Friday, September 9, 2011

Political Economy and Financialization

This post is an attempt to explain in a little more detail what I have been saying (for instance, here and here) about the political economy of the Great Recession and its perverse response.  Of course, that would suggest an article or even a book, but who has time for that?  So a blog post will have to do.

Here is a synopsis of the argument: in a world dominated by “real” capital—ownership tied to capital in place, managed by organizations in place—political power is exercised through pressure exerted by firms and industries on behalf of their particular interests.  In the world we now live in, financial capital—assets organized into diversified portfolios—presses for the highest possible returns to investors based on the freedom to invest in anything, anywhere.  These differences are ideological, reflected in different conceptions of how economies work and should be run, and political, yielding different policy outcomes.  This is offered as a sweeping generalization, since we have not seen a wholesale shift from one configuration to the other in any country (OK, maybe Iceland for a few years), but it seems correct as a first approximation.

Let’s work inductively from a single example, health care reform in the US.  From a political-economic perspective, both Clinton and Obama worked from the same premise, that reform could be achieved by peeling off large segments of the business community from support for private health insurers, pharmaceuticals and providers.  The logic is straightforward: health care is a net cost for every employer outside the health sector, and their own self-interest should lead them to support programs that cut these costs and transfer more of them to the public sector.  On this basis the lions should lie down with the lambs Wal-Mart should join forces with Andy Stern and the SEIU, and the intense lobbying of the health care sector should be neutralized by everyone else.

But it didn’t work that way.  For sure, many businesses put out press releases endorsing the broad outlines of the Clinton-Obama proposals, but the balance of power remained decisively anti-reform.  In particular, the public option, that foot in the door for single-payer, didn’t have a chance, even though it would have been a significant force for cost reduction.  How can this be?

My answer would be that Mitt Romney is right, corporations are people too.  That is, the top tier of ownership and control is vested in individuals who act in their self interest and in accordance with their intellectual perspective—usually related.  General Electric, for instance, may benefit as a corporate entity from lower health care costs, but those who own and run it are not tied to that firm, or its current facilities, markets or organizational hierarchies, for life.  At the highest levels, individuals see their economic interest as that of maximizing the value of their personal portfolios.  They want to earn as much as they can in the present, but they especially want high rates of return on their investments.  If they have taken a position in the health sector, its distended profitability is a personal plus.  (In fact, since GE, like most other corporations, sits on a large pile of cash, it should consider investments in health insurers and providers as an intelligent hedge.)

I don’t want to make the mechanistic claim that rich folks were just looking out for their health profits in the debate over health care.  Far more, I suspect, they were motivated by principle.  They truly believe that unfettered market forces, directing capital to its most profitable uses, drive the engine of growth.  Government impingement on that freedom, or worse, government-run alternatives to privately-financed enterprises, cannot serve the common good.  It is a coincidence that, in this view, personal wealth maximization coincides with good public policy.

A richer model would recognize that both “old” and “new” political-economic configurations are at work.  Certainly the heavy expenditures of the health sector to defend its profits made a difference.  For me, however, the key question is why there wasn’t a sufficient countervailing effort from other sectors, when the evidence is clear that exorbitant health costs are crushing the economy.  The answer I propose is that, in the broader context of financialization, dueling lobbyists is not the right way to frame the politics.

A second example, even more poignant, is financial reform itself.  It could not be clearer that what benefits the financial sector now threatens the livelihood of everyone else, but the political foundation for reigning it in does not exist.  I leave to readers to flesh out the story—why the CEO’s of nonfinancial firms, for instance, are not beating the drums for deconcentration and tight regulation.

To repeat: this is description at a very general level.  I don’t think the political economy of any modern country, much less the global system, is monolithic.  Ideology is not a simple reflection of self-interest, and collective political behavior is a function of political organization and not just an arithmetic summing of individual beliefs.  Above all, I am making quite a few empirical claims that ought to be backed up by careful observation and testing.

Like I said, this is just a blog post.


Alice Cook said...

Fiscal adjustment, that is the issue now. At least that is what the IMF thinks:

Bob Sharak said...

A couple of comments.

First, I don't mean to pick at your analogy - but GE is not a good example. It's GE Healthcare Division made roughly $2 billion in profits on revenue of about $15 billion. Clearly the company has a stake in promoting expensive medical technology that keeps health care costs high.

Second, I don't think your argument goes far enough. We have a top level management class in the US that is singularly concerned with increasing their personal wealth - at the expense of the environment, the US economy (they are, after "citizens of the world") and even shareholders. This is why the link between CEO pay and company performance is as weak as it is. It is also why companies are pouring cash into politicians that protect - above all else - the personal tax benefits of the ultra wealthy.

Company managers routinely use shareholder money to help ensure that their heirs pay no estate taxes. How does that help the average schmo owning GE in her IRA or 401K portfolio?

bobreply said...
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Anonymous said...

It is a coincidence that, in this view, personal wealth maximization coincides with good public policy. Peter Dorman

Oh, the irony!

Or -- "It is difficult to get a man to understand something, when his salary depends upon his not understanding it." --Upton Sinclair

buermann said...

"why the CEO’s of nonfinancial firms, for instance, are not beating the drums for deconcentration and tight regulation"

A lot of the large "non-financial" corporations are in fact large financial firms. GE FInance; GM's GMAC/Ally bank; Ford Motor Credit; Target; UnitedHealth; Harley Davidson; Walmart very nearly decided to follow their example a few years ago.

The Oriole Way said...

"why the CEO’s of nonfinancial firms, for instance, are not beating the drums for deconcentration and tight regulation"

Well, for one, those financial sector CEOs get paid a lot of money. And when other CEOs get paid a lot money, it's easy to make the case to your board that you should get paid a lot of money, too. Especially when your board consists of CEOs that get paid a lot of money.

Anonymous said...

From a political-economic viewpoint, both Clinton and Obama worked from the same assumption, that change could be obtained by shedding off large sections of the world of business from support for private health insurance services, medication and services. happy retirement