Coming
in October
From Common Courage Press
Today's
Stories
August 29, 2003
Lenni Brenner
God
and the Democratic Wing of the Democratic Party
Bister, Estrin and Jacobs
Howard Dean, the Progressive Anti-War Candidate? Some Vermonters
Give Their Views
August 28, 2003
Gilad Atzmon
The
Most Common Mistakes of Israelis
David Vest
Moore's
Monument: Cement Shoes for the Constitution
David Lindorff
Shooting Ali in the Back: Why the Pacification is Doomed
Chris Floyd
Cheap Thrills: Bush Lies to Push His War
Wayne Madsen
Restoring the Good, Old Term "Bum"
Elaine Cassel
Not Clueless in Chicago
Stan Goff
Nukes in the Dark
Tariq Ali
Occupied
Iraq Will Never Know Peace
Arnold Schwarzenegger
Behold, My Package
Website of the Day
Palestinian
Artists
Recent
Stories
August 27, 2003
Bruce Jackson
Little
Deaths: Hiding the Body Count in Iraq
John Feffer
Nuances and North Korea: Six Countries in Search of a Solution
Dave Riley
an Interview with Tariq Ali on the Iraq War
Lacey Phillabaum
Bush's Holy War in the Forests
Steve Niva
Israel's
Assassination Policy: the Trigger for Suicide Bombings?
Website of the Day
The Dean Deception
August 26, 2003
Robert Fisk
Smearing the Dead
David Lindorff
The
Great Oil Gouge: Burning Up that Tax Rebate
Sarmad S. Ali
Baghdad is Deadlier Than Ever: the View of an Iraqi Coroner
Christopher Brauchli
Bush Administration Equates Medical Pot Smokers with Segregationists
Juliana Fredman
Collective Punishment on the West Bank: Dialysis, Checkpoints
and a Palestinian Madonna
Larry Siems
Ghosts of Regime Changes Past in Guatemala
Elaine Cassel
Onward, Ashcroft Soldiers!
Saul Landau
Bush:
a Modern Ahab or a Toy Action Figure?
August 25, 2003
Kurt Nimmo
Israeli Outlaws in America
David Bacon
In Iraq, Labor Protest is a Crime
Thomas P. Healy
The Govs Come to Indy: Corps Welcome; Citizens Locked Out
Norman Madarasz
In an Elephant's Whirl: the US/Canada Relationship After the
Iraq Invasion
Salvador Peralta
The Politics of Focus Groups
Jack McCarthy
Who Killed Jancita Eagle Deer?
Uri Avnery
A Drug
for the Addict
August 23/24, 2003
Forrest Hylton
Rumsfeld
Does Bogota
Robert Fisk
The Cemetery at Basra
Veteran Intelligence Professionals for
Sanity
Insults to Intelligence
Andrew C. Long
Exile on Bliss Street: The Terrorist Threat and the English Professor
Jeremy Bigwood
The Toxic War on Drugs: Monsanto Weedkiller Linked to Powerful
Fungus
Jeffrey St. Clair
Forest
or Against Us: the Bush Doctor Calls on Oregon
Cynthia McKinney
Bring the Troops Home, Now!
David Krieger
So Many Deaths, So Few Answers: Approaching the Second Anniversary
of 9/11
Julie Hilden
A Constitutional Right to be a Human Shield
Dave Lindorff
Marketplace
Medicine
Standard Schaefer
Unholy Trinity: Falwell's Anti-Abortion Attack on Health and
Free Speech
Catherine Dong
Kucinich and FirstEnergy
José Tirado
History Hurts: Why Let the Dems Repeat It?
Ron Jacobs
Springsteen's America
Gavin Keeney
The Infernal Machine
Adam Engel
A Fan's Notations
William Mandel
Five Great Indie Films
Walt Brasch
An American Frog Fable
Poets' Basement
Reiss, Kearney, Guthrie, Albert and Alam
Website of the Weekend
The Hutton Inquiry
August 22, 2003
Carole Harper
Post-Sandinista
Nicaragua
John Chuckman
George Will: the Marquis of Mendacity
Richard Thieme
Operation Paperclip Revisited
Chris Floyd
Dubya Indemnity: Bush Barons Beyond the Reach of Law?
Issam Nashashibi
Palestinians
and the Right of Return: a Rigged Survey
Mary Walworth
Other People's Kids
Ron Jacobs
The
Darkening Tunnel
Website of the Day
Current Energy
August 21, 2003
Robert Fisk
The US
Needs to Blame Anyone But Locals for UN Bombing
Virginia Tilley
The Quisling Policies of the UN in Iraq: Toward a Permanent War?
Rep. Henry Waxman
Bush Owes the Public Some Serious Answers on Iraq
Ben Terrall
War Crimes and Punishment in Indonesia: Rapes, Murders and Slaps
on the Wrists
Elaine Cassel
Brother John Ashcroft's Traveling Patriot Salvation Show
Christopher Brauchli
Getting Gouged by Banks
Marjorie Cohn
Sergio Vieira de Mello: Victim of Terrorism or US Policy in Iraq?
Vicente Navarro
Media
Double Standards: The Case of Mr. Aznar, Friend of Bush
Website of the Day
The Intelligence Squad
August 20, 2003
Robert Fisk
Now No
One Is Safe in Iraq
Caoimhe Butterly
Life and Death on the Frontlines of Baghdad
Kurt Nimmo
UN Bombing: Act of Terrorism or Guerrilla War?
Michael Egan
Revisiting the Paranoid Style in the Dark
Ramzi Kysia
Peace
is not an Abstract Idea
Steven Higgs
NPR and the NAFTA Highway
John L. Hess
A Downside Day
Edward Said
The Imperial Bluster of Tom Delay
Jason Leopold
Gridlock at Path 15: the California Blackouts were the "Wake
Up Call"
Website of the Day
Ashcroft's Patriotic Hype
August 19, 2003
Jeffrey St. Clair
Blackouts Happen
Gary Leupp
"Our Patch": Australia v. the Evil Doers of the South
Pacific
Sean Donahue
Uribe's Cruel Model: Colombia Moves Toward Totalitarianism
Matt Martin
Bush's Credibility Problem on Missile Defense
Juliana Fredman
Recipe for the Destruction of a Hudna
John Ross
Fox Government's Attack on Mexican Basques
Sasan Fayazmanesh
What Kermit Roosevelt Didn't Say
Website of the Day
Tom Delay's Dual Loyalities
August 18, 2003
Uri Avnery
Hero in War and Peace
Stan Goff
The Volunteer Military and the Wicked Adventure
Cathy Breen
Baghdad on the Hudson
Michael Kimaid
Fight the Power (Companies)!
Jason Leopold
The California Rip-Off Revisited: Arnold, Milken and Ken Lay
Matt Siegfried
The Bush Administration in Context
Elaine Cassel
At Last, A Judge Who Acts Like a Judge
Alexander Cockburn
Judy Miller's War
Harvey Wasserman
The Legacy of Blackout Pete Wilson
Website of the Day
Fire Griles!
Congratulations
to CounterPuncher Gilad Atzmon! BBC Names EXILE Top Jazz CD
August 16 / 17, 2003
Flavia Alaya
Bastille
New Jersey
Jeffrey St. Clair
War Pimps
Saul Landau
The Legacy of Moncada: the Cuban Revolution at 50
Brian Cloughley
What Has Happened to the US Army in Iraq?
William S. Lind
Coffins for the Crews: How Not to Use Light Armored Vehicles
Col. Dan Smith
Time for Straight Talk
Wenonah Hauter
Which
Electric System Do We Want?
David Lindorff
Where's Arnold When We Need Him?
Harvey Wasserman
This Grid Should Not Exist
Don Moniak
"Unusual Events" at Nuclear Power Plants: a Timeline
for August 14, 2003
David Vest
Rolling Blackout Revue
Merlin Chowkwanyun
An Interview with Sherman Austin
Adam Engel
The Loneliest Number
Poets' Basement
Guthrie, Hamod & Albert
Book of the Weekend
Powerplay by Sharon Beder
Hot Stories
Dardagan,
Slobodo and Williams
CounterPunch Exclusive:
20,000 Wounded Iraqi Civilians
Steve
J.B.
Prison Bitch
Sheldon
Rampton and John Stauber
True Lies: the Use of Propaganda
in the Iraq War
Wendell
Berry
Small Destructions Add Up
CounterPunch
Wire
WMD: Who Said What When
Cindy
Corrie
A Mother's Day Talk: the Daughter
I Can't Hear From
William Blum
Myth
and Denial in the War on Terrorism
Standard Schaefer
Experimental Casinos: DARPA and the War Economy
Uzma
Aslam Khan
The Unbearably Grim Aftermath of War:
What America Says Does Not Go
Paul de Rooij
Arrogant
Propaganda
Gore Vidal
The
Erosion of the American Dream
Francis Boyle
Impeach
Bush: A Draft Resolution
Click Here
for More Stories.
|
August
30, 2003
Tech Bubble: Who Benefited?
An
Interview with Michael Hudson
By STANDARD SCHAEFER
During the boom of the 1990s, neoliberal economists
and the financial press promoted the the high tech revolution
for its ability to reduce production costs. As long as government
did not interfere with markets, technology would lead to an improvement
in the quality of life. The ultimate beneficiary was supposed
to be the consumer. This did not happen.
The main beneficiary was Big Finance.
Finance capital, long assumed to play a facilitating role, not
a dominating one, actually led to scaled back and distorted technological
innovations. Deregulation in finance and the privatization of
public services lead to market manipulation, and record consumer
debt. Legal protection of intellectual property rights also allowed
corporations to keep prices higher than consumers had been lead
to expect.
Workers felt they were getting rich as
prices for their property boomed, along with the relatively modest
stockholdings in their retirement funds. It seemed as if everyone
might look forward to becoming a millionaire, not by saving out
of their salaries  but as investors.
People ran up debts to buy better homes,
and then borrowed against the rising market value of their property
to pay off the credit-card debt that was financing much of their
rising consumption.
Low interest rates helped fuel the real estate and stock market
bubble by making the debt side of the balance sheet less expensive,
creating a "wealth effect" as people came to believe
that rising property and stock-market prices would be able to
pay off their obligations.
In this interview, Professor Hudson explains
how financial engineering rather than technological engineering
was the fundamental force behind the bubble. Rather than becoming
the anticipated force for social and cultural progress, technology
became a vehicle for financial exploitation. Companies sought
to keep productivity gains for themselves in the form of economic
rent (income without costs) rather than lowering product prices
or raising wages. This decoupled the traditional relationship
between technology and living standards. Consumer spending no
longer occurred in proportion to earnings. The impact of these
debts can be felt in the energy sector, medicine, and the labor
market.
Employment, productivity
and technology
Standard Schaefer: During the bubble
Alan Greenspan rarely was criticized except for the relatively
weak employment figures during what otherwise was considered
an economic boom. His explained this in terms of increased productivity,
and cited technological advance as displacing workers, creating
unemployment.
Michael Hudson: There certainly seemed
to be a riddle as to why wages were rising so slowly despite
historically low unemployment levels. But I don't think Mr. Greenspan's
explanation focused on technology. In February 1997 he explained
to the Senate Banking Committee that the practice of out-sourcing
labor and privatizing public services--which in practice meant
shifting to non-union labor--was making employees feel so insecure
about their jobs that they were afraid to press for higher wages.
Under normal conditions, he said, unemployment at the rate then
being registered--about 5.4 percent, the same as in the boom
years 1963 and 1979--would have led to rising wage levels as
employers competed to hire more workers. But stagnating wage
gains were more like those of the 1991 recession (when the unemployment
rate topped 8 percent) and 1982 (when unemployment reached 11
percent in the aftermath of the Volcker-Carter interest-rate
spike).The reason, Mr. Greenspan explained, was heightened job
insecurity:
In 1991, at the bottom of the recession,
a survey of workers at large firms indicated that 25 percent
feared being laid off. In 1996, despite the sharply lower unemployment
rate and the demonstrably tighter labor market . . . 46 percent
were fearful of a job layoff.
If workers felt as secure as they had
fifteen years earlier, they would have pressed for wage increases.
But the character of the labor market was shifting sharply in
favor of employers, apart from unionized baseball players. Larger
companies in particular were being downsized, making workers
too worried about being laid off to ask for raises.
Commenting on Mr. Greenspan's remarks, David Hale of Kemper/Zurich
International pointed out that as a result of Europe's more "rigid"
(that is, unionized) labor markets, "If France or Germany
had enjoyed America's success in reducing unemployment, their
trade union movements would be pushing up wages aggressively
and setting the stage for a monetary tightening to slow down
the economy's growth rate." Yet despite the fact that U.S.
unemployment rates were so low that employers found themselves
obliged to hire and train people from society's most marginal
groups, "corporate restructuring [has] produced widespread
anxiety about economic security among middle class Americans."
Under these conditions labor "flexibility"
became a euphemism for flexibility in one direction--downward.
Workers agreed to go on a part-time basis, acting as consultants
or other off-payroll status so that their employers would not
have to pay for medical insurance, Social Security and pensions.
So to refer to technology is simply to distract attention from
the institutional changes that are taking place.
SS: What role has increased productivity
played, if any?
MH: There are two kinds of productivity.
Most people think of capital equipment increasing output per
workhour. Labor does the same amount of work, but produces more.
And as it produces more, it does not need to work as hard, because
capital saves labor by doing jobs more quickly and cheaply than
manual labor, or doing work that people can't do at all. This
is the kind of productivity that one associates with investment
in machinery, computers and information technology (IT).
However, today's productivity is taking
a different form. It is associated with laying off employees
and working the remaining workers harder. There is little technology
at work here, but rather the kind of drudgery from which technology
was supposed to free employees. Work has become more unpleasant
and stressful as companies let their work force shrink by attrition.
When workers leave, their work is distributed among the remaining
employees.
Working labor more intensively is occurring
most of all in the so-called high-technology sectors such as
information technology and computer programming, as well as finance.
The higher an employee is paid, the more intensively he or she
tends to be worked. So while someone may be making, say, $150,000
a year, in effect they are doing the equivalent of three 35-hour-per-week
jobs that pay $50,000 each. The effect is a rapid burnout. Workers
are being used up and discarded.
Employees who do not agree to work late
(without overtime pay) find themselves criticized for not showing
enough "company spirit" and giving 110 or 150 percent.
These are the next ones to be let go, frightening the remaining
workers to fall into line.
None of this has much to do with increasing
technology through new capital investment or technological innovation.
It is more a cultural phenomenon, a change in attitudes. It is
simply a case of working employees more intensively. This increases
worker discontent and causes resentment in an environment of
fear--the kind of tension that led to British-style class war
and ended up lowering productivity because of the constant labor-capital
strains. Yet the statistics show it as increasing productivity,
and the process is called "rationalization," which
is another euphemism for downsizing the labor force.
Over the long run it may not seem to
have been so rational when America suffers from the "British
disease" of class antagonism. This was the disease that
continental European social democracy aimed at curing, but the
cure is now being denounced as government intrusion into free
markets.
In the sphere of public-sector employment,
cities and states are privatizing public services. This means
shifting to provider companies that employ non-union labor, which
lacks the power to protect itself against downsizing and more
intensive working conditions and forced overtime. I suppose one
might call this the "technology of intimidation." But
it has involved control of government and cultural attitudes,
not technology as most people understand the term.
Everybody likes technology in principle,
so that is the term applied to make bad situations appear as
something inevitable and inherent in progress, not as a dysfunctional
social change. Nobody likes intimidation, except corporate managers.
So the vocabulary has been loosened accordingly, in a way that
George Orwell would have found familiar.
SS: How is this different from past productivity
booms, and what was the effect on workers back then?
MH: Working conditions were much less
stressful back in the 1960s. The booming economy was creating
a demand for labor that obliged employers to meet basic social
standards. Employees left at 5 o'clock. President Kennedy's wage-productivity
guidelines said that when labor productivity increased--as measured
by output per workhour--then wages should rise proportionally.
This was the principle embodied in the 1962 steel settlement,
for instance.
The 1960s also saw workers receive profit-sharing
and pension plans, as well as medical insurance. Today, mergers
and acquisitions are being "engineered" to wipe out
many of these benefits, emptying out the pension funds to pay
the financial institutions that have put up the money for the
corporate raiders. All this merger and takeover activity has
been ruled legal rather than prosecuted as racketeering, as it
was widely perceived to be as recently as the early1980s, when
some companies tried to use RICO laws against Drexel Burnham
during the Michael Milken years.
So the corporate merger movement has
aggravated the problem, and it is being managed by the large
financial investment bankers. The motive for these mergers is
not technological, and in fact most mergers do not even increase
earnings, but result in simple asset stripping. The labor force
is also stripped of its most experienced and loyal members.
In this setting the new financial managers
have replaced earlier personnel practices with an adversarial
attitude toward labor. Rather than seeking to retain workers,
many companies seek a high turnover, precisely to minimize their
non-wage benefits.
SS: What is the long-term effect?
MH: The kind of productivity envisioned
from the Industrial Revolution down to the rosy forecasts made
around 1945 saw machinery doing more work and freeing labor for
more leisure. Instead of this occurring in recent years, just
the opposite has resulted. From the 1950s onward, more and more
women have been forced to go to work to help their families make
ends meet.
This was welcomed as opening the full
range of intellectual and economic opportunities for women. And
indeed this was the most positive result. But the basic impetus
of economic need became apparent as men and women, mothers and
fathers, both had to work longer and longer hours to break even,
and even had to hold two jobs--a full-time job and part-time
job moonlighting.
Statistically this appears as the labor
force producing more output per worker and per workweek. But
actual labor productivity per hour has not increased by anywhere
near as much. Workers are spending more hours--and more of the
year--working than do their counterparts in Europe.
The reason is that they can't afford
to pay their bills without working more, and even so most are
going further into debt.
SS: What about high productivity and
the promised leisure society? How does the relatively high unemployment
undermine worker's ability to demand decent wages?
MH: It seems ironic that American workers,
who are reported to have nearly the highest international labor
productivity, are obliged to work longer days, with fewer vacation
days, than their European counterparts, without the overtime
paid by employers in the other leading industrial nations, and
without their health and injury protection or other social insurance.
Responding to the wishes of the retail store-owners' lobby seeking
to minimize overtime pay, the Bush administration pulled a trick
on workers by reclassifying many of them as "management"
and depriving them of the right to collect overtime payments.
On June 30 a group of Democratic senators and Congressmen sought
to reverse this plan, pointing out that "At least one in
five employees now has a workweek that exceeds 50 hours. Protecting
the 40-hour workweek is vital to balancing work responsibilities
and family needs." And this is from a Republican president
who claims to be pro-family.
The source of this scrimping on overtime pay has nothing to do
with technology displacing workers, but rather with the power
of industrial lobbies contributing to the campaigns of politicians
who pledge themselves to cut back labor rights in a way that
European social democracies would not dare to do--yet. This is
why Margaret Thatcher and Ronald Reagan aimed so much of their
hatred against Germany, whose unions have more political clout
and even more important, cultural influence, and much less class
warfare exists. But American labor has not been confronted with
the kind of class war situation that is being waged today in
a rather one-sided way.
SS: Conservative pundits argue against
increasing the minimum wage on the ground that if employees were
paid more, it would lead to higher unemployment--and more unemployment
would derail consumer spending and ruin the economy. But you
say that this spending already is in jeopardy. Can you explain?
MH: First of all, you need to look at
just who the economists saying this are, and who they are working
for. Graduate economics courses have become classes in rhetoric.
The idea is to make plausible and logical arguments based on
assumptions that need not be realistic at all. The criterion
for economic theory is simply whether it is internally logical,
not its realism. That is what makes economics a non-science in
the sense that the physical sciences require not only a consistency
of assumptions, but realism as well. The task of economists is
to come up with a set of assumptions that will lead to the conclusions
promoted by their employers. Academic programs train economists
to succeed in this endeavor.
SS: If we had a more objective, non-biased
economic analysis, what would it show?
MH: The problem of inadequate consumer
demand to fuel an economic recovery does not lie with the cost
of labor so much as with the fact that it is now normal for families
to pay a quarter or even a third of their income for debt service.
This diverts spending away from goods and services. The Bureau
of Labor Statistics reports that this proportion rises to 40
percent for home-owners who have taken out big mortgages to buy
their homes as the real estate bubble has pushed housing further
and further out of reach of families that in the past could have
afforded to buy similar properties with their earnings.
Many companies are in a similar strapped position. They are not
able to invest in new physical capital equipment or buildings
because they are obliged to use their operating revenue to pay
their bankers and bondholders, as well as junk-bond holders.
This is what I mean when I say that the economy is becoming financialized.
Its aim is not to provide tangible capital formation or rising
living standards, but to generate interest, financial fees for
underwriting mergers and acquisitions, and capital gains that
accrue mainly to insiders, headed by upper management and large
financial institutions.
The upshot is that the traditional business
cycle has been overshadowed by a secular increase in debt. Instead
of labor earning more, hourly earnings have declined in real
terms. There has been a drop in net disposable income after paying
taxes and withholding "forced saving" for social Security
and medical insurance, pension-fund contributions and--most serious
of all--debt service on credit cards, bank loans, mortgage loans,
student loans, auto loans, home insurance premiums, life insurance,
private medical insurance and other FIRE-sector charges.
Hardly any economist has been so outrageous
as to claim that this Financial, Insurance and Real Estate (FIRE)
overhead is "technology." It has not even been mentioned
that the growth in this financial and rentier overhead has outstripped
the contribution of productivity gains for most workers economic
welfare.
SS: Isn't the growth in wealth and saving
recycled somehow to become a demand for goods and services? I'm
referring to Say's Law of Markets--the idea that supply creates
its own demand.
MH: This circular flow is interrupted
by FIRE-sector charges siphoning off the revenue which employees
normally would have available for spending on the goods and services
produced by their employers and other producers.
SS: Wasn't this the criticism that Keynes
levied against Say's Law?
MH: Not really. He saw saving simply
as non-spending. The problem is that savings are turned over
to financial institutions, which lend them out at interest, which
leads debts to double and redouble. As this debt service grows,
consumers have less net ready money to spend, because they are
obliged to pay more interest and amortization on the loans they
have been obliged to take out just in order to break even, to
pay for their education, to achieve the American dream of home-ownership,
to pay for their children's education, and simply to retain their
social and economic status by keeping up with their neighbors.
The irony here is that these neighbors themselves are running
into debt for just the same reasons to participate in today's
economic rate race. Yet most people think that the problem is
theirs alone, and blame themselves for a change that has become
society-wide.
As consumption and home ownership have
become financialized and debt-ridden, earnings growth is eaten
up in payments to creditors. Debt repayment, along with Social
Security, Medicaid and pension fund contributions, are euphemized
as "savings," as if they are available to people to
cope with their current needs, or may be available later rather
than wiped out by new predatory financial scandals. Meanwhile,
the interest charges on these unavailable quasi-savings accrue
to the financial sector to lend out to yet new borrowers, extracting
yet more interest from the economy at large.
The upshot is debt deflation. This occurs
when debt service absorbs an amount larger than the increase
in income, leaving less net revenue available for spending on
current goods and services.
SS: If profits were being eaten up in
this way, how is it that the stock market bubble was attributed
to problems in digesting the rapid pace of technological breakthroughs
since the 1980s?
MH: It's only playing with words. Certainly
the explosion of internet usage spurred public offerings in dot.com
companies, while privatization of telephone companies throughout
the world, and new communications technologies for high-speed
information technology led telecom companies to become the largest
investors--and also the largest debtors. What brought stocks
down was not a technological slowdown or mere overcapicity but
rising debt to buy property rights--the radio and communications
frequencies being auctioned off by governments, on which companies
could charge rent just as landlords charge rent for their locations
and sites.
The workers were not better off, but
neither were many companies or even their stockholders (who included
their own workers via captive pension plans). Bankruptcies were
concentrated in the highest-technology sectors, that is, the
most debt-intensive. These were the sectors that permitted their
fortunes to be steered by investment bankers and other financial
advisors. These financial interests got the richest gains.
SS: When you say the economy has become
financialized, you are suggesting that its character has changed.
Jobs today certainly require more technical knowledge, and this
requires more education. That costs money, and most students
now need to take out loans to afford it. Some economists say
that the United States doesn't need the old-fashioned "rust
belt" jobs. We've exported the demand for manual labor--the
traditional working class--and the economy may become a nation
of service- and technology-oriented workers. Isn't this the dream
of a "post-industrial economy"?
MH: It could almost as well be called
a lapse back into the pre-industrial usury and rent economy of
European feudalism.
SS: But that was not an economy of productive
services, or of goods or even wage labor. Can you be more specific
as to what is unique today?
MH: Small and medium-sized companies
have been responsible for the growth in private-sector U.S. employment
since 1990. These companies range from small manufacturing establishments
to retailers, real estate management companies and law firms.
Most of these companies are domestic, not multinational. That
means that they are more likely to pay federal, state and local
taxes, as they are unable to use intra-company pricing via tax-avoidance
banking centers abroad, or other techniques that the financial
industry has promoted for larger companies.
If one breaks down employment by sector,
the statistics show that employment in manufacturing and other
sectors that classical economists called "productive"--primary
production in agriculture and mining, secondary production in
industry, power production and transportation--has not risen
since 1929. All the growth has been in services and in the government
sector, mainly at the state and local level in the case of public
employment.
However, state and local employment has
been cut back as a result of the fiscal squeeze on local government
imposed by Pres. Bush's tax cuts on the higher wealth brackets
and their capital gains. The circular flow between wealth-creation,
tax payments and the supply of public services has been broken.
The gap can be closed only by running yet more deeply into debt--or
in reversing the growing tax giveaways to the FIRE sector since
1980.
Industry also has become debt-ridden.
This is especially the case for the largest firms, for these
have been where most merger and acquisition activity (a euphemism
for corporate raiding) has been concentrated. The sharpest declines
in private-sector employment have occurred in the "high-tech"
industries whose balance sheets have become so debt-ridden that
they have been obliged to cut back their investment in order
to use what revenues they have to pay their bankers and bondholders.
The most serious bankruptcies, bond defaults
and layoffs have occurred in companies that have borrowed to
acquire other companies or to buy up the public domain that is
being privatized. Investment bankers found "wealth addicts,"
ambitious CEOs who could be persuaded to pay enormous consulting
fees to the bankers and accounting firms to arrange for them
to borrow money to buy other companies or public rent-yielding
assets being auctioned off.
The problem was that these mergers and
takeovers did not create new wealth, that is, new capital formation.
They merely upped the price of existing companies and their property
claims on income--their ability to charge for access to
the domain they controlled. That was the essence of the telecom
and dot.com bubble. What Mr. Greenspan and the media taking his
statements at face value called "wealth creation" was
a process of loading the high-technology sectors down with debt,
while issuing shares at enormous commissions and instant capital
gains that were made possible by convincing the population that
"peoples' finance capitalism" had arrived and everyone
had a chance to become a millionaire in the new Wall Street casino.
It is true that part of the debt was
used for capital spending on industrial equipment, hoping to
achieve a monopoly position. But by far the bulk of debt was
used to buy rival companies, as occurred when MCI bought Sprint,
and when European companies bought hitherto public monopolies.
As in most casinos and lotteries, the
clients end up losing. That is why casinos have become such good
business for their proprietors. Their technology is ancient,
by the way, not new.
SS: Supposedly, this is where market
forces are supposed to come in and clean shop. It's going to
be hell on workers when they get laid off as companies are forced
to downsize and sell off assets or entire divisions and affiliates
to pay debts. Meanwhile, their bankruptcy procedures wipe out
employee pension plans invested in the stock of their employers,
and employee savings in general.
This is euphemized as the "corrective"
method of the marketplace, at least of financial markets stripped
of public protection for employee savings in favor of Big Finance.
A lot of speculation in military contractors occurred after 9/11,
and has continued to this day. So it seems the market thinks
the defense industry will be where the growth is, providing a
political umbrella of subsidies for new high-tech ventures.
The privatization of medical care has
proved to be a boon to biotech and pharmaceutical research, and
DARPA is now giving money to these sectors as well. So my question
is whether these booms in R&D spending are likely to bolster
the economy and employment even if they fail to lead to new technological
breakthroughs.
MH: Even military spending and its related
high-technology spending won't be enough to offset the debt overhead
that is stifling new investment in today's financial environment.
It is too narrowly focused to be able to save California, Long
Island and Massachusetts.
Although interest rates are falling,
new direct investment will not be undertaken at less than a 15%
expected rate of return on equity. It is easier to make money
financially than by new direct investment. Most corporate bonds
were issued when interest rates were much higher, so the companies
have to pay them. The beneficiaries of falling interest rates
have been mainly the bondholders, not new borrowers, because
only a fraction of existing debt represents new debt at the recently
falling rates--which now are rising once again.
A large proportion of corporate and real
estate debt was not issued to create new wealth and new sources
of income, but to buy property already in place. In this sense
it was what classical economists called unproductive debt. To
the extent that "wealth creation" takes the form of
debt-financed property and securities transfers, it has created
deadweight on the economy's tangible wealth and income.
SS: At what point do increasing interest
payments on the national debt interfere with the return on these
securities?
MH: Interest payments are deemed "non-discretionary."
This means that they cannot be cut back. Either "discretionary"
spending must be reduced--social welfare, new infrastructure
investment and military spending--or the money must be borrowed
or new government money must be created. Something must give
somewhere.
Borrowing more will require still more
interest charges. Cutting back government spending will reduce
private-sector income, making it even harder to carry the corporate,
real estate and personal debt overhead, so the debt problem will
snowball. This is what systems analysts call positive feedback.
Energy and the debt
crisis
SS: Peter Schwartz and like-minded futurists
haven't put much emphasis on debt. They promise that the internet
and information technology can pull us out of the crisis. How
do you respond to the futurists who still pound the table for
technological advance?
MH: Back in 1976, I got into an argument
with Herman Kahn over just this question He asked me to project
GNP growth exponentially for the third world. His objective was
to show that with only 2 or 3% growth, the per capita GNP of
these countries would double and redouble in time, bringing their
living standards up to those of North America and Europe today.
I couldn't make myself do the simple
calculations. I pointed out that only debts grew exponentially,
year after year, and they do so inexorably, even when--indeed,
especially when--the economy slows down and its companies and
people fall below break-even levels. As their debts grow, they
siphon off the economic surplus for debt service, capped by late
charges and foreclosures--or in the case of third world countries,
privatization sell-offs of the public domain to financial interests
in the creditor nations.
The problem is that the financial sector's
receipts are not turned into fixed capital formation to increase
output. They build up increasingly on the opposite side of the
balance sheet, as new loans, that is, debts and new claims on
society's output and income.
The assumption made by financial lobbies
to insist that debt is not a problem is that technology will
produce enough profit to carry the interest and debt repayment
charges that are due. But as I just pointed out above, debt problems
actually are highest in the "high-technology" sectors,
precisely because they are the most capital-intensive sectors
and because their monopoly position has been bid up in price
with borrowed funds.
In this respect the technology bubble
has convinced people that earnings--their own personal income,
and that of the companies in which they invest--may outrun the
growth of debt. This has been an illusory dream for centuries.
It neglects to distinguish the financial sector's exponential
dynamics from the technological and industrial sector's earning
power, which is dependent on market demand net of debt service.
The most serious shortcoming of many
futures studies is the tendency to view technology as a force
in itself. The problem deterring economic recovery today is not
a slowdown in technological innovation, but the exponential expansion
of debt. This means that the volume of debt grows more rapidly
than the economy's ability to create an economic surplus to carry
this debt.
The point of intersection looks like
it has been passed for the information and real-estate sectors
at the top of the economic pyramid, and for lower-income debt-strapped
families at the bottom. When this occurs the economy and its
technology become over-indebted, and property begins to pass
from debtors to creditors. Stockholders are wiped out as bankers
and bondholders take indebted assets into their own hands.
The financialization
of medicine
SS: So you contend that workers and consumers
have not benefited from the technology boom.
MH: Obviously it has greatly increased
the range of consumer goods. It has vastly lowered the cost of
telephone service and other communications, as well as information
processing. It has made capital gains for stock-market speculators,
gains that have spilled over to homeowners as the economy's asset
prices have been inflated across the board. The technology boom
also has provided new medical techniques, new drugs and other
positive breakthroughs. But, the supply price of delivering medical
care and even many of the hitherto public services that have
been privatized has increased.
Look at how medicine and health care
have been financed. Most of the profits generated by nursing
homes and managed health care have been absorbed by mortgage
debt, stock dividends and executive salaries--including stock
options and capital gains. The largest short-term gains of all
have come from underwriting new stock issues. To the investment
bankers the technology boom simply meant more commissions and
day-to-day trading gains, a churning of accounts.
Medical technology and pharmaceuticals
provide a good illustration of one of the best-known set of breakthroughs
whose promise has been absorbed primarily by financial overhead
since World War II. It shows why doctors, nurses and other practitioners
of the new technology as well as patients have found themselves
squeezed rather than benefited in the way that was widely anticipated.
Most observers back in 1945 would have thought that the technology
would prove to be a bonanza for doctors. Certainly the American
Medical Association did everything it could to make this the
case.
What they did not anticipate was how
the financial sector would create the "managed care"
industry as an outgrowth of the FIRE sector's insurance component.
The way in which things have worked out has monopolized the lion's
share of earnings from the new technology for debt service, insurance
and other FIRE-sector returns.
A precondition for doctors opening their
practice, for instance, is to outfit their offices with expensive
diagnostic equipment and treatment facilities. Hospitals have
bought even more expensive technology. This equipment does indeed
produce an income, but doctors don't get to keep most of it.
They have to pay much of their revenue in principal and interest
charges and have to employ almost a full-time office accountant
to deal with the insurance and managed-care companies to get
fees which are steadily reduced to squeeze out as much profit
as is available after meeting basic break-even operating costs.
Meanwhile, the "human capital"
that represents the cost of their graduate medical education
finds its counterpart in education loans, also at interest. It
takes most doctors many years just to work their way out of debt
and get to the "zero" mark. In this sense they are
analogous to most professions. Modern men and women are born
into debt, and spend their working lives trying to extricate
themselves. The more capital-intensive and patent-intensive (that
is, rent-yielding) the technology is, the harder it is for its
practitioners and consumers to work their way out of debt. It's
as if debt has become the post-modern version of Original Sin.
The medical sector has been "financialized"
most notoriously by a shift away from traditional family doctors
to impersonal HMO's. The practice has nothing to do with technology
as a "mode of production." What is at work is rather
a mode of financing. Its development shows the degree to which
the financial sector's power is so strong that it overshadows
the impact of technological advance.
We see here the tendency of finance--and
of pro-finance legislation to adopt a social philosophy
that breaks up traditional long-standing family relationships.
The former coherent world is cut apart. Each time a worker changes
jobs, or even each time the employer changes its health insurance
carrier, employee-patients are obliged to change their doctors
or at least their specialists--or else pay exorbitant rates due
to the doctors' own financial overhead.
These practices make privatized medicine
more expensive than socialized medicine. That too has problems,
to be sure, but they are a different kind of problems, and are
more amenable to streamlining than financialized technology.
The moral is that anyone trying to forecast
the future on the basis of technological determinism is bound
to be overly optimistic. Technology represents potential. Finance
represents constraint.
SS: What is the common denominator at
work here?
MH: In many cases technology has simply
been a vehicle to induce its users (and the companies supplying
it) to run into debt. In this respect its major consequence has
been financial, and this has been largely left out of account.
The economic surplus is being absorbed by interest charges on
the loans that have financed the capital investment that doctors
make, telecom companies make, and that the big information technology
companies have made, without generating the profits needed to
pay off this debt.
Most people are now coming to see the
costs that are left in the wake of this kind of financialized
technology. Attorney General Eliot Spitzer's prosecutions depict
Wall Street as using technology as an opportunity to charge heavy
fees for underwriting and promoting stocks, and seizing the opportunity
to make quick trading gains. These gains have accrued to finance
capital, not physical capital. The result--and in many cases
even the aim--of technology has not been to benefit society,
but to create management fees, consulting fees and lending opportunities
for the financial sector.
The supposed beneficiaries you asked
about earlier--the consumers--are being squeezed. The employees
in these new high-tech industries are being squeezed, and as
employees they are being squeezed even more by being overworked,
and then laid off. Many have defaulted on their home mortgages
and other debts. Small investors who put their savings into these
companies are likely to find themselves wiped out by the insider
dealing and financial maneuverings that have been engineered--and
without any serious criminal prosecutions to date!
It is an ominous sign of our times that
the term "engineering" is now being used more in reference
to corporate balance sheets for "financial engineering"
than to physical research and development.
SS: Much of what we think of as technological
progress from the modern era like easy access to electricity
required government intervention. Rural electrification came
together under LBJ in the 1960s because power companies didn't
want to spend the money to connect those areas to the grid. The
above-mentioned Peter Schwartz says that just as the 20th century
expanded on the wave of low-priced energy, the coming century
will expand on a wave of low-priced information. How do you respond?
MH: Let's look at the August 2003 blackout.
Neither the power generation companies nor the distribution companies
had a "market" motivation to supply sufficient power.
Just the opposite. The power companies realized that they could
make more by not investing, leading to shortages that would enable
them to charge crisis prices, Enron-style, than by investing
to keep up with the growth of demand--in this case, peak demand.
Distribution companies for their part had little "market"
incentive to build more transmission capacity that would only
be used at peak hours. In this sense the power crash was created
by the deregulation philosophy pursued since the Market Fundamentalists
gained control of public policy in the 1980s. And their philosophy
in turn was sponsored by the financial sector, in order to gain
rent-yielding resources and manipulate balance sheets to as to
avoid paying taxes.
Many engineers have been warning that
the present crash was bound to occur. Here again the cause was
not technology as such, but economic ideology.
SS: The economy is reliant on power for
growth in output. There is a correlation between kilowatt-hour
consumption and GDP. What do the changes in power production
and costs mean for future economic growth?
MH: Energy has produced power less expensively
than horse-power or manual labor. Information technology does
not lower costs so much as provide a new array of services. Some
people have suggested that as much time has been absorbed by
using information technology for these new purposes (games, e-mail
and activities like reading of this interview) than has been
saved.
SS: How would you summarize your views
on how finance capitalism has shaped technology, in a nutshell?
MH: My basic point is that the 1990s
were not so much a decade of technological innovation as financial
innovation, including the political deregulation of companies
being financialized. This financial innovation has not spurred
technology and industry but has worked to strip capital formation,
research and development. "Economic research" consists
largely of looking over balance sheets to engineer corporate
takeovers rather than improve production techniques. The so-called
rationalization of labor and production has consisted mainly
of working labor harder and burning it out earlier, while stripping
away the responsibility for employers to pay medical and retirement
insurance by out-sourcing labor and moving it off the balance
sheet. The result has intensified the drudgery of labor rather
than freeing labor.
SS: This seems to be a good point to
break this interview, and hold the next one on the effect of
today's New Finance on the legal system, culture and politics.
Professor Michael Hudson is an independent Wall Street financial economist.
After working as a balance-of-payments economist for the Chase
Manhattan Bank and Arthur Anderson in the 1960s, he taught international
finance at the New School in New York. Presently, he is Distinguished
Professor of Economics at the University of Missouri (Kansas
City). He has published widely on the topic of US financial dominance.
He has also been an economic adviser to the Canadian, Mexican,
Russian and US governments. His books include Trade, Development,
and Foreign Debt (Pluto, 1992, 2 vols.). He is the author of
Super
Imperialism.
Standard Schaefer is an independent economic journalist, a cultural
historian, literary critic, poet and short-story writer. He teaches
at Otis College of Art and Design. He is the non-fiction editor
of the New Review of Literature. He can be reached at
ssschaefer@earthlink.net.
© 2003 Michael Hudson and Standard
Schaefer. This interview is part of a work-in-progress. Any reproductions
or excerpts are subject to request.
Weekend
Edition Features for August 23 / 24, 2003
Forrest Hylton
Rumsfeld
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Robert Fisk
The Cemetery at Basra
Veteran Intelligence Professionals for
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Insults to Intelligence
Andrew C. Long
Exile on Bliss Street: The Terrorist Threat and the English Professor
Jeremy Bigwood
The Toxic War on Drugs: Monsanto Weedkiller Linked to Powerful
Fungus
Jeffrey St. Clair
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Bring the Troops Home, Now!
David Krieger
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A Constitutional Right to be a Human Shield
Dave Lindorff
Marketplace
Medicine
Standard Schaefer
Unholy Trinity: Falwell's Anti-Abortion Attack on Health and
Free Speech
Catherine Dong
Kucinich and FirstEnergy
José Tirado
History Hurts: Why Let the Dems Repeat It?
Ron Jacobs
Springsteen's America
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The Infernal Machine
Adam Engel
A Fan's Notations
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Five Great Indie Films
Walt Brasch
An American Frog Fable
Poets' Basement
Reiss, Kearney, Guthrie, Albert and Alam
Website of the Weekend
The Hutton Inquiry
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