What Goes Around

Read any news story about the onrushing ‘fiscal cliff’ and somewhere within it will be a reference to the massive damage it is doing to business confidence. A major, if not the only, reason for limp business hiring and investment is the supposed uncertainty that the ‘cliff’ implies. Financial writers especially speak of the ‘cliff’ as if it were some huge dark cloud lurking in the distance about to engulf and swallow whole businesses and their profits.

Elsewhere we read that the impasse is ideological – it is caused by a titanic clash between two views of government. The big versus small argument that has torn American politics apart for the past four decades has reached its boiling point. The ‘cliff’ debate will determine, for now at least, which side wins. So there’s a lot to lose. No one wants to be the first to blink.

Other writers are now beginning to write about the inordinate shift in the way GDP is parceled out. It comes as a shock to them – quite why I don’t know since it’s a longer term trend – that profits are taking an ever larger chunk. Wages are being shunted to the side. The division of our collective efforts is ever more being scarfed up by the owners of assets. The contributors of labor are getting the shaft. This has apparently bamboozled some. After all, they see a historically low interest rate environment as one is which the returns to capital ought also be low. This point of view, I think, inherently assumes that the interest rate and profits are somehow determined by market magic. And if market magic – the supply and demand for investments – manifests itself in the form of low interest rates, then business ought to find it difficult to decouple profits from them. In this view market magic ought also determine profits.

Not so.

Interest rates and profits are more socially constructed. They are determined intentionally within the business community. The impact of market magic is tenuous. In the case of profits is is almost non-existent.

And this is where all these pieces of news start to fit together.

What goes around comes around.

About four decades ago big business started to throw its political weight about. It started to channel cash into right wing think tanks. It began to build up its lobbying capacity. It sought to roll back what it saw as the evils of regulatory government. To do this it, naturally, aligned itself with the Republican party which was also going through a thorough re-invention. The party of Lincoln was morphing into the party of Reagan. The two could not be more different.

Up until this change America had lived in the glow of a post-war social contract that de-emphasized big business, and especially finance, and sought to divvy out the economic rewards more evenly between labor and capital. Of course the tensions were abundant, but the balance was, by and large, honored by both major parties. There was a broad political consensus within which the differences were acute but not shattering.

Reagan changed all this.

He sought actively to destroy the post-war bargain. The energy that carried him forward was fed by the sudden shift in our political landscape. The deep south, once a Democratic stronghold, suddenly became the epicenter of modern Republicanism. This shift was entirely explained by racism and cyclical rise of evangelical religious fervor – one of America’s frequent ‘awakenings’. Though these two political forces appear different they can be united by a common theme: hatred of Washington and big government. After all it was Washington that imposed the hated Civil Rights Act, and it was Washington that undoing traditional conservative family values with its torrent of liberal actions aimed at equality of various sorts.

Big business saw its opportunity and allied itself with the Reagan coalition, becoming the third part of a grand coalition.

It was difficult to find policies that this cobbled-together coalition could all support, but opposition to big government and its intrusions into private life was the most potent. So that has been the banner under which the Republicans have fought every battle since. Tactically this has been expressed as opposition to anything that smacks, or even hints at, socially progressive activity. Hence the votes against the minimum wage, unemployment assistance, bank bail-outs, welfare of any kind, and so on. The sharp end of the attack was always the desire to lower taxes. For by reducing the flow of revenue into Washington the Republicans could starve big government even if they did not control sufficient power to kill it all together.

But while the attack on big government was the nice unifying theme, big business was not ideologically committed to its total destruction. It needs government. Business has a more complex relationship with Washington than the libertarians, the racists, or the socially conservative. It wants protection. It craves the arbitrary decisions that demonize foreign competition or carve out monopolies. It wants privileges of every kind to protect itself from the very market forces that it publicly swears to live by. The banks thrive off of subsidies even while they strut their market credentials. The big auto companies love to be bailed out even while they ship jobs abroad. Manufacturers want environmental and product protection regulations eased if not eliminated. But they want import quotas too. The relationship is tense and muddled. The best way, big business learned, to get its way was simply to buy politicians. Hence the recent flood of cash into elections. By debasing democracy business could tilt the balance of power in its favor and complete the political march it began back in the late 1970’s.

But.

What goes around comes around.

The result of the take over by business has begun to show up in the economy. By squeezing wages in order to shift wealth into profits in the pursuit of shareholder value big business has undermined itself. The imbalance is now so acute that demand is stifled for the very products that business wants to sell. Shareholder value is being undone by the very strategies designed to create it. Business can only maintain its profit growth rates by shifting itself abroad. Where labor costs are significant it moves production to the lowest cost location.

And it continues its relentless drive to replace labor with capital. Thus, when robots can do the work, business can suddenly start to bring production back onshore. It looks patriotic. It isn’t. It is simply looking to lower costs yet again. Once labor is an insignificant part of total cost then production decisions will be driven by other costs – like distribution. Whichever is the largest cost will always draw management attention first. But those other costs still represent a wage in some aspect. Distribution companies have come under pressure to reduce wages or workforces. The anti-labor drumbeat takes on a different tone, but remains the same.

So when the media and those analysts start to worry about the ideological divide that threatens debates about the ‘fiscal cliff’; or when they suddenly take notice of the imbalance between capital and labor in GDP; when they deride Obama for hanging tough on those tax increases for the wealthy; or when they chatter on about the uncertainty this all creates for big business; they are talking about the same thing.

The consequences, intended or otherwise, of the debasement of our democracy by big business.

The antagonistic tension between capitalism and democracy has never been more apparent. Democracy just flickered back to life: Obama’s winning coalition was founded on the less privileged majority banding together. That this base could rise up against that of the wealthy and big business has so shocked the media and the Republicans that they are having a hard time reacting. So committed are they to the ways of market magic and the notion that entitlement spending must be reduced to free up more GDP for allocation to the owners of assets – in the name of reducing deficits, naturally – that they choke on the daring of the little people to speak their minds. They are not used, after four straight decades of ever increasing power, to being questioned.

But the questioning has begun.

What goes around, comes around.