Forget the cresting, breaking and other visible economic waves we discern on the surface of our economy — all accompanied by “cyclical” blathering of the dire necessity to create jobs and growth, and reduce debt and deficit spending.
While we blather, we’re blind. The less visible, stronger undercurrents of our dying free market capitalism that catapulted us to global economic dominance with the promise of an “American Dream” along with it, has been morphing into what I’m calling “bubble capitalism.” Some are calling it “crony capitalism,” which is equally descriptive. It’s just that bubbles are what the cronies feed off of. And it is crushing the American Dream by tipping the once-level playing field in favor of a narrowing segment of big finance and big business, aided and abetted by big government.
And let me be crystal clear. I am not whining for redistribution. I’m suggesting that if we don’t figure out a way to get back to good old democratic capitalism and its level playing field, we will have a barren wasteland in our future, albeit one that will be filled with a bunch of worthless stuff (popped bubble residue), scattered across a country that will look more and more like the third world. Think about three million empty, decaying and devalued houses following the leveraged-up mortgage crash of 2008. And what about the jobs lost, and spike in the number of people living below the poverty line?
Sorry, you want nice, you probably won’t find it in the Robin Report. We like to make wake-up calls.
From The Land of Opportunity Where It All Began
Adam Smith, widely considered capitalism’s founding father, defined free, unobstructed or manipulated markets as the necessary ingredients for capitalism. This free “invisible hand,” as he phrased it, would guide balance and efficiency—a level playing field of democratic capitalism—with a harmonious confluence of government, business and finance all guiding us to growth and prosperity. So how has Smith’s capitalism been turned on its head?
We have to start by looking at what Adam Smith, if he were still alive, would probably point to as the quintessential example of his thesis at work: capitalism’s finest hour. The post-WWII economy in the US, lasting well into the 1970s, experienced the most explosive growth in recorded history anywhere on planet Earth.
Then consumer demand began to taper off in the early 1980s. However, the captains of industry and finance were not about to lower their growth objectives. So, to move the growth needle back up, even as competition was increasing, the magic of marketing, advertising and promoting was put into overdrive. And the shift from a production-driven to a marketing-driven economy was wellon its way, spawning the most sophisticated communications and distribution infrastructure in the world, including the expansion of the retail industry as 54,000 miles of interstate highways invited the massive construction of regional malls.
Indeed, during those halcyon years—the golden age of Adam Smith’s democratic capitalism—we were able to promise an American Dream to all who would strive hard enough to achieve it, even for those of lesser means. There was a harmonious balance of supply and demand, of production and consumption. There was also a great balance in people’s lifestyles…until there wasn’t.
The American Dream On the Slippery Slope Of Trading Value Creation for Bubbles
Entering this new phase, greater capital would be invested in the tools of marketing to create demand and ever-higher levels of consumption. Thus, the US economy was transforming itself from primarily creating value to consuming it. According to the Economic Strategy Institute, total manufacturing as a percentage of GDP has been in steady decline from about 25% in the early 1980s to roughly 11% today. Worse, the decline accelerated during the past decade, dropping some six percentage points. Conversely, consumption has risen from about 62% of GDP to roughly 73% during the same period. Further, the Institute states that our drop in manufacturing has been more dramatic than in any other industrialized economy.
Of course we knew we would lose labor-driven, basic manufacturing industries to lower-cost countries. But the good news about this was supposed to be that we would simply move up the “food chain” to create higher levels of value, such as the technology, engineering, science, and other industries requiring higher and more specialized skills and educations. It did not happen, and there are many supporting metrics and arguments as to why this “brain drain” will continue, easily enough for another article.
Therefore, the famous quote of a half century ago by then-President of General Motors, Charles Wilson: “What’s good for General Motors is good for the country,” could credibly be replaced with, “What’s good for Walmart is good for the country.”
So, the real marketplace economy begins to drift into lower levels of value creation; namely, the services and marketing industries, to fuel more and more consumption, faster and cheaper, required to keep the economy growing.
Thus, the American Dream was stepping onto a slippery slope, in an economy that was shifting from value creation to value consumption, which would make it more difficult to achieve the dream. And thus began a spiral downward that fed on itself, as I will explain below.
Big Government, Big Business, Big Finance: The Bubble Capitalism Playbook
In fact, I would suggest that Adam Smith’s invisible hand is indeed invisible to most of society, however very visible to those they belong to: the hands of big business, finance and government.
Sailing into the 80s with the tailwinds from the golden age, the titans of business and masters of finance created several innovations in an attempt to stimulate the then-slowing pace of growth. One such idea was stock-based compensation (stock options), promising outsized pay for outsized performance. Paradoxically, in many cases it has re-defined real growth as simply “making the numbers, however we must.” And of course, the new masters of the universe now residing in a handful of “too big to fail” financial institutions, not only added to the pressure on businesses to deliver, they too, needed to find ever more creative ways to gin-up growth.
And the third component (following big business and big finance), of what would turn out to be a deleterious cycle of “bubble” formation (leveraging up worthless value), and creating an unlevel playing field, was the complicity of big government. As the financial industry, with their armies of the “best and brightest” in kind of a creative Nirvana, began engineering hundreds of new instruments—not for investing, but for “betting,” insuring, hedging and swapping—it required that the government relax its rules and regulations to create what the masters of finance proclaimed would be healthier and freer markets.
With little urging, the government complied. Ironically, instead of freer markets, and a more democratic, meritocratic capitalism delivering greater real growth (as a result of the convergence of these three entities), instead it led to real invisible hands manipulating capitalism, often creating bubbles of worthless value. And as we’ve witnessed, when these bubbles pop, their creators at the top of the pyramid get bailed out, and those on the bottom are left with worthless residue, certainly nothing any American would be dreaming for.
Understanding the Playbook
Capitalism, therefore, as envisioned by its founder, based on competitors winning or losing in the real marketplace of supply and demand, has given way to market expectations of what the top- and bottom-line “numbers” must be for winning or losing. And of course it is fueled by stock-based executive compensation.
Thus, big business has a strong incentive to do whatever is necessary to make those numbers, and the financial industry thrives on market expectations, its volatility, and winning in their marketplace is often achieved more by trading value than building it.
Of note, just as our value creation in manufacturing as a percentage of GDP gave way to value consumption, now at 73%, the financial sector doubled its share of GDP during the period between the early 1980s and today, from 4% to 8%. And its share of all domestic corporate profits soared from 16% to a whopping 41%.
So, the game of expectations is trumping the “real” game of capitalism and the invisible hands of big finance, big business and big government are tipping the playing field in their favor, and the American Dream is beginning to look like the American Nightmare for far too many.
From the Land of Opportunity to A Barren “Deflated” Wasteland (The Scenario)
So into the US consumption machine we go. It’s now fully driving our economy. And we must meet our “numbers expectations”—double-digit, quarter-on-quarter growth. How do we do it?
Well, we can engineer financial strategies to stoke ever-higher levels of consumption. Whoa! What do you mean by “engineer” financial strategies? Well, how about providing unlimited credit to any consumer who wants it—no questions asked, nor credit rating needed—or promoting credit to those who are not even asking for it.
Aha! I get it, just keep ‘em buying, whatever it takes. You got it: freely available credit, and when the economy collapses like it did in 2008, under the weight of a total credit market debt that was almost 400% higher than our GDP (versus about 160% in the 1940s), our government can jump in and play its part to perpetuate our now clearly consumption-driven economy. They can print money, trillions of it, and just throw it out there hopefully to keep consumers borrowing and consuming. The notion is that businesses will take advantage of borrowing “free” money (low-interest rates) to invest in growth, thus hiring more workers, thus generating more disposable income, and thus encouraging more spending on consumption.
Well, so much for that notion. The financial giants have borrowed the “free” bucks and are using them not to invest in building new value but rather to trade value, for higher profit-taking (and much of it through “speed trading”). And companies have never had so much cash sitting on the sidelines—trillions actually—that they have not used for expansion in the US, much less rush to hire more workers.
Why? Because there is not sufficient demand to invest in new plants, equipment, or more workers. Hmmm! Seems like we need another bubble.
So, the conundrum continues. The Fed throws more and more cash at the wall, hoping a consumer or two will spark another borrowing frenzy to buy, buy, buy. And of course, our hungry retailers, prodded by Wall Street’s demands for growth, are doing their part by deeper and more creative discounting, and opening more and more outlet stores. And all of their consumption stoking is added to by the multiplicity of new websites launching daily, each one offering a better discounted “deal” than the one before it, or selling “pre-used” goods, or just plain “swapping.”
In the face of this deleterious type of demand creation, we must accelerate it to even higher levels because we counterintuitively continue to create more and more stuff and stores, piling on the over-capacity already existing in most industries.
This is a train wreck that is happening as I write! We can see it every day. We acknowledge it, but then continue to open more stores and websites and throw more stuff into an already over-stuffed marketplace, only to have to discount even deeper, and/or provide easier credit to get it sold to a consumer whose real, inflation-adjusted income hasn’t budged for 30-plus years, to say nothing of their disposable income.
And, I’m sorry to say, that for every new, innovative, exciting product, service or experience breaking through with real new value, there are ten times more of commoditized excess that sit on shelves until it is all but given away.
This is simply and clearly, and as I’ve said before, a vicious cycle of value deflation, dragging “all ships down.” In my opinion, this dynamic of a demand- and consumption-driven economy, aided and abetted by government, the financial industry, and big business (all juicing consumption with free money, freer credit, and insane levels and types of discounting), all while being complicit in juicing the supply side using the same tools, leveraging credit and piling on more capacity, is unsustainable.
Furthermore, as I’ve also pointed out, just as there is too much stuff sloshing around the globe, there is too much capital racing at lightning speed, frantically looking for investment opportunities. Well, guess what? The trillions of capital is invested in three places: either to build more capacity (which we do not need in the US); or invested to prop up losers (I rested my case on the Sears example long ago, and there have been, and will be, many others); or, to leverage up another “bubble” (technology maybe?). This vicious cycle accelerates and perpetuates the paradoxical and unsustainable combination of an economy reliant on consumption for growth—the demand side—and over-capacity on the supply side, that is being devalued daily in the attempt to get it sold.
As value is being deflated, over time, in the aggregate, it deflates the economy and everything in it. The end game may not be the US slipping into third-world status, but it could easily slip us into the ranks of a third-rate global economic engine, as a mere consumption machine for the rest of the world.
So, If No Real Growth, Where’s the Next Expectation Bubble?
Well, as former Secretary of Defense Ronald Rumsfeld said, “…you go to war with the army you have.”
So, should we accept bubble capitalism and “go to war” with it? Should we find more bubble opportunities to blow up with credit, enabling everybody to sip Champagne on the way up? Then, following the “pop,” the titans of industry, the masters of finance and big government can continue sipping the bubbly, counting their bounty as they also take a headcount of the number of additional jobs lost, more declining income, and the residue of whatever excess stuff is left scattered across the landscape, adding to all the previous excess?
But not to worry, our now compulsively consumptive culture will be there waiting, with one of the multitude of credit cards sent to them in the mail—no questions asked—poised to find the best deal ever for more stuff than they will ever need.
Seriously, There Can Be a Happy Ending
According to Dr. Robert J. Gordon, Economics Professor at Northwestern University quoted at a recent TED conference, he asked, “…would it be so terrible if economic growth slowed to a halt?” and replied, “…it’s worth considering.” The editors of Forbes posited, “The great concern these days about a lack of growth is primarily due to technological progress: If GDP growth does not keep up with productivity growth, the result is unemployment, but an end to productivity growth would end this worry. Even by Gordon’s estimate, this could happen in the US in the middle of the century at a GDP of around 80,000 dollars per capita. More equally distributed, this should be plenty for a comfortable life. Interestingly, this point was argued 80 years ago by the father of modern macroeconomics, John Maynard Keynes, in an essay titled “Economic Possibilities for our Grandchildren.” In the essay, he suggested that his grandchildren “… might use improvements in productivity to enjoy more leisure and less work. Maybe we do not need economic growth beyond a certain level.”
Whooopeee!!! We can take it easy and smell the flowers along the way. But, wait a second! I have to go shopping. There’s a sale at the “Everything For Free Store.” They’re paying customers to take the stuff. Can you believe it?
Yes I can.
The Final Word
Without the elements of trust and fairness, democracy and free market capitalism cannot work. And poll after consumer poll are revealing that a greater percentage than not believes our government and the business and financial sectors are lacking both.
As I said, it’s not about rules and regulations, it’s about fixing a broken capitalism.
Adam Smith, where are you when we need you?