After the New Economy
by Standard Schaefer
November 6, 2003
Review of After the New Economy by Doug Henwood (New Press 2003)
With the Nasdaq up about 40% since the beginning of the year, boosterism and ballyhoo are back. The very ideas that drove the bubble -- financial deregulation, monetarism, and reduced public sector spending -- are being repacked as solutions to the problems they caused in the first place. Fortunately, Doug Henwood, premier muckraker on matters economic, has returned as well. In After the New Economy, Henwood does not simply dismiss the bubble as the “madness of crowds,” but as the inevitable end to an era whose policies have not worked.
Divided into five sections, the basic strategy of the book is to present the work of the most famous promoters and their equally high-profile critics on such issues as the alleged novelty of the era, the diminished status of labor, vast income disparities, dominant myths of globalization, and the role of the financial sector in the economy. In doing so, he produces a solid introduction to each of these themes, stirring in wry humor and amusing anecdotes, while never compromising his rigor. Duly covering the requisite references to official economics, he also makes use of Jean Baudrillard, The Ramones, Herman Melville’s The Confidence Man, and Gordon Gekko. But After the New Economy is not a pretentious, postmodern pastiche. It is a masterful exposé of the guiding ideology behind both left and right wing pundits.
As Henwood deftly takes apart various statistics, he actually makes the issues clearer the more in depth he goes. There is much to learn about statistical imprecision, the ideological blind spots in certain numbers, and their tendency to de-emphasize the wealth of those on the top. Henwood’s explanation of productivity figures, for example, is not a broad attack on the illusion of technological innovation. It is a return to the issue of real working conditions. While technology changed the lives of workers, the change was not for the better. Even Alan Greenspan admits as much. A careful look at Fed Chairman’s testimony reveals devotion toward keeping wages low (and thus inflation) by increasing worker anxiety. This occurred while productivity was being explained by technological innovation and new management techniques that were alleged to motivate workers. Among them was the so-called “democratization of wealth” from employee stock options. As Henwood notes, they never affected more than 7% of all workers in California and even fewer elsewhere. The truth is that the tech boom did not create more leisure time. It often forced workers to increase hours, often without overtime pay, just to keep their earnings at the national average. This coupled with the fact that capital gains do not turn up in income figures means inequality during the era was dramatically under-reported.
In truth, it was the finance sector that really benefited. Freer of entanglements than they had been since the 1920s, brokerage firms and financiers made money taking stocks to market, sometimes twice. When IPOs failed, companies were taken off the market (again for a fee) and brought back again when the outlook looked brighter. While the financial industry itself was interested in making as many companies public as possible without regard to viability, men like Dick Grasso were being compensated not for brilliant stewardship in promoting market capitalism, but for looking the other way while the thievery escalated.
Wall Street overcame its usual short-sighted tendency to seek quick earnings and replaced it with even greater shorter-sightedness. The pursuit of instant capital gains, rather than true earnings, particularly on the part of investment banks, fueled speculation and increased corporate debt. While Henwood does not mention how capital gains tax rates being lower than the rate on ordinary income fueled the speculation, he is great on the Fed’s role. He also explains that tax cuts were hardly a boon to the middle class. They led Americans to pay more for insurance, healthcare, and tuition than people in other highly developed countries.
Regarding the ballyhoo that the US had evolved out of traditional business cycles, it is particularly fun to read his analysis of the sacred, sober minded theories of “legitimate” economists like Simon Kuznet. Kuznet argued that inequality would decrease in a mature economy. Henwood turns this around and shows that the rise in inequality was in essence a clue that a bubble was afoot.
One of Henwood’s most urgent themes is how little the field of economics has to say about finance. Here readers of his Wall Street will find echoes: the parasitic effect of the finance sector; the inefficiency of markets to turn “financial” capital into direct, productive investment; the way these markets decouple from the real economy and exacerbate instability. Wall Street has long hidden the difference between “capital” invested in the financial markets and spending on actual capital equipment. Henwood reveals the myth of a “post-industrial” society and the inevitable low wage tendency of a service economy. His description of how the IMF exacerbated the Asian crisis by forcing countries to raise interest rates is quick primer on the dangers of capital flight, all the more a threat in a high-tech world where transactions occur almost instantaneously.
Henwood is at his rhetorical best when he shows how Alan Greenspan’s efforts to keep wages low sound shockingly reminiscent of the Marxist Michael Kalecki. Particularly insightful is the explanation about how the Fed came to be such an effective tool for class warfare, especially his characterization of chairman Paul Volker’s reign. Henwood wisely places this discussion next to the one on the repeal of the Glass-Steagall Act, which led to the wave of corporate crime this era is now famous for. But, his discussion of pensions is a little skimpy. Union pensions were regularly shanghaied for speculation by corporations and obligations were often met by citing the portfolio’s paper-only gains. Corporations will have to make up contributions out of their future profits. That means they will put more pressure on their workforce, possibly even slashing it.
The speculative bubble, Henwood correctly asserts, was unique in one regard: as assets inflated, they fueled unprecedented borrowing, both among corporations and consumers. These loans were collateralized on the basis of asset inflation, whereas traditionally such loans would have been based on income. It creates the threat of a debt crisis, all the more serious given the deregulatory regime that created freer capital flows. Henwood’s finance chapter is a good political introduction to these issues. It is even better on monetary policy. By focusing on historical accounts of Margaret Thatcher’s regime and Paul Volker’s Fed, Henwood shows that money flows are not politically neutral. He makes this unorthodox point convincingly without mentioning currency valuations and the balance of payments. Had he addressed these admittedly arcane angles, he could have made the point even more forcefully. Still, he has to be commended for being able to trace the role of finance in the economy at all since Nobel Prizes are given to those who have obscured the connections.
Henwood’s most surprising chapter is the one on globalization. He begins by gleefully examining the murkiness of the term. However it is defined, Henwood explains, the claims for it are hardly new. In essence, Henwood argues that globalization is really only capitalism under another name. What is surprising is that Henwood argues that there is little evidence that capitalism is any more capable of producing misery in its global form.
Any cursory look at the history of capitalism reveals that it has always had global aims, as Henwood knows. Likewise, its imperialistic impulses have always needed new guises. Adam Smith himself pointed out that the American colonies had become a drain on mother England. Henwood’s contribution to the debate is that he exposes the facile popularizers of globalization on both the right and left. On the left, he reveals the cruel Malthusian impulse of certain globalization critics who prescribe forced population reductions. He pulls no punches with Ralph Nader either. To Henwood, Nader’s assertion that NAFTA undermines US self-sufficiency is cockamamie. America has never been self-sufficient and even if it could be, what would be the relevancy? Trade’s effect on US hourly wages during the 1970s-1980s explains about 25% of the decline, sizable but not overwhelming. But hourly wages in the US have risen since NAFTA. That Henwood does not avoid evidence that runs counter to the usual dogma of the left is a testament to his fairness.
He even includes evidence, though shaky, that inequality is lower in countries that are more globally integrated. On this point, he does not mention how globalization tends to make nations convert their output from serving the domestic market to serving export interests. The benefits in such cases are often limited to those along export routes, and so do not improve conditions broadly. Benefits accrue in very small sections, but raise total averages in ways that underestimate the degree of dependency on a client-state. Henwood is a little dismissive about dependency theories, but only to the extent that they might serve one of his chief targets -- those anti-globalizers who naively argue for only local, self-sustained, agriculture based economies. Henwood’s strategy, is to give the benefit of the doubt to his enemies’ evidence, when doing so can allow him credibility in exposing their utopian longings for a pre-industrial world, and a nostalgia for the rural past. Anti-globalization, Henwood wisely reiterates, best not be anti-development.
To make this point, however, he cites evidence that environmental regulation is more common in countries when they broaden their industrial base. This is sometimes true. But it ignores the severe pollution in places like Chile that resulted from IMF privatization schemes and financial deregulation. Henwood probably thinks that most New Era flunkies think Chile is ancient history, so best to focus on the now. But the IMF’s increased power throughout the 1970s paved the way for the New Era ballyhoo. It gave undue legitimization to privatization, deregulation, and the monetarism he elsewhere criticizes. Had Henwood acknowledged the route many countries take to broaden their industrial base, he would also have had to acknowledge why environmental regulation is more prevalent there. The situation is usually pretty desperate by the time governments take any action.
One could also quibble with his declaration that multinational corporations often earn less when they seek profits abroad. He does not account fully for the notion that larger corporations tend to have trouble maintaining breakneck growth rates due to their sheer size. Quibbling such as this does not damage Henwood’s larger point: both businessmen and anti-globalizers tend to overestimate the profits going abroad will produce. In other words, there is much to be said for basic research and development and for more efficiently designed capital equipment. Henwood is reminding his opponents that keeping labor costs down is not the single solution for higher profit. Economic justice and technological progress can co-exist.
This sort of heterodoxy is designed to jostle those on the left as well as those on the right. Henwood correctly sees the need for the left to get their facts straight if they are to stay properly focused. And he is optimistic. He simply prefers his optimism to be well-founded. Even in evaluating the optimism of his comrades like anti-capitalists Antonio Negri and Michael Hardt, authors of Empire, Henwood is cautious. Even with them, Henwood is evenhanded. He frankly discusses their deemphasizing the role of the nation-state, but concludes offers them as a counterweight to Luddism and localism. In doing so, he restores the terms of the debate. National interest is inseparable from international concerns. This engaged spirit coupled with fairness will no doubt lend After the New Economy book staying power. He may even win over a few moderates, no small accomplishment for someone who once made his New Year’s resolution to quote Marx more often.
Standard Schaefer is a free-lance financial journalist in Pasadena, California. He can be reached at firstname.lastname@example.org.
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