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Debt, Business, and the State: The New Concentration of Power

October 21, 2013

by J. Andrew Zalucky

3_wings_revolving_door

Though it hasn’t been the main topic of discussion in 2013, the concern about our national debt has begun to creep back into everyday conversation. With the hilariously botched implementation of the Affordable Care Act, also known as “Obamacare”, and the (totally useless, distracting, and futile) attempt by House Republicans to destroy it, concerns about our country’s financial well-being are at the forefront of this legislative posturing battle. One item that comes up very often in conversation is our skyrocketing national debt, which at the end of Fiscal Year 2013 is expected to number 17.548 trillion dollars.

Daunting as that looks, perhaps the more crucial figure is the debt-to-GDP ratio, which currently sits at 105% of GDP. This number is important because, even though the 1990’s saw a continued increase in our national debt, the economic boom the US experienced helped to push the ratio downward, making the debt itself less of a concern. But of course, things like gigantic economic meltdowns tend to slash economic growth terribly, while increasing the need for spending on social safety-net programs for the newly unemployed. This, and variety of other factors (you know…that whole WAR thing) have pushed our debt up to levels that should make us very concerned. However, what if there was a group of people in The United States who had a vested interest in keeping us in debt and actually have no interest in maintaining financial stability?

I’m not saying we should have zero national debt, in fact I would say that any nation that has zero national debt is either not trusted at all by outside creditors (not good) or has never funded anything involving some sort of risk (also not good). In fact, it is the whole idea of debt and credit that has allowed for modern commerce to exist, starting with the Dutch in the 1700’s, followed soon afterwards by Great Britain and The United States. I’ve quoted William J. Bernstein’s The Birth of Plenty before, and I’ll do it again here:

a healthy market for  government debt is, in fact, essential for funding business…Since the mechanisms for the pricing and sale of commercial capital are the same as for government bonds and bills, a successful market for government debt must exist before a commercial debt market can function smoothly

This paints a rather rosy picture of the process, and to be fair it’s pretty accurate as well. This is all fine and good when the capital created goes to fund actual brick-and-mortar businesses. But things become a little more dicey when you consider the very process by which this capital is generated can by used to keep capital trapped within the hands of powerful elites. Bernstein says as much himself when he reminds us that “The Dutch, unfortunately, marched in the same vanguard of another trend in modern finance: the shearing of small investors by investment banks.” As Karl Marx (oh yea, I went there) once wrote in his chapter on Money Capital and Actual Capital:

Gain and loss through fluctuations in the price of these titles of ownership, and their centralisation in the hands of railroad kings, etc., naturally becomes more and more a matter of gambling, which takes the place of labor as the original method of acquiring capital and also assumes the place of direct force. This sort of imaginary money wealth does not merely constitute a very considerable part of the money wealth of private people, but also of banking capital

By bringing up Marx, I certainly don’t mean to advocate for the full centralization of capital in the hands of a redistributive central committee- quite the opposite actually. And I wouldn’t dream of dismantling the system of trust and credit that much of the progress of the past 200 years has been built on. If anything, it makes it clear that the power of the state must not be used as a tool of favoritism for one corporation or another, at least not beyond issuing securities and overseeing bankruptcy proceedings. This is why corporate welfare and certain overly-complicated regulations, along with various subsidies and tariffs only serve to further the phenomenon we often call the “revolving door” between corporations and the government. A system where the elites sit on both sides of the negotiating table and share the same priorities will best serve the well-connected, the privileged, and eventually the corrupt.

For the good-hearted economic interventionist, this makes something like the 2008 Corporate bailouts very problematic. This becomes clear when you realize that some of the companies who received gigantic sums of taxpayer money themselves fund their own business ventures through the purchasing of government-issued debt securities. It’s as if you went to Las Vegas and purchased debt securities issued by a casino which you then used to gamble with at that casino…and then failed miserably- only to be bailed out again…by the casino! And if the casino itself was in enough debt, then obviously some portion of the liquid assets they used to bail you out must have been backed up by, you guessed it- more debt. But it’s ok, because you and the casino owners are good friends, and it doesn’t matter to you if the rest of the gamblers and employees get completely screwed over. You’ve made your calculation, and by the time the casino collapses, you’ll have collected enough to ride it out. Or better yet, maybe you won’t even be alive by the time everything comes crashing.

Beyond eliminating corporate welfare and other mechanisms which enable the revolving door to keep spinning, I don’t have any easy solutions to this problem. One should be careful when prescribing grand schemes to fix macroeconomic ailments. And one should also be cautious in the rhetoric used to address the problem, lest we awaken the ghosts of hysterical grand-banking-conspiracies once peddled by fascists and other reactionaries with their anti-Semitic undertones. We may yet be able to generate enough economic growth in enough time where the deficit continues to shrink (as it is already) and our debt-to-GDP ratio is such that we can make our interest payments without too much difficulty. But it’s important to keep in mind that while our fiscal solvency may be in the world’s best interest, there are many whose interests can at times run counter to this and are banking on a form of what Keynes once said when speaking on monetary reform: “in the long run, we’re all dead”.

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