Amity Shlaes, the director of the George W. Bush "Institute"'s "economic growth project", writes in the Wall Street Journal today (Oct. 17, 2011) about "Three Polices that Gave Us the Jobs Economy".
Shlaes sings in praise of the 1970s-1990s economy, claiming that it was wonderful because it allowed "private capital devoted to venture capital," "underwritings of firms with a net worth of less than $5 million," and led "innovative companies" to create a "boom economy." Further, she asserts that three corporatist policies "caused the boom": tax cuts (especially on capital gains); relaxation of pension fund investment requirements to permit riskier investments (leading to more money in venture capital funds--and of course, not mentioned by Amity in the op-ed, more losses for pensioners because of those riskier investments); and IP changes permitting university professors to own the innovations developed in the university's laboratories and with the university's (and frequently federal grant) funding (and then leave the university, establishing new startup companies in which they got rich off those ideas.
Shlaes sees all of these as positives. I see the exaggerated role of venture capital as one of the problems in our economy, since much private equity funding works by buying (often with considerable leverage on the company being bought), firing (mostly of low-rung workers, not often of the high level executives), and reselling at great profits without having added much value. Yes, it is useful when there is ready capital to support an important innovation. But the capital doesn't create the innovation and much of what is supported by venture capital isn't great innovation. (see the last paragraph quoted from Smith's discussion of Rattner, below, for her similar view on this issue.) Letting pension fund monies be used by venture capital and private equity firms is problematic, because the pensioners bear the losses and they are depending on those funds for retirement. Allowing university profs to get rich off of research that was funded by the university (and, almost always, considerable public funds) is not so clearly a great boon to mankind. Those innovations funded by public monies should be available to the public without IP protection.
Of course, Shlaes' position on these issues is really just another way to say that the mechanisms in the economy that support capital acquisition and income from capital are 'inherently' good. That is the mantra of the right these days.
It shouldn't be surprising to see Steve Rattner (a Wall Street insider if there ever was one, having been a Lazard M&A partner and then head of a private equity firm) praising globalization and telling ordinary workers who see no opportunities other than low-paying service jobs that "Let's Admit It: Globalization Has Losers." Sunday Review, NY Times (Oct. 15, 2011).
Rattner admits that there are "many losers" --he seems to think that workers just have to eat the s**t shoveled out by big multinational quasi-sovereign corps like GE and GM, resulting in inequitable pay (because those companies can move to other countries and pay workers less).
By 2010, real median household income had fallen to $49,445, compared with $53,164 in 2000. While there are many culprits, from declining unionization to the changing mix of needed skills, globalization has had the greatest impact.
Note that this is only true if this country allows corporations headquartered here to shut down US jobs and hire abroad without exacting a price--such as a tax charge on moving assets/jobs out of the country. We don't exact any price now -- in fact, we allow corporations to 'restructure' tax-free to move active businesses abroad.
Rattner thinks we should just accept that we're never gonna manufacture stuff in this country any more, and then be happy with have high-paying 'service' jobs in entertainment, IP and financial services.
Nope, sorry. I'm not glad that all our smark kids are either trying desperately to make big money in entertainment (and all but a few failing to make even a living, much less a fortune) or financial services (where engineers go in pursuit of high bucks, without realizing that they are likely to lose their souls in the process).
Rattner doesn't want the government "lurching into the private sector". He says that's "terrifying" and uses the single example of the Solyndra loan as proof. (Funny, when private sector banks went bad like Countryside, and Washington Mutual and Lehmann Brothers and Bear Stearns or insider traders go rogue or corporations like Enron and WorldCom and Scrushy's health care empire go south, rightwingers say it's just a single bad apple and shouldn't be viewed as representative. Not applying that logic to Solyndra, are they?) So Rattner wants no "dysfunctional" government intervention, but it does want Washington to "assist the private sector" with tax incentives or "easing access to PUBLIC financing markets or "reform" of patents and "reform" of the "regulatory apparatus"! Anyone see "socialization of losses, privatization of gains" writ in large hand on Rattner's wall?
Yves Smith over at Naked Capitalism has a good takedown of Rattner's piece, at "Steve Rattner, Card Carrying Member of Top 1%, Tells Us We Should Lie Back and Enjoy Much Lower Wages Resulting From Globalization" (Oct. 17, 2011)
- the peak was 2007, not 2010 and was only slightly higher than the prior 1999 peak, so most of the 2000s was a lost decade for wage earners;
- the decline in income is due to the global financial crisis, not inflation;
- it isn't "free trade" that created a nation of winners, it's "managed trade" (that, I would add, favors a 'winner-take-all' outcome that puts money into the hands of people (and corporations) with money);
- American management is much more expensive than Mexican management, not just American workers--so shouldn't those wages fall too under globalization, but they haven't--in fact, US CEO pay isn't correlated with performance--failure pays;
- location and innovation matters too, and Rattner disregards that;
- workers are just 10% or so of cost of goods--to reduce prices means reducing costs, but it doesn't have to be workers' wages that are reduced
As Smith notes
Until the 2000s, in every economic expansion, labor got the bulk of the increase in GDP, typically over 60%, via more jobs and increased pay. Post 2000, there was an astonishing change, a shift from labor share, which fell to below 30%, and a massive increase in corporate profits. In other words, there was huge shift away from labor to capital. This has little to do with globalization and much to do with the weakened bargaining power of US workers. As much as it has become fashionable to look down on unions (and their corruption and short-sightedness hasn’t helped), having well paid blue collar workers helped the negotiating position of non-unionized white collar employees.
Rattner also conveniently fails to discuss how the rapacious tendencies of private equity firms made matters worse. An unduly candid investor described the business model in Confidence Men: pile debt on the acquisitions, and if only one of ten made it (meaning survived!) you still made a good return for investors. So many companies in Europe have gone bankrupt thanks to the tender ministrations of PE pirates that the officialdom has read them the riot act. PE firms have to register, and they cannot either buy companies or raise money in the Eurozone unless the conform to regulations, which include strict limits on leverage.