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
Abbe Gluck abbe.gluck 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 msl46 at law.georgetown.edu
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
Neil Siegel siegel at law.duke.edu
Brian Tamanaha btamanaha at wulaw.wustl.edu
Mark Tushnet mtushnet at law.harvard.edu
Adam Winkler winkler at ucla.edu
In his inaugural address, President Obama stated that "a nation cannot prosper long when it favors only the prosperous." But virtually every critical personnel choice he's made in recent months suggests little, if any, concern about addressing the root causes of American inequality. The turn to Jeff Immelt and Bill Daley reminds me of the worldview of Larry Summers, as summarized by the president of a well-connected international advisory firm:
[While traveling in Chile,] I thought back to [a] conversation with Lawrence Summers at the Charles Hotel in Cambridge, Massachusetts. Summers had suggested that the reason the most economically successful members of society are getting so much more might be that the world is actually becoming more efficient: the system is rewarding the more skilled at proportionally higher rates, giving those with access to technology greater rewards for their heightened productivity, and giving those leading enterprises of growing scale greater returns for their companies' incremental growth. Unfettered markets are doing their job. Isn't it possible, he was positing, the overachievers are now finally able to capture their fair share of returns given their relative talents, productivity, and contribution of valued economic outcomes? (55)
A Summersian economist might lament the mere $101 million earned by Verizon's CEO over the past 5 years. Between 2006 and 2007, Mexican communications mogul Carlos Slim Helu grew his fortune by $19 billion, a sum equivalent to about 2.5 percent of Mexico's GDP. Perhaps if Verizon's CEO can make that much, he'll finally be able to capture his fair share, too. Obama's choice of the Jeff Immelt to head the President’s Council on Jobs and Competitiveness is only the latest concession to this mindset. As Senator Sanders reminds us, GE has all too often considered China its key target for investment, and the US a backstop for failed speculation:
[Immelt has stated that] "You can take an 18-cubic-foot refrigerator, make it in China, land it in the United States, and land it for less than we can make an 18-cubic-foot refrigerator today ourselves." Gee. A couple of years ago when GE had some difficult economic times, and they needed $16 billion to bail them out, I did not hear Mr. Immelt going to China . . . . I heard Mr. Immelt going to the taxpayers of the United States for his welfare check.
Mike Konczal has much more on the bailout of GE Capital. A work called "Financialization and Strategy" describes the core GE business model, which includes "run[ning] the industrial business for earnings" while "add[ing] industrial services to cover hollowing out of the industrial base," and "rely[ing] on large-scale acquisition to prevent like-for-like comparisons and to increase opacity and the power of narrative." In other words, just keep the stock prices going up; pay no attention to the grander corporate strategy of shifting production to places with wage repression and minimal environmental and labor standards (or tax havens).
Suspicion of Aggregates
What explains these trends? I think the key problem is that the President can't get reelected unless people perceive the economy to be improving. Crude and misleading measures of economic growth drive those perceptions. The media monitors every blip of the stock market, rarely if ever reporting that the richest 10% own about 85% of all outstanding stocks. Extreme inequality also goes unreflected in GDP figures. There are about 95,000 ultra-high-net-worth-individuals (UHNWI) in the world (those with financial assets in excess of $30 million). Imagine how many unemployed individuals would have to join the labor market to match the impact on US GDP of a 10% increase in our UHNWIs' earnings.
Extreme inequality should make us suspicious of all aggregate figures. As the first Citibank plutonomy report put it,
[T]he top 1% of households account for 40% of financial net worth, more than the bottom 95% of households put together. . . .Plutonomy plus an asset boom equals a drop in the overall savings rate [due to more consumption at the top, which no longer has to worry about saving]. . . .Let’s look at some of the coolest figures that amplify and verify this idea. . .
In a plutonomy there is no such animal as “the U.S. consumer” . . . [T]here are rich consumers, few in number, but disproportionate in the gigantic slice of income and consumption they take. There are the rest, the “non-rich”, the multitudinous many, but only accounting for surprisingly small bites of the national pie. Consensus analyses that do not tease out the profound impact of the plutonomy on spending power, debt loads, savings rates (and hence current account deficits), oil price impacts etc, i.e., focus on the “average” consumer are flawed from the start. It is easy to drown in a lake with an average depth of 4 feet, if one steps into its deeper extremes. . . . The Plutonomy Stock Basket outperformed MSCI AC World by 6.8% per year since 1985.
The report concludes that "we think the plutonomy is here, is going to get stronger, its membership swelling from globalized enclaves in the emerging world." When the top 5% account for 35% of consumption in the US, there is no way to improve "the economy" (as measured by stock prices and GDP) without intensifying the very inequalities that gave rise to the crisis in the first place. A weak labor market can't bargain for the gains from productivity---they are going to the very top. Since the midterms, the President has shown little inclination to fight to tax those gains; rather, he cemented them into place with his recent tax deal. The inequality-intensifying dynamic is now self-reinforcing: those who bankrolled the fight against Obama's modest efforts to tame inequality are more powerful thanks to their political victory in November.
Asset Price Keynesianism: Welfare for the Wealthy
As was noted earlier, the economic strategy of the US now resembles that of GE: financialized growth that primarily benefits the wealthiest. Robert Brenner (who called the finance bubble in 2003) explains the repeated resurgence of "asset price Keynesianism:"
To stop the bleeding and insure growth, the Federal Reserve Board turned, from just after mid-decade [in the 1990s], to the desperate remedy pioneered by Japanese economic authorities a decade previously, under similar circumstances. Corporations and households, rather than the government, would henceforth propel the economy forward through titanic bouts of borrowing and deficit spending, made possible by historic increases in their on-paper wealth, themselves enabled by record run-ups in asset prices, the latter animated by low costs of borrowing.
The substitution of asset price Keynesianism for the stodgy old fashioned version from 1996 was unable, any more than its predecessor, make any impression on the implacable underlying trend toward system-wide economic enfeeblement. It could not, however, but profoundly increase the system’s exposure to crisis. . . .
Companies’ reduced prospects for making profits by means of capital accumulation only enhanced their motivation to pay out their surpluses to their stockholders, rather than invest them in new plant and equipment or new hiring. While Greenspan, Bernanke, and Paulson sought to outdo one another in touting the economy’s health, corporations expressed their own appreciation of their economic prospects by making dividend payouts as a percentage of gross profits (net profits plus depreciation), that were entirely unprecedented. Meanwhile, they engaged in an historic splurge of financial investment.
There is now no necessary relationship between corporate profits and US growth, or between executives' salaries and those of their employees. The President has just appointed as chief of his Jobs Council one of the people who exemplified the breaking of that connection. Expect more "compulsory technology transfer" from the Chinese government, and more blaming of American workers for failing to be "competitive enough." No one will ask whether America's superclass will make itself more competitive by cutting its own wages and benefits.
I believe that the President's economic team will continue to suffer a crisis of credibility so long as no one in it appears to have a real, substantial, personal interest in US growth. Those with tens of millions of dollars in the bank have very little to lose if ever more US citizens are unemployed. In fact, their companies will probably make higher profits to the extent they can drive a harder bargain with an increasingly desperate workforce. Can Jeff Immelt responsibly serve his shareholders if he chooses any other course? Posted
by Frank Pasquale [link]