Steve Denning from the billionaire mouthpiece, Forbes magazine, has written a fairly insightful article titled “The Surprising Truth About Where Jobs Come From“. The direct answer to the question is that young and relatively recent businesses tend to create many jobs, while older businesses (usually big corporations) do not really create many jobs. But the key insight is also that the Federal Reserve and the government generally ensure that these big corporations and the top shareholders and executives steering them are the ones that gobble up virtually the entire gains of the economy, in addition to the lackluster investment in plants and jobs.
The Fed’s role, in the most recent years, has been to pump significant liquidity into financial institutions and the large investors standing behind them, which are the large corporations. Small borrowers, businesses and working people, can only dream about receiving so much Fed cash at virtually zero interest rate. More perfidiously, what do these big corporations do with all the cash, and all the profits? They do share buybacks. They artifically increase the value of the firm, which will guarantee that more real value cash ends up in the pockets of those CEOs, whose sole incentive is to maximize shareholder value.
Shareholder value maximization has the expected consequence that investments in the real economy are neglected, which form the basis of job creation, demand and future investments. Out of a lack of investment, there will be a lack of demand and jobs, and the national income will continue to be transferred from the global working class to the global oligarchic class. If you are really upset about the lack of job creation especially in sectors of the economy that pay high wages, then we know that you need to blame the principle of shareholder value maximization, which is really the sanctification of greed for the global oligarchy.
We have been sold the idea that the financialization of the global economy would turn out to be beneficial for most people, because we would all be part of the ownership society, owning stocks, owning 401k pensions, owning houses. But that is all a hoax. I have been trying hard to think about what is exactly meant by ‘financialization’ of the economy. We can tell that when the big five banks have assets equivalent to 60% of the national GDP, there has been significant financialization, but that’s not it.
Financialization boils down to two problem areas: (1) shareholder value maximization, whereby firms maximize profits and dividends for shareholders rather than expand investments in the productive sector, which are the essence of job creation and a higher standard of living (consider that GDP growth in the most financialized economies of the West have been lower than in, say, China, where finance- until most recently at least- had been relatively contained). One aspect of shareholder value maximization is the rise of private equity finance, whereby private equity companies use debt to buy up companies, fire some workers, make the remaining workers produce more at less pay, and then resell those companies at a profit. A tragedy for workers, a great outcome for the equity partners.
(2) A sharpening social divide between debtors and creditors, as the nominal and real debt continues to explode. Consider that debt has been expanding significantly over the last couple of decades. It is the debt, the contractual claim of future repayment of a loan, which is the nexus that makes up the modern financial system. The more debt there is outstanding, the greater the level of financialization, and the sharper the division between debtor and creditor. Homeowners had taken on too much housing debt until 2008. Students continue to take out too much student debt to complete their college education. The government needs to borrow more money from the private sector to pay off the debt, which the private banking sector has incurred, and to ensure that the private-sector can sell enough products. Growing debt is the essence of increasing inequality, leads to a growing financialization of the economy and risks future financial catastrophe beginning with widespread debt default.
Bernie Sanders’ populist presidential campaign can continue to pick up so much popular support precisely because more and more people begin to realize that the entire economy is rigged in favor of the wealthiest people. How is it possible that most working people should work longer hours for lower wages despite all the gains of technology, which make workers more productive, and the nation more wealthy? It is a complete tragedy that in the wealthiest country in the history of the world, there are so many people who are needlessly living in poverty and scrambling for ways to buy their meal and find shelter.
It is becoming increasingly obvious that the current financial system and the onerous debt obligations favoring the global oligarchy at the expense of everybody else is becoming an increasing fetter to the successful development of a good society. This is a point that Marx had made 150 years ago. Marx recognized the contradiction between the productive relations and property relations in capitalist society. The productive relation is that of workers needing to band together in huge factories to create a desirable output that can potentially be enjoyed by all. But the problem is that private property does not allow that output to be enjoyed by all people, but allows it to be concentrated in the hands of a few capitalists.
By the same token has the financial system become the impediment to the full development of a good society, where all people can live in peace, prosperity and dignity. We are usually told about the essential role that finance plays in the capitalist economy, that we need to take the idle savings of those that have much money and little use and give them to those who can do a lot of useful things with that money. That is the basic role of finance, but the reality is that current finance has gone well beyond those initial limitations to actually prevent society from advancing. Why do we throw more money after banks and other financial institutions, when all they do is promote further share buyback options and not more job creation and productive investments? In addition, debt claims that have become so huge and onerous for the debtors (see Greece) do not allow countries and people to contemplate options for a better life and more opportunities. How is that useful finance?
Finance needs to be tamed and placed under democratic control. That would mean that we need more national and state-owned banks that provide credit to the productive economy, lend at moderately low interest rates, pay their executives modest salaries instead of huge compensation and stock options, and return the surplus/ profits to the state treasury to ensure other investments like education or health care. It can be done, but people need to at least rethink their approach to finance.
At the end, I want to concede that finance from time to time will run out of control in the framework of a capitalist economy, and that has to do with the nature of private property, which privileges the few creditors over the interests of their debtors. Secondly, I think that the move toward neoliberal financialization of the 1990s is connected with the realization that a well-balanced, Keynesian class compromise of the post WW II era is no longer sustainable.
Some academics make the argument that all we need to do is to tame finance and use it to benefit the development of the real economy (which I have also suggested in the last paragraph…). But what if the real economy is not subject to the kind of economic growth trajectory that we find necessary to keep the class compromise (between workers demanding regular pay rises and job security, and employers demanding stable profits) alive? If we can not hold the economic growth trajectory of years passed, then social forces develop that will want to challenge the class compromise, which will lead to the class warfare, social polarization and financialization that we have been able to observe over the last few decades. A few years of additional growth may be purchased with more finance (see China since 2008), but such growth is unstable and unsustainable.
Financialization, consisting of shareholder value maximization and growing debt claims, are merely a tool to dismantle the previous class compromise, and (a bad way) to cope in an era of a low-growth environment. Our history suggests that huge economic growth is only obtainable by enormous technological innovations or by a global war, which destroys enough means of production and the physical infrastructure, that rebuilding the country leads to huge growth in itself. The latter option is not really desirable and the first option is highly uncertain. Besides, untrammeled economic growth will exacerbate the climate change and global warming crisis, which threatens our existence as a species.
My complex rumination has to end with a simple statement: socialism or barbarism. In other words, if we want to continue to live in a habitable planet, enjoy a good standard of living, share wealth equitably, and remove ourselves from the growth (and finance) imperative, then we need to embrace a form of socialism.