The relentless revolution: a history of capitalism (65 page)

Among the woes of the heads of General Motors, Ford, and Chrysler, which employ 75 percent of the nation’s some three hundred thousand auto workers, are their escalating payroll costs. When they went to testify before Congress in 2008, the head of the United Auto Workers of America went with them. This troubling entanglement of caring for present and retired workers is ironic because their predecessors had opposed national legislation for health insurance. Proposed in the 1940s, a bill would have funded the universal care through the Social Security Administration. Fearing that such a provision would undermine workers’ loyalty, Detroit’s leaders worked against the measure, pushing unions to fight successfully for their members’ benefits at the bargaining table.
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The fact that workers in American plants making Hondas and Toyotas didn’t earn the equally high wages and benefits of Detroit’s workers rankled with members of Congress and their constituencies. In an earlier time, the public might have wondered why those other workers weren’t doing better. Three decades of slow wage growth and the success of low-wage employers like Walmart had effected a marvelous change in perceptions.

To counter these attitudes, labor leaders have awakened to the need to rebuild the solidarity that once existed between the public and organized labor. With the goal of representing a third of the American work force, as it did in its heyday in 1950, the AFL-CIO began a campaign explaining how a strong labor movement energizes democracy and keeps alive a moral commitment to living wages and decent working conditions worldwide. The facts on the ground back it up: Between 1978 and 2008 CEO salaries went from levels 35 times those of an average worker to 275 times. Nor have corporate heads been generous to their workers, as Henry Ford once was. Although the rate of American productivity has risen since 2003, wages have not, and benefits have declined in value.

Organized labor backs the Employee Free Choice Act, which Republicans blocked with a filibuster in the Senate in 2007. EFCA would protect workers’ right to organize their plant once a majority of them had signed cards expressing their intent to form a union. Statistics indicate that one-quarter of all employers have illegally fired at least one person for union organizing, so unions consider EFCA essential to organizing new plants. Reports of flat wages coupled with escalating incomes in the top tenth of the top 1 percent of American earners have brought much of the public back to the union side. The disgrace into which laissez-faire economic theory fell during the fancy-free years that opened the twenty-first century bodes well for organized labor too, but it will have to contend with the countervailing force of shuttered shops and the monolithic opposition of American business.
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Missing warning signs of disaster apparently is a human trait found in capitalist and noncapitalist countries alike. In his study
Collapse,
Jared Diamond showed that failed societies invariably clung to their value systems long after they were dysfunctional.
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The insistence that the market has its own self-correcting mechanism may be a fresh example of an old human failing. It certainly sounds now like whistling through the graveyard. Does each generation have to learn its own lessons? It would seem so. The post-World War II fiscal arrangements ushered in a quarter century of widespread prosperity in the capitalist homelands. Maybe it can be done again. The French president and the prime minister of Great Britain have called for a Bretton Woods agreement for the twenty-first century to rebuild the financial foundations of the world economy. For them evidently the accords hammered out in New Hampshire in 1944 represent a symbol of a shared appreciation of the clout of cooperation.

Although the center of the subprime mortgage debacle was in the United States, the meltdown of credit credibility spilled over the entire globe. The trouble brewing in lower Manhattan quickly reached cities and towns across the nation, not to mention foreign investors who took a ride with America’s financial Evel Knievels. Even America’s cockiest center of enterprise, Silicon Valley, felt the cascading effect of the credit crunch as orders dropped off, no small matter considering that computer and software sales account for half the capital spending of businesses in the United States. Normally awash in venture capital, the technology sector saw that dry up some as well.

When people who had borrowed against the rising value of their houses in the frenetic days of the real estate boom stopped spending, it hurt big and little exporters who counted on the dependable American consumer. Latin American leaders, often critical of the Goliath to the north, engaged in a bit of schadenfreude until they saw the looming danger in their own countries from collapse of the housing market in the United States. Like a booby trap with a trip wire that catches a walker unawares, this financial blowout caught everyone. Only India, saved by its conservative banking traditions, escaped relatively unscathed. The unexpected fragility of these securities—an oxymoronic term—that American banks were pushing worldwide left leaders of many emerging economies angry at the perpetrators of the debacle.

Globalization got another notch in its belt with the first worldwide Ponzi scheme, one that came a cropper at the end of 2008. Named after Charles Ponzi, the notorious swindler of the Roaring Twenties, such flimflams rely on enticing ever more people to invest in order to pay off those who have already bought into the fake firm. Buoyed by strong earnings, the shareholders then become informal salesmen of their remunerative investment. Bernard Madoff, a respected Wall Street financier, acknowledged that he had bilked fifty billion dollars from his clients, selling shares in one of his firms across a large swath of the world, including the United States, Canada, Europe, Middle Eastern countries, and China, before he ran out of new prospects.
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So indifferent to its charge was the Securities and Exchange Commission that despite an insistent expert who told it repeatedly that the emperor Madoff had no clothes, it refused to investigate.

The dominance of the financial services industry in the last fifteen years is a classic case of the tail wagging the dog. Financial institutions developed initially to facilitate enterprise, but at the end of the twentieth century they became venture capitalists themselves. Stock markets, begun more than two hundred years ago, have acted as mediators between the public and publicly traded companies. Once the preserve of the wealthy, the stock market now serves thousands of institutions and millions of small investors. Banks too funneled funds into the production of goods and services. Power accrued to them. In the twenty-first century, financiers increasingly intruded into the affairs of the companies whose stock they traded and whose loans they negotiated. This shift of authority from company managers to debt holders had a profound impact on corporate decisions because of an emphasis on immediate gains. Shareholders have benefited from this—at least in the short run—while many values associated with strong firms have cratered.

If the goals of financial capitalism differ too much from those of enterprise generally, then the public suffers, as became apparent in 2008. When President Dwight Eisenhower chose General Motors CEO Charlie Wilson to be secretary of defense in 1953, Wilson made headlines by saying he thought: “What’s good for the country is good for General Motors, and vice versa.” Wilson got pilloried for that remark, made at his confirmation hearings, but there was sense in what he said. Then America’s automakers were paying auto workers good wages and making consumers happy with their cars. The enormous profits to be made from the dexterous leveraging of paper transactions like mortgages pushed all the incentives into the short run, as have the complicated and generous CEO salaries of the early years of the twenty-first century. With hindsight, perhaps firms will put executive bonuses in escrow accounts to be paid after a spell of good years instead of a couple of flashy seasons.

The subprime mortgage collapse points up the difficulty of stabilizing the relentless revolution of capitalism because the past is a very imperfect guide to the future. Barney Frank, chair of the House Financial Services Committee, wryly commented that the surge of subprime lending was a kind of “natural experiment,” testing theories about the radical deregulation of financial markets.
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A whole new banking system materialized outside the safety net put in place in the Great Depression of the 1930s. Major concentrations of capital moved from conventional commercial banks that held deposits and lent money to investment banks that lent money through a veritable mangrove maze of lines of credit. Nor is this an anomaly. It is integral to capitalism that investors will seek new ways to make money, preferably free of regulation.

The time of reckoning finally arrived. The G20, formed in 1999 to give developing countries like Argentina, Brazil, Mexico, India, and China a chance to talk with the G7 industrial giants of France, Canada, Germany, Italy, Japan, Great Britain, and the United States met in São Paulo at the end of the tumultuous year of 2008. The finance ministers and central bank governors of the emerging economies called for cooperation in reconstructing the world’s financial architecture. They stressed that the “rest” was no longer content letting the West carry on irresponsibly. Another meeting in Washington followed quickly. Protocol at the White House state dinner gave some hint of the rest’s success. Luis Inácio Lula da Silva, president of Brazil, sat on President Bush’s right and Hu Jintao of China on his left. The times were again propitious, as they had been after World War II, for reaching international solutions to global instabilities.
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The new phenomenon of globalization made itself known in diverse ways, perhaps through the sight of a scarved elderly woman in Turkey using a cell phone or from TV images of Iranian youths dancing to American hip-hop or learning that some beautiful gerbera daisies were grown in Nigeria. For others, the recognition of our interconnectedness was more shocking and came in the form of a plant closing that supported a whole community like the Hershey Company in Hershey, Pennsylvania. As readers of this history know, global trade began in earnest in the sixteenth century with the arrival of spices from the East Indies and silver from the New World. Why then does globalization deserve our attention now? Because world communication and transactions have tied our lives together in ways unimaginable even fifty years ago. Governments have become more open, and their borders more porous. “The world is flat,” as Thomas Friedman announced, by which he meant that people, money, and goods moved freely across the plane surface of the globe.
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Going well beyond telegraphy and telephones, the Internet links individuals, firms, and institutions instantly with messages, tables, photos, and spreadsheets. The incorporation of Asian nations into world markets made cheap imports available to the world’s consumers. It also tied all these producers and consumers into the ups and downs of the international market. It hardly took the financial meltdown of 2008 to demonstrate that when the United States (or Germany or China) sneezes, the rest of the world gets a cold. The first decade of the twenty-first century also brought a lot of hype about global integration, typified by a two-page newspaper advertisement that IBM ran. Sharing the globalphilia of Friedman, the ad expatiated on the theme of a smarter world where sensors carry intelligent messages to cars, appliances, cameras, roads, pipelines, livestock, and medicine! To stress the point, IBM described its “holistic management approach that promotes business effectiveness and efficiency while striving for innovation, flexibility and integration with technology.”
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But intelligence and communication are not enough, as the recent financial fiasco demonstrated. Wisdom is required too.

Economists are now talking about something called moral hazard, a term that refers to the dangers of giving people the wrong incentives. It’s a moral hazard for the government to bail out banks because bankers in the future will take foolish risks if they conclude that they will not have to pay for them. It’s reminiscent of the expert who claimed that “capitalism without bankruptcy is like Christianity without hell.”
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A systematic means of controlling sin apparently is as necessary in economics as it is in religion. The phrase “moral hazard” itself suggests that market participants now realize that capitalism has an essential underpinning in social norms. People may say that virtue is its own reward, but most of us find that an insufficient return. We prefer vacationing, but because we must eat or we covet a higher standard of living, we are willing to work.

So there is something of a disconnect between what the market requires and what its participants want. We didn’t see this for a long time because we as a society have been committed to the moral benefit of hard work. Only recently has an ethic of pleasure seeking become prevalent. And that’s the problem. The free enterprise economy depends upon competition, sensible choices, and widely shared information, even as it rewards people who corner a market, trick others into foolish bargains, and use secret information to their own advantage. It’s just possible that the real moral hazard today is that capitalism is battening off an older ethic taught by parents and teachers when there was an adult consensus about how to rear children to behave responsibly. If this set of values fades altogether, we will be bereft of the moral base of capitalism, which depends upon men and women’s meeting obligations, managing resources prudently, valuing hard work, and treating others fairly.

The 2008 financial disaster was severe enough to reinstate regulations and a sense of caution among officeholders. It also changed the conversation in capitalist countries, and not a moment too soon. What is needed more than a new financial system is a legal overhaul. Capitalism can work pretty well to deliver on its promise of progress and prosperity when its participants have secured, as one expert detailed, “an effective legal system, a trusted judiciary, enforceable contract law, a disinterested civil service, modern bookkeeping, accurate property records, a rational system for tax collection, a successful educational system, clean police, clean politicians, transparent campaign financing, a responsible news media, and a widespread sense of civic responsibility.”
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Capitalism generates the wealth to pay for these social benefits. Whether the political will exists to secure them is now the question.