Posted by: Doug Henwood | September 24, 2013

Situating finance

I’ve long been bothered by activists’ habit of focusing on debt both as a political target and analytical center. This came to the fore during the Occupy moment, and continues today in, well, should we call it the post-Occupy era?

Yes, debt is a problem, no doubt about it. Given the age of many Occupy activists, student debt is understandably very much on their minds (as are crappy job prospects, which don’t always get as much attention). Before that, mortgage debt and exotic variations on it were major contributors to the financial crisis of 2008, and the inability to get the debt machinery going again has contributed to the weakness of the post-crisis recovery. And across the Atlantic, debt is obviously a major part of the European crisis, which goes on and on.

But debt is also symptom as well as cause. If education were free, as it should be, student debt wouldn’t be a problem. If we had a humane health care financing system, medical debt wouldn’t be a problem. If housing weren’t so expensive—and if rising prices weren’t taken as a sign of a “healthy” housing market (why is the rising price of one of life’s essentials a good thing?)—then mortgage debt would’t be a problem. If wages hadn’t been under relentless downward pressure for the last 30 years, people wouldn’t have borrowed so heavily against home equity during the bubble, and wouldn’t have put so much on their credit cards.

Along with that, there’s a mistaken theory making the rounds. Here’s a concise statement of it from Andrew Ross (someone I should say I like and admire a great deal, even if I’m disagreeing with him here), in an article (“The Politics of Debt Resistance”) in New Labor Forum:

In recent decades, however, elites in advanced economies are less and less dependent on profits from productive labor. They rely increasingly on unearned income from financial manipulation by circulating paper claims on the future in the form of debt-creation. This form of wealth accumulation has meant that the majority of populations in fully industrialized countries are now caught in a debt trap that fundamentally affects how they make a living.

This is only a partial truth. Trading profits of the sort that Andrew Ross alluded to above (“circulating paper claims”) are essentially a wash—one trader’s gain is another’s loss. But there’s much more to the story. The claims are claims on incomes earned in production.

There’s no denying that the financial sector has grown enormously in size and importance over the last few decades. But that doesn’t mean that production and productive labor have disappeared from view. A few numbers to make this point. In the second quarter of 2013, U.S. GDP—the total value of goods and services produced domestically—was $16.7 trillion. Of that, $8.3 trillion—half the total—was produced by nonfinancial corporations. Just over half of that, $4.7 trillion, went to pay employees. These same nonfinancial corporations “earned” $1.2 trillion in profits, after paying salaries and other expenses. Financial corporations, though huge, contributed only about 15% as much as their nonfinancial counterparts to GDP. (See table 1.14 here—alas, no direct link is possible.)

Of course, finance is very big—I’m not trying to deny that. But where does its money come from? A lot of it from income earned in production. Firms and their employees pay interest and fees to their bankers. (In the second quarter of this year, nonfinancial corporations paid out a net of $304 billion in interest to creditors, and households another $244 billion.) And nonfinancial corporations have been shoveling out huge quantities of cash to their shareholders, some of whom are individuals, but many of whom are financial institutions. Combine traditional dividends with other means like share buybacks and takeovers (both of which involve corporate resources going to buy up outstanding stock), and there’s been a massive transfer of cash from corporate treasuries to shareholders—an average of $867 billion a year since 2011.

The conclusion to draw from that blizzard of numbers is that finance gets most of its money from corporations and workers engaged in the real world of production. Appearances to the contrary, financiers aren’t creating the stuff ex nihilo. The financial and the real are intimately connected to each other. So if you want to talk about debt, you shouldn’t stop there—you need to start talking about debt for what, serviced by income from where.

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Responses

  1. The housing thing would have to come from a shift in public policy on what we think our housing set-up should be. Right now, all the emphasis is on ownership, and since most household’s “wealth” consists of the value of their home, there’s a big emphasis on rising home prices.

    I don’t think that’s entirely bad – ask someone renting in a gentrifying neighborhood about whether or not it would be better to own their home than rent it.

  2. Thank-you for your clear exposition, Doug. Indeed, debt is part of what makes the system turn and circulate wealth.

    The question is: Where does wealth come from? Debt is repaid from wealth.
    The answer which Marx supplied is: nature or natural resources, if you will and from employing labour power (aka ‘human resources) to produce it…in the capitalist system via purchasing the skills labour embodies for its market price…increasingly, its global market price. In other words, the wealth of nations depends on what can be found in their natural resources in combination with the employment of the wage system.

    It is the wage system which results in most of the wealth ending up in the hands of the top 10% of the population. The question is: Do we really owe them anything?

  3. Quite a bit of those profits are coming from production overseas. There’s an easy to find chart on that in NIPA, and it decisively trends upward over the last two decades.

  4. “I don’t think that’s entirely bad – ask someone renting in a gentrifying neighborhood about whether or not it would be better to own their home than rent it.”

    Sure Brett, it might be better, but if you are one of the ones currently renting and the housing price is starting to rise, you are probably one of the ones getting locked out of owning and into renting.


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