market was only set up in 1985), the country was transformed into a vibrant new hub in the emerging global financial system. From the late 1990s, Iceland grew at an extraordinary rate and became the fifth richest country in the world by 2007 (after Norway, Luxemborg, Switzerland and Denmark). The sky seemed to be the limit.
"Unfortunately, after the global financial crisis of 2008, the Icelandic economy went into meltdown. That summer, all three of its biggest banks went bankrupt and had to be taken over by the government. Things got so bad that, in October 2009, McDonald's decided to withdraw from Iceland, relegating it to the borderland of globalization. At the time of writing (early 2010), the IMF estimate was that its economy shrank at the rate of 8.5 per cent in 2009, the fastest rate of contraction among the rich countries" (2).
The same basic story is true of Ireland.
"Extraordinary though Iceland's story may sound," (for the details you should read the book: "23 Things They Don't Tell You About Capitalism" by Ha-Joon Chang), "it was not alone in fuelling growth by privatizing, liberalizing and opening up the financial sector during the last three decades. Ireland tried to become another financial hub through the same strategy, with its financial assets reaching the equivalent of 900 per cent of GDP in 2007. At the time of writing, the IMF estimate was that its economy contracted by 7.5 per cent in 2009" (3).
"Latvia, another aspiring financial hub, has had it even worse. Following the collapse of its finance-driven boom, its economy was estimated by the IMF to have shrunk by 16 per cent in 2009" (4).
"Dubai, the self-appointed financial hub of the Middle East, seemed to hold on a bit longer than its European rivals, but threw in the towel by declaring a debt moratorium for its main state-owned conglomerate in November 2009" (5).
The seductive power of the finance-driven strategy
"For some, even the recent collapses of Iceland, Ireland and Latvia have not been enough reason to abandon a finance-led economic strategy. In September 2009, Turkey announced that it will implement a series of policies that will turn itself into (yet another) financial hub of the Middle East. Even the government of Korea, a traditional manufacturing powerhouse, is implementing policies aimed at turning itself into the financial hub of Northeast Asia, although its enthusiasm has been dented since the collapse of Ireland and Dubai, after which it was hoping to model the country" (6).
Furthermore, Dr. Chang would have us know that what Iceland and Ireland had done, was only a more extreme form of "the economic strategy being pursued many countries -- a growth strategy based on financial deregulation, first adopted by the US and the UK in the early 1980s" (7).
The issue, according to Dr. Chang, is that, with "a growth strategy based on deregulated finance was the fact that in such a system it is easier to make money in financial activities than through other economic activities --- or so it seemed until the 2008 crisis" (8).
Still quoting Dr. Ha-Joon Chang:
"A study by two French economists, Gerard Dumenil and Dominique Levy --- one of the few studies separately estimating the profit rate of the financial sector and that of the non-financial sector --- shows that the former has been much higher than the latter in the US and in France during the last two or three decades. According to this study, in the US the rate of profit for financial firms was lower than that of the non-financial firms between the mid 1960s and the late 1970s. But, following financial deregulation in the early 1980s, the profit rate of financial firms has been on a rising trend, and ranged between 4 per cent and 12 per cent. Since the 1980s, it has always been significantly higher than that of non-financial firms, which ranged between 2 per cent and 5 per cent. In France, the profit rate of financial corporations was negative between the early 1970s and the mid 1980s (no data is available for the 1960s). However, with the financial deregulation of the late 1980s, it started rising and overtook that of non-financial firms in the early 1990s, when both were about 5 per cent, and rose to over 10 per cent by 2001. In contrast, the profit rate of French non-financial firms declined from the early 1990s, to reach around 3 per cent in 2001" (8).
Okay, France and Britain were also involved in all of this.
Last item of the addendum
As I said, non-financial firms virtually turned themselves into financial institutions over the same thirty or forty-year period.
Its easier to just quote Dr. Chang:
"Jim Crotty, the distinguished American economist, has calculated that the ratio of financial assets to non-financial assets owned by non-financial corporations in the US rose from around 0.4 in the 1970s to nearly 1 in the early 2000s" (9).
"Even companies such as GE, GM and Ford --- once the symbols of American manufacturing prowess --- have been 'financialized' through a continuous expansion of their financial arms, coupled with the decline of their core manufacturing activities. By the early twenty-first century, these manufacturing firms were making most of their profits through financial activities, rather than their core manufacturing businesses... For example, in 2003, 45 per cent of GE's profit came from GE Capital. In 2004, 80 per cent of profits of GM were from its financial arm, GMAC, while Ford made all its profits from Ford Finance between 2001 and 2003" (10).
By the way, its worth noting---just to show what a global system capitalism is---that by early 2009, the export-led economies of East Asia and Southeast Asia were "contracting at an alarming rate." Taiwan, China, South Korea, and Japan saw their exports fall by 20 percent or more in two months (11).
Into the Substance of the Matter
The "Financialization" of the U.S. Economy (circa 1980 to the present)
Financialization as a growth strategy can produce formidable results, at least in the short term. By one astonishing measure, the United States accumulated more than half of the wealth that the country ever generated, in its entire history, since the year 1980, the year of the ascension of Ronald Reagan to the White House (12).
If that staggering claim is true, then U.S. economic "growth," since 1980 has undoubtedly been driven by finance, largely or mostly; or we might say, increasingly detached from production (13) --- which, in turn, was reflected in the stock market frenzy of the 1980s.
And that stock market hysteria, financial historian Edward Chancellor would have us know, was driven by the "boom in leveraged buyouts," which become the foundation of "the bull market of the mid-1980s" (14).
Question: Why did the "boom in leveraged buyouts" become the "driving force behind the bull market of the mid-1980s"?
Answer: Author David C. Korten supplies the answer for us. It is because "[f]inding ways to create new value in a sophisticated modern economy is seldom easy. Finding ways to create new value that will produce returns in the amount and with the speed demanded by a predatory financial system many times larger than the productive economy is virtually impossible. The quickest way to make the kind of profit the system demands is to capture and cannibalize existing values from a weaker market player" (15).
Let's recall an analogy
I have equated a nation's capitalist economy to the human body. A nation's financial system is like the metabolism of the human body; and a nation's "real" economy of manufacturing production is like the bone, muscle, blood, organs, circulatory system, nervous system, skin, hair, and teeth, the body itself.
The function of the metabolism is to break down the incoming food into nutrients, vitamins, and minerals, and the like, to the various areas of the body as needed, to sustain the body.
Under optimal conditions of rest, exercise, and balanced, healthy diet, and so forth, the body will function at the optimal level, barring catastrophic illness.
If the quality of conditions the body undergoes deteriorates (including the quality of food), then the metabolism will have to work harder to extract anything of "value," so to speak, in order to keep the body going, at all, in any form or fashion.
If an even more desperate of actual starvation occurs, the metabolism will react with equal desperation in forcing the body to consume itself --- in a desperate attempt to keep the body alive.
At which point, we begin to be treated to a maddeningly circular logic, not unlike that of the Vietnam War era, that went a little something like this: We had to destroy the village, to save it.
Therefore, this leverage buyout frenzy of the 1980s, is an example of the financial system forcing the real economic body of the United States --- to consume itself --- in order to keep itself "alive."
Does that make sense?
I hope so. Remember, the financial system "metabolizes" inputs, breaks them down, and distributes the "nutrients" throughout the real economic body. For our purposes, the "inputs" would be, say, good jobs at good wages and benefits.
Stay with me. We're not done yet.
Now, I have been talking about a capitalist nation's move to the "financialization" of its economy, as indicative of a weakness, of some kind, in production. It is the indicator of economic weakness.
Question: If that is true, if "financialization" of the economy is indicative of a weakness in production --- then why have the American ruling class been talking in such a triumphalist way about it, for the last 20-25 years?
By the way, the American ruling class have been talking about the "financialization" of the economy in triumphalist terms, for the last 20 to 25 years, both at home and abroad.
I'll just quote Nobel-prize-winning economist, Joseph E. Stiglitz, from his book, The Roaring Nineties.
"What happened in the Roaring Nineties was that a set of longstanding checks and balances --- a balance between Wall Street, Main Street (or High Street, as it is called in the United Kingdom), and labor, between Old Industry and New Technology, government and the market --- was upset, in some essential ways, by the new ascendancy of Finance. Everyone deferred to its judgment. Countries, including the United States, were told to accept the discipline of the market. Longstanding wisdom that there were alternative policies, that different policies affected different groups differently, that there were trade-offs, that politics provided the arena through which the trade-offs were evaluated and choices were made, was shunted aside" (16).
"[I]n the Nineties, America set itself up as the role model for the rest of the world. America was looked to for its views about the right balance of government and the market and about what kinds of institutions and policies are needed to make a market economy work well" (17).
One more passage, last but not least:
"Those countries which did not voluntarily mimic America, in the hope that their economy too would experience a boom, including those that thought America had not gotten the balance right, were cajoled, badgered, and in the case of developing countries dependent on assistance from the International Monetary Fund, effectively forced to go along with what was described as the sweep of history" (18).
The first thing to say about this....
We can expect the beneficiaries of an economic "growth" strategy, based on finance, to be, rather lopsidedly and disproportionately, the elite and sub-elite --- since it is the elite and sub-elites who work in high finance, as well as related fields. I'm thinking of law (especially tax law and business law in general), accounting, marketing, public relations, and media (especially the business media; but some might cynically call all American media business media) --- the latter two being useful for the ruling class, in helping to persuade the public that everything is fine; that what is happening is the best thing that could possibly happen; that the rising tide will lift all of our boats; and that our ruling authorities know precisely what they are doing.
Once again, to return to our question: If the "financialization" of a capitalist nation's economy is an indicator of weakness in production, of one kind or another, of general economic weakness of the so-called "real" economy --- then why have the American ruling class been speaking of "financialization" with such a triumphalist note, over the course of the past 20-25 years?
The two circumstances are not that hard to reconcile, when you think about it. What happens when you are forced into taking a specific course of action?
Well, many things can happen; but one well known psychological option it to take possession of the act you are being forced into committing --- and pretending to others that X is exactly what you want to do. In time, perhaps you convince yourself; and in this way, you try to escape the initial feeling of powerlessness and helplessness, that initially attended the circumstances under which you were compelled into taking X action.
You see, in this way you resolve the cognitive dissonance involved. Take the fable of the "sour grapes." You can read this on Wikipedia.
The fox tries to get some grapes from a high branch. He cannot do so; everything he tries, fails; and he is left grape-less. Basically, in order to evade the feelings of helplessness, powerlessness, and incompetence that surely attends his failure to get the grapes --- he persuades himself that he did not really want the grapes anyway, because they are "sour"; and he implies that he had not really been putting forth maximum effort to get the grapes.
Now, you know that business started offshoring production to other national locales around the world, in order to save themselves on labor costs and labor strife, in the 1970s. Government was surely helpless to prevent them from doing this, right?
Remember, a national capitalist economy can be thought of as having two general halves, the financial arm and the "real" economy of manufacturing production.
Okay, so all government "had left," so to speak, in general, was the financial arm.
Tell me: What do you do when there is a person or a thing that is "all I have left in this world"? Isn't the tendency to try to do everything you can to "hold on to" this person or thing "with everything I've got," with a sense of urgency and desperation?
Suppose that was the situation that stared the political arm of the ruling class in the face.
Therefore, we might say that...
"Instead of seeking to restore the older manufacturing industries or build the new technological sector," wrote political analyst and historian, Kevin Phillips. "Washington authorities steadily protected and advanced banking and finance, providing rescues from perils, insolvencies, and crises hitherto regarded as being hazards of the marketplace. The continued eminence of both the treasury and the Federal Reserve furnished a central continuity between the eighties and the nineties and the Republican Bush and Democratic Clinton eras. Finance was in a bipartisan catbird's seat" (19).
And like the fox, with his talk of "sour" grapes, so too, might our political leaders speak of us living in a "post-industrial age" of the "knowledge worker."
Those of you who remember might correct me if I'm wrong, but I seem to recall Vice President Al Gore introducing such terminology into the lexicon during his run for the White House with Bill Clinton, during the 1992 campaign.
Thank you for reading.
References and Notes
1. Chang, Ha-Joon. 23 Things They Don't Tell You About Capitalism. Bloomsbury Press, 2010. 232-233
2. ibid, 233-234
3. ibid, 234-235
4. ibid, 235
8. ibid, 236
9. ibid, 236-237
10. ibid, 237
11. Harvey, David. The Enigma of Capital And The Crises of Capitalism. Oxford University Press, 2010. 6
12. Johnston, David Cay. Free Lunch: How The Wealthiest Americans Enrich Themselves At Government Expense (And Stick You With The Bill). Portfolio, 2007. 9
13. Phillips, Kevin. Wealth and Democracy: A Political History of the American Rich. Broadway Books, 2002.
Kevin Phillips is a political analyst who has written a great deal about the phenomena of "financialization." In the 1970s there was a recession: "stagflation," inflation plus stagnant growth of the economy.
Mr. Phillips points out that there was a four-point recovery formula pursued by Washington, starting in 1982; and these policies did indeed spur economic "growth." First: military spending; Second: corporate investment -- favored by the 1981 tax law; a lot of money went into computer purchases, but far more went into office buildings and construction; Third: Debt -- state and local governments, corporations, and individuals borrowed massively as never before; Fourth: financial activities, such as mergers, leveraged buyouts, "deal-making," which facilitated the massive growth of the banking and investment sector of employment ----- pp.91-92
Phillips also crucially notes that much of the money made in this way was spent on luxury consumption, by the rich, or "held liquid for trading in assets rather than being invested in capital equipment for production" --- p.92
14. Chancellor, Edward. Devil Take The Hindmost: A History of Financial Speculation. Farrar, Straus, & Giroux, 1999. 262
15. Korten, David C. When Corporations Rule the World. Berrett-Koehler Publishers, Inc., & Kumarian Press, 1995. 207
16. Stiglitz, Joseph E. The Roaring Nineties: A New History of The World's Most Prosperous Decade. W.W. Norton & Company, 2003. xiv.
17. ibid, xv
18. ibid, xv-xvi
19. Phillips, Kevin. Wealth and Democracy: A Political History of the American Rich. Broadway Books, 2002. 97