Marxism on Wall St. versus Main St.

♠ Posted by Emmanuel in , at 6/15/2007 01:05:00 AM
A recent article from the Economist restated what is perhaps the central question of contemporary international political economy for those in the developed world: Just who is the patsy of globalization?:

“If you've been in the [poker] game for 30 minutes and you don't know who the patsy is,” said Warren Buffett, “you're the patsy”. As the world watches hedge-fund and private-equity managers build up billion dollar fortunes, many people are wondering where all this money is coming from. In short, who is the patsy?

To a left-wing politician, the answer is obvious: the ordinary worker. Financial speculators and corporate raiders force companies into short-term decisions, which increase share prices by holding down wages, sacking workers or skimping on capital expenditure.

To a free-market enthusiast, the question might seem misguided. There need be no patsy, because the economy is not a zero-sum game. Private-equity and hedge-fund managers improve economic welfare by allocating capital more efficiently.

But even if such people create wealth, they may create losers too. After all, even though the growth of trade is a blessing all things considered, some people might suffer as it happens. In fact, economic progress hardly ever succeeds in making some people better off, without also making someone else worse off.

Stephen Roach notices a similar phenomenon, with labor receiving an all-time low share of national income in the developed world according to Morgan Stanley research. In other words, labor is indeed globalization's patsy:

The pendulum of economic power is at unsustainable extremes in the developed world. For a broad collection of major industrial economies — the United States, the euro zone, Japan, Canada and the U.K. — the share of economic rewards going to labor stands at a historical low of less than 54% of national income — down from 56% in 2001. Meanwhile, the share going to corporate profits stands at a record high of nearly 16% — a striking increase from the 10% reading five years ago.

This divergence is not sustainable. The angst of workers in the developed world has become a major source of tension. Yet with labor unions on the decline and with workers from China, India and the former Soviet Union representing a doubling of the global labor supply in the last 15 years, workers in the developed world don't have much of a leg to stand on. They have chosen, instead, to express their displeasure in the polling booth, with the result that the pendulum of political power is now swinging to the left in countries such as the United States, France, Germany, Spain, Italy, Japan, Australia and yes, even Switzerland.

Worse yet, burgeoning productivity growth in the American case has not been accompanied by concomitant wage increases. Here is Stephen Roach again on "globalization's new underclass":

What is new is how America’s income distribution has become more unequal in a period of rapidly rising productivity growth -- a development that has been accompanied by an extraordinary bout of real wage stagnation over the past four years. Economics teaches us that in truly competitive labor markets such as America’s, workers are paid in accordance with their marginal productivity contribution. Yet that has not been the case for quite some time in the US. Over the past 16 quarters, productivity in the nonfarm US business sector has recorded a cumulative increase of 13.3% (or 3.3% per annum) -- more than double the 5.9% rise in real compensation per hour (stagnant wages plus rising fringe benefits) over the same period.

Bill Gross couches this dichotomy in slightly dissimilar monetary policy terms:

My primary thesis is that globalisation and financial innovation have enormously complicated the job of central bankers in recent years. Whereas in prior decades a "one-size-fits-all" policy rate may have coincidentally and democratically affected households and corporations alike, the 21st century seems to have ushered in an "innovation" revolution favouring corporations with global investment opportunities as opposed to individuals with daily bills to pay. The same 5.25 per cent rate does not and cannot be "neutral" for both sides in today's US economy.

A company such as tractor maker Caterpillar, for instance, views the fed funds rate from its perspective in Peoria, Illinois, much differently than a homeowner on Main Street in the same city. For CAT, the almost unlimited ability to borrow at around 5.5 per cent in the domestic money markets affords it enormous opportunities for arbitrage profits.

It sports a 16 per cent return on investment, can deploy funds either domestically or internationally to take advantage of the most attractive labour, or can simply choose to buy back its own stock at an earnings yield of nearly 8 per cent. There seems to be nothing neutral about the current fed funds level to chairman Jim Owens in Peoria. To him, it's a godsend.

Homeowner Jane Doe on Main Street, however, sees it differently. Real wages at the CAT headquarters have been stagnant in recent years thanks to outsourcing of production, and Ms Doe had to refinance her home in 2002 in order to send the kids to college.

The problem is that the 4 per cent adjustable rate mortgage that permitted her to extract "equity" and keep her monthly payments at nearly the same level is now about to adjust upward. Fed funds were approaching 1 per cent when she took out her loan and now they're more than 400 basis points higher.

A neutral 5.25 per cent rate? It's the rate from hell for Jane and millions like her across the US. In 2007 alone, nearly 2m mortgages will adjust their yields and required monthly payments skyward by an average of 250 basis points. Similar hikes loom ahead in 2008.

So what's a Fed chairman to do? Hike rates in order to slow CAT's stock buybacks and cool the stock market, or lower rates so that homeowners can continue to afford to live a frugal existence while directing mortgage payments from Main Street to Wall Street?

One policy rate, two constituencies - where does the cool cat go? It's not an easy answer, clouded in many respects by the Fed's public focus on consumer inflation and the real economy. Globalisation and financial innovation have also introduced new complexities.

These changes have created investment opportunities for corporations and, in some cases, excessive borrowing by households that have led to asset-price bubbling and perhaps asset-bubble popping if the fed funds rate moves too far from "neutral" for either constituency.

To me, the evidence suggests that almost everything humanly possible has been done to increase returns to capital in the United States, especially by the Bush administration as Kash Mansori points out. In Marxist terminology, the political superstructure has tilted the playing field more and more in favor of capital:

You have to acknowledge the incredible consistency of the Bush administration. On every aspect of the workings of the federal government there's one unifying guiding principle that directs all policy-making: always do whatever increases corporate profits, regardless of the moral, ideological, or human implications.

Increasingly, I'm becoming convinced that stories like this explain much of the rapid rise in income inequality in the US in recent years. It's a matter of consistency, and patience... like an inexorable geological process. Each individual regulatory or policy change has no measurable effect on income inequality, but the hundreds of individual decisions on taxes, the environment, the social safety net, energy policy, Medicare, international trade, and worker safety are like countless tiny accretions that collect over time to form a mass large enough to have perceptibly changed the landscape, and to have tilted the balance of power away from average Americans and toward corporate management and owners.

It seems quite plausible to me that this explains how the shares of income that corporations and their workers each receive have been altered as a direct result of policy decisions taken by the federal government.

Returning to the earlier discussion, what do these Big Name Economists from the eponymous magazine, Stephen Roach, and Bill Gross have in common? They sidestep a brand of analysis that is appropriate for "class warfare" type issues that's not readily acceptable in conventional economic circles--Marxism. Since this is an IPE site and not an economics site, it's alright for me to use a Marxist perspective here. Call me a commie pinko if you like, but try to separate a Marxist analysis from a Marxist ideology. The Economist tries to explain that sometimes, other financial service providers lose out too. Stephen Roach sees the pendulum swinging back--at an unknown future time--to a more equitable balance of income between capital and labor. Finally, Bill Gross counsels that the US Federal Reserve needs to make a choice between two constituencies (though I would argue that it chooses the side of business in most instances).

However, Marxism explains things more succinctly through the famous "internal contradictions" of capitalism. Here are its six easy steps:

  1. Value is created solely through labor;
  2. Innovation, the bedrock of capitalism, finds ever-newer ways of extracting more "surplus value" at the expense of labor (through rightsizing, offshoring, etc.);
  3. Since less labor becomes necessary relative to capital as innovation takes place (for productivity has been enhanced), labor's share diminishes while that of capital holders increases. This process is called "exploitation";
  4. This process leads to the greater polarization of winners (capital) and losers (labor);
  5. Eventually, labor's share becomes so minuscule that there are few left who can buy all the wonderful goods and services wrought by innovation;
  6. Capitalism succumbs under the weight of its internal contradictions.
Arguably, we're already at (4). Believe me, you don't want to see what happens if and when we reach (5) and (6). If there is a better explanation of stagnant wages in the developed world wrought by offshoring/outsourcing/globalization combined with the marginalization of labor unions, I'm all ears. The Marxist perspective does makes sense to me in this context, however much they've tried to bury it from economic orthodoxy.