Читать книгу Sustainable Futures - Raphael Kaplinsky - Страница 26

The neo-liberal policies adopted after the early 1980s fostered the growth of what has come to be termed financialization, particularly in the US, the UK and other high-income countries. Financialization describes a structure in which the financial sector grows very much more rapidly than the productive sector producing goods and services for sale to consumers. And where there is a conflict of interests between the productive and financial sector, the interests of finance triumph. As we will see, financialization has had adverse consequences for economic growth, income distribution, innovation, investment and other drivers of economic and social wellbeing.

The roots to financialization can be traced back to the neo-liberal policy agenda and the changes in tax legislation in the US in the early 1980s. This provided companies with the facility to repurchase their shares and, in so doing, to distribute profits to shareholders. The mantra for these changes was that of ‘maximizing shareholder value’. The argument was that economic growth would be fostered if corporations were run in the interests of their shareholders rather than their workforces, society at large or a combination of these stakeholders.

These changes in the tax regime had a major impact on corporate governance. The new incentives for stock repurchases led to senior executives receiving their remuneration in the form of shares as well as salaries. This meant that, being both ‘owners’ and managers, corporate managers had a triple-dip into the cash generated by their enterprises – their salaries, the rewards they received through dividends on the shares they held, and cash repurchases of shares.

There were two major related consequences of this change in incentives to corporate managers. The first was their impact on innovation and investment. Providing management with the incentive to pay themselves with shares meant that they had an overwhelming interest in driving up the value of their company’s stocks. Share prices increasingly responded to short-term profit trends – usually reported at quarterly and half-yearly intervals. Investments in research and development, innovation and costly equipment required to deliver productivity change and growth in the medium and long term reduced profits in the short term and so were neglected. This led to a frenzied focus on the capacity of managers to deliver immediate profits at the cost of long-term growth and had perverse outcomes. New managers would sweep into a company, cut investments in innovation and costly equipment and produce sparkling profits. Share prices would consequently rise and management would cash in their shares. They would then move on as ‘heroes’ (because of their amazing impact on profitability) to the next company, which would be hollowed out in similar fashion. Ironically, their ‘hero status’ would be enhanced by the collapse of profitability in the firms which they had previously ‘rescued’ after they left, with scant recognition that this decline in profitability was a direct result of their ‘heroic’ management. As Bill Lazonick has shown, all of this led to a sharp decline in investment in innovation and other drivers of longer-term productivity growth.⁵

A second and related consequence of this change in tax incentives was a process of widespread and systematic ‘looting’ of company coffers by senior executives and shareholders. Not only did senior management gain from their appreciating share options but, instead of using profits to invest in the future, profits were distributed to shareholders, which of course included the very same executives who made the decisions on what to do with profits. Mariana Mazzucato refers to this as a transition from ‘value addition’ to ‘value extraction’.⁶

The outcome of these developments can be seen in the changing face of stock markets. Stock markets are in theory supposed to provide the finance for new productive investments. Companies which require funds to invest in expansion and product development can raise resources by issuing shares to investors. During the 1950s and 1960s, the stock markets in the US had served this function. They provided substantial investment finance for the non-financial corporate sector, averaging more than 0.5 per cent of GDP. But the changes in tax legislation introduced in the early 1980s by Ronald Reagan changed the direction of financial flows. The flow of funds shifted from investors providing funds to the corporate sector via the stock market, to the corporate sector shifting funds to shareholders, again via the stock market. In the decade before, during and after the 2008 Financial Crisis, the accumulated flow of funds from the corporate sector to the stock markets was an astonishing $4.46tn, equivalent to 2.7 per cent of total US GDP over the period.⁷

The neo-liberal tax reforms introduced by the Trump Administration in 2017 (the Tax Cuts and Jobs Act) provided a further bonanza to shareholders. Sixteen US corporations which had held financial assets of more than $1 trillion outside the US had been waiting for the day in which they could repatriate these funds to the US at reduced tax rates. They argued that punitively high corporate taxes of 35 per cent inhibited them from returning global profits to invest in the US. The value of these external assets for the five major companies was $269bn for Apple, $143bn for Microsoft, $107bn for Alphabet, $76bn for Cisco and $71bn for Oracle. Following intense lobbying from these major corporations, the 2017 tax reforms reduced the tax paid on these repatriated funds from 35 per cent to 16.5 per cent. In the first nine months of 2018, the five largest tech firms utilized only $19.3bn of this windfall for capital investment. They distributed the bulk ($115bn) to shareholders in the form of share buybacks. So much for tax reduction inducing investment and growth!

The consequences of financialization are not limited to undermining long-term investments in the corporate sector and the looting of corporate funds. It has also led to the development of a component of the financial sector which is detached from the economically useful function of transferring money from savers to productive investors. Fuelled in part by the liquidity injected into economies by QE programmes, massive quantities of money have been directed into arbitrage, that is buying and selling to gain from price differentials.

This was one of the factors driving up the prices of raw materials during the commodities boom between 2003 and 2014. Growing demand for raw materials from China and other countries led to an increase in their price. Anticipating this growing demand for commodities, financial speculators bought primary commodities in the expectation that their prices would continue to rise. In so doing, they accentuated the growth in commodity prices.⁸ Financial speculation for arbitrage was not limited to physical commodities. For example, investors took advantage of the low interest rates in their home economies to speculate on changing currency rates. Large sums of money were borrowed and transferred to bank accounts in other countries which had very slightly higher interest rates. The differential in interest rates was often minute and short-lived, but, since they applied to very large money transfers, profits were substantial.

As we saw above in the discussion of Quantitative Easing, another avenue for financial speculation was the housing market, particularly in the US. During the 1990s, and especially after the turn of the millennium, many poor and middle-income householders were aggressively sold mortgages to buy their own homes. The attraction to borrowers was that house prices were growing at 10 per cent per annum. Moreover, they were offered enticing terms. These loans often began with near-zero interest rates, which then escalated after a few years to unaffordable levels. Irresponsible lenders paid little attention to the valuation of the properties or to the capacity of borrowers to meet their monthly repayments. They were only interested in the commissions they earned on arranging these loans. Risky loans were bundled together with more secure mortgages in Collateralized Debt Obligations (CDOs). These CDOs had very low levels of transparency and were sold and resold as if they were secure assets. Each round of sale, of course, earned commissions for the financiers involved in the transactions. But, ultimately, the pack of cards in these schemes collapsed, triggering the 2008 Financial Crisis. Mortgage defaults led to a sharp fall in house prices and widespread personal bankruptcy, with devastating welfare impacts. As I will show in the following chapter, the numbers of homeless families in the US ballooned, as did the incidence of poverty and ill health. After decades of improvement, life-expectancy began to fall.

So, what is the relevance of the post-1980s neo-liberal policy regime to the rise and fall of the Mass Production paradigm from the end of World War 2 to the present day? As we have seen above, these policies exacerbated the underlying decline in rates of productivity growth, investment and economic growth. Changes in the tax regime and the inability to direct QE money into productive investments fuelled a climate of short-termism and a reluctance to invest in innovation for the long term. The combination of free-trade policies and the retreat from industrial policies destroyed large swathes of manufacturing and led to the growth of depressed rust-belt societies. It also resulted in unsustainable unevenness in global trade, with the US in particular sinking into ever deeper international trade deficits.