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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, but perhaps predictable, commentary that during the 2016 Presidential campaign there was 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 current mainstream economic policy 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, as used here, 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 and corporate profits. 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”. [One can legitimately question whether this cycle is actually “virtuous” given its dependence on a production-consumption logic that is based on wage labor exploitation, extractivism, consumerism, and the progressive destruction of the planet.] Historically, self-sustaining and dynamic capitalism has depended upon a 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 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, and the upward redistributive effects of this economic model, that ensures, under out current political system, that these material 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.