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After
the New Economy
by
Standard Schaefer
Dissident
Voice
November 6, 2003
Review of After the New Economy by
Doug Henwood (New Press 2003)
With
the Nasdaq up about 40% since the beginning of the year, boosterism and
ballyhoo are back. The very ideas that
drove the bubble -- financial deregulation, monetarism, and reduced public
sector spending -- are being repacked as solutions to the problems they caused
in the first place. Fortunately, Doug
Henwood, premier muckraker on
matters economic, has returned as well.
In After
the New Economy, Henwood does not simply dismiss the bubble as the
“madness of crowds,” but as the inevitable end to an era whose policies have
not worked.
Divided
into five sections, the basic strategy of the book is to present the work of
the most famous promoters and their equally high-profile critics on such issues
as the alleged novelty of the era, the diminished status of labor, vast income
disparities, dominant myths of globalization, and the role of the financial
sector in the economy. In doing so, he
produces a solid introduction to each of these themes, stirring in wry humor
and amusing anecdotes, while never compromising his rigor. Duly covering the requisite references to
official economics, he also makes use of Jean Baudrillard, The Ramones, Herman
Melville’s The Confidence Man, and Gordon Gekko. But After the New Economy is not a
pretentious, postmodern pastiche. It is
a masterful exposé of the guiding ideology behind both left and right wing
pundits.
As
Henwood deftly takes apart various statistics, he actually makes the issues
clearer the more in depth he goes.
There is much to learn about statistical imprecision, the ideological
blind spots in certain numbers, and their tendency to de-emphasize the wealth
of those on the top. Henwood’s
explanation of productivity figures, for example, is not a broad attack on the
illusion of technological innovation.
It is a return to the issue of real working conditions. While technology changed the lives of
workers, the change was not for the better.
Even Alan Greenspan admits as much.
A careful look at Fed Chairman’s testimony reveals devotion toward
keeping wages low (and thus inflation) by increasing worker anxiety. This occurred while productivity was being
explained by technological innovation and new management techniques that were
alleged to motivate workers. Among them
was the so-called “democratization of wealth” from employee stock options. As Henwood notes, they never affected more
than 7% of all workers in California and even fewer elsewhere. The truth is that the tech boom did not
create more leisure time. It often
forced workers to increase hours, often without overtime pay, just to keep
their earnings at the national average.
This coupled with the fact that capital gains do not turn up in income
figures means inequality during the era was dramatically under-reported.
In
truth, it was the finance sector that really benefited. Freer of entanglements than they had been
since the 1920s, brokerage firms and financiers made money taking stocks to
market, sometimes twice. When IPOs
failed, companies were taken off the market (again for a fee) and brought back
again when the outlook looked brighter.
While the financial industry itself was interested in making as many
companies public as possible without regard to viability, men like Dick Grasso
were being compensated not for brilliant stewardship in promoting market
capitalism, but for looking the other way while the thievery escalated.
Wall
Street overcame its usual short-sighted tendency to seek quick earnings and
replaced it with even greater shorter-sightedness. The pursuit of instant capital gains, rather than true earnings,
particularly on the part of investment banks, fueled speculation and increased
corporate debt. While Henwood does not
mention how capital gains tax rates being lower than the rate on ordinary
income fueled the speculation, he is great on the Fed’s role. He also explains that tax cuts were hardly a
boon to the middle class. They led
Americans to pay more for insurance, healthcare, and tuition than people in
other highly developed countries.
Regarding
the ballyhoo that the US had evolved out of traditional business cycles, it is
particularly fun to read his analysis of the sacred, sober minded theories of
“legitimate” economists like Simon Kuznet.
Kuznet argued that inequality would decrease in a mature economy. Henwood turns this around and shows that the
rise in inequality was in essence a clue that a bubble was afoot.
One
of Henwood’s most urgent themes is how little the field of economics has to say
about finance. Here readers of his Wall
Street will find echoes: the
parasitic effect of the finance sector; the inefficiency of markets to turn
“financial” capital into direct, productive investment; the way these markets
decouple from the real economy and exacerbate instability. Wall Street has long hidden the difference
between “capital” invested in the financial markets and spending on actual
capital equipment. Henwood reveals the
myth of a “post-industrial” society and the inevitable low wage tendency of a
service economy. His description of how
the IMF exacerbated the Asian crisis by forcing countries to raise interest
rates is quick primer on the dangers of capital flight, all the more a threat in
a high-tech world where transactions occur almost instantaneously.
Henwood
is at his rhetorical best when he shows how Alan Greenspan’s efforts to keep
wages low sound shockingly reminiscent of the Marxist Michael Kalecki. Particularly insightful is the explanation about
how the Fed came to be such an effective tool for class warfare, especially his
characterization of chairman Paul Volker’s reign. Henwood wisely places this discussion next to the one on the
repeal of the Glass-Steagall Act, which led to the wave of corporate crime this
era is now famous for. But, his
discussion of pensions is a little skimpy.
Union pensions were regularly shanghaied for speculation by corporations
and obligations were often met by citing the portfolio’s paper-only gains. Corporations will have to make up
contributions out of their future profits.
That means they will put more pressure on their workforce, possibly even
slashing it.
The
speculative bubble, Henwood correctly asserts, was unique in one regard: as assets inflated, they fueled
unprecedented borrowing, both among corporations and consumers. These loans were collateralized on the basis
of asset inflation, whereas traditionally such loans would have been based on
income. It creates the threat of a debt
crisis, all the more serious given the deregulatory regime that created freer
capital flows. Henwood’s finance
chapter is a good political introduction to these issues. It is even better on monetary policy. By focusing on historical accounts of
Margaret Thatcher’s regime and Paul Volker’s Fed, Henwood shows that money
flows are not politically neutral. He
makes this unorthodox point convincingly without mentioning currency valuations
and the balance of payments. Had he
addressed these admittedly arcane angles, he could have made the point even
more forcefully. Still, he has to be
commended for being able to trace the role of finance in the economy at all
since Nobel Prizes are given to those who have obscured the connections.
Henwood’s
most surprising chapter is the one on globalization. He begins by gleefully examining the murkiness of the term. However it is defined, Henwood explains, the
claims for it are hardly new. In
essence, Henwood argues that globalization is really only capitalism under
another name. What is surprising is
that Henwood argues that there is little evidence that capitalism is any more
capable of producing misery in its global form.
Any
cursory look at the history of capitalism reveals that it has always had global
aims, as Henwood knows. Likewise, its
imperialistic impulses have always needed new guises. Adam Smith himself pointed out that the American colonies had
become a drain on mother England.
Henwood’s contribution to the debate is that he exposes the facile
popularizers of globalization on both the right and left. On the left, he reveals the cruel Malthusian
impulse of certain globalization critics who prescribe forced population
reductions. He pulls no punches with
Ralph Nader either. To Henwood, Nader’s
assertion that NAFTA undermines US self-sufficiency is cockamamie. America has never been self-sufficient and
even if it could be, what would be the relevancy? Trade’s effect on US hourly wages during the 1970s-1980s explains
about 25% of the decline, sizable but not overwhelming. But hourly wages in the US have risen since
NAFTA. That Henwood does not avoid
evidence that runs counter to the usual dogma of the left is a testament to his
fairness.
He
even includes evidence, though shaky, that inequality is lower in countries
that are more globally integrated. On
this point, he does not mention how globalization tends to make nations convert
their output from serving the domestic market to serving export interests. The benefits in such cases are often limited
to those along export routes, and so do not improve conditions broadly. Benefits accrue in very small sections, but
raise total averages in ways that underestimate the degree of dependency on a
client-state. Henwood is a little
dismissive about dependency theories, but only to the extent that they might
serve one of his chief targets -- those anti-globalizers who naively argue for
only local, self-sustained, agriculture based economies. Henwood’s strategy, is to give the benefit
of the doubt to his enemies’ evidence, when doing so can allow him credibility
in exposing their utopian longings for a pre-industrial world, and a nostalgia
for the rural past. Anti-globalization,
Henwood wisely reiterates, best not be anti-development.
To
make this point, however, he cites evidence that environmental regulation is
more common in countries when they broaden their industrial base. This is sometimes true. But it ignores the severe pollution in
places like Chile that resulted from IMF privatization schemes and financial deregulation. Henwood probably thinks that most New Era
flunkies think Chile is ancient history, so best to focus on the now. But the IMF’s increased power throughout the
1970s paved the way for the New Era ballyhoo.
It gave undue legitimization to privatization, deregulation, and the
monetarism he elsewhere criticizes. Had
Henwood acknowledged the route many countries take to broaden their industrial
base, he would also have had to acknowledge why environmental regulation is
more prevalent there. The situation is
usually pretty desperate by the time governments take any action.
One
could also quibble with his declaration that multinational corporations often
earn less when they seek profits abroad.
He does not account fully for the notion that larger corporations tend
to have trouble maintaining breakneck growth rates due to their sheer size.
Quibbling such as this does not damage Henwood’s larger point: both businessmen and anti-globalizers tend
to overestimate the profits going abroad will produce. In other words, there is much to be said for
basic research and development and for more efficiently designed capital
equipment. Henwood is reminding his
opponents that keeping labor costs down is not the single solution for higher
profit. Economic justice and
technological progress can co-exist.
This
sort of heterodoxy is designed to jostle those on the left as well as those on
the right. Henwood correctly sees the need for the left to get their facts
straight if they are to stay properly focused.
And he is optimistic. He simply
prefers his optimism to be well-founded.
Even in evaluating the optimism of his comrades like anti-capitalists
Antonio Negri and Michael Hardt, authors of Empire, Henwood is
cautious. Even with them, Henwood is
evenhanded. He frankly discusses their deemphasizing the role of the
nation-state, but concludes offers them as a counterweight to Luddism and
localism. In doing so, he restores the
terms of the debate. National interest
is inseparable from international concerns.
This engaged spirit coupled with fairness will no doubt lend After
the New Economy book staying power.
He may even win over a few moderates, no small accomplishment for
someone who once made his New Year’s resolution to quote Marx more often.
Standard
Schaefer is a free-lance financial journalist in
Pasadena, California. He can be reached
at ssschaefer@earthlink.net.
*
Related Article: Turmoil by
Doug Henwood