The rule of the financial jungle is that big fish eat little fish. Companies use Employee Stock Ownership Plans (ESOPs) to buy up their own stock, enabling managers to cash out their stock options at a higher price. A rule of thumb has long been that about half the ESOPs are wiped out in corporate bankruptcies. After Sam Zell’s leveraged buyout of the Chicago Tribune, the newspaper’s employees were left holding an empty ESOP.
Federal Reserve Chairman Alan Greenspan described the role of rising personal and mortgage debt in today’s evolving class warfare. Under normal conditions unemployment at the relatively low 1997 rate (about 5.4 percent, the same as in the boom years 1967 and 1979) would have led to rising wage levels as employers competed to hire more workers. However, Greenspan explained to the U.S. Senate, a high rate of unemployment no longer was needed to hold down wages. All that was needed was job insecurity:
As I see it, heightened job insecurity explains a significant part of the restraint on compensation and the consequent muted price inflation.
Surveys of workers have highlighted this extraordinary state of affairs. In 1991, at the bottom of the recession, a survey of workers at large firms indicated that 25 percent feared being laid off. In 1996, despite the sharply lower unemployment rate and the demonstrably tighter labor market … 46 percent were fearful of a job layoff.
Despite the increase in labor productivity from fewer strikes and more intensive working conditions), U.S. wages were failing to rise. A major reason, Chairman Greenspan pointed out, was that workers were afraid to go on strike or even to complain about working conditions for fear of losing their paychecks, defaulting on their mortgage and falling behind on their monthly credit card bills and seeing their interest rates explode as their credit ratings declined. In July 1997 testimony he said that a major factor contributing to the “extraordinary” U.S. economic performance was “a heightened sense of job insecurity and, as a consequence, subdued wage gains.” Bob Woodward reported that Greenspan called this the “traumatized worker” effect as attrition spread the same volume of work among fewer employees, squeezing out higher “productivity.”
Median U.S. household income rose by a mere 15 percent during 2001-06 while mortgage credit inflated the cost of housing by 74 percent. Heavy mortgage debt and other housing and living costs have made workers feel one paycheck away from homelessness. As employees became debt ridden, widespread home ownership became a euphemism for a cowed labor force. Austerity’s squeeze on labor is tightened rents and consumer debt rise, along with shifts to part-time or lower-wage jobs and outright unemployment.
Financial appropriation of labor’s disposable personal income
The classical idea of a post-industrial leisure economy was to free nations from rent and interest overhead to bring prices in line with necessary direct costs of production, with governments subsidizing basic services out of progressive taxes or new money creation. By contrast, today’s financialized version of “free markets” obliges families to spend their life working mainly to pay banks for the credit needed to survive in today’s world.
Saddling students and homebuyers with debt has turned their hopes and ambition into a road to insolvency. People can choose which bank to borrow from, which home to buy with a 30-year working-life mortgage, and which college to take out an education loan to attend. But whatever their choice, they are subjected to a financialized version of the Company Store, a deregulated and predatory economy. Something must give way when earnings are unable to cover the stipulated debt service. If banks do not write down their loans, foreclosure time arrives and assets will be forfeited.
Next to home ownership, education is the path to the middle class. Student loans are now the second largest category of personal debt (over $1.3 trillion as of 2015, exceeding the volume of credit-card debt). Carrying charges on this debt absorb over 25 percent of the income for many graduates from lower-income families.
The 2005 U.S. bankruptcy code, written largely by bank and credit-card lobbyists, makes it harder to write off personal debts in general, and nearly impossible for student loans to be cleared. The effect is to turn many graduates into indentured servants, obliged to spend much of their working lives paying off the debt taken on to obtain a degree — or even for failure to complete their studies, most notoriously at for-profit crypto-colleges funded by government guaranteed student debt. The easiest way for many graduates to make ends meet is to live at home with their parents. Inability to save enough for a home of their own slows the rate of marriages and family formation.
By imposing an access fee on the entry point into the middle class job market, privatizing and financializing the educational system raises the cost of living and. This reverses the policy long followed by the United States, Germany and other successful nations that made their economies more competitive by providing education and other basic services freely or at subsidized rates. Creating a need for loans at the educational choke point turns universities into vehicles for banks to earn government-guaranteed interest.
Much as interest charges on home mortgages end up giving banks a larger sum than the sales price received by the sellers, student loan payments often give the bank as much interest income over time as the college or trade school has received as tuition. Consumer credit, home mortgage and education loans thus treat the labor force much as feudal landlords treated the land and its occupants: as a source of tribute.
From finance capitalism to neofeudalism
Hiding behind an Orwellian rhetoric that inverts the classical idea of a free market, financial planners are leading the world down the autocratic path that Spain and France took five hundred years ago. Without contributing to production, rentier income is overwhelmingly responsible for the wealthiest One Percent obtaining 73 percent of U.S. income growth since the 2008 crash, while the 99 Percent have seen their net worth decline. Yet in contrast to classical economics, Piketty’s much-applauded neoliberal attempt to explain today’s economic polarization does not single out finance and rent-seeking, so his remedy does not include focusing tax collection on rentier income or de-privatizing infrastructure monopolies by restoring a mixed public/private economy.
The drive to widen political democracy was expected to avoid this fate. Voters were expected to elect politicians who would put in place fiscal and regulatory checks against rentiers, so that industrial capitalism could use its economic surplus to expand markets and, in the process, raise living standards. The idea of asset-price inflation as a financial strategy, extending credit in ways decoupled from helping economies grow, was nowhere on the intellectual horizon. Thorstein Veblen was almost alone in explaining how Wall Street’s financial engineering was undercutting industrial capital formation.
Paying bankers and bondholders at the “real” economy’s expense is antithetical to industrial capitalism. The financial business plan is to turn economies into a set of rent traps, carving out privileges whose purchase and sale is financed by banks and bondholders. Instead of lowering the cost of basic services to make economies more competitive, the effect is to load them down with debt to extract interest, fees and rentier overhead. This destructive policy inflates the economy’s cost structure by building in higher user fees for the privatized monopolies and a rising flow of debt service to bankers, while imposing debt and rent deflation on the core economy.