Requiem for the American Dream (4)
The third principle of the concentration of wealth and power is “Redesign the Economy,” i.e., use your political influence to change the rules of the economic system, so that it favors the already advantaged class in new and more powerful ways. Noam Chomsky identifies two major factors under this principle: (1) financialization of the economy and (2) the offshoring of production.
Writing in Forbes, Mike Collins defined the term financialization as “growing scale and profitability of the finance sector at the expense of the rest of the economy and the shrinking regulation of its rules and returns.” In the film, Chomsky says that financial institutions—”banks, investment firms, insurance companies, and so on”—have a legitimate role to play in the economy, but starting in the 1970s they started to expand their power and influence beyond that legitimate role, thereby enriching the wealthy and making the economy vulnerable to crashes. During this period, the U.S. economy weakened due to the shift from manufacturing to finance, until, in the words of Mike Collins, “The emphasis was no longer on making things—it was [on] making money from money.” According to Chomsky:
By 2007, right before the latest crash, they had literally 40% of corporate profits—far beyond anything in the past. Back in the 1950s, as for many years before, the Unites States’ economy was based largely on production. The United States was the great manufacturing center of the world.Financial institutions used to be a relatively small part of the economy, and their task was to distribute unused assets, like bank savings, to productive activity. That’s a contribution to the economy. Regulatory system was established. Banks were regulated, the commercial and investment banks were separated [to] cut back their risky investment practices that could harm private people. There were, remember, to financial crashes during the period of regulation. By the 1970s that changed.
In the United States, the history of growing inequality is really a history of the systematic dismantling of the New Deal. Chomsky points out that Richard Nixon was the last New Deal President, though he is rarely recognized as such. Starting from Franklin D. Roosevelt in the early 1930s all the way to Richard Nixon in the early 1970s, the United States Government’s domestic spending shows a continuous upward trend. This trend started to reverse with Jimmy Carter, who was also the first President to increase the social security tax, reduce the capital gains tax, and started the process of deregulation. The dismantling of the New Deal became an increasingly important priority in the successive administrations of Ronald Reagan, George H. W. Bush, and Bill Clinton. Since the mid 1970s, both the Republicans and the Democrats have played an active role in this dismantling.
Many of the financial regulations put in place by President Roosevelt under the New Deal were intended to prevent risky behavior on Wall Street, and these regulations functioned well in preventing financial bubbles and crashes.The most of famous of these was the Glass–Steagall legislation (named after Senators Carter Glass and Henry Steagall), also known as the Banking Act of 1933 (revised in 1935). Among other financial reforms, the Glass–Steagall Act established a firm separation between commercial and investment banking. Commercial banks could issue short-term loans but were prohibited from speculating with depositors’ money, while investment banks could invest in equity and long-term loans but were not allowed to take deposits. These provisions of the Glass–Steagall Act were repealed under Bill Clinton as part of his drive towards deregulating the financial sector.
The role of the United States Congress in the dismantling of the Glass-Steagall Act is especially instructive. Since the mid 70s, no fewer than 25 attempts were made to repeal that law. In 1991, the George H. W. Bush administration tried to amend the law so that commercial banks could participate in investment activities. The House voted 216–200 against the proposed amendment. Seven years later, in 1998, the House passed a very similar legislation 214–213. However, these numbers don’t tell the full story.
As Roslyn Fuller explains in her book Beasts and Gods: How Democracy Changed its Meaning and Lost its Purpose (2015), there was a critical difference between the two pieces of legislation. The 1991 reform effort favored banking interests while the one in 1998 favored insurance and investment interests. The latter were against the 1991 reform, and so they gave substantial donations to Congressional Democrats, who were in the majority, in order to prevent the law from being passed. Their spending paid off, as 74% of Democrats opposed the amendment, as compared to only 22% of Republicans. The same interests then supported the 1998 version of the legislation and, to ensure success, significantly increased their financial contributions to Congressional Republicans, who were now in the majority. As a result, this time 77% of Republicans supported the amendment, as compared to only 38% of Democrats.
Out of the 182 representatives who voted in both 1991 and 1998, two-thirds switched their votes depending on which way the wind was blowing. In 1991, Democrats voted in favor of the insurance and investment companies from whom they were receiving substantial sums of money, but by 1998 the money supply had shifted in favor of the Republicans, which made it rational for the Democrats to start favoring their more reliable donors from the banking industry. On the other hand, the Republicans supported the banking interests in 1991, but changed their votes seven years later in response to the increased generosity of the insurance and investment interests.
Finally, in 1999, the Congress passed the Financial Services Modernization Act with bipartisan support, putting the final nail in the coffin of the Glass-Steagall Act. By this time, the interests of both banking and investment companies had converged, and this was reflected in how the House voted: 362–57 in favor.
As the New York Times reported at the time, Treasury Secretary Larry Summers was ecstatic when the Congress passed the Financial Services Modernization Act (also known as the Gramm–Leach–Bliley Act) : “This historic legislation will better enable American companies to compete in the new economy.” Senator Charles E. Schumer (D-New York) praised the new legislation: “There are many reasons for this bill, but first and foremost is to ensure that U.S. financial firms remain competitive.” In contrast to these optimistic assessments, Senator Byron L. Dorgan (D-North Dakota) made the following prescient comment: “I think we will look back in 10 years’ time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930’s is true in 2010.” Today, President Clinton’s repeal of the Glass-Steagall Act is widely believed to have paved the way for conditions that made the financial meltdown of 2008 much worse than what it might have been; others believe that the meltdown would not have happened if that New Deal legislation were still in place.
As already mentioned, however, the trend toward financial deregulation had started much earlier—specifically, during the Carter administration. The landmark event was a 1978 decision by the US Supreme Court that practically ended all limits on interest rates. In Marquette National Bank v. First of Omaha Service Corp., the Supreme Court ruled that national banks did not have to follow the interest rate regulations of the borrower’s state but only those of their own home states. This decision provided a powerful incentive for financial companies to relocate to the states with the least onerous regulations, thereby encouraging states to do abolish anti-usury laws and end interest rate ceilings. Two years later, the U.S. Congress passed the Depository Institutions Deregulation and Monetary Control Act, which included a provision exempting federally chartered savings banks, installment plan sellers, and chartered loan companies from state mandated anti-usury laws. As a result, both the federal judiciary and the legislature effectively ended the age-old practice of capping interest rates. The resulting competitive pressure led to an explosion of financial services, since a lot more money could now be made through lending than through investing in the real economy.
Writing in Harper’s, Thomas Geoghegan explained “how the dismantling of usury laws” produced such as results as “the loss of our industrial base” and “the loss of our best middle-class jobs.”
First, thanks to the uncapping of interest rates, we shifted capital into the financial sector, with its relatively high returns. Second, as we shifted capital out of globally competitive manufacturing, we ran bigger trade deficits. Third, as we ran bigger trade deficits, we required bigger inflows of foreign capital. We had “cheap money” flooding in from China, Saudi Arabia, and even the Fourth World. May God forgive us — we even had capital coming in from Honduras. Fourth, the banks got even more money, and they didn’t even consider putting it back into manufacturing. They stuffed it into derivatives and other forms of gambling, because that’s the kind of thing that got the “normal” big return; that is, not five percent but 35 percent or even more.
As the financial sector became more profitable than manufacturing, it started to bloat up in unprecedented ways. In the documentary, Noam Chomsky describes the results of financialization as follows:
You started getting that huge increase in the flows of speculative capital—just astronomically increase—enormous changes in the financial sector from traditional banks to risky investments, complex financial instruments, money manipulation, and so on. Increasingly, the business of the country isn’t production, at least not here. The primary business here is business. … By the 1970s, [U.S. corporations], say General Electric, could make more profit playing games with money than you could by producing in the United States. You have to remember that General Electric is substantially a financial institution today. It makes half its profits just by moving money around in complicated ways. And it’s very unclear that they are doing anything that’s of value to the economy.
The following graphs tell the story of how the decline of American manufacturing has been accompanied by the rise of American finance.
Offshoring of Production
The second factor in how the economy was redesigned to suite the wealthy was the offshoring of production. This consists of two basic components: (1) lobbying governments to deregulate the movement of goods and capital across national borders; (2) moving factories out of countries that have strong labor and environmental protection laws to countries were workers can be made to work longer hours and at lower wages.
The trade system was reconstructed with a very explicit design of putting working people in competition with each other all over the world. And what it’s led to is a reduction in the share of income on the part of working people. It’s been particularly striking in the United States, but it’s happening worldwide. It means an American worker is in competition with the super-exploited worker in China. Meanwhile, highly paid professionals are protected. They are not placed in competition with the rest of the world—far from it. And, of course, the capital is free to move. Workers aren’t free to move; labor can’t move, but capital can. Well, again, going back to the classics like Adam Smith, as he pointed out, the free circulation of labor is the foundation of any free trade system. But workers are pretty much stuck. The wealthy and the privileged are protected, so you get obvious consequences.
As the world is increasingly integrated into the global economy, large business corporations are able to lower their labor costs by manufacturing their products in relatively poor countries. This allows them to bypass the rights that working people have won in more developed countries, as well as avoid the various environmental regulations. Exploitation of labor goes on in places like India, China, Bangladesh, and Mexico, while unemployment rises in the United States. Capital can move anywhere in the world in search of higher profits, but workers aren’t allowed to go from one country to another in search of higher wages or better working conditions.
Globalization protects the owners of capital while further degrading those who have nothing to sell but their labor. The consequences include increasing wealth for the already wealthy and diminishing prospects for the working class. Chomsky notes that such consequences are not accidental; they are the intended goals for which offshoring of production is pursued in the first place. Indeed, it is not uncommon for economic policy-makers to proudly take credit for institutionalizing policies that intensify the financial insecurity of the lower and middle classes. Such insecurity helps maintain obedience on the part of the population.
Alan Greenspan, when he testified to Congress [in 1997], he explained his success in running the economy as based on what he called “greater worker insecurity.” Keep workers insecure, they’re going to be under control; they’re not going to ask for, say, decent wages or decent working conditions, or the opportunity of free association, meaning unionize. Now, for the “masters of mankind,” that’s fine—they make their profits, but for the population it’s devastating.
The Greenspan quotation that Chomsky is referring to is from “Monetary Policy Report to the Congress,” dated February 26, 1997. Greenspan, who was chairman of the Federal Reserve from 1987 to 2006, had made the following comment: “Atypical restraint on compensation increases has been evident for a few years now and appears to be mainly the consequence of greater worker insecurity.”
At this point in the narrative, the film digresses a bit from the main discussion to provide an introduction of Noam Chomsky himself. We learn about Chomsky as a groundbreaking intellectual who transformed the field of linguistics in the 1950s before becoming famous for his public opposition to the Vietnam war during the mid 1960s. We watch a short clip from William F. Buckley’s interview of (and/or debate with) a much younger Noam Chomsky that took place in New York on April 3, 1969, as part of the TV show “Firing Line.” The video of the debate is available here, while a complete transcript can be found here. In “Requiem,” Buckley is seen introducing a younger Chomsky as follows:
Professor Noam Chomsky is listed in anybody’s catalog as one of the half-dozen top heroes of the New Left. This standing he achieved by adopting over the past two or three years a series of adamant positions rejecting at least American foreign policy, at most America itself.
The older Chomsky then responds to the charge of “anti-Americanism,” which is fun to watch. He points out that in all societies anyone who criticizes the status quo usually becomes a target of various types of attacks, but it is only under totalitarian rule that the critics of concentrated wealth and power are accused of being enemies of their own countries—as in “anti-Soviet” or “anti-American.” The very existence of such forms of verbal abuse in a “democratic” society is rather revealing.