The Road to Corporate Perdition
Even The New York Times has now raised the specter of capitalists destroying capitalism. Granted, that's hyperbole, at least so far, and it's necessary to keep in mind how resilient and adaptive this economic system has proven to be. Nevertheless, since the initial Enron disclosure, we've seen a rising tide of unambiguous evidence that what many of us suspected throughout the Wall Street-driven economic boom is true: The whole thing always seemed uncomfortably like a Ponzi scheme.
Stock valuations surged wildly beyond firms' profitability; even companies that never showed a profit at all became the market's darlings in the orgy of speculation. Attractiveness for investors was driven as much by reports of cost-cutting and "downsizing"--that is, breaking unions, speeding up and laying off workers, and cutting full-time jobs and benefits--as by sales or production figures. Companies increasingly supplanted defined-benefit pension plans with defined-contribution plans, like the now notorious 401(k) plans, and encouraged--often pressured or coerced--workers to buy company stocks.
Pundits and economists reassured us daily, especially as some of them began salivating at the thought of looting the Social Security system through privatization, that there was no longer risk of a serious market downturn. We had finally reached the millennium of crisis-free, perpetual growth--led by the technology and telecommunications "new industries." By the mid-1990s the Nobel Prize committee dropped any pretense at recognizing attempts to explain how real economies work. At the most vulgar point they gave the prize to Myron Scholes and Robert C. Merton, a pair of economics professors who developed a formula to help plot the movements of a particular kind of derivative investment. (The winners were also partners in Long-Term Capital Management, a hedge fund that collapsed within six months after the two economists won the Nobel. It seems their formula made no accommodation for the possible effects of economic downturn. The American Economics Association should have a 1-900 phone number!)
Part of the success of the Reagan Revolution was inducing many of us to identify with the investor and speculator class. I remember in the mid-1980s--in the heady days of the speculative boom driven by tax cuts, defense spending, and financial deregulation--noticing a shift in consciousness about home ownership. The goal of owning a house was no longer simply a matter of having security for old age, or freeing oneself from the grip of private landlords, or even getting the tax breaks the federal government bestows upon the middle-income strata. All of a sudden home ownership became desirable as an entry ticket into the speculative economy, or at least a Rotisserie League version of it. People began tracking their accumulations of equity as if they represented real money.
Never mind that much of this accumulation was fictitious. There were only two ways to realize it: selling, which usually would mean buying again in the same inflated housing market, or borrowing against it, which meant accumulating only more debt. Enough people were able to cash in, or appear to cash in, in the short term at least, to keep the dream, and the identification with big speculators, alive.
The Reaganite rhetoric of "choice" and "personal responsibility" rationalized further waves of privatization and deregulation, and the explosion of 401(k) pension investment plans. Employers prefer 401(k) plans because they're less costly to administer and give them tax breaks. During the stock-driven boom of the 1990s, we were all encouraged, and often enough pressured, to take our old-age security and retirement planning into our own hands as individuals, which led to more people spending more time following the stock market. Most of us have seen the television commercials in which cab drivers, secretaries, paralegals, and plumbers proffer sophisticated stock analyses and investment tips. And, all too often, real-life conversations among groups of co-workers, relatives, and neighbors would drift to animated comparisons of their investment strategies and portfolio performance.
The stock market was roundly hailed by pundits and hypesters as the real democratizing force in America and the world: Anyone, regardless of station, with proper diligence and effort could attain wealth, luxury, and independence. At the height of its exuberance this rhetoric sanctified day-trading as the zenith of human freedom, a kind of Ayn Rand utopia. In reality, it was really just a form of video poker that preyed on compulsive gamblers with more liquid assets. It took a mass murder by a day-trader who'd lost his shirt and wide reporting of the fact that 90 percent of day-traders don't make money to scuttle this perverse redefinition of human fulfillment.
But the sheen on the stock market stayed as glitzy as ever. By the late '90s, it was not only treated as the sole barometer of economic health; it also seemed to have become even more than the centerpiece of the daily news. Cable news networks began sanctifying daily market openings as if they were liturgical; the Opening Bell became equivalent to the Angelus or Muslim Call to Prayer.
All the while, corporations were plundering and hollowing out the domestic economy. The distribution of wealth and income in the country became among the most unequal in the history of our species. And deregulation was the watchword of the day. But deregulation is, ultimately, still a form of regulation. It sets a framework within which private interests can pursue their objectives--as, for example, in permitting corporations to locate their headquarters in Bermuda as a tax haven. Deregulation just means that public and social interests are cut out of the equation.
The scandals of Enron, WorldCom, Global Crossing, Tyco, et al., have exposed a cesspool of fraud and corruption at the highest reaches of corporate power. Even prodigious corporate tool Tom DeLay now chirps about the need for more federal oversight.
The corporate media have gone into crisis management mode. This includes attempting to steer the story into the familiar grooves of the "What-did-he-know-and-when-did-he-know-it" narratives. That's what they did with Watergate and the Iran-Contra affair, which similarly threatened to expose corruption and illegality at the very core of the national government, and with Ken Starr's ludicrous crusade against Bill Clinton. This whodunit approach may provide titillating tidbits, in that Lifestyles of the Rich and Famous way, and it fits the comfortable formula of TV melodrama. But these corporate scandals aren't isolated incidents or the actions of uniquely venal individuals. They're natural products of the deregulated financial regime that was supposed to be our salvation. They are simple extrapolations from business as usual.
The line between insider-trading and the acceptable use of contacts and intuition is very fine and porous. Similarly, large firms with multiple divisions operating semi-autonomously, often trading back and forth internally, can only be expected to record their transactions in the ways most favorable to enhancing the firm's stock position. Accounting firms--even large, prestigious ones--know who their clients are and what those clients need or prefer. The bigger the account, the more the accounting firm will aim to please. And there are enough gray areas, with all the funny-money transactions that occur between divisions and subsidiaries, to hide or misrepresent revenues, expenses, profits, and losses almost at will. As long, that is, as nobody's watching. And that's the essence of deregulation.
This should underscore how preposterous the idea is that each of us can or should take our retirement portfolios into our individual hands. It has always been absurd to imagine that most of us are able to commit the quantities of time and effort that would be required to pretend to narrow the odds on the stock market; this is another expression of economists' idiotic presumptions of an idealized rational actor. This view is absurd also because it denies the extent to which the deck is stacked to the advantage of structural speculators--those with power and connections to insulate themselves from, if not actually influence, market forces. By diminishing oversight, deregulation actually increases the relative power of structural speculators and superwealthy insiders. The current exposures of corporate flimflams threaten a crisis of confidence in the market partly because the firms involved were so large, but partly also because the pool of those who were able to protect themselves is so tiny. That bracing fact is what has led to a revival of regulatory spirit within the corporate elite itself, though the converts' zeal may not be very deep or genuine. It's not just us little people who are left holding the bag now. After all, not many of the bourgeoisie are on intimate enough terms with Martha Stewart to expect a heads up that a stock is about to tank.
The warning signs about Wall Street's house of cards have been present for more than a decade: the savings and loan scandal; one major, highly reputable brokerage and investment house after another being busted for insider-trading and taking bribes and kickbacks; and, most recently, the California utilities crisis. But politicians and pundits insisted that each case was an aberration, that there was no need for structural reforms. Democrats and Republicans equally trumpeted market triumphalism, though the Republicans do so with more religious fervor, as befits the true hypocrite. Democratic and Republican officials and candidates lapped up corporate and Wall Street cash and sang the appropriate tunes.
The Bush Administration is implicated in these scandals up to its eyeballs. In fact, this Administration may be the most blatantly corrupt in living memory. Its record began, of course, with the theft of the election. But that was only the beginning. The key players in this Administration see the national government only as a vehicle for enriching themselves, their cronies, and the firms they have ties with. Even Nixon's Administration included some old-style statist Republicans who understood themselves to have a responsibility, if not mission, to govern in the interest of the capitalist class as a whole as they saw it or minimally in the interests of a coalition of key sectors. In practical terms, this kind of broad perspective on the ruling class's interests is what is ultimately meant when pundits talk about statesmanship. No one in George W.'s Administration gives off the faintest hint of such a perspective. They're all either Republican hacks, narrowly self-interested corporate plunderers, or both. And the Republicans in Congress are no better. They're nearly all either crackpot free market zealots, cash-and-carry pimps for corporate interests, or both.
So once again our fates are in the hands of the Democrats, who are only barely less beholden to corporate interests than the Republicans are. As usual, we can expect them to make noises about excesses and the need for reform, all the while making sure that there's no reason to question their commitment to free market theology. This time, though, because it's not just the rest of us who are feeling the brunt of corporate perdition, there's a better chance that some regulatory probity will be restored to the system.
We need more, however, than stepped-up enforcement efforts and stronger mechanisms to level the playing field among big investors. We need to take this crisis as a lesson that we can't afford the insanity of a casino-based pension system. We need national legislation requiring employers to maintain defined-benefit pension plans, and we need a system of portable pensions. The current circumstances also underscore the importance of the Social Security system for the vast majority of us who aren't in Martha Stewart's or Kenny Boy Lay's Palm Pilot.
There are larger lessons to take from this corporate crisis, as well. First of all, capitalism is capitalism, and the tendency to produce this kind of crisis is endemic to it as an economic system. There's no technical fix, no new technology or religion, that can eliminate that tendency. The more complex and more extensive a capitalist economy becomes, the deeper and more devastating its periodic crises will be, particularly in the absence of efforts to equilibrate market forces in the interest of social stability and the common good. The regulatory regime that began with the New Deal was a response to the Great Depression. And it's that regime the Republicans have been hell-bent on destroying since Reagan came to power. They've succeeded well enough, again with Democrats' complicity, that they've brought us once again to the precipice of economic collapse.
A second lesson has to do with the popular response to the crisis. There's no doubt a lot of talk among leftists now about what political entailments follow from the current situation. The fact is, we don't know and can't know. We do know that many people are going to suffer terribly as a result of this debacle of theft, fraud, and corruption. But we don't have a clue what that's going to translate into as a political response. Only when people perceive themselves to be confronted with a crisis situation and mobilize pressure to assert their concerns and interests can progressive change come about. It was just such popular mobilization, and the concern to contain it, that led to construction of the regulatory apparatus that the Republicans and Democratic neoliberals have largely dismantled. More than anything else in America now we need a vehicle for expressing an independent political voice representing clearly and uncompromisingly the concerns of this country's working class majority. Only then will we be able to turn the tide against the twenty-year corporate offensive that has thoroughly corrupted our political institutions and led us to the brink of economic catastrophe.
Adolph L. Reed Jr. is Professor of Political Science on the Graduate Faculty of Social and Political Science at the New School.