Monday, August 8, 2016

Political-Economic Correctness: Neither the ‘N’ or the ‘F’ Word Shall Be Spoken

Political-Economic Correctness:  Neither the ‘N’ or the ‘F’ Word Shall Be Spoken

The US economy is in the throes of a death spiral that will ensure continuing slow growth, stagnant wages, and growing inequality. It is a sad commentary that that there is virtually no mention by either of the two major party candidates of the pernicious effects of what is now termed Neoliberalism, nor its pernicious appendage, Financialization.  In fact, the terms have been banished from political campaign discourse despite the fact they are routinely evoked by those analyzing the past 30 plus years of US capitalism. The consequences of neoliberalism, alongside financialization, contribute to an economic death spiral because they produce a vicious cycle that promises self-perpetuating economic stagnation.

Neoliberalism refers to the political-economic policy regime that emerged in the 1980s in response to economic crisis conditions of the 1970s. In an effort to reestablish corporate profitability, it elevated private corporate interests over all others through regressive taxation, anti-labor legislation, the evisceration of the social welfare system, “free trade” policies, and deregulation.  The role of government is largely reduced to creating favorable “free market” business climate conditions and reducing the obstacles to the free flow of capital investment, domestically and globally. One of the most significant consequences of the new policy regime was that corporations responded to this neoliberal environment by structurally downsizing and geographically relocating   their operations to reduce costs and enhance profits. This contributed to deindustrialization and the declining role of manufacturing.  

Financialization refers to the growing role of the financial sector in determining the priorities, and accounting for a larger share, of economic activity.  This can be seen in the way corporate decision-making is increasingly based almost exclusively on the anticipated reaction of financial markets, and how an increasing proportion of corporate profits are based not on production but financial speculation.

Neoliberal corporate restructuring and financialization have worked in tandem to undermine what has been described as the virtuous cycle of capitalism. Historically, self-sustaining and dynamic capitalism has depended upon a virtuous cycle that involves the following sequential process -- capital investment in production, employment, labor income, discretionary spending by labor on produced commodities, the generation of profit, and the net profit directed toward more productive capital investment, which starts the cycle anew.  The two critical and necessary conditions in sustaining this cycle are corporations reinvesting profits back into production of goods and services, and workers directing their income toward consumer spending on those goods and services.  Today this virtuous cycle is short-circuited at just these two points as a result of two structurally symbiotic features of the US economy stemming from neoliberal policies instituted in the 1980s – the outsourcing/offshoring of production and financialization.   

How have we arrived at this unsatisfactory economic state? 

Let’s start on the production side.
1.       In response to the economic crisis of the 1970s corporations restructured by outsourcing (aka subcontracting) manufacturing to make their companies leaner and meaner, and sourced manufacturing suppliers, or their own facilities, offshore. This contributed to deindustrialization and the disappearance of well-paying blue-collar factory jobs in the US, thus resulting in downward mobility and unemployment. This also put domestic workers in competition with cheaper foreign labor.
2.       At the same time, one central aspect of financialization was the transition from a philosophy of “managerial capitalism”, involving corporate decision-making by professional managers aimed at improving and expanding business operations, to a “financial capitalism” model that shifted corporate strategy toward the single-minded goal of maximizing “shareholder value”.   Other stakeholder interests – those of workers, communities, or the long-term viability of the enterprise – were subordinated to maximizing the return to shareholders. In order to ensure that managers would pursue shareholder value, their compensation packages included stock options which served to align this desired behavior with monetary incentive.  
3.       The “market”, and accordingly share price, responded favorably when corporations were able to sell off various units and divisions, downsize their labor force, offshore facilities or suppliers to low wage/deregulated locations, and cut costs. Thus, the financial sector both rewarded and reinforced corporate restructuring resulting in progressive deindustrialization.
4.       As corporations, under neoliberalism and corporate restructuring, were able to increase their profit share at the expense of labor’s share, they had large sums of money in search of profitable investment outlets. Since many of these corporations had outsourced manufacturing, the profits would no longer be plowed back into new or upgraded factories or production (which was now carried out by subcontractors, increasingly offshore) but rather into something with potentially higher returns.

5.       At the same time, financial institutions, newly deregulated under the neoliberal regime, developed and invented an assortment of exotic financial instruments to attract the growing corporate windfall. This fueled the further financialization of the economy and the upward concentration of income and wealth (see below).   



6.       Theoretically and historically, a rationale for allowing capitalists to retain the greatest share of profits was based on the assumption that they would plow them back into more investment and production in factories and new enterprises, and thus generate expanding employment and worker income. But today in the US, rather than a convergence, there is a divergence between profits and capital investment (see Figure 1 below). The delinking of these represents a fundamental failure of US capitalism.  Profits are no longer retained and re-invested in production; rather they are diverted toward financial instruments, or used for stock buy-backs to support or enhance share price. 



This is how the capital investment process necessary for a virtuous cycle has been short-circuited.

How has the consumption side of the equation been thwarted?

7.       While the financial sector both shapes and is the recipient of the flow of investment dollars, the broader production side of the economy is neglected, employment opportunities are curtailed, and income and wealth are further concentrated in the hands of financial engineers and their corporate clients.  For the average worker, who has experienced stagnation in buying power, or worse downward mobility, as the economy is restructured and globalized, debt becomes the means to sustain and support their standard of living.
8.       Consumer demand is not only depressed as a result of neoliberal economic policies that favor capital over labor producing stagnant wage growth, but an increasing portion of one’s income stream is diverted to servicing or paying off the various claims made by financial entities as part of car loans, mortgage, credit card, and student debt   (from which the financial sector benefits). This diverts what little income they receive back to the financial sector through debt service rather than into the consumption and spending that would stimulate business growth and employment.  And given the offshoring of production, much of the already limited simulative impact of consumer spending is restricted domestically to the retail sector as the actual manufacturing of commodities takes place abroad.  
9.       Thus we have a toxic symbiotic relationship between financialization and continuing de-industrializing disinvestment. 
 
It is important to note that as a result of the restructuring of our economy under the neoliberal regime, the financial sector is now in the most powerful political-economic position as the recipient of the diversion of monetary resources from both production and consumption.  Economically, the dominance of the financial sector has been identified by such establishment institutions as the Bank for International Settlements as a serious drag on “real economic growth”.  Politically, mainstream economists such as Simon Johnson speak of a “financial oligarchy” determining policy in the United States. Others describe the rise of debt peonage under a neo-feudal financial regime.  

It is the very power and influence of this sector that ensures, under out current political system, that their interests will continue to be protected by both political parties.


Two Recommended Sources on Outsourcing/Offshoring and Financialization

William Milberg and Deborah Winkler, Outsourcing Economics: Global Value Chains in Capitalist Development.  Cambridge Univ Press

Michael Hudson, Killing The Host: How Financial Parasites and Debt Destroy the Global Economy. Islet Press.



Monday, August 1, 2016

The Myth of Party Polarization

The Myth of Political-Economic Party Polarization

“I actually think the divide is not that wide…. When you go to other countries, the political divisions are so much more stark and wider. Here in America, the difference between Democrats and Republicans — we’re fighting inside the 40-yard lines”
President Obama, November, 2013

It is difficult to read anything about American politics today without coming across the claim that the political system is more polarized than at any time in recent history and that this is the source of current intractable gridlock.  However, as it pertains to the political-economic policy dimension, I believe the claim is false and is due to a misconception of what polarization would involve, and the actual type of division and animosity that actually characterizes party politics today.  

Technically, polarization of the political parties would involve each of the two parties moving in opposite directions toward the left and right ends of the political spectrum. A stylized example of a theoretical party polarization is represented in Figure A.  Here you have, over a 30 year period, the Democratic Party moving toward the left end of the political spectrum and the Republican Party moving toward the right end of the political spectrum. They are moving in opposite directions and toward opposing ideological poles  

  



A more accurate representation of the political-economic shifts of the two parties is presented in Figure B. Here we have, since 1970, both parties moving toward the right end of the political spectrum. But even though both parties have moved to the right, fueled by their dependence on and cultivation of corporate campaign contributions, the distance between the two parties can still widen if one party is moving more radically to the right than the other. This describes the Republican Party. As political scientists Mann and Ornstein put it in It’s Even Worse Than It Looks,  “The Republican Party has become an insurgent outlier — ideologically extreme; contemptuous of the inherited social and economic regime; scornful of compromise; unpersuaded by conventional understanding of facts, evidence and science; and dismissive of the legitimacy of its political opposition.”  When one of only two parties takes an extreme ideological position, sharp political division is the logical outcome.  This results in a growing distance between the parties despite the fact that they have been moving in the same direction.




The alternative perspective presented here on the issue of polarization is based on what we know about the Democratic Party, beginning with the Carter administration, but solidified under Clinton, that involved a clear departure from New Deal social democratic principles and an embrace of more conservative neoliberal political-economic policies. Among the most notable under Clinton were the North American Free Trade Agreement (NAFTA), the Personal Responsibility and Work Opportunity Act, and the Commodity Futures Modernization Act.   All three of these pieces of legislation moved the Democratic Party to the right as part of the “triangulation” strategy adopted by the Clinton administration.  The Obama administration has done little if anything to reverse policy in these three areas and, in terms of trade agreements, has actually pursued a deepening of the global neoliberal apparatus as evidenced by his promotion of the Trans-Pacific Partnership (TPP).

So, if the parties have moved in the same direction, what accounts for the real hostility and antagonism between the parties and party members?  I would like to offer two simple concepts, based on the existence of a two-party versus multiparty system, which might provide a partial explanation.

First is what I call zero-sum partisanship. This means that (as in a zero-sum game) any gain for one party (electorally or legislatively) is viewed as a loss for the other; and any loss for one is viewed as a gain for the other. Under this destructive arrangement, the notion that there might be a mutually beneficial agreement or a basis for cooperation or compromise between the two parties becomes increasingly unlikely.   

A second closely associated feature of our party system is binary partisanship.  As with a binary numerical system, you are either a 1 or 0.  One’s political identity, and the tone of political discourse, is shaped by one’s location into one category or the other. If you criticize a Republican you must be a Democrat. If you criticize a Democrat, you must be a Republican. If you are not a 1 you must support a zero. There is no space in a binary system between 0 and 1; nor is there the option for a 0 to choose a 2, as this would automatically be interpreted as assisting 1, and thus supporting a “spoiler”.

When Reince Priebus, the chair of the Republican National Committee, was recently asked why the party was now embracing Trump, he replied, "It’s a binary choice. It’s Donald Trump or Hillary Clinton."

Principled non-partisanship under the zero-sum and binary conditions becomes nearly impossible.  Antagonism and mutual distain becomes the norm.

All of this has produced partisan co-dependent relationship between the two parties; each depending on the other to serve as the nemesis against which to generate antipathy among their base.   Instead of offering a politically principled policy agenda, the parties are content to mobilize voters on the basis of the claimed horrors that will result if the opposition is victorious.

For example, in soliciting support and campaign contributions in the current election, Hillary Clinton has made the following pitch: “Donald Trump is not a normal candidate, and if he beats us, it will be more than a defeat at the ballot box — it will be a once-in-a-generation setback for our values and our shared idea of what America means.”​

Rather than proposing a progressive left agenda, as one might expect if ideological polarization were occurring, Clinton, and the Democratic Party of recent election campaigns, is content to run on defending the status quo from the reactionary right. This is aptly described by Matt Karp, in a recent article in Jacobin, as “fortress liberalism” – “the dominant mentality within the Democratic establishment”.

In short, the notion of political party polarization must be examined more carefully and critically as it suggests that not only is there extremism from both parties, but that the Democratic Party has somehow moved sharply to the left. On the central matter of political economic ideology, this characterization is clearly false. The fact that the greatest challenge to the Democratic establishment has come from the progressive social democratic left, and that that ranking officials of the Chamber of Commerce of Commerce and Wall Street moguls such as Michael Bloomberg are now actively supporting Hillary Clinton for President, provides further dis-confirming evidence of the ideological party polarization claim.







Sunday, July 31, 2016

Property Party?



In the words of Gore Vidal:   “There is only one party in the United States, the Property Party … and it has two right wings: Republican and Democrat.”



Tuesday, July 26, 2016

Exit, Voice, or Loyalty: Thoughts on the Sanders Movement

The 2016 primary election season has seen the greatest widespread dissatisfaction and defection from the two-party duopoly in modern times. For both the Democrats and the Republicans, members have challenged the party establishment and promoted insurgent candidates.  How will this all play out through the general election and beyond?  We can consider the case of the Sanders supporters.

One way to approach this question is to take Albert O. Hirschman’s brilliant conceptual triad designed to analyze the options available to those who are dissatisfied with a particular organization, institution, or situation.  The model offers three course of action – exit, voice, or loyalty.  Under the “exit” option one simply leaves or takes their business elsewhere.  This is regarded as the market-based solution.  Alternatively, one can exercise “voice” through the organization of like-minded others and demand change, so that the organization can be transformed into something more satisfactory. Hirschman associates this option with democratic activism. Finally, there is the default option of “loyalty” where one can continue to faithfully support, or remain. in the organization.

Hirschman’s scheme is conceptually elegant, and it can be applied to a wide variety of situations, but fails to consider fully the contextual factors that might constrain the seemingly “free choices” or options facing the social actor.  For example, in the case of a disgruntled employee, “exit” may be highly desirable but not feasible under poor labor market conditions of high unemployment.  Similarly, “voice” may seem an attractive option but there may be few opportunities or the consequences of exercising voice may be dismissal from the job.  What then appears, after considering and rejecting these options, as “loyalty” is in fact really a situation of highly restricted and constrained choice, or no choice at all. 

How do the three options of the Hirschman model currently apply in the short-run to the Sanders supporter? Many may choose to exercise the “exit” option. This could mean not supporting Clinton and either voting for another political party or abstaining all together.  “Voice” could involve working to change the Democratic Party from within so that it more closely aligns with the principles and policies of the Sanders movement. “Loyalty” would entail the strong partisan commitment of supporting whatever nominee emerges from the Democratic Party nominating process.

In the case of the Sanders supporter, there are also contextual constraints that limit easy choices.  One of these contextual factors is the political dynamic generated by a two-party system. As it applies to the exit option, under a two-party system failure to turn out for the Democratic Party, or casting a ballot for a third party, may serve to benefit the Republicans. One is then cast, no matter how unfairly, as somehow responsible for an outcome that may be the least desirable – in this case a Trump victory. 

Some variant of the “voice” option was incorporated into the platform drafting procedures with the appointment of Sanders’ representatives to participate in that process.  Voice can, in the short run, be further exercised through protests and demonstrations at the national convention.  But there are obvious constraints given the fact that the Democratic Party is a corporate dominated party institutionally devoted more toward defending the establishment status quo than promoting radical structural changes that would challenge the balance of social class power. 

Further, the very foundation of the Sanders campaign – as a “political revolution” dependent upon a long-term mass social movement – requires a non-institutionally regulated, sometimes-cacophonous, overture that will disrupt and agitate for substantive social change.   

For this reason, the post-Bernie led movement is best advised, over the post-election long-run, to combine “exit” -- from the shackles of the two party system (which has been the graveyard of social movements) -- with the “voice” of the various movements and existing organizations sharing common ground in seeking justice, equality, and democracy.  

Of course, this will require some level of organization to be most effective. Last night Bernie Sanders communicated the following to those supporting his campaign and movement:

“Our work will continue in the form of a new group called Our Revolution. The goal of this organization will be no different from the goal of our campaign: we must transform American politics to make our political and economic systems once again responsive to the needs of working families.



Friday, July 22, 2016

Trump as Personification of 21st Century U.S. Capitalism

Many of those supporting Donald Trump for President base their support on his record as a successful businessman. But how did Trump amass his financial fortune? A closer look reveals that Trump is, in fact, the perfect personification of the current state of American capitalism -- an economic system that is based heavily on three strands of capitalist practice that today depart radically from the idealized version of the self-made entrepreneurial form.  Trump’s record as a business executive conforms closely to all three strands.

The first is patrimonial capitalism.  This term was introduced by Thomas Piketty in his book Capital in the Twenty-First Century which charts the long-term trajectory of inequality in capitalist societies. His analysis concluded, as the term suggests, that those who dominate and direct our economy base their wealth increasingly on inheritance. It is largely family income and wealth that determines who will occupy the capitalist class rather than merit.  This does not mean that the principle of meritocracy is irrelevant as it does provide, if nothing else, a powerful legitimizing ideology along the lines of “I was born on third base, so I must have hit a triple”.

Trump fits squarely into the patrimonial model as his father, Fred Trump, amassed a net worth of at least $200 million and Donald inherited somewhere between $40 and $200 million. Donald also benefited throughout his business career from a long series of loan guarantees underwritten by his father.

Second is crony capitalism.   This refers to the close relationship between capitalists and government officials in which said officials provide capitalists with various favors (e.g. abatements, incentives, re-zoning, etc.) that translate into private profit. Donald learned the lessons of crony capitalism from his father Fred who developed powerful political connections enabling profitable opportunities in the building of public housing. Donald has built on those connections and that strategy throughout his life. This has included relationships with the City of New York for tax abatements, efforts in Bridgeport CT to have existing businesses condemned, the use of eminent domain in numerous locations to obtain property, and obtaining casino licenses in Atlantic City.  Trump has been quite open about his ability to make economically useful connections with any political official, and his “pragmatic” campaign contributions to both parties reflect this practice.

Opportunities for crony capitalism have increased under the neoliberal supply-side economic development model that privileges the needs of capital over the needs of workers and communities. As states and localities are charged with building favorable business climates for capital investment, and the number of so-called “public-private partnerships” increase, government favors can be rationalized as contributions to job creation.

The third outstanding feature of the contemporary US economy is debt-driven capitalism.   Trump proudly has proclaimed himself “the king of debt” and he claims he “made a fortune out of debt”. He has used what is now a common business practice that was the subject of a recent story in the New York Times on Trump’s business record in Atlantic City: “…even as his companies did poorly, Mr. Trump did well. He put up little of his own money, shifted personal debts to the casinos and collected millions of dollars in salary, bonuses and other payments. The burden of his failures fell on investors and others who had bet on his business acumen.”  A variant of this model, sometimes described as “vampire capitalism”, is the standard operating procedure for the private-equity firms which gained national attention when Mitt Romney was running for President.  As reported during that last presidential race: ”Borrowing lots of money and incurring bad debts is not how real businesses make money in a normal world. But we don’t live in such innocent times. Modern American capitalism is rife with sophisticated financial intermediaries who exploit flaws and complexity in the system, as well as insider connections, to make profits off of predatory behavior” 


So when people hold up Trump as an exemplary example of business acumen, it must be put in the context of U.S. capitalism more generally and the larger systemic failure of our political economy that concentrates wealth in an oligarchical fashion, allows government to be captured by narrow corporate interests, and economically rewards those who use financial sector debt for short term gain.

Friday, May 6, 2016

How Has The "Model" Free Trade Agreement with Korea Worked Out?

Free trade agreements, like neoliberal economic policy, are faith-based policies that are promoted by both the business interests that benefit from them and economic policy-makers captured by the ideology of mainstream economic thought, in spite of the overwhelming evidence for their negative consequences (for the larger economy and the working population).

Obama has been working overtime in support of the Trans Pacific Partnership (TPP) but as reported by Lori Wallach of Public Citizen’s Global Trade Watch, there is now more damning evidence for the utter misinformation (lie?) about these trade agreements.

“Today’s alarming fourth-year trade data on President Obama’s U.S.-Korea Free Trade Agreement (FTA) arrived just as the Obama administration has started its hard sell to pass the Trans-Pacific Partnership (TPP). And that is a real problem for the White House.

The Korea deal served as the U.S. template for the TPP, with significant TPP text literally cut and pasted from the Korea agreement. And the Obama administration sold the Korea deal with the same “more exports, more jobs” promises now being employed to sell TPP.

And since then, our trade deficit with Korea more than doubled as imports surged and exports declined. The increase in the U.S. trade deficit with Korea equates to the loss of more than 106,000 American jobs in the first four years of the Korea FTA, counting both exports and imports, according to the trade-jobs ratio that the Obama administration used to promise at least 70,000 job gains from the deal.”

Thursday, April 28, 2016

Fallacious Logic Informs St Johns River Dredging Project

The most recent development in the ongoing contention over the proposed St Johns River dredging/deepening has the St Johns Riverkeeper filing a legal challenge to block state permitting of the project. While much of the debate over the project has revolved around the environmental impact, and the classic tradeoff between environmental protection and economic growth, there is an even more fundamental question worth asking -- what is the likelihood that the presumed economic gains in jobs and revenue will be realized if the project actually comes to fruition? On that score, one can file a logical challenge against the project and its proponents who repeatedly commit a fundamental logical socio-economic fallacy known as “the fallacy of composition”.

This logical fallacy plagues many proposed economic development panaceas. The tendency is to isolate a single case, in this instance Jacksonville’s port, showing how investing in an infrastructural enhancement will make the port more competitive and result in positive economic benefits. But what appears as individually rational -- for a port to seek public funds in order to finance infrastructural expansion and meet the demands of carriers and shippers – may in fact be collectively irrational. This is because Jaxport is not the only port engaging in this activity. Every major port on the East coast is or will be as deep, or deeper, than Jacksonville. Once one considers the larger east coast port population, all pursuing the same strategies and competing for the same limited amount of containerized cargo, it should be obvious that the result will not be equally beneficial for all parties. Some will be more successful than others based on existing and cumulative advantages; and, collectively, scarce public funds will be expended on redundant infrastructure resulting in overcapacity and underutilization.

Avoiding the fallacy of composition would have led the Army Corp of Engineers to conduct a multiport analysis in determining the wisdom of recommending the St Johns River dredging/deepening project (but they did not). Understanding the fallacy of composition would make clear that when every port seeks to gain an advantage through costly infrastructure and channel deepening it will inevitably result in “destructive competition” where no net competitive advantage is gained by any port, while the bargaining position of the shippers and global carriers is strengthened. As one study of port competition concludes: “…interport competition results in an unnecessary and unrewarded transfer of wealth from local taxpayers and users to global firms.”

There is a second similarly relevant socio-economic fallacy known as Say’s Law -- that supply will create its own demand. This has been translated into the equally fallacious assumption made by advocates of the deepening project that “if we dredge, they will come”. But supplying a container terminal and deep water will not automatically produce a demand for port services, as that is contingent not only on the state of global trade but decisions made by the shippers and carriers, who, it turns out, have expressed a clear preference for Savannah and Charleston over Jacksonville.

Finally, one would be remiss if they did not make reference to the more well-known concept of “opportunity cost”. This refers to the lost benefit or value of an activity not undertaken because another course of action is pursued. As it pertains to the river deepening, one might consider whether the estimated $400 million local share of total project cost would be better directed toward an alternative form of public investment that might generate greater benefits for the citizens of Duval county, such as improved public transportation.

In short, one does not need to conduct a technical econometric analysis in order to assess or challenge the logical shortcomings of the proposed dredging project. It is remarkable, but not entirely surprising, that paid consultants conducting economic impact studies would overlook these fundamental, but inconvenient, socio-economic principles. What will be more inexcusable is if public officials actually decide to expend scarce taxpayer resources, in a time of severe fiscal strain, on such a highly speculative megaproject.