[lbo-talk] Fitch and Brenner

SA s11131978 at gmail.com
Mon Feb 16 20:33:48 PST 2009


http://www.wpunj.edu/~newpol/issue46/Fitch46.htm

I just read this long article, above, by Robert Fitch in the latest New Politics. (A really good journal, BTW). It's on The Current Crisis.

Sorry for length, but I have to get this off my chest. To me, Fitch's piece, along with the Robert Brenner interview that Patrick Bond pointed to a couple weeks ago (below), demonstrate the deep weaknesses of what we might call the emerging Marxist analysis of the crisis. I like Fitch and Brenner - when I see their bylines I always read the article. But their analyses of the crisis just don't make sense.

Both of them start with the same obligatory premise: Those bourgeois myopes who think the crisis somehow originated in finance have once again failed to see the Deeper Mechanisms at work. Really, it's all about the rate of profit. It must be.

Here's Brenner's argument, from the interview Patrick posted:

http://www.hani.co.kr/arti/society/society_general/335869.html


> BRENNER What mainly accounts for [the "long downturn"] is a deep, and
> lasting, decline of the rate of return on capital investment since the
> end of the 1960s. The failure of the rate of profit to recover is all
> the more remarkable, in view of the huge drop-off in the growth of
> real wages over the period. The main cause, though not the only cause,
> of the decline in the rate of profit has been a persistent tendency to
> over-capacity in global manufacturing industries. What happened was
> that one-after- another new manufacturing power entered the world
> market--Germany and Japan, the northeast Asian NICS, the southeast
> Asian Tigers, and, finally, the Chinese Leviathan. These
> later-developing economies produced the same goods that were already
> being produced by the earlier developers, only cheaper. The result was
> too much supply compared to demand in one industry after another, and
> this forced down prices and in that way profits. The corporations that
> experienced the squeeze on their profits did not, moreover, meekly
> leave their industries. They tried to hold their place by falling back
> on their capacity for innovation, speeding up investment in new
> technologies. But of course this only made over-capacity worse. Due to
> the fall in their rate of return, capitalists were getting smaller
> surpluses from their investments. They therefore had no choice but to
> slow down the growth of plant and equipment and employment. At the
> same time, in order to restore profitability, they held down
> employees‘ compensation, while governments reduced the growth of
> social expenditures. But the consequence of all these cutbacks in
> spending has been a long term problem of aggregate demand. The
> persistent weakness of aggregate demand has been the immediate source
> of the economy’s long term weakness. [...]
> Since the start of the long downturn, state economic authorities have
> tried to cope with the problem of insufficient demand by encouraging
> the increase of borrowing, both public and private. At first, they
> turned to state budget deficits, and in this way they did avoid really
> deep recessions. But, as time went on, governments could get ever less
> growth from the same amount of borrowing. In effect, in order stave
> off the sort of profound crises that historically have plagued the
> capitalist system, they had to accept a slide toward stagnation.
> During the early 1990s, governments in the US and Europe, led by the
> Clinton administration, famously tried to break their addiction to
> debt by moving together toward balanced budgets. The idea was to let
> the free market govern the economy. But, because profitability had
> still not recovered, the reduction in deficits delivered a big shock
> to demand, and helped bring about the worst recessions and slowest
> growth of the postwar era between 1991 and 1995. To get the economy
> expanding again, US authorities ended up adopting an approach that had
> been pioneered by Japan during the later 1980s. By keeping interest
> rates low, the Federal Reserve made it easy to borrow so as to
> encourage investment in financial assets. As asset prices soared,
> corporations and households experienced huge increases in their
> wealth, at least on paper. They were therefore able to borrow on a
> titanic scale, vastly increase their investment and consumption, and
> in that way, drive the economy. So, private deficits replaced public
> ones. What might be called “asset price Keynesianism” replaced
> traditional Keynesianism. We have therefore witnessed for the last
> dozen years or so the extraordinary spectacle of a world economy in
> which the continuation of capital accumulation has come literally to
> depend upon historic waves of speculation, carefully nurtured and
> rationalized by state policy makers--and regulators-first the historic
> stock market bubble of the later 1990s, then the housing and credit
> market bubbles from the early 2000s.

So Brenner is saying:

(1) There was a crisis of profitability due to overcapacity (2) The profitability crisis forced capitalists to cut wages and social spending (3) The wage cuts led to insufficient aggregate demand (4) To address the demand problem, the authorities engineered or permitted a series of bubbles which allowed the growth of household credit to compensate for workers' declining wages

Here's the problem: There has been no reduction in wages. There's been a redistribution of wages from low-paid to high-paid workers. The wage share has not declined. It just hasn't. Here is the wage share of total corporate wage-and-profit income by decade since 1930:

all corporate nonfin corporate 1930's 87.7% 89.7% 1940's 75.5% 76.3% 1950's 77.0% 78.4% 1960's 78.0% 79.6% 1970's 83.2% 85.2% 1980's 85.7% 87.0% 1990's: 83.5% 85.9% 2000-07 83.9% 86.4%

Clearly, capitalists have *not* been cutting wages in order to restore profits. Wages of some workers have no doubt been cut to boost the pay of managers and executives. But the pay of managers and executives is not a part of corporate profits. Every dollar of extra income captured by a CEO is a dollar that *could* have gone to the shareholders' profits in the form of higher dividends, or retained earnings, but did not.

Brenner has been promoting the idea of a long-term crisis of declining profitability, due to overcapacity, for the past decade. Then this crisis happened and now he wants to show that his overcapacity thesis can explain the crisis. So he's constructed the causal chain above. Now, I think it's true that stagnating wages - for some workers - created a dynamic favorable to the unsustainable growth of consumer credit (which was a cause of the crisis). But if Brenner were to acknowledge that those stagnating wages were actually caused by rising inequality *within* the wage bill - not a redistribution from wages to profits - it would derail his whole effort to pin the crisis on the dynamics of profitability. For God's sake, Brenner would sound like Louis Uchitelle! Can't have that. This dilemma has ended up crippling his analysis.

Then there's Fitch's piece. Here are his nut grafs:


> The long boom that began in 1983 saw astonishing reversals of economic
> structure -- particularly in the United States where the FIRE industry
> displaced manufacturing and all others -- as the leading industry by
> GDP share. In 1983, at the beginning of the boom, manufacturing was
> still larger than FIRE. By 2007, the FIRE sector had become 1.8 times
> the size of the manufacturing sector.21 There were equally bizarre
> reversals of economic fortune, as the United States once the world's
> prime creditor nation, became its greatest debtor nation, with poor
> nations -- most prominently China -- among its largest creditors.
>
> Yet despite these startling novelties, the present boom has ended in
> overproduction and over-consumption just like the classic booms of the
> past. Consider the world depressions that began in 1837, 1873 and
> 1929. For these crises, like the implosion of 2007-08, the following
> seven stage sequence can serve as a model:
>
> 1. A fall in the rate of accumulation, or at least a fall in the
> rate of acceleration; actual profit rates may even rise just before
> the collapse; but the high rates are sustained by a slowing down of
> accumulation rates.
>
> 2. Formation of surplus capital hoards. Unable to return "home" for
> productive re-investment, the surplus seeks to preserve itself by
> moving into financial channels.
>
> 3. Capital over-supply forces down interest rates, clearing the way
> for asset inflation and financial excess. First because low interest
> rates automatically increase the value of fictitious capital in land
> and in securities; and second because low interest rates cause risk
> premiums to fall, promoting riskier behavior as rentiers chase yield.
>
> 4. Asset bubbles form as speculators are attracted by the seemingly
> inexorable rise in asset prices. Prices accelerate further because of
> rampant bubble psychology.
>
> 5. The chain letter snaps. Housing prices burst the bounds of
> household incomes. Stock prices soar far beyond historic
> price/earnings ratio. Prices collapse. A local financial crisis breaks
> out among the most vulnerable borrowers, who can no longer re-finance,
> leaving the most recent round of developers and mortgage holders
> unable to pay off their loans, and/or stock speculators can't cover
> margin calls from their brokers. Asset prices collapse, taking down
> credit suppliers.
>
> 6. A spreading of the financial ripples outward from their point of
> origin, as asset deflation produces a global panic. And finally -- but
> not yet of course in 2007-08:
>
> 7. Protracted economic stagnation; widespread double-digit
> unemployment rates; falling wages and commodity prices; growing
> economic nationalism and a tendency towards "organized capitalism."
>
> There are two main differences between this seven step scenario and
> the mainstream accounts. Regulatory and monetary explanations see the
> problem as U.S. centered. Obviously the United States can't be ignored
> -- the meltdown began here. But the emphasis must be on global
> imbalances. True, the United States is over-consuming. But the rest of
> the world is over-producing. The second difference is the emphasis on
> how excesses in the real sector -- the capital glut and the resulting
> low interest rates -- produce wilding in the FIRE sector. By contrast,
> mainstream models reverse the causal arrow so that financial and real
> estate excess bring down an essentially healthy real sector.

This is a deep misunderstanding of the nature of the financial sector. (It's interesting, BTW, that Brenner calls the post-1973 period "the long downturn" while Fitch calls the post-1983 era "the long boom." Not sure what that means.) The misunderstanding can be seen in crucial point #2 - the magical moment when the crisis supposedly originating in the real economy suddenly sublimates itself into a financial problem. According to Fitch, a decline in profitable investment outlets generates "Formation of surplus capital hoards. Unable to return 'home' for productive re-investment, the surplus seeks to preserve itself by moving into financial channels."

This point of confusion has been raised on the list before. In fact, Patrick repeated this notion when he linked to Brenner's interview a couple weeks ago. He wrote: "under conditions of overaccumulation..., there 'wasn't enough investment' in the 1980s-2000s, because of overinvestment in the prior era. Hence underinvestment in the real sector accompanied hyperinvestment in the financial sector."

"Underinvestment in the real sector accompanied hyperinvestment in the financial sector." I think it's worth going over this fallacy again.

In Fitch's version, the problem lies in the use of the phrase "surplus capital hoards." What does he mean by "capital"? Obviously he does not mean fixed capital - plant, equipment, software, inventory. That type of capital can't be "moved into financial channels." (You can't buy a mortgage-backed security with a stamping press.) He's talking about *money*. It was money that "sought to preserve itself by moving into financial channels." But moving money into financial channels does *not* prevent money from being moved into real productive investment. A surge of money into "financial channels" in no way entails that money is being diverted away from productive investment. _That is because money is not a scarce commodity._ It is not a "rivalrous good." Money used for one purpose does not prevent money from being used for another purpose. Money can be created costlessly by banks, including central banks. Its supply can zoom upward. And even if the money supply doesn't increase, greater financial transaction volumes can be accommodated simply by increasing the velocity of the existing money supply.

So once again, if we observe a massive surge in the volume of speculative financial transactions, that does *not* tell us that capitalists currently perceive "real" investment to be unprofitable.

In fact, financial bubbles are almost always accompanied by a surge of real investment in those sectors of the real economy that the bubble is focused on. In the 1990's it was massive amounts of high-speed fiber-optic communications lines. In the 2000's it was real, solid honest-to-god houses that were being built - millions of them, in the unlikeliest places. By generating hugely overinflated asset prices in particular sectors, bubbles cause a temporary, though large, misallocation of resources toward those particular sectors of the economy, which then causes a hangover after the bubble bursts, as demand takes a long time to catch up with the excess capacity in those particular sectors. Again, this happened with fiber optic lines and it is happening now with houses.

As proof of the alleged speculative displacement of the real economy, Fitch cites the big increase in finance's share of GDP relative to the manufacturing sector. But this *relative* measure doesn't make his point for him. To demonstrate that the expansion of finance has been crowding out manufacturing, he must show that there has been "not enough growth" in manufacturing in *absolute* terms. This is because logically, finance's share of GDP could outpace manufacturing's share even if manufacturing were growing spectacularly; finance would just need to grow *more* spectacularly. As I noted on the list a couple weeks ago, the BEA's quantity index for manufacturing value added doubled - in per capita terms - in 1980-2007. In other the words, per person, the US economy produces twice as much manufacturing output (value added) as it did a generation ago. I don't know if that would satisfy Fitch, but it certainly doesn't seem like stagnation to me.

The problem is that on top of all that manufacturing output, US consumers purchased a lot of additional output from overseas, on credit. The problem is not that we "produce too little" in absolute terms; the problem is that we consume too much relative to the abundant amount that we *do* produce. This is a financial problem. Against the "monetary and regulatory explanations," Fitch writes: "True, the United States is over-consuming. But the rest of the world is over-producing." But the US is "over-consuming" relative to its *own* production and the rest of the world is "over-producing" relative to *its* own consumption. Fitch does absolutely nothing to show that *total* worldwide consumption is too low or that *total* worldwide production is too high.

Now, I admit, this fails to explain how FIRE's output could increase by so much in the U.S. Okay, let's think about this.What is the Commerce Department measuring when it measures FIRE's contribution to GDP? Basically, it's measuring wages plus profits in the financial sector. Where does all that money for wages-and-profits come from? It comes from FIRE collecting more money from customers and counterparties than it pays out to suppliers and counterparties. In other words, FIRE earns a money surplus.

How does FIRE manage to generate this money surplus? In two ways. The first is what might be called "fee-for-service." For example: I want a physically safe place to put my money, so I open a checking account. The bank charges me $5 a month for this useful service. This is no different in principle from paying the babysitter $50 to watch your kid. The other method, which is unique to the financial sector, is what might be called "money-out-of-money." This almost always involves some variation on borrowing short and lending long. Finance companies' surpluses generated via this method go up when (a) short-term interest rates fall; (b) long-term interest rates rise; or (c) there is an overall expansion of the *scale* of their operations.

This last point is important. Increasing profits via Method #2 - money-out-of-money - does *not* require using up scarce societal resources. To see this, imagine a bank. It has depositors. It makes money by paying depositors interest on their savings and then lending or investing the money elsewhere at a higher rate of return. Now imagine that all of a sudden every one of the bank's depositors comes into the bank and doubles the size of their accounts by depositing extra money. Even if the bank just parks all that extra money in Treasury bonds, it increases its annual money surplus significantly. It can now increase wages and profits. _The bank's share of GDP has increased._ Yet it did not need to hire a single additional employee or pay for a single dollar of additional fixed investment.

So instead of focusing on the rather meaningless figure of FIRE's share of GDP, let's look at the share of real, scarce resources that the FIRE sector consumes. When you walk into your friendly local bank or into Goldman Sachs' headquarters, what scarce resources do you see around you? Basically: (1) the labor of human beings; and (2) lots of "stuff" - computers, desks, office supplies, real estate, etc. The Commerce Department calls the latter intermediate inputs. Below is the FIRE sector's share of total employees and total consumption of intermediate inputs since 1987. (That's as far back as the intermediate inputs numbers go):

intermediate inputs employees 1987 11.0% 6.1% 1988 11.1% 6.1% 1989 11.3% 6.0% 1990 11.5% 5.9% 1991 11.6% 5.9% 1992 11.3% 5.8% 1993 11.6% 5.8% 1994 11.9% 5.8% 1995 11.6% 5.6% 1996 12.2% 5.6% 1997 12.2% 5.7% 1998 12.7% 5.7% 1999 13.1% 5.7% 2000 13.6% 5.7% 2001 13.0% 5.7% 2002 12.7% 5.8% 2003 12.9% 5.9% 2004 13.6% 5.9% 2005 14.0% 5.9% 2006 14.3% 5.9% 2007 14.3% 5.8%

So in the last 20 years, FIRE has increased its share of intermediate-input consumption by a grand total of 3.3% and its share of employees has shrunk by 0.3%. If we weight these according to the respective shares of intermediate inputs and employee compensation in national gross output (about a 3-to-2 ratio), we find that FIRE has gobbled up an extra (gasp!) 2% of society's economic resources.

I just don't see the payoff from this obsession with the idea that lurking behind every financial crisis is a crisis of profitability. This is the first serious global economic crisis since the collapse of socialism. For the left, it's an opportunity to hit the reset button, to start fresh. Why should people believe us if we keep saying the same things we've said for 150 years?

SA



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