an unanticipated consequence of
Jack M. Balkin
Jack Balkin: jackbalkin at yahoo.com
Bruce Ackerman bruce.ackerman at yale.edu
Ian Ayres ian.ayres at yale.edu
Mary Dudziak mary.l.dudziak at emory.edu
Joey Fishkin joey.fishkin at gmail.com
Heather Gerken heather.gerken at yale.edu
Mark Graber mgraber at law.umaryland.edu
Stephen Griffin sgriffin at tulane.edu
Bernard Harcourt harcourt at uchicago.edu
Scott Horton shorto at law.columbia.edu
Andrew Koppelman akoppelman at law.northwestern.edu
Marty Lederman marty.lederman at comcast.net
Sanford Levinson slevinson at law.utexas.edu
David Luban david.luban at gmail.com
Gerard Magliocca gmaglioc at iupui.edu
Jason Mazzone mazzonej at illinois.edu
Linda McClain lmcclain at bu.edu
John Mikhail mikhail at law.georgetown.edu
Frank Pasquale pasquale.frank at gmail.com
Nate Persily npersily at gmail.com
Michael Stokes Paulsen michaelstokespaulsen at gmail.com
Deborah Pearlstein dpearlst at princeton.edu
Rick Pildes rick.pildes at nyu.edu
Alice Ristroph alice.ristroph at shu.edu
Brian Tamanaha btamanaha at wulaw.wustl.edu
Mark Tushnet mtushnet at law.harvard.edu
Adam Winkler winkler at ucla.edu
The economy has now reached a "new normal" of soaring profits and stalled employment. Why aren't stock market gains, bank bonuses, and rising CEO pay translating into more jobs for American workers? Firms could be buying more labor-saving technology or speeding up production. They may also be investing overseas. Brazil, India, and China have more growth potential than the US. As Keynes stated, "Owing to [a developed economy's] accumulation of capital already being larger . . . the opportunities for further investment are less attractive unless the rate of interest falls at a sufficiently rapid rate." While American securities markets have long been reputed to be far more transparent and law-governed than "developing" markets, the gap may not seem so great nowadays. This will be a painful transition for the U.S., all the more so due to our repeated failure to follow stabilizing models of industrial policy. But it is an overdue "rebalancing" of global economic flows.
More troubling is the possibility that buying power is being segregated by the very wealthy into closed circuits of spending and investment (among themselves). Inequality has now become so extreme that it's difficult to imagine how, say, America's Fortunate 400 could spend their money. Consider this analysis of Sandy Weill's recent purchase of a $31 million estate:
Although the value of most housing in Sonoma County, in the heart of the wine country, is down 30 to 50 percent, Weill was willing to pay close to the asking price for his new property. And why not? As the San Francisco Chronicle quoted one Coldwell Banker real estate agent, the sale “is not an indicator of an emerging real estate recovery, but rather the ability of the world’s wealthiest individuals to buy what they desire.”
In a transaction like Weill's, some real estate agent(s) probably made a good commission. But the home's former owner may just use that $31 million to buy a Damien Hirst work. Or stocks. Or gold. The possibilities are limitless, of course, but as the top 5% of earners now account for 35% of consumer spending (and a far higher proportion of investing), we might learn something from modeling ideal-typical economic decisions of the very wealthy.
In the case of the art splurge, a gallery may have a big payday, and spend some of that money in the less rarefied economy. In the case of stocks, the public often thinks of such funds as inevitably invested in more or better equipment and staff, to enable the growth of a company. But maybe the firm just piles up cash.
Already-mined gold appears to be the ultimate sink of value. Of course, the seller of the gold has the cash, which she or he might spend. But a long term appreciation of the price of gold could signal the hope of the rich to opt out of currencies altogether, and to develop their own private circuit of "hard" value.
Luxury goods of enduring value might fill a similar role; as Swiss watchmaker Patek Philippe puts it: "You never actually own a Patek Philippe. You merely look after it for the next generation." The FT's weekly guide "How to Spend It" may actually instruct "How to Save It," assuming some connoisseur will eventually want whatever "eclectible" (definition: a "desirable acquirable") one happens to purchase. (Admittedly, the "Bespokesperson" on the site advises the ultimate indulgence of customization.) Finally, exotic financial instruments offer another venue for speculation for those rich enough to take a gamble.
When Finance Mostly Finances Finance
But is this process sustainable? A Green Tory might advocate for more money circulating in the economy's stratosphere: a luxury handbag costing $80,000 may have less of a carbon footprint than, say, 32 Tata Nanos. I am uncomfortable with that justification. For anyone concerned about the environment, it would be far better to see the handbag consumption turned to sustainable energy investment, rather than continuing as a diversion of spending power away from the poor. Moreover, if domestic and international inequality continues at current levels, it will reinforce the US recession. Even for those who think the average US citizen is too rich anyway, the probable political consequences of perpetual stagnation are frightening.* Money is being drained away from an ordinary economy into an economic stratosphere with a logic of value all its own.
In an extended essay on financialization (first delivered as the keynote address at the Fifteenth National Conference on Economics of the Brazilian Political Economy Society (SEP)), John Bellamy Foster responds to Keynes and observes how increasingly segregated circuits of consumption and production affect the economy:
In the 1970s total outstanding debt in the United States was about one and one-half the size of GDP. By 2005 it was almost three and a half times GDP and not far from the $44 trillion world GDP. Speculative finance increasingly took on a life of its own. Although in the prior history of the system financial bubbles had come at the end of a cyclical boom, and were short-term events, financialization now seemed, paradoxically, to feed not on prosperity but on stagnation, and to be long lasting. Crucial in keeping this process going were . . . central banks . . . assigned the role of “lenders of last resort,” with the task of bolstering and ultimately bailing out the major financial institutions whenever necessary (based on the “too big to fail” principle). . . .
[As] Jan Toporowski (professor of economics at the University of London) observed in The End of Finance, '[We] have seen the emergence of an era of finance that is the greatest since the 1890s and 1900s. . . . In an era of finance, finance mostly finances finance.' . . . We can picture this dialectic of production and finance, following Hyman Minsky, in terms of the existence of two different pricing structures in the modern economy: (1) the pricing of current real output, and (2) the pricing of financial (and real estate) assets. More and more, the speculative asset-pricing structure, related to the inflation (or deflation) of paper titles to wealth, has come to hold sway over the “real” pricing structure associated with output (GDP). Hence, money capital that could be used . . . within the economic base is frequently diverted into . . . speculation in asset prices.
To put it more concretely: if a very wealthy person wants to maintain his spending power today, he may be far more interested in buying gold, collectible handbags, or commodities futures, than investing in a green energy company or even, say, Ikeas in China. A cautious investment manager following the herd may want, above all else, to deal with a counterparty who is "too big to fail," guaranteed by the coercive power of the state and backing of the Fed or Treasury to deliver whatever payments it commits to. Such counterparties are most often found on Wall Street. As Robert Kuttner of The American Prospectreports, "Fitch Ratings gives Bank of America and Citigroup 'stand alone' ratings of C/D when external government support is not included but actual ratings of A-plus when it is."
This month, Kuttner's magazine focused on phantom green jobs, noting that the US has done little to guarantee a market for renewable energy sources. I am under no illusions that current politicians will change this; even the President has failed to take many important steps to change government procurement policies in a green direction. It also appears that some degree of TBTF backing is inevitable. As its price, the government should insist that TBTF firms take measurable steps toward rebuilding America's real economy---rather than endlessly siphoning more of our human and financial capital into complex games of speculation.