Deficit deceit and the rentier class

[10 June 2011]

By Rob Horning

It drives me a little crazy when I read any kind of reporting or polling on the U.S. deficit and all the phony concern people feel obliged to exhibit about it. It’s a bit like when people complain about how many thousands of dollars a baseball player gets paid per at bat or something—that fact that we know about it to complain is testimony to why the player deserves it. Fears about the deficit size has nothing to do with any impact it will have on most ordinary people and everything to do with media coverage of big numbers and the admonitory tone that is reflexively adopted. Matt Yglesias linked to an image that gets at the problem; it depicts a van covered in anti-abortion and anti-debt-limit-raising slogans. Yglesias writes, “It’s a problem for the country when strong emotional and ideological views about abortion get intimately linked in people’s ideas with views about much more technical questions about the merits of raising the debt ceiling or whether we have too much inflation or too little.” When these things are lumped together, it means that both have become subject to demagoguery and tribalism, about winning at the expense of enemies, who in the case of the deficit are wholly imagined.

The losers in the deficit-reduction scenarios being worked out in Washington are basically everyone who is not a rentier, as this recent Krugman column argues: “Consciously or not, policy makers are catering almost exclusively to the interests of rentiers — those who derive lots of income from assets, who lent large sums of money in the past, often unwisely, but are now being protected from loss at everyone else’s expense.” Who, exactly, are the rentiers? Krugman has some data here. He concludes that “it’s very much about benefits to the wealthy versus benefits to the middle class.”

Krugman is elucidating a case made by Robert Kuttner in this essay (pdf) for the American Prospect, which inspired Mike Konczal to do some good analysis here and assemble a bunch of useful links here. Kuttner’s basic point is that debt politics is about protecting previous creditors from accepting any losses (full repayment, despite the risk premium they had already been earning as interest) and protecting them from inflation, which reduces the value of their claims. (An argument for why inflation—most obviously wage inflation—would help most of us here.) Here’s how Konczal puts it, in the context of the financial sector’s recent recovery in profits (while the rest of the economy sputters):

Whatever you think of the financial sector being that profitable, it is important to remember what those post-crisis profits represent. Those profits aren’t the reward for effectively allocating capital to a recovering economy. The financial sector actually did a terrible job of that in the past decade. And capital isn’t being allocated anyway. Much of the capital in the economy is sitting on the balance sheets of banks and large corporations.

These profits are based off milking the bad debts of the housing and credit bubbles while Americans struggling under a crushing debt load. Instead of sharing the losses, the financial sector has locked itself into the profit stream and left the real economy to deal with the mess. These profits reflect, in Kuttner’s excellent phrasing, the claims of the past, not the potential of the future.

At Interfluidty, Steve Randy Waldman points out that big banks become rentiers because of implicit government guarantees that they won’t be allowed to fail. Those guarantees in turn are perpetuated by bankers’ outsize influence in politics:

when we modified accounting standards to eliminate the risk that bad loans on the books would translate to failures, when we funded their recapitalization on the sly, we changed banks. We transformed them from nervous debtors into pure rentiers, who see a lot more upside in squeezing borrowers than in eliminating a crippling debt overhang. And since banks are, shall we say, not entirely disenfranchised among policymakers, we increased the difficulty of making policy that includes accommodations between creditors and debtors, accommodations that permit the economy to move forward rather than stare back over its shoulder, nervously and greedily, at a gigantic pile of old debt.

As a result, politicians serve banks’ interests and unemployment starts to be regarded as a permanent feature of the economic landscape, unfortunate but “structural” and not at all related to the suffocating claims of the rentier class.

Rentiers always argue from their interests that austerity is necessary and whip up support for their position with a bunch of misleading rhetoric about how reduced debt generates economic confidence that encourages business owners to expand and hire. There’s not much evidence to support this idea; the recent experiment with austerity in the UK suggests that ruthless budget cutting removes demand from the economy by impoverishing everyone but the rentiers, and this stifles growth across the board. Everyone loses, not just the people who were once supposedly “winning” by benefiting from spendthrift government bureaucrats and their allegedly indefensible spending programs. But that doesn’t prevent the idea from taking hold among regular voters, who are presumably seduced by the fallacious logic of budget cutting as inherently virtuous, as though government debt and personal debt were analogous (they aren’t) and as if debt is a moral failing (it’s not, especially in an economy that explicitly relies on entrepreneurialism).

No one who is not living entirely on bondholdings—no one who has to work—should be rooting for austerity or bothering at all with deficit worries. Such worries are not really their worries; they are the transferred worries of elites who need to manipulate voters to protect their financial interests and their privilege in a democracy.

Konczal linked to this 1943 article by Michael Kalecki, “Political Aspects of Full Employment,” which serves as a useful reminder about what is at stake in austerity debates—not fiscal responsibility or the insecure future of welfare spending but labor discipline:

One might expect business leaders and their experts to be more in favour of subsidising mass consumption (by means of family allowances, subsidies to keep down the prices of necessities, etc.) than of public investment; for by subsidizing consumption the government would not be embarking on any sort of enterprise.  In practice, however, this is not the case.  Indeed, subsidizing mass consumption is much more violently opposed by these experts than public investment.  For here a moral principle of the highest importance is at stake.  The fundamentals of capitalist ethics require that ‘you shall earn your bread in sweat’—unless you happen to have private means…. The maintenance of full employment would cause social and political changes which would give a new impetus to the opposition of the business leaders. Indeed, under a regime of permanent full employment, the ‘sack’ would cease to play its role as a ‘disciplinary measure.  The social position of the boss would be undermined, and the self-assurance and class-consciousness of the working class would grow. Strikes for wage increases and improvements in conditions of work would create political tension. It is true that profits would be higher under a regime of full employment than they are on the average under laissez-faire, and even the rise in wage rates resulting from the stronger bargaining power of the workers is less likely to reduce profits than to increase prices, and thus adversely affects only the rentier interests. But ‘discipline in the factories’ and ‘political stability’ are more appreciated than profits by business leaders. Their class instinct tells them that lasting full employment is unsound from their point of view, and that unemployment is an integral part of the ‘normal’ capitalist system.

This seems more true than ever with “factory discipline” dissolved for many workers into post-Fordist arrangements of self-exploitation. Independent “free agents” and flexible workers have even less bargaining power and less of a basis for solidarity, less grounds to demand their share of profits earned from the increased productivity that has come from workers’ devoting ever more time to work—from all aspects of everyday life, in effect, becoming work, as consumption becomes a mode of immaterial production.

But capitalists are always fighting a two-front war in democracies, against workers and against their representatives in the government, who might begin to change the social framework to give workers more bargaining power. Capitalism is predicated on the asymmetries of power, on capital’s ability to compel workers to sell their labor power. Capitalists must fight anything that threatens that imbalance, regardless of whether it leads to an aggregate increase of social wealth or even improves their individual profits.

UPDATE: In this post Yglesias links to a paper called “Financialization, Rentier Interests, and Central Bank Policy” (pdf) which describes central bank policy as serving the interests of keeping asset prices stable rather than raising employment levels. As Yglesias puts it: “For all the rising salience of goldbug cranks whining about fiat money, the Fed has hardly been indifferent to the potential for monetary expansion. It’s just that the goal of monetary expansion has been to do just enough to stabilize financial asset prices without going far enough to produce catch-up growth in the labor market.
What’s more, from the point of view of capital maybe it’s better not to catch up. As long as growth is positive and unemployment isn’t rising then maintaining a large 8-9% of the labor force out of work could be a useful tool of wage restraint.”
Not to be too functionalist about it, but it often seems like a good idea to work backward from the need for labor discipline to understand certain vagaries of economic policy; at the level of policy and not individual firms, class struggle and getting leverage over workers matters more than efficiency or profit or even growth.

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