The State-Corporate Complex: A Threat to Freedom and Survival
Text of lecture given at the The University of Toronto, April 7, 2011
(Transcript courtesy of Yvonne Bond)
I'm going to talk mostly about the United States, in part because I know it better, but also in part because it its unique significance in the global system. That's been true dramatically since the Second World War. The character and extent of this uniqueness often isn't understood and would be easily worth a talk in itself, but I won't go into that.
However, we constantly see that even in relatively small ways. So for example when the housing bubble in the United States burst a couple of years ago, that initiated a global economic crisis which most of the world is still mired in. The worst outcomes were just averted by quite desperate measures.
In another domain, when France and Britain wanted to bomb Libya a couple of weeks ago, they had to turn to a more reluctant Washington to do the heavy lifting and provide the vast bulk of the means of violence. The U.S. has a huge comparative advantage in that domain. Furthermore, although the United States -- U.S. society and its political economy -- are unusual in some respects, it's not that different from elsewhere. And in fact developments within the United States over the years have often foreshadowed what is going to happen pretty soon in other industrial societies in the state capitalist world.
That world, in fact the whole world, is of course always changing, but there are significant continuities and they're worth bearing in mind. One continuity is that those who control the economic life of a country also tend to have overwhelming influence over state policy. That should be a truism taught in elementary school. It was formed succinctly by Adam Smith in words that I've quoted before but are important enough to repeat. He, speaking of Britain of course, wrote that the principle architects of policy are the owners of the society, in his day the merchants and manufacturers, “the masters of mankind” as he called them. And they insure that state policy serves their interest, however grievous the effect on others, including the domestic population, but primarily the victims of what he called their savage injustice abroad, and India was his prime example. That was early in the days of the destruction of India.
Today the masters of mankind are multinational corporations and financial institutions, but the lesson still applies and it helps explain why the state-corporate complex is indeed a threat to freedom and in fact even survival. By now there are important elaborations of Smith's truism applied to the modern world. The most significant and sophisticated version that I know is by political economist Thomas Ferguson, what he calls his investment theory of politics which in brief, simplified, simply views U.S. elections as occasions in which the coalitions of private investors coalesce to invest to control the state. It turns out to be a thesis of quite predictive success over more than a century as he shows.
What it means in effect is that elections are pretty much bought and that the buyers expect to be rewarded, and that happens all the time. It's illustrated very clearly in the last U.S. Presidential election in 2008. President Obama's victory traces largely to a huge influx of capital from the financial institutions, especially toward the end of the campaign. They preferred him to his opponent, McCain, and they expected to be rewarded. And of course they were. The country at that time was mired in a deep recession, so Obama's first act was to select an economic team. It was drawn almost entirely from those who had caused the severe economic crisis that he inherited. He systematically avoided critics of their practices, including quite prestigious ones, Nobel laureates.
Actually the business press wrote rather ironically about this. The Bloomberg News did a review of Obama's economic team, went through each one of them and looked at their records and concluded that these people shouldn't be on the economic team to fix up the economy. They should be getting subpoenas, which was pretty correct. They didn't, of course.
Well, not surprisingly the team chose measures which rewarded the major culprits who are now richer and more powerful than before, and poised to lead the way to the next and probably more severe financial crisis. There was recently an interesting article about this by the Special Inspector of the bailout programs, Neil Barofsky. He wrote a bitter condemnation of the way it was executed. He points out that the legislative act that authorized the bailout was a bargain. The financial institutions that were responsible for the crisis would be saved by the taxpayer and the victims of their misdeeds, in fact real crimes -- the victims would be somewhat compensated by the measures to protect home values and preserve home ownership. It was mostly a housing crisis.
Only the first part of the bargain was kept. The financial institutions were rewarded lavishly for causing the crisis and they were forgiven for outright crimes, but the rest of the program floundered. As Barofsky points out, I'm quoting him, “Foreclosures continue to mount with eight to 13 million filings forecast over the program's lifetime while the biggest banks are 20% larger than they were before the crisis and control a larger part of the economy than ever.” They reasonably assume that the government will rescue them again if necessary. Indeed, credit agencies incorporate future government market bailouts into their assessments of the largest banks. That means exaggerating market distortions that provide them with an unfair advantage over smaller institutions which continue to struggle.
So in short, as he puts it, Obama's programs were a giveaway to Wall Street executives and a blow in the solar plexus to their defenseless victims. In other words, the government listened to those who have a voice in the political system and acted accordingly, all completely in accord with Smith's truism.
While there should be no surprises here, there are careful studies of Senate votes over a long period and they show that the Senate is indeed responsive to the sector of the population [that is] the top third in income. Actually a closer analysis would show that it's a very small fraction of that top third. In contrast there's no correlation at all between Senate votes and opinions of the middle third. And for the bottom third there is a correlation. It's negative. Senate votes are counter to preferences for the bottom third. And on major issues of foreign and domestic policy, there's quite a sharp disconnect between public opinion and public policy over a long period.
One might argue that these results don't really depart very far from the intentions of the founders of the society. So James Madison, who was the main framer of the Constitutional order, explained to the Constitutional Convention that power should remain in the hands of the Senate. The Senate was not chosen directly by voters until about a century ago. In those days the executive was pretty much an administrator, not an emperor. And the House, the third part of the system, which is closer to the public, had much more limited authority. That's the way in fact it was set up. As Madison explained to the Constitutional Convention, “the Senate represents the wealth of the nation, the more capable set of men, men who have respect for property owners and their rights and understand that government must protect the minority of the opulent against the majority.”
That's quite accurate. Something else that ought to be taught in elementary school.
We should bear in mind, however, kind of in Madison's defense, that his mentality was pre-capitalist. So he assumed that a Senator would be, as he put it, “an enlightened statesman and benevolent philosopher.” The Senate would be a “chosen body of citizens whose wisdom may best discern the true interests of their country and whose patriotism and love of justice will be least likely to sacrifice it to temporary or partial considerations.” They would therefore refine and enlarge the public views by guarding the public against the mischiefs of democratic majorities. This is all rather like the noble Roman gentleman of the fantasies of the day. Adam Smith before him had a sharper eye.
Well, it didn't take long for Madison to shift his thinking about this. As he viewed the early results of the democratic experiment, he had second thoughts. In fact by 1792, a couple of years later, by then he deplored what he called “the daring depravity of the times as the stock-jobbers become the Praetorian band of the government, at once its tool and its tyrant, bribed by its largesses and over-aweing it by clamors and combinations,” which isn't a bad description of today's political system and its social and economic correlates.
Today in the richest country in human history, 20% of the population qualify for food stamps. Real unemployment today is at the level of the Great Depression for much of the population, manufacturing workers for example. And in fact their actual circumstances are much worse than in the Great Depression, which I'm old enough to remember. Most of my family were unemployed working class and the country was of course far poorer than it is today. But it was a hopeful period in many ways. There was a sense that people were doing something about it and that times would get better. And indeed they did, thanks to very active organizing, CIO, other things. And then an immense government stimulus, first during the War and then continuing through the post-war decades.
That's not true today. The jobs that are being lost are unlikely to return, at least under the current programs of the masters of mankind. Not graven in stone, but that's their programs. While the population suffers, Goldman Sachs, which is one of the main architects of the current crisis, is now richer than ever and they have just quietly announced 17.5 billion dollars in extra compensation for last year with the CEO, Lloyd Blankfein, getting 12.6 million while his base salary more than triples. And exactly as Barofsky said, they're poised to play the same game again.
And why not? They can rely on the government insurance policy that enables them to safely engage in risky transactions, make huge profits, and they don't take into account what in the jargon of economics are called externalities -- the effect of a transaction on others; crucially in their case what's called systemic risk, that is, the likelihood that the whole system will collapse as a result of their risky and hence profitable transactions.
And when it does collapse, as is anticipated, that's not a big problem. They can run to the powerful nanny state that they nurtured, clutching in their hands their copies of Hayek and Milton Friedman and Ayn Rand and so on and they can demand the bailout to which they're entitled because they're too big to fail as it's put. As one commentator added, Riley, also too big to jail for quite serious crimes. It's a pretty impressive scam. Of course it's in radical violation of capitalist principles, but the masters of mankind believe in those principles only for others, not for themselves.
That stance has a long pedigree. That's another matter that's important to understand if we want to grasp the nature of the world in which we live: actually lies in the background a very revealing interaction that's taking place between two countries that are quite different in terms of independence and economic development: the United States and Egypt. The democracy uprisings in the Arab world, particularly in Egypt, these are events of truly historic importance. And they're very frightening to western power, for very simple reasons. The west is certainly going to do whatever it can to prevent authentic democracy in the Arab world.
To see why it's enough to take a look at the studies of Arab public opinion, which is certainly known to planners, even though not to the western public, at least to those who keep to the media. What they show is for example in Egypt about 90% of the population think that the United States think that the United States is the main threat that they face. Maybe 10% think Iran is a threat. Actually about 80% think the region would be more secure if Iran had nuclear weapons. Those figures happen to the high in Egypt but they're pretty much true across the Arab world, so it's obvious that the west is going to do whatever it can to prevent those opinions from entering into policy which means to prevent any form of authentic democracy.
Well, these are extremely important events and it's important to take a look at how they're developing. All of these have long histories incidentally. So for example the Egyptian movement as you probably saw was led by a group of young tech-savvy people who called themselves the April 6th Movement. Why April 6th? That's a reference to a major action that was planned on April 6, 2008. At one of the major industrial installations in Egypt, the Mahalla textile installation, there was supposed to be a big strike. There were a lot of support activities. It was crushed by the military dictatorship that we were supporting. Forgotten here; who cares? But not forgotten there. And the same is true of the other countries.
The things that have suddenly burst forth are not coming from nowhere. That's true of the first one too, which doesn't even get reported. The current wave of uprisings actually began in the last African colony, one of the two countries of the Arab world that was invaded, occupied, and settled by an outside power. That's Western Sahara, technically a U.N. dependency, supposed to move on to independence. It was invaded in 1975 by Morocco, a brutal invasion like most. [They] settled a lot of the Moroccan population there, illegally of course. And there have been repeated protests. There was another one in last November, an effort to set up a tent city. Moroccan forces quickly crushed it. Since it's a U.N. responsibility the issue did come to the Security Council, but France made sure that there would be no inquiry into what happened. It has to protect its Moroccan client. That was the first of the other occupied countries so far the lid has been on tightly. That's Palestine. Plenty to say about that, but I think most of you are familiar with it, not least from the very courageous and important work done right here by the late Jim Graff.
Whatever is going to happen it's not clear. All of this is still a work in progress. But despite the internal barriers and internal constraints, these popular movements have achieved substantial success and they have pretty exciting prospects. One of the most dramatic recent moments was last February 20 when Kamal Abbas sent a message from Tahrir Square in Cairo to the Wisconsin workers saying “We stand with you as you stood with us.” Abbas is a leader of the years of struggle of Egyptian workers for elementary rights that lie in the background of today's Arab spring, as I said brutally crushed by the western-backed dictator. He's also a leading figure in the current uprising. And Abbas' message of solidarity to Wisconsin workers evoked the traditional aspirations of the labor movement -- solidarity among working people of the world and populations generally.
Right now the trajectories in Cairo and Madison are intersecting but they're heading in opposite directions: in Cairo towards gaining elementary rights denied by the dictatorships; in Madison towards defending rights that have been won in long and hard struggles and are now under severe attack. Each of these is kind of a microcosm of tendencies that are underway in global society following varied courses. There are sure to be far-reaching consequences of what's taking place in the decaying industrial heartland of the richest and most powerful country in human history and in what President Eisenhower called the most strategically important area in the world, the Middle East -- “a stupendous source of strategic power and probably the richest economic prize in the world in the field of foreign investment.” Those are the words of the State Department in the 1940s. That was a prize that the U.S. intended to keep for itself and its allies in the unfolding new world order of the day that they were organizing and implementing, and in fact still do.
It's normal for the victors to consign history to the trash can and it's normal for the victims to take it seriously. If we want to understand the world we should follow their example. Today is in fact not the first occasion when Egypt and the United States are facing similar problems and moving in opposite directions. That was also true in the early part of the 19th century in ways which are quite crucial for both societies and generalize across the world, and are crucial for understanding of the creation of the divide between the rich First World and the poor Third World, much less sharp back in those days.
At that time, early 19th century, Egypt and the United States were both well placed to undertake rapid economic development. Both of them had rich agriculture. That included cotton, which is sort of the fuel of the early industrial revolution. Although unlike Egypt, the United States had to develop cotton production and a work force by conquest, extermination, and slavery, with consequences that reverberate to the present. There was one fundamental difference between Egypt and the United States, namely the United States gained independence and it was therefore free to ignore the prescriptions of economic theory -- pretty much the same ones as today. At the time they were delivered by the greatest economist of the day, Adam Smith, in terms similar to those preached to what are called developing societies today.
So Smith urged the American colonies to keep to what was later called their comparative advantage, that is, to produce primary products for export and to import superior British manufactures and certainly not to try to monopolize crucial goods. That meant particularly cotton in those days, kind of like oil today. Any other path, he warned, I'll quote him, “would retard instead of accelerating the further increase in the value of their annual produce and would obstruct instead of promoting the progress of their country toward real wealth and greatness.” Approximately what you study in economic courses today and the advice given to the world by the IMF and the World Bank. Having gained their independence, the U.S. colonies were free to ignore the laws of sound economics. They were free to follow England's own course of independent state-guided development with high tariffs to protect industry from superior British exports, the first textiles and later steel and others, and a wide variety of other modes of state intervention in order to accelerate economic development.
The independent republic also tried and came pretty close, to get a monopoly of cotton -- for a good reason. The purpose was to place all other nations at our feet, as the Jacksonian presidents put it at the time when they were annexing Texas and half of Mexico. They were particularly concerned with England. England was the big enemy in those days. It was a deterrent and they figured if they monopolized cotton they could bring England to its feet. It's pretty important. For example, it's one of the reasons why Canada wasn't conquered. The British deterred it several times. Maybe it's being conquered in other ways, but that's another matter. But it wasn't militarily conquered.
They also couldn't conquer Cuba, much as they wanted to, because the British fleet was in the way. They did finally conquer in later in the century in 1898 under the pretext of liberating it but actually conquering it. The idea was if they could monopolize control of cotton they could overcome this deterrent that was in the way of expansion. Actually it's kind of interesting that that's essentially the policy that was attributed to Saddam Hussein in 1990, ridiculous at that time. But if you look back at the propaganda at the time of the invasion, the pretext was, well, he's trying to monopolize oil to bring us all to his feet. That's totally outlandish. But what was charged, the crime attributed to Saddam Hussein, was in fact one of the main ones that led to U.S. economic development. It happened and it's had a big effect, one of the reasons it's out of history except that it's in history.
That was the United States. What about Egypt? Egypt couldn't follow a comparable course because it was barred by British power. It wasn't independent. So the British Lord Palmerston declared, in his words, that “no ideas of fairness toward Egypt ought to stand in the way of such great and paramount interests of Britain as preserving its economic and political hegemony.” And he expressed what he called his hate for the ignorant barbarian Muhammad Ali, the developmentalist leader who was trying to direct Egypt on an independent course. Britain's fleet and financial resources were deployed to terminate Egypt's quest for independence and economic development.
After World War II the United States displaced Britain as global hegemon and it adopted the same position. The U.S. made it clear that Washington would provide no aid to Egypt and the whole world badly needed aid at the time. The U.S. would provide no aid to Egypt unless it adhered to the standard rules for weak, the ones I cited, which of course the U.S. continued to violate itself, imposing high tariffs to bar Egyptian cotton and causing a debilitating dollar shortage. Actually [this is] the usual interpretation of market principles. It's fine for you, fine for disciplining the weak and controlling them, but not me, please. I want the nanny state to make sure I'm okay. That applies home too, the way Goldman Sachs and its colleagues and its representative in government understand very well. These are really leading themes of modern history. They're essentially the basis for the First – Third World distinction -- this generalizes all over -- and for what's happening internal to the rich societies as well.
As these kind of quite simple principles predict, elections are increasingly just becoming a charade run by the public relations industry which tries to mobilize populations to vote while making sure that issues are marginalized for the reason I mentioned. The public has different opinions about issues than the masters of mankind so you want to keep them aside.
I should say while I'm talking about the United States, it's not true everywhere. If you go, say, to the poorest country in South America, Bolivia, they actually had democratic elections, pretty remarkable ones and especially in the last ten years. So in the last ten years the most bitterly repressed segment of the population, the indigenous population, have actually entered the political arena, pressed their demands, took part in elections, won the elections, elected someone from their own ranks -- a poor peasant, not somebody from the Skull and Bones at Yale -- and won the election on real issues, serious issues like control over resources, cultural rights, how to handle problems of justice in a complex multiethnic society. And then in another election a couple of years later they did even better.
That's democracy. You have to look pretty hard to find anything like that in the industrial world. What's happening in our societies is something quite different. The public relations industry, which essentially runs the elections, is applying certain principles to undermine democracy which are the same as the principles that applies to undermine markets. The last thing that business wants is markets in the sense of economic theory. Take a course in economics, they tell you a market is based on informed consumers making rational choices. Anyone who's ever looked at a TV ad knows that's not true. In fact if we had a market system an ad say for General Motors would be a brief statement of the characteristics of the products for next year. That's not what you see. You see some movie actress or a football hero or somebody driving a car up a mountain or something like that. And that's true of all advertising. The goal is to undermine markets by creating uninformed consumers who will make irrational choices and the business world spends huge efforts on that.
The same is true when the same industry, the PR industry, turns to undermining democracy. It wants to construct elections in which uninformed voters will make irrational choices. It's pretty reasonable and it's so evident you can hardly miss it. It's another one of those things that ought to be taught in elementary school. It's kind of embarrassing to talk about something so obvious to a university audience.,
All of this is second nature to the masters of mankind. So for example after his 2008 victory as perhaps you know, Obama immediately won an award from the advertising industry for the best marketing campaign of 2008. He beat out Apple Computers. And if you look at the business press, where people talk more openly, executives were euphoric. They said they'd been marketing candidates like toothpaste ever since Reagan but 2008 was the greatest achievement. They said it was so great it's going to change the style in corporate boardrooms.
The 2012 election is now expected to cost two billion dollars. It's going to have to be mostly corporate funding. So it's not at all surprising that Obama is selecting business leaders for top positions. The public is quite angry and frustrated, but unless western populations can rise to the level of Egyptians they're going to remain victims.
In the United States the Republicans long ago ceased any pretext of being a traditional political party. They are so deep in the pockets of corporate America, the super rich, you need a telescope to find them. Democrats, who incidentally by now are what used to be called moderate Republicans, they're not too far behind. Obama's choice of an economic team which I mentioned is an example. Actually I didn't put in quite accurately. There was one exception in his economic team, namely Paul Volcker. He was the Secretary of Treasury under Ronald Reagan. But the spectrum has shifted so far to the right that Volcker was the last liberal calling for some kind of regulation -- was, incidentally, not is. He was kicked out, replaced by Jeffrey Immelt. He was the CEO of General Electric. That's the nation's largest corporation.
His special responsibility, if you look back at the rhetoric, was to create jobs. Actually more accurate comment, again by Tom Ferguson, is that what we actually have here is the disappearance from the scene of the best-known and most visible critic of the excesses of the financial sector and his replacement by the sitting CEO of a company that is heavily dependent upon government aid of all sorts including diplomatic assistance to invest more in China and to shift jobs there. This is not about jobs, it's about political money. The White House knows it will need to raise about a billion dollars for its re-election campaign.
That's the context in which this and Obama's other recent appointments need to be judged, and the business world not surprisingly was quite pleased. The London Financial Times reported that Mr. Immelt's appointment was applauded by the U.S. Chamber of Commerce, the major business lobby, which they said which they said has been among the President's harshest critics and funded many Republicans that ran against Democrats in last November's election. But maybe that will be over and the last barrier to business rule could be out of the way.
If you look at GE, General Electric, more than half of its work force is abroad and more than half of its revenue comes from overseas operations. Also most of its revenues come not from production though it's regarded as a manufacturing enterprise but from financial operations, for which, incidentally, it received a hefty bailout when Wall Street tanked. While the appointment was proclaimed to be for job growth, it actually has little to do with that and more accurately it's what's called follow the money. More than a century ago the great political financier Mark Hanna said that two things are important in politics: money and I've forgotten the second one. Another thing for elementary school.
That's far more true today especially with the radical changes of the past thirty years. They're important to understand. These developments roughly the last 30-odd years followed one of the major changes in world order in the modern period, namely the dismantling of the post-Second World War economic system, so-called Bretton Woods system, which had been designed by the victors of the Second World War, the United States and Britain. The basic designers were John Maynard Keynes from Britain and the New Deal economist Harry Dexter White for the United States.
One central component of this system was regulation of currencies. In fact that was part of the basis for the huge economic growth for the next couple of decades, the highest in history. That was dismantled about 40 years ago. That was one factor that led to the huge explosion in the financial speculation and the vast growth of financial institutions. At that time they were small components of the economy and they were mostly doing what the banks are supposed to do in state capitalist systems, namely to direct unused funds like your bank to some kind of productive investment.
That was then. By 2007, just before the great crash, they gained about 40% of corporate profits in the U.S. Their profits come mostly from complex financial manipulations, actions that have little if any social or economic utility and are harmful to the economy and also to people in many ways. These practices would be sharply curtailed if capitalist principles were to prevail. They would be curtailed by crashes and losing your money. But thankfully there's no fear of that, at least for the rich.
Another factor in the financialization of the economy was that the rate of profit in production was declining so it was easier to make money by financial manipulations, of course always with the protection of the nanny state. A closely related development was the offshoring of production. That's within a global trade system that is very carefully designed to set working people in competition with one another worldwide along with a very high level of protection for wealth and unprecedented rights for investors. That's the usual interpretation of market discipline again: fine for you, but not for me, please.
These developments set in motion a vicious cycle of concentration of wealth and with it concentration of political power, again in accordance with Smith's maxim. For the past 30 years state corporate policy has been very precisely designed to accelerate this cycle so inequality as you probably know has soared to the highest levels in U.S. history. But less known is that this is actually misleading. The radical inequality results primarily from the extraordinary wealth of the top one percent of the population, actually more accurately the top one tenth of one percent. It's a group so small that it's missed by the U.S. census, which vastly underestimates inequality for this reason. It's been studied by economists.
Meanwhile for the majority of the population real incomes have pretty much stagnated. People are getting by with heavier workloads, much more than, say, in Europe and Japan; debt, and asset inflation like the last housing bubble. The miniscule category of victors, and it is extremely small, that's primarily CEOs, hedge fund managers and the like. And they use their political power to enhance the process. The cuts, for example, are carefully crafted to benefit the super rich. If you look back, until 1980, until Reagan, taxes in the United States were somewhat redistributive -- that's according to the analysis of the Internal Revenue Service -- as in most countries. That's what they're supposed to be. Since then with a couple of blips, that in fact has declined, and if other factors are introduced, like tax havens and other evasion options, they redistribute upwards. That's carefully designed.
Take the Bush tax cuts ten years ago, which are huge burden on the economy. They were designed very carefully. They started the first year with a small tax rebate to people. So you get a couple of hundred dollars in the mail and you think this is great, a tax rebate. But they were designed so over the years the benefits would shift towards the rich, and by the tenth year when they were set to expire, more than half of the tax benefits went to the top one percent, the people that count. But then it's kind of invisible if it happens that way. There's a name for it. It's called the sunset technique. They make sure that by the time the sun sets, things are happening the right way. You kind of delude people at the beginning. Only those who are inside the game can see what's planning down the road.
These are perfectly normal kind of policies for the people who are called conservatives, who now want to make it permanent. Take a look at the front page of the newspapers. They want to make these cuts permanent, but for jobs, the same as here. The reason we have to give a huge amount of money to the top one percent of the population or a fraction of that, which spends it on whatever they feel like, is for jobs. Actually there's an interesting changes that's taken place in the English language in this respect. There is a word which has become obscene, so since there may be children in the audience I can't say it but I'll spell it: P-R-O-F-I-T-S. You're not allowed to say that. In fact it has a pronunciation. It's called jobs, and that's kind of by now routine.
And that's what this is about. The same here. That was the Bush tax cuts, but the same thing is happening right at this moment. Like the lame duck session of Congress, the session after the November election before the next Congress takes office. Obama was greatly praised for his achievements during the lame duck session, a statesmanlike display of bipartisanship and so on. Praised by his own supporters, in fact. There were some achievements. The main achievement was a tax break for the super-rich, and I mean super-rich. Like I'm pretty well off, but I'm below the cutoff for that one. It was super-rich tax cut. Of course it increased the deficit, which is supposed to be the big thing we're worried about. Carrying that off required some pretty impressive footwork but it was done.
Also at the same time there was a tax increase for federal workers, but it wasn't called that because you're not supposed to talk about tax increases. It was called a freeze, I think for five minutes. A freeze for maybe five seconds. A freeze for public sectors is identical to a tax increase for them, so this is a tax increase for public sector workers disguised as a freeze. There was also a payroll tax decrease for Social Security. Social Security is paid by working people. It doesn't contribute anything to the deficit -- to the contrary. The workers pay for it, and there was a decrease in that payment, which kind of sounds good. The people need the money. But again it was a Trojan horse. Take a look at the way it was designed. It was the sunset technique again. The freeze was carefully designed so that it ends right before the Presidential election.
Political figures understand perfectly well that with an election coming up, nobody's going to say let's raise the payroll tax. So that essentially makes it permanent, which is a way to defund Social Security. Social Security is actually in pretty good shape despite what everybody screams about. But if you can defund it, it won't be in good shape. And there is a standard technique of privatization, namely defund what you want to privatize. Like when Thatcher wanted to defund the railroads, first thing to do is defund them, then they don't work and people get angry and they want a change. You say okay, privatize them and then they get worse. In that case the government had to step in and rescue it.
That's the standard technique of privatization: defund, make sure things don't work, people get angry, you hand it over to private capital. That's the Social Security scam. If they can succeed in defunding it -- they've been trying for decades, it's too popular to do much about, and very efficient incidentally, miniscule administrative costs. Nothing like the privatized health care system. So it's kind of hard to get rid of. But if you can defund it, it might work out. That's the point of this decision in the lame duck session. That's kind of important. First of all, if it can be privatized it's a huge bonanza for investors. There's a ton of money in the Social Security system. It's kept in a trust fund or invested in government bonds and goes back to working people. But if that can get into the hands of financial institutions, they can make a ton of money by using those funds to enrich themselves. And as usual when the system crashes, going back to the taxpayer to bail them out.
Also, Social Security really has defects. It's almost of no use at all to wealthy people. They may get it but they're not going to notice it. It's a toothpick on a mountain. So who cares? But for a large part of the population it's their means of survival. That's particularly true right now. People had a tremendous amount of their fake wealth which they believed it in housing. It was all a fake bubble but they believed in it. So it was used borrowing, for education, for anything. That's gone. Eight trillion dollars of it are gone. Those people are going to be surviving on Social Security that's of no significance to the wealthy, of course.
There's a kind of a deeper point, that Social Security is based on the principle that Kamal Abbas was talking about, namely social solidarity. Social Security is based on the idea that you're supposed to care what happens to people who are in need. So like if there's a disabled widow across town and she doesn't have food to eat, you're supposed to care about it. That's what Social Security is about. And that's a bad idea. You're supposed to look after yourself, not care about other people. Social Security is dangerous. It kind of undermines preferred doctrines and can even lead to action, which could change the way the world works. So we don't want that. In fact there's a large scale attack on public education that's based on the same principle, if you can privatize. . . and the same techniques are being used. Defund it so it doesn't work, complain about how it doesn't work, privatize it, it gets worse. But then you've undermined social solidarity and it's fine for the wealthy anyway. They'll get what they want.
All of this is part of a quite impressive campaign of class war, which has many aspects. A lot of them aren't immediately visible but they're there. So for example the government sets rules on how corporations are run, what's called corporate governance. And the rules that have been set up during this passionate class war period, the rules are that CEOs can pick the boards that set their salaries and work out techniques like, say, stock options which conceal short-term gain. You can imagine how that works when you pick your own board.
There have been efforts to try to get this to be more transparent, but they were beaten back by Congress. The same is true of deregulation. During the period when New Deal deregulations were maintained there were no financial crises. The system went along smoothly. Since Reagan there have been regular financial crises, each one worse than the preceding one. But the rich and powerful make out fine for the reasons I mentioned. The public pays, the rich benefit.
All of this is kind of a new stage of state capitalism. Loyalty to firms is less and less necessary when the goal of management is short-term profits, which of course comes mostly from financial manipulations. So who cares about the firm? If it goes under, fine. I'm rich. Domestic unemployment is not a problem. There's no need for a domestic work force when Mexico and China and Vietnam and other sources of cheap and brutally exploited labor can be used as assembly plants, and they are assembly plants. Major industries increasingly have their work forces overseas, like General Electric, while -- I have to say that word, I'm afraid; sorry -- while profits come home back to the pockets of a few.
Take IBM. It's quite an interesting example. The business press recently ran a big article about them and said correctly that IBM may strike many people as the quintessential American company, but over 70% of its work force was outside of the United States at the end of 2008. And the following year, while continuing to reduce its U.S. employment, the company announced a program to offer employees the opportunity to move their jobs to emerging markets. In other words, you have the opportunity to move to India, say, where you could live at a much lower standard of living. Nice opportunity, but that increases the efficiency of the company and it provides wealth for the masters. If employees don't take this opportunity that is so benignly offered to them, they have options. They can join the people standing in line for food stamps. But IBM's a benevolent company, the article points out. They're offering to foot some of the relocation costs so they're really nice guys.
The report in the business press didn't explain why IBM should be regarded as the quintessential American company, but there are in fact good reasons. One is that IBM relied on the taxpayer for its wealth. That's how it learned to forget about earlier things like helping out Nazi Germany. But just in the recent period it learned to shift from punch cards to modern computers. It learned it at Pentagon-funded labs where I worked, for example. Finally in the early sixties the firm was able to produce its own fast computers but they were too expensive for businesses, so the United States stepped in to purchase them. In general a procurement by the state is a major device of taxpayer subsidy.
Many years, actually decades later, IBM was finally able to make profits in the market and it was also able to spin off wildly successful enterprises like Microsoft and others which also benefited amply from public subsidy. So indeed it's true: it is the quintessential American company and management is following sound economic principles in shifting employment abroad. What happens to the country is not their business. It's worth noting that this really isn't new. Not very long ago the long-term future of the firm was an important consideration for management. Less and less so under modern forms of state capitalism.
Rather interestingly these issues were foreseen by the great founders of modern economics, Adam Smith for example. He recognized and discussed what would happen to Britain if the masters adhered to the rules of sound economics -- what's now called neoliberalism. He warned that if British manufacturers, merchants, and investors turned abroad, they might profit but England would suffer. However, he felt that this wouldn't happen because the masters would be guided by a home bias. So as if by an invisible hand England would be spared he ravages of economic rationality.
That passage is pretty hard to miss. It's the only occurrence of the famous phrase “invisible hand” in Wealth of Nations, namely in a critique of what we call neoliberalism. The other leading founder of modern economics, David Ricardo, he drew similar conclusions. He hoped that home bias would lead, I'm quoting him now, “would lead men of property to be satisfied with the low rate of profits in their own country rather than seek a more advantageous employment for their wealth in foreign nations.” He said “These are feelings that I would be sorry to see weakened.” Their predictions aside, the instincts of the classical economists were quite sound.
I mentioned before one well-known market inefficiency, the market inefficiency of dismissing externalities; that is, the effect of a transaction on others. In the case of financial institutions, the externality that's dismissed in systemic risk, the risk that the whole system will crash as the result of some failed transaction. You don't take that into account when you make a transaction. In that case the taxpayer can come to the rescue. That way you can make sure that those who profit from risky transactions will be saved.
But that's not always an option, and the consequences can be severe -- in fact awesomely severe. So nobody's going to come to the rescue if the environment is destroyed, and that it must be destroyed is close to an institutional imperative under contemporary state capitalism. Just think it through. Business leaders right now are conducting massive propaganda campaigns to convince the population that anthropogenic global warming -- global warming because of human interference -- is a liberal hoax, and they're succeeding. Like in the United States probably two-thirds of the population believes this by now.
The CEOs who are running these campaigns, they understand what all of us understand. They understand that the threat is very real, very grave; that it'll destroy everything they own, that it'll wreck the lives of their grandchildren. They know all of that. But then as CEOs of a corporation, in that institutional role they have no choice. They can pull out of course, but if they stay there they have to maximize short-term gain and market share. Actually that's a legal requirement under Anglo-American law. If they don't do it, they'll be out and somebody else will come in who does do it. So it's an institutional property, not an individual one. And it does set off a vicious cycle, one that could be lethal.
To see how immanent the danger is, just have a look at the new Congress in the United States, the one that was propelled into power by large scale business funding and propaganda. Almost everyone there is a climate change denier and they've already been acting on those assumptions. They've been cutting the limited expenditures there are for dealing with environmental problems. If the United States doesn't do anything significant, the rest of the world isn't either.
Worse than that, some of them are true believers. For example the new head of one of these committees on the environment explained that global warming can't be a problem because God promised Noah that there wouldn't be another flood. That takes care of that. If that was happening in Andorra or some small remote country, maybe we would laugh. But it's not laughable when it's happening in the richest and most powerful country in the world. Before we laugh, we might bear in mind that the current economic crisis is traceable in no small measure to the fanatic faith in such dogmas as the efficient market hypothesis and in general to what Nobel laureate Joseph Stiglitz 15 years ago called “the religion that markets know best.” The religion made it unnecessary for economists and the Federal Reserve to notice that there was an eight trillion dollar housing bubble that had no basis at all in economic fundamentals, that was way off historical trends, and that devastated the economy when it burst. No need to look at it because we have the religion. Markets know best, so forget it. That religion is resuscitated despite what happened.
All of this and much more can proceed as long as the general population is passive, apathetic, devoted to consumerism or maybe hatred of the vulnerable. As long as that's true the powerful can do as they please and those who survive will be left to contemplate the ruins.