Friday, December 5, 2008

Too big = made to fail. And take democracy with it...

We're using the bailouts to rebuild giant financial institutions. But what we really need are small ones. - By Eliot Spitzer - Slate Magazine

Say what you will about Eliot Spitzer's personal life, I think he makes some pretty good points here. Although he doesn't take it so far as to connect the current economic behemoths and their natural instability as the inevitable result of capitalism itself, he's only a couple of steps away from that.

[The risk is] that current bailouts—a remarkable $7.8 trillion in equity, loans, and guarantees so far—may merely perpetuate a fundamentally flawed status quo. So far, at least, we are simply rebuilding the same edifice that just collapsed. None of the investments has even begun to address the underlying structural problems that are causing economic power to shift away from the United States, sector by sector:
  • Our trade deficit has ballooned from about $100 billion to more than $700 billion annually in the past decade, and our federal deficit now approaches $1 trillion. These twin deficits leave us at the mercy of foreign-capital inflows that may diminish as Asian nations, in particular, invest increasingly at home.
  • Our household savings rate has been close to zero—and even negative in some years—not permitting the long-term capital accumulation required for the investments we need; China's savings rate, by comparison, is an astonishing 30 percent of household income.
  • U.S. middle class income has stagnated over the past decade, while the middle class in China—granted, starting from a lower base—has seen its income growing at about 10 percent annually.
  • Our intellectual advantage could soon turn into a new "third deficit," as hundreds of thousands of engineers are being created annually in China.
  • We are realizing that the service sector—all the lawyers, investment bankers, advertising agencies, and accountants—follows its clients and wealth creation. This, not over-regulation, is the reason investment-banking activity has begun to migrate overseas.

The great irony is that our new place in the global economy is a direct consequence of our grand victory over the past 60 years. We have, indeed, converted virtually the entire world into one integrated capitalist economy, and we must now bear the brunt of serious and vigorous competition. In the immediate aftermath of World War II, the United States was essentially the only nation with financial capital, intellectual capital, skilled labor, a growing middle class generating consumer demand, and a rule of law permitting safe investment. Now we are one of many nations with these critical advantages.

While he's mostly right, there are a few other things I would like to point out. Assuming the American capitalism can weather the current financial tsunami (which is not at all guaranteed), this trend is unlikely to reverse itself. The Washington Post reported this week that access to college education in the United States gets an "F" in every single state except for California, "which received a C because of the relatively low cost of its community colleges." If you think community colleges are churning out the next world leaders, at least under the current aristocratic system, you're sorely mistaken. College tuitions and fees have risen by an astonishing 439% since the early 1980's, which is almost twice as much as medical care (251%) and three times faster than the median family income for the same time period (147%). So what are the implications of this? Only the wealthiest will be able to send their children to any institution of higher learning, thus furthering the concentration of wealth in fewer and fewer hands.

Secondly, the consolidation of companies in the financial sector is mirrored by consolidation in virtually every other industry. The Center for Corporate Policy points out that

The accelerated concentration of corporate power is reflected in the relatively small number of major media conglomerates, defense contractors, etc. Another symptom is the precipitous rise in the value of corporate mergers and acquisitions over the past 25 years – amounting to a total $1.4 trillion during the 1980s, exploding to $11 trillion during the 1990s, and continuing at an even greater frenetic pace of $7.6 trillion during 2000-2003 (including $3.4 trillion in 2000 alone) — adding up to a combined total of $20 trillion.(2)

This trend has not abated in the years since- if anything, it has accelerated. And, it's affecting all sectors of the economy. The big 3 automakes got bigger by acquiring other brands, which they are now frantically trying to spin off again (see Saab, Volvo, Saturn, Hummer, etc...). Six conglomerates control virtually all of the television, radio, publishing and newspapers in America. Saturday's Opinion page in the Wall Street Journal had this nugget to look forward to:

- Financial concentration will gain even greater momentum and influence. This is the most profound long-term consequence of the current credit crisis. Leading independent investment banks already have been taken over by large financial conglomerates that are controlled by commercial banking entities, as have giant deposit institutions. Within the next year, many smaller and medium-sized financial institutions also will lose their independent identities.

Today, more than half of all nonfinancial debt (debt held by households, nonfinancial companies and government) is held by the top 15 institutions. These were the very firms that played a central role in creating an unprecedented amount of debt by securitization and complex new credit instruments. They also pushed for legal structures that made many aspects of the financial markets opaque.

In the years ahead, the influence of these financial conglomerates will be overwhelming -- and they will limit any moves toward greater economic democracy. These conglomerates are and will continue to be infused with conflicts of interest because of their multiple roles in securities underwriting, in lending and investing, in the making of secondary markets, and in the management of other people's money. And because there will be fewer market participants of importance, the price volatility of financial assets likely will remain high.

Through their global reach, these firms will transmit financial contagion even more quickly than it spread in the current credit crisis. When the current crisis abates, the pricing power of these huge financial conglomerates will grow significantly, at the expense of borrowers and investors.

So if you're happy with the way the last year has gone in the financial industry, you'll love what's ahead. Far more troubling to me, is the consolidation within the food industry. Mega-corporations have been trying for years to patent or control basic necessities of life, including water, something that ought to horrify anyone in today's business climate. If it doesn't, imagine Lehman Brothers or Citigroup in sole control of your water supply. In Stuffed and Starved Raj Patel discusses consolidation thusly:

It's a consolidation that spans the entire food system. The ten largest companies control half the world's seed supply... Ten firms control 84 per cent of the nearlyUS$30 billion pesticide markets, with analysts pointing to a trend in concentration that will see, by 2015, only three major players in that sector. The top ten in food and beverage processing amount for 24 per cent of hte US$1.25 trillion market in packaged foods. And the market with the sharpest trends in concentration, retail, sees the top ten players accounting for 24 per cent of the US$3.5 trillion market. (p.102)
Still, the government thinks it's good policy to hand out billions in subsidies and incentives to the megafarms as part of the travesty known as the Farm Bill. The end result? Virtually all fast food is made from corn- your burger included. High fructose corn syrup makes up the soda, cows are raised on a diet of corn, fries are cooked in corn. "Of 160 food products we purchased at Wendy's throughout the United States, not 1 item could be traced back to a noncorn [sic] source. Our work also identified corn feed as the overwhelming source of food for tissue growth, hence for beef and chicken meat, at fast food restaurants," says a new study published in the Proceedings of the National Academy of Sciences.

Thirdly, Spitzer points out that our "grand victory" was conversion of "virtually the entire world into one integrated capitalist economy", but he neglects the extent to which that conversion was an unwilling one. We have created a world full of enemies, ready to mete out justice to their imperialist overlords that have been exploiting their natural resources, their environments, their labor, and their very cultures in the name of "economic growth". Of course, these giant mega-corporations have exploited those of us in the U.S. as well, but our travails are of little comfort to those in the massively impoverished global south.

I will close with a quotation from Robert Reich in his book Supercapitalism that encapsulates a good portion of my argument.

Supercapitalism has triumphed as power has shifted to consumers and investors. They now have more choice than ever before, and can switch ever more easily to better deals. And competition among companies to lure and keep them continues to intensify. This means better and cheaper products, and higher returns. Yet as supercapitalism has triumphed, its negative social consequences have also loomed larger. These include widening inequality as most gains from economic growth go to the very top, reduced job security, instability of or loss of community, environmental degradation, violations of human rights abroad, and a plethora of products and services pandering to our basest desires. These consequences are larger in the United States than in other advanced economies because America has moved deeper into supercapitalism. Other econoimes, following closely behind, have begun to experience many of the same things.

Democracy is the appropriate vehicle for responding to such social consequences. That's where citizen values are supposed to be expressed, where choices are supposed to be made between what we want for ourselves as consumers and investors, and what we want to achieve together. But the same competition that has fueled supercapitalism has spilled over into the political process. Large companies have hired platoons of lobbyists, lawyers, experts, and public relations specialists, and devoted more and more money to electoral campaigns. The result has been to drown out voices and values of citizens. As all of this has transpired, the old institutions through which citizen values had been expressed in the Not Quite Golden Age-- industry-wide labor unions, local citizen-based groups, "corporate statesmen" responding to all stakeholders, and regulator agencies-- have been largely blown away by the gusts of supercapitalism.

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