Marx, banking, firewalls and firefighters

“If Karl Marx had been alive in 2007, he would have been working for a bank. Banks had reached a state of communist perfection. The workers took home everything; the capital holders were left with nothing. Shareholders of banks were raped by the staff, who paid themselves extravagant sums out of illusory profits.  Labour had found a far more effective device than trade unions for destroying capitalists, by duping the shareholders that higher pay was essential to retain Talent.  They were assisted by the accountants, who allowed them to declare profits before they received any cash. Marx would have been laughing all the way from the bank.”  So said Karl Sternberg of Oxford Investment Partners in the Financial Times last week (http://www.ft.com/cms/s/0/a2ea734a-2e7f-11e2-9b98-00144feabdc0.html#axzz2Cfd8hPGi).

So, according to Sternberg, the global banking crash was caused by ‘communism’ in banks i.e. greedy workers “getting too large a share of the income generated“.  Really? Apart from the distortion of the idea of communism into something that has to do with labour’s share being maximised under capitalism, it’s just not true that wages or ‘employee compensation’, as the Americans like to call it, have increased as a share of national income in the major capitalist economies over the last 30 years.  On the contrary, as we have shown many times on this blog, labour’s share has fallen back and inequality of income and wealth has increased sharply, at least in the major financial ‘rentier’ economies of the US and the UK.

Of course, what Sternberg means (when he is not being too silly) is that the executives of the big banks and financial institutions racked up investments in ‘financial weapons of mass destruction’ and then took huge bonuses out as ‘compensation’.  This drove up the ratio of employee compensation relative to revenue to record levels.  Why Sternberg thinks this brought the banks down is not clear. But anyway, the increase in the share of compensation in the banks went mainly to the very top levels of executives and the investment bank traders, not to the average bank worker in the high street or loan centre.   And contrary to Sternberg’s argument, the poor old bank shareholders did fine out of the arrangement as the credit boom boomed.

Indeed, as Andy Haldane, the Bank of England official responsible for financial stability, pointed out in a recent speech (to the Occupy group!): “There are 400,000 people employed in banking in the UK. The vast majority of those, perhaps even 99%, were not driven by individual greed and were not professionally negligent. Nor, even in the go-go years, were they trousering skyscraper salaries. It is unfair, as well as inaccurate, to heap the blame on them. For me, the crisis was instead the story of a system with in-built incentives for self-harm: in its structure, its leverage, its governance, the level and form of its remuneration, its (lack of) competition. Avoiding those self-destructive tendencies means changing the incentives and culture of finance, root and branch. This requires a systematic approach, a structural approach, a financial reformation.”

And since the banking crash, it is the bank staff in back offices, on the counters and in the call centres that have been losing their jobs, not the top executives (apart from a  few headline names).  The number of City-style jobs in the UK peaked at 354,134 in 2007; they are now down to just 249,512, according to the Centre for Economics and Business Research (CEBR), and will fall to 237,036 in 2013 and 236,494 in 2014, the lowest since 1993. One out of three posts will have been axed since the height of the bubble. So much for a “communist” banking sector.

Sternberg goes onto argue that what is needed to avoid a renewal of ‘communism’ in banking is regulation.  This “must involve splitting the banks into their trading functions and their deposit-taking and lending functions.”   In other words, we must divide traditional and ‘safe’ forms of banking from the risky speculative areas.  This is also the view of the Vickers Commission in the UK, set up to come up with recommendations for safer banking in the future.  There should be firewalls between risky banking and safe banking. It’s the same argument presented in America by ex-Fed chief Paul Volcker. Sternberg idiotically calls this “more capitalism and less communism.”  Whatever you call it, will such regulation work in curing capitalism of future banking crises?

So far global banking regulators have proposed Basel-III (the third such attempt to regulate banking over the last 20 years).  These regulators said they wanted to satisfy the need for ‘more regulation’ without ‘strangling the banks’ so they could not function profitably.  Indeed, a very tricky objective!   Under Basel-3, banks are supposed to keep at least 4.5% in cash and equity with another buffer of up to 2.5% for safety’s sake.  And when things were going well and they started to make good profits, they were going to have to keep another 2.5% of assets in reserve for a rainy day.   However, the banks said this would ruin profits and so these new ratios do not have to be met until 2015 at the earliest and in the case of some ratios, not until 2018 or even 2023!

Meanwhile the recommendations of Vickers and Volcker on putting firewalls into the banks have been watered down or downright rejected.  The Vickers Report on the UK banking sector (http://bankingcommission.s3.amazonaws.com/wp-content/uploads/2010/07/ICB-Final-Report.pdf) also proposed to increase the amount of capital funds that banks must hold relative to the loans they make and financial assets they purchase.  They also want to reduce the holdings of ‘risky’ assets that banks can hold.  And they have gone halfway to proposing (through ‘firewalls’) separating the activity of banks between their ‘traditional’ role of lending to business and households and their ‘investment’ role of gambling in bond and stock markets.

And then there is the idea of breaking up banks that are so large that if they fail they would bring down the whole sector (like say Lehmans in 2008).  This has been totally shelved.  On the contrary, the big banks that survived the crisis are getting bigger.  That’s because breaking up the banks would mean fewer profits and in those countries like Britain or the US, where financial sector profits are so important, there is little enthusiasm to pursue the Volcker rule.  So it’s really business as usual.  Bonuses are down not because of regulation but because bank revenues are down as the global economy stagnates.

And anyway, as former UK Labour Chancellor Alastair Darling commented, what makes Vickers or Volcker think that a banking crisis can only happen in the ‘speculative’ part of banking?  In Britain, the banking crisis first erupted in the ‘ordinary’ banks like Bradford & Bingley, Northern Rock and HBoS.  Only later did the ‘universal’ banks that speculated in US mortgage-backed assets and credit derivatives like RBS get into trouble when the whole banking world began to implode.  As Marx would have argued, loan-bearing capital is inherently vulnerable to the possibility of crisis, because loans may not be paid back and deposits may be withdrawn and transactions can break down.  So it’s very unlikely that he would want to have worked for a bank in 2007.

The answer to avoiding another financial collapse is not just more regulation.  Bankers will find new ways of losing our money by gambling with it to make profits for their capitalist owners.   In the financial crisis of 2008-9, it was the purchase of ‘subprime mortgages’ wrapped up into weird financial packages called mortgage backed securities and collateralised debt obligations, hidden off the balance sheets of the banks, which nobody, including the banks, understood.   Next time it will be something else.  In the desperate search for profit and greed, there are no Promethean bounds on financial trickery.

But why should banks be commercial (let alone speculative) operations?  What is to stop us turning them into a public service just like health, education, transport etc?  Nothing is the short answer.  If banks were a public service, they could hold the deposits of households and companies and then lend them out for investment in industry and services or even to the government.  It would be like a national credit club.  If banks had been under public ownership and engaged only in a plan to provide funds for industrial investment, government infrastructure development and housing,the financial crunch would have been avoided (even if the Great Recession was not).

The evidence shows that where there has been publicly-owned banking, it has been highly successful.  In the right-wing US state of North Dakota, the main bank is publicly-owned and has been for years.  It provides solid and reasonably priced loans to farmers, students and the public; it was not broken by the global banking crisis ans continued to provide profits for North Dakota state.

Indeed, during the Great Recession, those countries that suffered least were precisely those countries that were bolstered by state-owned investment banks that supported infrastructure projects to keep jobs and create investment.  Brazil’s INDES investment bank was very successful in that, despite the cries of foul by the privately-owned and foreign banks operating in Brazil.  It is no accident, for example, that Brazil had a very mild recession because the government there plunged huge resources through its state-owned development bank for infrastructure spending.  China’s banks were ordered to do the same.  Speculation in financial instruments was avoided.

I’ve argued in this blog many times that banking plays an important role in a modern capitalist economy and credit mechanisms will do so for many generations even if capitalism were to go as the dominant economic system.  But banks need to be run as a public service to small businesses and households providing credit for projects that create jobs and incomes, with loans at reasonable rates.  This ‘traditional’ role has all but disappeared in the binge of financial speculation.  The assets of British banks, for example total £6trn, or over four times the UK’s annual GDP.  But loans to business are just £200bn, or 3% of that total!  Indeed, most UK bank assets are abroad.  Only 20% of that £6trn is invested domestically.  British capitalism is an imperialist rentier economy.

The most important domestic function for banks is to channel savers’ money to businesses for investment. Only productive investment generates growth.   But banks in both the US, Europe and the UK are failing in this vital task.  Just look at the very latest data from the Bank of England on bank lending growth.

Sure, the lack of loan growth is mainly due to the lack of demand for loans.  Britain’s biggest corporations are international and cash-rich.  They are hoarding their cash and not investing.  So they have no need to borrow.  On the other hand, Britain’s small and medium size businesses are unable to borrow because they have too much debt and are not making profits.  They are increasingly becoming ‘zombie’ companies.  According to new research, one in ten British businesses are able only to pay interest on their debts and not reduce the debt.  “Zombie companies cannot invest or innovate, they just sit there slowly losing employees and customers and dragging on the economy “ (KKR asset management).

And Britain’s banks are not helping.  Even though two of the big five UK banks now have a sizeable public shareholding (RBS 82%, Lloyds 43%), they are not helping small businesses, despite various incentive schemes and targets being set by the government for them to do so.  While the Bank of England base interest rate is near zero and the BoE is buying up the government bonds held by the banks to give them huge amounts of cheap cash, they are still charging increased rates of interest to businesses in the real economy, because they have to make a profit to their shareholders.

And they will have to go on doing this until the banks are profitable enough to drive up their share prices.  The House of Commons Select Committee recently concluded that the British taxpayer’s original equity investment in RBS and Lloyds of £66bn is still below the water line and probably will never be recovered.  If the government sold their shares today (as they would like to), the taxpayer would lose £34bn on the investment.

But why should the government sell anyway?  On the contrary, the best way forward for taxpayers and a better economy is to take the big five banks over completely.  At current share prices, this would cost taxpayers (assuming the government paid full compensation) just £55bn, or 3% of GDP.  This could be funded by government bonds (currently at all-time low rates of interest).  In return, the British people would then have full control of the banks to help industry within an integrated plan for investment and growth.  The government could sack overpaid top executives (reducing ‘communism a la Sternberg’) and taxpayers could reap the full benefits of future profits without the need for special ‘windfall’ taxes etc.

“We also provide a dividend back to the state. Probably this year we’ll make somewhere north of $60m and we will turn over about half of our profits back to the state general fund. And so over the last 10, 12 years, we’ve turned back a third of a billion dollars just to the general fund to offset taxes or to aid in funding public sector types of needs. Not bad for a state with a population of 600,000. Our capital was in a fine position to go ahead and do that. So in some cases we’ve acted as a rainy day fund.  We in fact are dealing with the largest surplus we’ve ever had. So our concern is how do we spend it wisely and make sure we save it for the future.”   Interview with Eric Hardmeyer, head of the Bank of North Dakota (http://www.motherjones.com/mojo/2009/03/how-nation%E2%80%99s-only-state-owned-bank-became-envy-wall-street).

It is this idea that Britain’s Fire Brigades Union (FBU) has recently taken up (http://www.fbu.org.uk/?page_id=6204).  The FBU realises that protecting their members’ wages, conditions and pensions cannot just depend on their negotiating skills or campaigns.  It requires political action because what is happening in the wider economy will affect the conditions of all workers whether in the private or public sector.  Indeed, public sector workers are under direct attack by the UK government that is trying to make them pay for the bailout of the banks and the ensuing Great Recession.  And private sector workers are facing reduced real incomes as British capitalism stagnates.

So the FBU launched a campaign earlier this year to bring the big five UK banks into full public ownership and democratic control.  The FBU managed to get a motion along these lines through the annual conference of the Trades Union Congress in September.  And now they have produced a pamphlet, It’s time to take over the banks, as part of the campaign to win public support for this policy (s-time-to-take-over-the-BanksLR.pdf.)  Mick Brooks (see my post on his recent book, http://thenextrecession.wordpress.com/2012/08/20/capitalist-crisis-theory-and-practice/) and I helped write this pamphlet and outlined its contents at a recent FBU education school (at the FBU school picture below).

It’s just the start of the campaign.  The British public is convinced that its railways should be returned to public ownership, bringing to an end the disastrous privatisation adopted under the previous Tory government in the late 1990s and promoted by the New Labour Blair government.  A recent poll said that 70% of Britons asked wanted a publicly-owned national rail service.  The public is also convinced that the utilities (water, gas and electricity) should be returned to the state to stop the ludicrous profits being handed over the private shareholders (and ‘communist’ top executives) as energy and water prices rocket.  But they are less sure that banking can be a proper public service that could help the economy.  The FBU hopes to change that view.

Paul Sternberg is apparently the co-founder of Oxford Investment Partners.  This is an investment manager that looks after the investment of five very rich Oxford University colleges, among other investors.  What these speculative investment managers know about communism, banking or the interests of the British public is hard to see.  I think Britain’s firefighters have a better idea.

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21 Responses to “Marx, banking, firewalls and firefighters”

  1. Edgar Says:

    Balme the failure of capitalism on socialism! The last reguge of the apologist.

    On the pay of the top execs, where exactly does this feature in your rate of profit analysis? Is it under profit or wages?

    • michael roberts Says:

      This is another interesting debate. Simon Mohun has argued that top executive pay should be included under profits as top executives are really capitalists. Indeed, he goes further and wants to include the wages of all ‘supervisory’ workers in the US under profits. He call this a class rate of profit. See my post of 23 January 2012. I think goes way too far as it means that 19% of all US employees are capitalists, or at least some sort of managerial class that is not part of the working class. Simon has modified his analysis somewhat in a paper at the latest HM conference – see my post of 12 November 2012. In this paper, it seems that only 2% of employees (at the top) can be characterised as capitalists and their income excluded from wages.

      • Edgar Says:

        I think this explains why your declining rate of profit argument does not register with my experience of the last 30 years.

        Mohun is in my opinion correct

  2. Robert Says:

    “…it’s just not true that wages or ‘employee compensation’, as the Americans like to call it, have increased as a share of national income in the major capitalist economies over the last 30 years.  On the contrary, as we have shown many times on this blog, labour’s share has fallen back and inequality of income and wealth has increased sharply, at least in the major financial ‘rentier’ economies of the US and the UK.”

    I might have misunderstood him, but Andrew Kliman seemed to be claiming the opposite during a panel he participated in last week with Loren Goldner, Paul Mattick, jr., and David Harvey.

    • michael roberts Says:

      Robert
      It all depends on what you want to show. I have not heard Andrew’s comments at that panel yet, but in his book, The Failure of Capitalist Production, in chapter 8, Andrew successfuly refutes the argument that the crisis was one of underconsumption by showing that just measuring wages and salaries as a share of GDP is inadequate. When you include employee benefits and net government transfers (the so-called social wage), then there is no fall in labour’s share. And when you deflate workers hourly total compensation by a measure of inflation, real compensation has risen. Thus the underconsumption theory falls.

      BUT if you want to show how the share of labour in CAPITALIST PRODUCTION has changed, as in the post here, it would not be right to include net government benefits. On p154 of Andrew’s book in Figure 8.1, workers’ compensation, if you exclude the social wage, DOES fall as a share of national income from the early 1980s through 2007, the neo-liberal period. Indeed, as my graph shows, that share fell even more after 2007, where Andrew’s figures end, and is one of the reasons why the mass of US corporate profits (not profitablity) has recovered so well from the Great Recession. Andrew goes on to argue that measures of increased inequality of income by Saez and Piketty are exaggerated because they are based on tax units not individuals. Even so, in his Table 8.1 p160, however you measure it, incomes rose much faster at the top than at the bottom throughout the neo-liberal period.

      Other studies, including my own, show that employee compensation as a share of national income has declined in most of the major capitalist economies – not counting net social transfers. If you include them, I find that there is little or no change in labour’s share for the US, as Andrew does, and for Japan. But in Europe, there seems to be a significant decline in share.

  3. henry Says:

    Michael,

    There is an overwhelming amount of evidence that the labour share in GDP declined at least since 1980s, in the US and the UK done by Reagan and Thatcher who created an artificial depression by using the political business cycle (i.e. reducing public expenditures and raising the rate of interest) to break the back of the unions with a lot of unemployment and a negative impact on wages.

    Since than you see a rise in S/V and the growth of the share of rentier classes in the amount of profits earned and GDP. See the working papers of Gerald Epstein of PERI institute).

    I fully support your analysis for the nationalisation of the big British Banks, This idea was launched by John Strachey after WW ll. Problems of stagnation/depression of the UK economy due to the impact of the financial sector in Britain are not new, as happened in the 1920s and 1930s.

  4. henry Says:

    Michael,

    An interesting graph from a PERI working paper of Stockhammer “Rising Inequality as a Root Cause
    of the Present Crisis” 2012. http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_251-300/WP282.pdf

    It shows clearly that the wage share in the US and the UK has a downward trend since 1980s. This is part of the explanation of the actual crisis.

    If they create an investment boom in sector 1, a Kondratev cycle with a rising S/V, this means that the innovations are labour saving, if at the same time OCC is declining this means they are are capital saving as well. What happened in the 90s in the US is a kind of jobless growth.

    If sector 2 is not growing enough to absorb the growing unemployment of sector 1, than sector 2 is not growing enough to absorb the growing production of sector 1. By growing unemployment of sector 1 due to laboursaving innovations you will get overproduction in sector 2 and a collapse of the marginal rate of profit in sector 2, in sector 1 you will get overinvestment and a collapse of the marginal rate of profit in sector 1. This is reflected on the stock market..

  5. henry Says:

    The graph about declining wage shares can ben found on page 22 of the PERI working paper

    For who is wondering which innovations are meant, think of innovations in information technology which caused a sequence of investments in computer, Internet, cellular phone, software, and other important electronic equipment and tools, which produced significant causes and effects for many variables over the coming years. In other words, the diffusion of innovations generated more investments. This trend in favor of investments can be observed by the high growth rate of investment in information technology relative to business investment. This ratio increased from 27 percent in 1990 to about 39 percent in 2000, implying that computers and microchips were producing higher profits and rapid productivity growth which in turn increased investments and profits again.

    Various computer firms were established and a variety of software was developed. Individuals took advantage of this process of innovations by a simple process of start-ups and public offerings whose consequences were many new products. Also, these innovations forced many firms to use (or copy) the new technology in order to compete through cost reduction, high efficiency, and high quality of output, and by the year 2000 the private sector in the United States spent about $200 billion on Research and Development (R&D). All these sources generated a high profit share for capital and a high rate of profit.

  6. henry Says:

    Michael,

    The Great Recession was inevitable if you look at what they did in times of a boom in the US to the American labour force. All these measures are normally taken in a slump and of course this increased the US mass of profits (S/V) in the 1990s, but they created the prerequisites of the Great Reccesion after 2000s.

    The key features of the “American Model” of the 1990s are –restructuring, downsizing, and “flexible labor markets;” slashing the social wage; privatization; deregulation; and competitive advantage–and are briefly elaborated below.

    Restructuring, downsizing and flexible labor markets: All of these terms are synonyms for cutting labor costs and increasing output by reducing the workforce, paying lower wages and fewer or no benefits, and forcing workers into either part-time jobs or into full-time jobs with lots of overtime. Unemployment and job insecurity are the whips used to discipline workers into working harder for less.

    The “American Model” involves laying off workers–whether in boom or slump. “Companies are using downsizing to control wage pressures,” says John A. Challenger, executive vice president of Challenger Gray.

    This is not to say that there hasn’t been job growth–there has, alongside the downsizing and “reengineering.” But many of these new jobs are overwhelmingly not the good jobs promised by the Clinton Administration. For example, of the 4.5 million new jobs created between the start of this recovery and 1994, one in five was a temporary job. And of the 3 million new jobs created in 1994 alone, a staggering 2.9 million were part time, according to the Labor Research Association.

    In the early 1990s, two waves of corporate downswing spread throughout the economy. Three-hundred thousand jobs were axed in 1990; 500,000 in 1991, 400,000 in 1992. In the second wave, 600,000 jobs were cut in 1993, reaching a record 104,000 in January of 1994 alone.

    Mass layoffs–those involving fifty or more workers at a single work site–rose by 4 percent in the last quarter of 1996. Statistics for early 1997 show the same trend. Job cuts last February were 20 percent higher than job cuts in February 1996.42 Not surprisingly, a May, 1997 survey by the Wall Street Journal reported that 46 percent of U.S. workers say they are “frequently concerned” about losing their jobs, compared with 31 percent in 1992.

    The effect of restructuring on those losing jobs has been devastating. Of those workers in the first wave, 12 percent dropped out of the work force altogether. Seventeen percent were still unemployed two years later. Of the 71 percent reemployed, 31 percent had to take wage reductions of 25 percent or more, and 32 percent had wage cuts of 1 to 25 percent. Only 37 percent found employment at no loss of wages.

    What began as a corporate response to declining competitiveness and recession has turned into a permanent way of doing business. “An essential force behind America’s comparative dynamism is its flexibility–in labor markets, capital markets and corporate culture,” says the Wall Street Journal.

    A key feature of “flexible labor” has been the large increase in the 1980s and 1990s of temporary and contract workers, who now comprise 13 million, or 10 percent of the labor force. They are the so called “disposable workers,” who have no benefits, and can be let go on a day’s notice. Many of these temporary workers are formerly full-time employees who were laid off in company “downsizing” and then offered the same jobs through temporary agencies at lower pay and with no benefits. They have made Manpower the largest employer in the U.S.

    Over the last fifteen years, the Fortune 500 companies reduced their full-time labor force by more than 30 percent. The number of temps in the U.S. has grown nearly 19 percent in the last three years.

    This temporary market is a new variant on the floating labor force segment of the reserve army of labor. When the next recession occurs there will be an horrific jump in the number of unemployed as these temporary workers are laid off wholesale. The consequences will be even more devastating, and the recession more severe, as only 40 percent of the labor force is now covered by unemployment benefits. This is the real meaning of “flexible labor”–low paid, overworked workers who can be fired at will.

    The U.S. labor force of 136 million people officially has just under 5 percent unemployment, or 6.5 million. This does not count a half million discouraged workers who have given up looking for work, or 4.5 million part-time workers who want full-time jobs but can’t find them. If these figures are added together to calculate unemployment as they are in some countries, then we get a much more realistic rate of 9-10 percent.

    Slashing the social wage: Clinton’s promise to “end welfare as we know it”–that is, to dismantle the social welfare gains of the 1930s and 1960s–is really part of reducing the social wage, that is, the public cost of the reproduction of labor.

    Though welfare was only a fraction of the budget, the attacks on it were carried out first, because it was an easier target, and also to drive home the point–the U.S. government has renounced any obligation to the poor. This has set the stage for further, even bigger cuts in Medicare and Social Security. Last year the Republicans proposed a $125 billion cut in Medicare over five years. Clinton proposed instead a cut of $100 billion. With the boom of the last year the government has recalculated its revenues and anticipates at least an additional $225 billion in the next five years. This is more than enough to eradicate the need for any Medicare cuts. However, since this New Age of prosperity for the few is based on the misery of the many, Clinton agreed to cut Medicare even more–by $115 billion.

    Privatization: The American economy never had the degree of state nationalization that existed elsewhere. American capital’s passion for privatization demands small government that costs less. What it was willing to tolerate as a burden during the Cold War now seems an unnecessary extravagance. As Clinton put it, “The era of big government is over.” Under Clinton, federal government spending as a share of GDP has been cut from 23 percent to 21 percent. It is this drop that contains much of the decline in the deficit. The “reinventing government” program cut the government work force by 250,000 to the smallest it has been since the 1970s. As a percentage of the labor force it is the smallest since the 1930s.

    Various social programs that have been slashed are now being privatized, at lower, nonunion wages. Welfare contracts in various states have been contracted out to Lockheed and other giant corporations whose profits depend on squeezing recipients. In New York State and elsewhere, welfare recipients are contracted out to work at various jobs at substandard wages–a strategy deliberately designed to exert a downward pressure on the wages of other workers. Other programs that have been privatized for profit include jails and orphanages.

    Deregulation: Deregulation has been part of a ruling-class strategy to boost competition for years. Ostensibly, its purpose is to encourage greater competition, and therefore efficiency. In practice it leads, in fairly short order, to greater concentrations of capital, monopolization, monopoly prices, and in new ways, greater state involvement. State “deregulation’ has encouraged the monopolization process through the mergers of such giants as Boeing with McDonnell, and Lockheed with Grumman (both aided and abetted by sizable government handouts). These are only some of the more dramatic moments in what is the largest concentration of capital in American history.

    Deregulation of the savings and loan (thrift) industry led to a remarkable transfer of income to a few wealthy owners. This was the heyday for the likes of Charles Keating, who in five years as head of Lincoln Savings & Loan in California, rewarded himself and his family with $41.5 million in salary, perks and benefits. (Incidentally, Keating employed one Alan Greenspan at the time as a consultant.) The collapse of the S&L industry will cost taxpayers anywhere from $300 to $500 billion. The attack on “big government” doesn’t apply when it comes to bailing out big business.

    Another aspect of deregulation has been the weakening of environmental standards for industry polluters. Though Clinton and Gore have tried to portray themselves as environmentalists, their practice shows otherwise–despite profiling cases in which the government has slapped large fines on polluters. The current administration has also cut funding for government agencies like OSHA to the bone. There are currently 2,000 OSHA inspectors who oversee the country’s 6 million private sector workplaces; that’s one inspector per 3000 workplaces.50 All of this is done in the name of encouraging efficiency by eliminating government red tape.

    Competitive advantage: “Flexibility” is at bottom about lowering labor costs–it is this that gives American capitalists a competitive edge over Europe and Japan. U.S. employers’ costs per employee hour of compensation in 1995 was $17.10 an hour of which $12.25 was wages and $4.85 benefits. These costs have been kept down through the use of part-time, temporary, and contract workers. Part-time workers make hourly half of what full-time workers do ($19.44 for wages and benefits for full-time workers, versus $8.98 for part-timers).

    Against the $17 an hour that U.S. employers pay, Japanese compensation costs are $24, and the comparable German figure is $32. While these costs constantly shift with fluctuating exchange rates, real unit labor costs in the U.S. have been flat since 1985, while they have grown strongly in other countries. The U.S. has had for years an underlying advantage of 25 percent against Japanese labor costs and 60 percent against German ones.52 This has led to a capital boom. Industrial capacity in the U.S. grew at 3.7 percent in 1995 and 4.4 percent in 1996; these are the largest growths in manufacturing capability since 1969.53 The result has been export led growth particularly in high tech manufactured goods. All exports have grown by 42 percent in the last four years, and account for one third of GDP growth. Without export growth it is estimated that the average growth in this cycle would have been 1.7 percent a year, similar to what it has been in Europe and Japan.

    The above facts are from an article International Socialist Review Issue 2, Fall 1997 Contradictions of the “Miracle” Economy by Joel Geier and Ahmed Shawki.

  7. marcello Says:

    Michael,
    it takes courage to make such proposals! Frankly, if it weren’t coming from you I would have dismissed them as petty-bourgeois, Proudhonian, and possibly crazy. I’m sure that you have considered the obvious objections – e.g., that these banks would still have to make profits, or they will be outperformed by other profit-seeking activities. I assume that these difficulties can be worked out. But banks cannot escape the need to “de-leverage” dead capital in order to boost profitability, and I believe that the consequences of this fact have to be spelled out in more detail.

    Btw, I like the idea of banking-as-a-service, as long as it benefits the working class (indirectly, counteracting the devaluation of labour-power). It is too easy, however, to interpret it as a proposal for (directly) helping the capitalist class out of its crisis.

    Consider that a similar argument can be made for the euro: some argue that the euro implies the devaluation of labour-power, so we (the piigs) should leave the euro in order to recover the ability to defend our wages. But the corollary is that exiting the euro would benefit the piigs’ capitalists by making their exports more competitive.

    At first sight your proposal looks more promising (for the working class) than the no-euro stuff, but it still presents many risks of being subordinated to the interests of the capitalist class.

    • michael roberts Says:

      Marcello,

      Let me add that public ownership of the banks on their own would not be enough to deliver an economy that works in the interests of the majority and avoids regular crises, injustices and inequality. The productive sector of the economy is at the heart of a real change. So owning the banks is just a start amnd would probanly would not happen without a government adopting more radical measures too.

  8. Bruciebaby Says:

    Hi
    I know you’ve covered the issue of effective demand before in relation to Krugman but what about those on the left who argue that the lack of demand is prolonging the crisis? My view is that it is as Marx said. That capitalists recognise only paying customers. It is also as he said ‘sheer tautology’. In short a statement that there is no demand begs the question ‘why is there no demand’? If the answer is that because there is none then that’s a tautology.

    Marx, especially in Theories of Surplus Value puts the cap on the theoretical arguement for me. For instance in relation to his critique of Ricardo there is real theoretical dynamite against the lack of demand arguement. he says:

    ‘Consumption—revenue—is by no means the guiding motive in this process, although it is for the person who only sells commodities in order to transform them into means of subsistence. But this is not capitalist production, in which revenue appears as the result and not as the determining purpose. Everyone sells first of all in order to sell, that is to say, in order to transform commodities into money’.

    Consumption doesn’t guide or lead anything. what about the arguement that financialization for example cuts into capitalist profits and reduces demand? Again is this merely comentating on the accomplished fact? Sounds pretty empty to me.

    I’m looking for some empirical evidence for consumption and investment demand. Ok demand has certaily shrunk in the Eurozone but with national variations. What’s the bigger picture?

    Has demand slumped? If that was the case we would be in a ‘Great’ instead of a ‘Long’ Depression surely? Some parts of the world economy are still growing, if slowing. Doesn’t this mean that demand in both departments is also growing but at different rates?

    • michael roberts Says:

      I agree with your theoretical approach. One key point is that it is a collapse in investment that leads an economy into a slump, consumption follows. And investment is determined by profits. Of course, once in a slump a reduction in consumption will also depress the economy. What turns things round is a recovery in profitablity and thus in investment. Then consumption and employment follow. In the capitalist mode of production, investment will generally grow faster than consumption. But contrary to the views of the underconsumptionists, this does not lead to crises unless profitability declines sufficiently – and that happens for reasons not to do with consumption.

  9. Bruciebaby Says:

    Fully agree. Any tips where I might find ready and easy accessible empirical data on a history of investment and consupmtive demand? Tried various searches but it appears quite discrete.

  10. henry Says:

    To give some idea how disproportionalities lead to a Great Depression, read this short article of Jim Devine, US economist and specialist on the Great Depression.

    http://myweb.lmu.edu/jdevine/JD-EPE-GreatDepression.pdf

    For an elaboration of this view, see his attached article

    http://myweb.lmu.edu/jdevine/JD-1983-GDepress.pdf

    He puts emphasis on the (over)-investment boom but rrelates this to the development of consumption….

  11. Bruciebaby Says:

    It could also be integrated into your analysis of debt perhaps?

  12. henry Says:

    For those who studied the articles of Jim Devine do understand that the Great Depression and the Great Recession start with an investment boom in sector 1. We should be aware of the kind of investments/innovations, most of them are capital and labour-saving, monopoly allows for capital deepening so to speak. A crisis could be averted if ever greater amounts of profit would be invested in sector 1 in new sectors and industries, but, monopoly does not allow for totally new sectors and industries. Because it is afraid of the collapse of the rate of profit in it’s existing old industries. And when the crisis starts it does not allow for a quick devaluation because they are too big to fail. Monopoly or monopolization is an important of the crisis story.

    When important countertendencies of the falling rate of profit in sector 1 (i.e. imperialism/rationalisation) are blocked, sector 2 and underconsumption do play an important role…

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