Debt, Credit, and Finance Capital

Clearly, the tendency of capitalism to increase inequality between

classes harms the public. Worse, as private-sector managers huddled
to protect their own interests, the domestic debt deepened, the result of
planning by the elites and systemic irrationality. Let us examine how the
rich did so well in the 1980s. One clue consists of the relative growth
rates of the various types of income . In the 1980s, the value of capitalist
wealth-stocks, bonds, money-market, and other financial instruments
grew three times as fast as from wages and salaries. If anything, this
data understates the difference
between wealth and salary income because the total for wages and
salaries also includes payments to managers and professionals, the very
groups that receive the most capital income. Indeed capital as a percent-
age oftotal national income has nearly doubled since the end of World
War II, although half of that increase (from 10.7 to 19.3) occurred
between 1979 and 1989. The main reason for this was the high interest
rates launched by the Federal Reserve Board in 1979 in order to crush
inflation. As interest income increased by 73 over the decade, the rich
derived an increasing share of their already large income not by invest-
ing in plant, equipment, and technology, but by lending money to all the
debtors of the U.S. and world economy: corporations, foreign govern-

ments, consumers, and of course, best of all, Washington, whose bonds

and notes were sold on "full faith and credit," which means that only the
collapse of the political system itself would stop payment of principle
and interest. More, attracted by the lure of high interest rates, corpora-
tions joined the ranks of the big investors in paper assets. As we noted
earlier, by the late 1970s, the 400 biggest U.S. firms enjoyed a $60 billion
cash hoard, much of which corporations used to speculate on the
international money markets.
Mainstream economic critics see the growing gap between invest-
ment in finance versus investment in production as the sign of a danger-
ous new stage in the U.S. economy's development. Business Week, for
example, worries over the advent of a "Casino Economy" that sacrifices
productive investment for speculation, while Secretary of Labor Robert
Reich laments the rise of "paper entrepreneuralism/'" Such critiques
pretend an innocence about the real purpose of capitalist production,
which has always been to make money, not goods. In the history of
capitalism, manipulation of paper assets is hardly novel or unforseen; if
opportunities for profit were greater from investing in paper than goods,
smart capitalists have always been quick to shift their money into these
more lucrative outlets.
In fact, as Thorstein Veblen argued nearly a century ago, the
distinction between "business"-the making of profits-and "indus-
try"-the making of goods-is crucial to understanding how modern
corporate enterprise actually works. All corporations are essentially
institutions of "business," not only because they are oriented toward
profits, but because in a more subtle sense, they are legal empires whose
very existence is based on stocks and bonds, paper assets whose value
the market determines. To survive in a capitalist economy, corporate
managers must focus on bolstering the value of their paper base.
Whether firms enhance the value of their assets by increasing industrial
production, by sabotaging production and raising prices, or by manipu-
lating the relative values of their paper assets is purely a strategic
question: Enhancing the market or exchange values of their stock is,
along with the making of profit itself, one of the main goals that drives
corporate business. But as Veblen noted, in times of economic instability
and disturbance, when paper values abruptly rise and fall, long-term
industrial investments become particularly risky. Such periods offer
bountiful opportunities for "gain or loss through business relations
simply," that is, exclusively, by manipulating stocks, bonds, and other
forms of credit and paper."
Developments since the 1960s offer vivid proof of Veblen's cen-
tury-old analysis. Indeed, according to Michael Dawson and John Bel-
lamy Foster, in this recent period of extreme economic turbulence for
the large corporations, and despite the brutal reduction of wages, we
can account for virtually all of the rise in surplus as a percentage of GNP
by growth in categories of business activity that are occupied mainly, if
not exclusively, with financial manipulation: net interest, surplus em-
ployee compensation (in fields such as finance, legal services, and real
estate), advertising costs, and the profit element in corporate officer
compensation, e.g., benefits such as stock options, bonuses, special
incentive plans, "golden parachutes," and "greenmail." In their words,
between 1963 and 1988
the rise in gross surplus ... can be accounted for entirely by
factors reflecting the general shift away from production
toward finance and marketing in the economy as a whole."
As we have seen, the twin evils of chronic stagnation and anarchic
global competition have rocked the foundations of the U.S. corporate
structure. The most ominous sign of this erosion was the declining value
of the dollar in world trade. The U.S. war in Vietnam, rising military
spending, and worsening U.S. trade deficits all combined to inflate the
world economy, push the dollar's value down, and accentuate the forces
of stagnation." As Europeans refused to accept ever cheaper dollars in
exchange for goods, the sinking dollar led in 1971 to the break-up of the
fixed-rate monetary system that had governed world 'trade since 1944.
Europeans were not the only ones sick and tired of accepting cheap U,S.
dollars. Inflation caused Third World producers to rachet up their
prices. The most important example, of course, was the four-fold hike
in energy prices by the Organization of Oil Exporting Countries in 1973.
This development itself greatly accelerated inflation, vastly increased
the circulation of dollars through the world banking and trading sys-
tems, and seriously compromised the economic sovereignty of many
nation-states, which now depended heavily on global banks to finance
their debts. As petro-dollars, Euro-dollars, and global interest payments
poured in, banks in the United States, Europe, and Asia created and sold
all sorts of new financial instruments to attract even more capital. As
Joyce Kolko summarizes these developments,
The new information and communications technology, the
floating currency exchange, and the floating interest rates
had an enormous effect. Banks moved from expanding as-
sets (loans) to "managing" liabilities (deposits) and continu-
ously developing new "products.t"
And the more instability there was in the value of money, the better
it was for the banks' many new "products," as momentary movements
of paper assets proved the best way for capitalists of all stripes to make
money quickly. While lenders continued to have a strong interest in
stability, Kolko notes, echoing Veblen, 'The new money traders had a
vested interest in instability" and manipulating disturbances."
The profitability of disturbance became even more influential for
world capital after Congress deregulated the domestic banking industry
between 1980 and 1982 and the Federal Reserve Board pushed interest
rates Up.67 And, despite lower inflation after 1984, interest rates stayed
high. The combination of declining inflation and high interest, coupled
with the release of U.S. finance capital from restrictions on lending,
motivated corporations to take advantage of the new "financial prod-
ucts." They could now move money around the world in seconds to
benefit from fast-changing exchange rates, to trade in money-market
accounts, to bet on stock index futures and junk bonds, or on virtually
any piece of commercial paper that promised quick returns on capital.
And each trade and sale brought lucrative commissions to brokers on
Wall Street, to merchant and investment banks around the world, and
to the law firms that wrote and defended the legal rules underpinning
the mysterious new forms of paper wealth. Between 1980 and 1985 the
volume of daily trades on the New York Stock Exchange more than
doubled; the marketing of tax-shelters, such as real-estate investment
trusts, increased nearly six-fold between 1981 and 1985. Markets in
futures, where money merchants bet on the future prices of everything
from pigs to Treasury notes, also took off. In 1983 alone, the value of
U.S. futures trading equalled $7 trillion, or $28 billion daily. The trading
of paper assets became so vast that in 1984, just one investment banking
house, First Boston Corp., handled $4.1 trillion in trades, more than the
total value of the entire U.S. GNPthatyear.68
Caught up in the frenzy of deregulation and fast profits, owners of
the nation's Savings and Loan (S&L) banks tore into virtually any
financial outlet they could find. Knowing full well that despite deregula-
tion, Washington guaranteed all S&L accounts up to $99,999.99, S&L
owners pulled in vast sums of no-risk money for speculation in livestock,
condominiums, junk bonds, anything that promised a return on a no-risk
investment In one instance, for example, the Sunrise S&L of Boynton
Beach, Florida, went from $5 million to $1.5 billion in assets between
1980 and 1985 by luring outside capital into "no money down" real-estate
deals," When such ventures failed, as thousands did, especially after
the stock-market and real-estate crash of 1987-1988, the U.S. govern-
ment and taxpayers were left holding the bag, to the tune of more than
$100 billion.
Of course, fast and loose financial ethics were not confined to
S&Ls. As ever higher paper values shook traditional financial expecta-
tions, stockholders in the once mighty U.S. corporations grumbled that
their dividends failed to keep up. In other words, the real productive
assets of many corporations were not generating returns at the level of
rival investments. Enter a whole new business substratum of "corporate
raiders," such as T. Boone Pickens and Henry Kravis. Funded by "junk
bond" traders and financiers, such as Michael Milkin, Dennis Levine,
and Ivan Boesky, figures who were among the most well-regarded
names on Wall Street and who each ended up in jail for illegal insider-
trading, the raiders made a mockery of the once vaunted power of the
U.S. corporate elite. By purchasing large blocks of corporate stock with
funds borrowed on Wall Street, raiders threatened to take command of
targeted firms. They put blue-chip managements on notice that estab-
lished managements must either yield corporate control or buyout the
raiders at the now elevated stock prices. If managements choked and
the raiders took control, the new "owners" could repay their own lenders
by selling off pieces of the company one at a time and still make gigantic
profits, as much as "$10 for every $1 of equity invested.t''" On the other
hand, if managements kept control by bidding up stock prices, the
raiders grabbed the difference between what they paid and the new
selling price. Either way, the raiders won millions without lifting a finger,
save to make the appropriate phone calls."
Companies "put into play" by the raiders comprise a virtual hall of
fame of U.S. business: Gulf Oil, Pillsbury, Kraft, Union Carbide, TWA,
among many others. In 1984 alone, $140 billion was spent on takeovers,
mergers, and buy-outs. All this financial activity absorbed much poten-
tial surplus, and the strategists of finance capital (brokers, bankers,
lawyers) got richer beyond measure, but they added little or nothing to
the country's industrial base. The damage was not limited to growth in
inequality, increased instability of managerial rule, and a vast waste of
capital. As if all that were not bad enough, the effect of shifting corporate
liabilities from stock to bonds tremendously increased the financial
vulnerability of the big companies to the same kind of bond-holder
power that lurks over the State. Stockholders, after all, hold a risk
investment; the value of their shares fluctuates with the market value of
the company. But bond purchasers expect to be paid a fixed rate of
interest, and their principle represents a first lien on the bond issuer.
Hence, although it was initially cheaper for management and raiders to
fight their financial wars through bond sales because interest payments
are tax deductible and stock dividends are not, the longer-run effect of
such maneuvering was to undermine the economic base for hundreds
of U.S. companies. In effect, thousands of corporations went massively
into debt in order to finance their own self-protection. Between 1982 and
1988, the corporate debt load nearly doubled, reaching $1.8 trillion,
nearly 25 of total corporate cash flow."
Of course, amidst the instability and confusion of stagflation, big
corporations were hardly the only segment of the U.S. economy to
borrow as a means of economic survival. Through their credit-card
operations, corporate capital urged all consumers to buy now and pay
later. And the resulting change in household debt patterns over the last
decade is, to say the least, unsettling. As a share of personal incomes,
household debt grew slightly between 1967 and 1979, rising from 63
to 67. However, between 1979 and 1989, household debt leapt to 80
of personal income." Indeed, compared to the debt loads that private
households, non-corporate businesses, and farmers accumulated, the
corporate sector's share of total private debt actually declined in the
1980s. And for all the scary talk about the federal debt, when it came to
living on borrowed money in the 1980s, Washington actually trailed all
segments of the private sector: in that decade, federal debt actually grew
more slowly than the whole of private domestic debt. The fact is that in
the credit-happy capitalism of the 1970s and 1980s, every sector of the
economy became addicted to borrowing as a way to keep the economy
going. By 1985, the total debt of households, corporations, and govern-
ments was slightly more than $7 trillion, nearly twice the nation's GNP,
one-third higher than a decade earlier."
Behind this trend toward a universalization of debt was a severe
weakening of U.S. corporate enterprise, rooted in deep-seated patterns
of chronic stagflation, inflation, accelerating world competition, and
overall financial insecurity. In the face of this increasingly vulnerable
financial condition, all segments of the economy became more depen-
dent than ever on government spending to avoid financial collapse." In
the words of economist Albert W ojnilower, of the First Boston Corpora-
tion, the federal budget deficit is "a large part of what has stood and will
be standing between us and a Depression with a capital 'D.",76
As Wojnilower's comment makes clear, the fact of big federal
spending does not mean that government has lost financial self-control.
Instead, it suggests a dangerously weakened corporate economy, a
private economy that cannot keep going, much less growing, without
massive injections of federal spending to absorb its very capacity to
generate surplus.

Stagnation, Inequality, and the Deficit

As everyone knows, u.s. government deficit spending has grown
substantially since the 1980s. The numbers are mindboggling in abso-
.ute size, but it is their magnitude relative to historic trends in national
utput that is actually more important. For example, during the glory
years of the U.S. post-World War II boom, from 1962 through 1973, the
:'ederal deficit averaged about 1.1 of Gross Domestic Product (GDP)
zanually. During the next seven more stagnant years, deficits rose
slightly as a percentage of GD P, averaging about 1.5 annually. however,
the consistently big uptick in deficits began in
the Reagan years, when deficits nearly doubled as a proportion of GDP
between 1981 and 1986, falling off a bit as the expansion of the mid-1980s
reached its peak, only to start rising once more as the most recent
recession rolled in. The up-and-down relation of government deficits to
the overall economy is just what mainstream economists expect. As the
economy contracts, tax revenues fall while the so-called automatic
stabilizers of unemployment compensation, Social Security, and welfare
payments rise, pushing the deficit up; as the economy expands once
again, tax payments go back up and unemployment compensation and
food stamp costs should fall, lowering the deficit. If we take a broader
view and look at how recent deficits have accumulated on top of the
historic debt of the federal government (the total accumulated borrow-
ings of the federal government throughout the years), it is obvious that
today's debt is actually much smaller than it was in the years immedi-
ately following World War II and the Korean War, when the federal
government's borrowing requirements mounted, as they do whenever
governments make war."
Spurred by the fast growth of the early post-World War II decades,
Washington sliced the debt-GNP ratio nearly in half by 1970. Consistent
with our analysis above, stagflation, coming to a headin the mid-1970s,
drove the debt-GNP relation sharply upward, especially In 1982, the
worst year for the U.S. economy in the whole post-1945 era, when the
relation of debt to GNP increased by almost 5, from 29.3 to 34. Since
1983, the debt-GNP relation has never fallen below that level.
Yet for all the problems posed by the debt-GNP relationship, the
truly worrisome aspect of the deficit is not so much its size as its
irrational and wasteful composition. And the bogeymen here are not the
usual suspects, such as Aid to Families with Dependent Children (also
known as welfare). AFDC takes up less than 2 of federal funding, and
for years spending on welfare has failed to keep up with inflation anyway.
The huge trouble spots are in three areas: health expenditures, princi-
pally Medicare and Medicaid; the still disproportionately high levels of
military spending; and, worst of all, the rising percentage of the deficit
that goes just to pay interest on the debt.
Though the United States ranks below the top of the list of the
world's healthiest nations, we spend more on health care than anyone
else. Medicare and Medicaid costs leapt from 8 of the federal budget
in 1980 to 14 by 1993. According to Congressional Budget Office
projections, if the nation does not adopt basic reforms, these two pro-
grams alone will absorb almost one-fourth of all federal spending by
1998. As The New York Times recently commented, unless health fi-
nance is reformed
even if the Government abolishes food stamps, welfare, farm
supports, child nutrition programs and veterans pensions-
an extreme step that no one is advocating-entitlement
spending on these two programs alone would still be a
higher percentage of the federal budget in 1998 than it is
now."
The tragedy is that much of the money spent on U.S. health care
does not go directly to human care at all, but to the corporate treasuries
of insurance, pharmaceutical, medical technology, and private-sector
hospital firms, which profit from health care's ever more byzantine
administration and commodification. Similarly, despite the end of the
Cold War, federal defense expenditures in 1992 remained almost one-
third greater than spending on non-entitlement, civilian programs. 81 The
health and military complexes are obviously enormously powerful insti-
tutions. But they are not immutable. Mass pressure can change their
habits of feeding off the federal budget.
Moreover, if the economy were to find a way to grow at its earlier
rate, even these irrational expenditure patterns would not come close
to bankrupting the country. Budget expert Allen Schick argues that "If
the economy had been as expansive in the 1970s and 1980s as it was in
the two preceding decades, the deficit would have been moderate" and
the cost of financing it would not have been a problem." But even a
stagnant U.S. economy is rich enough to support at least the current
level, if not the direction, of government spending. In 1989, for example,
the United States spent less of its domestic output on public activities
(36) than almost any other advanced industrial society; only Japan and
Switzerland spent less. At the same tirrie, the United States extracted
fewer taxes (29 of GDP) than any other capitalist government, except
for Japan (which taxed 27 of its GDP). In addition, as we noted in
Chapter One, between 1960 and 1990, the share of corporate taxes as a
percentage of federal revenues shrunk by more than half (from 23 to
9), while payroll taxes, which ordinary workers cannot avoid, more
than doubled (from 16 to 37).83 In short, capital's method of dealing
with global crisis, which has been to grab more of the surplus for itself,
has trounced labor in the private sector and left labor holding the bag
in the public sector. Today, working people must not only finance
needed programs, such as Social Security and health care, with much
less help from the corporate rich, but also the profit-driven waste
inherent in the corporate-State complexes of defense and health.
The fact is that if federal spending were channeled into socially
useful expenditures that enhanced the productivity of labor and im-
proved the real quality of life, if the State channeled public money into
a growing economic capacity to provide for social needs, deficit spend-
ing would harmonize with the public interest. "A deficit," as economists
Robert Heilbroner and Peter Bernstein note, "is not necessarily a drain
on our well-being.t'" The deficit only becomes a drain when government
spends the borrowed money on futile and wasteful purposes, when elites
use such irrationalities to justify repression and distortion of more
urgent domestic priorities, and when the overall economy grows less
capable of financing its obligations. This is precisely the situation we
face today.
The combined effects of slow growth, irrational modes of expen-
diture, and tax exploitation have led to a situation in which deficits and
debt now grow faster than the economy. This means that just as Wash-
ington must spend more and more to keep the economy afloat by
absorbing a larger potential surplus, the cost of financing this added
government expenditure keeps rising too, both because interest rates
rise as government borrows more of the available capital and because
the principle the government must service (that is, the total debt) also
keeps growing. In turn, as the debt gets bigger, interest payments
expand as a percentage of total federal spending. In 1992, interest
payments on the national debt equalled 14 of all federal spending, more
than the total amount of federal aid that goes to the State and city
governments of the United States." If the deficit continues to grow at
its post-1981 rate, the General Accounting Office estimates that interest
payments would, by 2020, eat up almost a third of all federal spending,
essentially the amount now spent by Washington on Social Security and
health care alone. By this point, the U.S. government would have lost
virtually all its power to control events." In other words, if the above
trend continues and interest keeps eating greater chunks of the national
budget, the federal government would be unable to absorb surplus, fund
social programs, and advance the interest of U.S. capital worldwide. The
days of the U.S. empire would truly be over. As the editors of Monthly
Review summarize the basic problem,
the stimulation generated by unending and ever more red
ink is self-limiting. Deficits piled on top of deficits provide
fuel for new inflationary spirals and help sustain high interest
rates; and at the same time they set in motion forces that
eventually arrest growth and lead to a new business decline.
In short, today's capitalism finds itself on the horns of a
dilemma: It can't live without deficits and it can't live with
them."
That the expanding debt holds the potential to further rattle the
foundations of U.S. power is the main reason even liberal segments of
the nation's power elite have concurred: fiscal conservatism must be the
new ruling ethos of U.S. politics. But as we have seen throughout this
chapter, the budget deficit is not the cause of U.S. economic woes. The
real culprit is the irrationality of a capitalist economy. The social rela-
tions of corporate power constrain the enormously powerful forces of
technical progress that this nation could turn to satisfying human needs.
Government deficits mount in order to counteract the underlying struc-
ture of constraint, along with the social deficit to which this constraint
corresponds: growing inequality, impoverishment, stagnant wages, de-
clining living standards, the whole degradation of the nation's urban
civilization. Meanwhile the rich, foreign and domestic, who hold more
than 50 of the federal debt, grow richer still on the interest payments,
an upward redistribution of wealth that further spreads the wealth gap
between the economic minority and the economic majority." Thus, by
focusing on the federal deficit "as the root of all evil," the leading
politicians serve the interests of capital in two ways: first, by cloaking
the real economic source of the problem, and second, by shifting the
burden onto the shoulders of working people. They tell us we must slash
government programs; we must raise taxes. Everyone must sacrifice,
proclaim both Democrats and Republicans. But the question needs to
be asked: For what and for whom? Why should working people end up
taking a double hit, first from the business attack on their jobs, wages,
and living standards and then from government's attack on their ser-
vices, programs, and taxes? The apparent answer is that this is the only
way to try to heal an economic system that-whether it works well or
badly-empowers and enriches elites at the expense of everybody else.
Whether the economic majority will continue to accept this answer is,
of course, the key political question of the 1990s.