What I Told the Hedge Fund Managers in Miami

That op-ed in the New York Times (October 25th) led to many radio interviews, and then the book came out.  The response has been astonishing.  Absolute silence from the Left, and curiosity from elsewhere.

The extreme Right has hammered the thing as communist propaganda, of course, but the business press has been more or less respectful, notwithstanding the twit who reviewed my book alongside James Roberts in the Wall Street Journal.  Did I tell you he and I “debated” the issues on Minnesota Public Radio?  Never mind.  It was like arguing with a clergyman about the Bible–surely you know money is the root of all evil, and, oh my god, you ought not spend more money than you got?–so that, when the radio host asked if there were some “middle ground” where me and Mr. Roberts could meet and make nice, I said No.

I’ll inquire into the Left’s silence in another post.  Meanwhile, here’s what I said in Miami last Friday.  I was invited to a gathering of businessmen and women–mostly investment bankers and hedge fund managers, in keeping with the “financialized” nature of contemporary capitalism–by the former CEO of Eastern and Continental Airlines, a man who led the deregulation fight of the late 1970s and, not coincidentally, managed Teddy Kennedy’s insurgent campaign against Jimmy Carter in 1980.

How come?  Why him and his constituency?  Especially when the Left seems so totally uninterested in my arguments that I’ll have to review my own book somewhere with a suitable pseudonym, something like “Don Whitman”?

But who’s complaining?  I stayed in a beautiful South Beach hotel overlooking a narrow park that opened onto the ocean. I learned to drive In Miami, where some demon has designed the stoplights to stall traffic at every hour, in every direction, unless you want to go south on Washington Street in Miami Beach at 7:30 am.  I drank just enough beer and wine to stay sober.  And I met some really smart and funny people who, unlike my academic colleagues, never donned contempt as the only proper attitude to my argument.

Here’s what I said on Friday, January 20th, between 8:15 and 9:30 am, to a gathering of the 1%–a larger gathering, I should note, than heard my pep talk beneath Brown Brothers Harriman, across from Zuccotti Park, to the Occupy Wall Street march on December 13th, 2011.


We’re here to take the long view.  We want to know how we got here, to a place where economic crisis has been compounded by political impasse, on the one hand, and intellectual exhaustion on the other—except from the fringes, where energy seems abundant and renewable, but ugly all the same.  Once we know how we got here, we can see where we we’re headed, and why we might want to choose another destination.

In interesting times like these, though, when novel facts collide with previous truths, prudence based on custom could be useless: the past can tell us where we’ve been, but not necessarily where we’re headed.  I’m sure this dictum sounds odd coming from a history professor, especially one who reveres Lincoln, the conservative Republican who led the Second American Revolution.  But we’ve now reached the limits of what our history can teach us.

So let’s begin by addressing the economic dimension of the crisis.  I’ll put all my cards on the table.  In my view, capitalism as we know it can’t survive this moment, and that’s a very good thing for everybody—for the 1% as well as the rest of us.  I believe, on historical grounds, that a necessary condition of political democracy is the economic pluralism that comes with markets, prices, arms-length bargaining, contracts, property rights, and so forth.  But I also believe, on the very same historical grounds, that if they are to work properly, as agents of growth and social mobility, markets require vigilant management, increasing socialization, and political pluralism.  The causative sequence runs both ways: liberty and equality, or market freedom and social justice, are not mutually exclusive imperatives: after the American Revolution, they go together.  Indeed I would insist that these two imperatives are the basic and indispensable ingredients of the American Dream.

What caused the Great Recession?  There are four explanations out there.  Mistakes were made, especially by the Fed; monopoly choked off market forces that would have averted such a huge crisis; the money supply was too great or unwieldy because the financial sector had metastasized after deregulation in 1999; or moral standards eroded to the point of utter decay, so that consumer credit was available to the least deserving of buyers.

These explanations, the Four M’s as I like to call them, aren’t “false”—there’s enough truth in each to satisfy a substantial constituency among influential observers and accredited policy-makers, on Main Street, Wall Street, and inside the Beltway.  But each is insufficient.  Sure, Alan Greenspan kept interest rates low, but he did so to avoid the deflationary trap Japan entered by pricking a housing bubble in 1990, not because he was ignorant of the alternatives and the downsides.  Yes, the too-big-to-fail banks crossed the line once drawn by Glass-Steagall, but that move was perfectly legal, and they were already riding a tidal wave of corporate profits with no place to go except into speculative channels; breaking them up will neither restore market forces nor stem the tide of surplus capital.  Of course consumer credit became more plentiful after 1995, but that, and a drop in household savings rates, merely compensated for the long-term stagnation of wages (thus consumer demand) which became measurable in the 1980s.  And yes, moral standards have changed since then—for the better.

My explanation of the current crisis improves on the Four M’s by acknowledging rather than dismissing their partial truths, and by grounding the discussion in historical evidence rather than theoretical axioms, and moral certainties.  I show that the real problem we face in rethinking the sources of growth—it’s a real promise as well—is that private investment for profit is not the engine of growth we think it is.  Investment out of profits by the so-called job creators in the private sector is just not that important; you might even say that it’s unimportant.  I certainly say so in my recent book.  Here’s why.

For a hundred years, growth of output and productivity has happened as net investment in non-consumable goods like plant and equipment has steadily declined.  So if our purpose is growth, higher corporate profits begin to look like dangerously flooded streams of income that are unnecessarily withheld from consumer demand, and that are necessarily bound for speculative channels.  If our purpose is growth, we need to divert these streams toward higher consumption—from the 1% to the 99%.

Notice how my explanation of the crisis has already become an argument for income redistribution.

Both my explanation and my argument run counter to mainstream economic theory, and counter to the bipartisan political consensus that tells us we can’t redistribute income in the name of anything, whether equity or growth.  I depart from this mainstream and this consensus by comparing the Great Depression and the Great Recession—by explaining both in the same terms.  Let me alert you to the possibilities of the comparison, the explanation, and the argument by citing some startling facts.

Between 1910 and 1920, something brand new in the history of the human species took place.  For the first time ever, an increasing output of goods required no increase of inputs, whether of capital or labor.  Where for two hundred years previously, capital inputs per unit of output had steadily risen—we call this the industrial revolution—around 1919, capital-output ratios began a measurable decline that continues into the present.  Net private investment fell 20% between 1900 and 1930, and yet non-farm labor productivity and industrial output grew spectacularly, especially in the Roaring Twenties.  Between 1929 and 1939, the capital stock withered as almost all private investment ceased—net investment was less than zero for the decade—and yet growth rates between 1933 and 1937 were the fastest of the 20th century.

Mechanization took command: labor-saving technology had finally become capital-saving as well.  In the past new plant and equipment bought with business profits might have displaced workers in this or that factory; but it would have meanwhile increased the labor force that was making new equipment and building new plant: more workers would be required to produce these capital goods, so more jobs appeared in this sector even though workers had been displaced elsewhere.  After 1919, that is no longer the case.  Thereafter, barring war, all labor force growth derives from the consumer goods and services sector.  But in the 1920s, hundreds of thousands of jobs were lost here, too, even as consumer demand became the engine of economic growth, making up for the atrophy of net private investment.

Well so what, you might say, what’s wrong with labor-saving innovation and cheaper capital goods?  Nothing, I’d answer, as along as the distribution of income doesn’t change so that wages stagnate and profits explode; because in that case, what will happen is a catastrophic end to growth—massive crisis—caused by lack of consumer demand, on the one hand, and market bubbles on the other.  For if new investment is not needed to improve productivity and increase output, profits become superfluous—just restless sums of surplus capital that will seek any remunerative outlet, including the most risky outlets available.

Look at what happened in the 1920s.  Corporate profits increased 62% and dividends doubled, but wages stagnated, and this at the very moment that broad-based consumer spending on new durables had become the critical engine of economic growth—spending on automobiles, to be sure, but also on vacuum cleaners, refrigerators, radios, and washing machines, not to mention housing.  In the absence of better wages—93% of taxpayers had less disposable income in 1929 than in 1921—consumers went into debt to buy these goods: 80% of their spending on these durables was financed by the new credit available through companies like GMAC.

At the same moment, net investment was declining because the mere replacement and maintenance of the capital stock was more than enough to improve labor productivity and increase output.  So CEOs of industrial corporations went looking for new places to put the profits that were piling up: they opened time savings deposits at banks, just parking the money, but they also got creative and loaned on call in the stock market—between the deposits and the loans, they wagered about $15 billion in superfluous profits—as Fed member banks helped them to inflate the bubble by doubling their investments in stock market collateral.  Meanwhile, as the stock market became bubbly, roughly 1924 to 1929, the proportion of proceeds from new stock issues that were spent “productively” declined precipitously: according to Moody’s Investors Service, it fell off a cliff.

Sound familiar?  Pretty much the same sequence has unfolded, but more slowly, over the last 25 years, since the Reagan Revolution.  Corporate profits have metastasized, CEO salaries and bonuses have, too.  Wages and median family income have stagnated, even though labor productivity has steadily risen, as Alan Greenspan reminds us, in keeping with the cybernation of work.  This massive redistribution of national income was not the stealthy project of right-wing conspirators—Democrats and Republicans have collaborated to cut taxes on profits and high-end incomes in the hope of getting more investment out of the private sector, thus more jobs and more growth.

And the results?  Mergers and acquisitions, greater concentrations of wealth, just like in the 20s.  A much slower rate of job creation—a net loss of manufacturing jobs—just like in the 20s.  A decline of personal savings, and an explosion of consumer debt that closed the shortfall between household incomes and expenditures, and compensated for the decline of net private investment, just like in the 20s.  A boom-bust cycle fed by surplus capital, just like in the 20s, which ended very badly, with a financial crisis that couldn’t be fixed except by ignoring the banks, as the Reconstruction Finance Corporation did in the 1930s and as the Fed is doing now.

In short, the catastrophes we call the Great Depression and the Great Recession were both caused by a redistribution of income that cut marginal rates on corporate and high-end incomes, on the assumption that higher profits and capital gains would provide obvious incentives to more private investment—thus more jobs, more growth.

If we can’t rid ourselves of that assumption, we’ll never get anywhere in thinking about what happened back then or what we can do about the economic crisis that still plagues us.  We’ll just fall back on the common sense of our time, and we’ll get all bewildered once again, when, come April, Occupy Wall Street again dominates the airwaves and demonstrators fill the streets.  What do they want, we’ll ask, as if we don’t already know.

But what follows when we do rid ourselves of the assumption that higher profits mean more private investment, and thus more jobs, more growth?  And beyond this, what happens when we stop assuming that private investment drives growth?

To begin with, we give John Maynard Keynes and his adversary Friedrich Hayek credit for teaching us that investors want a yield, not a productive asset, and that money in the bank is always an alternative to buying an asset.  Say’s Law is over, they both insisted: demand automatically equals supply only under primitive conditions of production, as when Robinson Crusoe roamed his fictional island.  Both Keynes and Hayek argued that more saving, more profits, didn’t naturally or easily translate into more investment.  Alan Greenspan, Martin Wolf, and the OECD have recently verified their argument by measuring the growing discrepancy between corporate retained earnings and business investment: by their accounting, idle money in the hands of bankers now amounts to about 8% of GDP, about $2 trillion.

But neither Keynes nor Hayek went far enough because neither could see that more private investment wasn’t the key to renewed growth; both understood that savings weren’t being invested, but both thought that if coaxed from the private sector by government policy—increased spending for Keynes, resolute stability for Hayek—these savings would of course become increased private investment, and would therefore solve the economic problem.

We can go beyond Keynes and Hayek because we can acknowledge the novel fact of economic growth without “capital formation”—without more personal saving and private investment.  We can see, in other words, that we don’t need more investment to increase output and improve productivity, which is longhand for economic growth.  We can do both by replacing and maintaining the existing stock of capital goods, without making any net additions.  So we suffer from surplus capital, too much saving—and too little consumption.  How to explain this predicament?

Here’s what W. Arthur Lewis, the Nobel Laureate, had to say about it in his Theory of Growth (1955): “At any level of income, people can consumer only the quantity of consumer goods which exists.  Since their incomes derive from producing consumer goods and [capital] goods, and since they can buy only the consumer goods, it follows that they must save a part of their income equal to the value of the [capital] goods which have been produced. . . .What they are thus forced to save may not, however, correspond to what they would like to save at that level of income.”

Translation: we are now being forced to save too much, in amounts equal to the value of the retained earnings being hoarded by non-financial corporations, on their own balance sheets or on deposit with Federal Reserve banks.  These superfluous profits can serve no productive purpose as expenditure on new plant and equipment—again, such investment is unnecessary to cause growth—and yet they are being withheld from the purpose of consumer expenditure.  So far, they’re merely pointless, but they could become destructive if diverted, once again, into speculative channels.   Why not, then, return them to the stream of national income that is available for consumption, a proven means to the end of growth?

Why not acknowledge, once and for all, that private investment doesn’t drive growth, and redistribute income accordingly, toward wages, toward consumer spending?  Why not acknowledge that the profit motive as we now act on it no longer promotes growth because all it does is encourage more saving—more withholding from consumption, more delay of gratification, more unnecessary “investment”—and find some better alternatives?  Why not acknowledge that Keynes was right, that the profit motive is a “somewhat disgusting morbidity”?

Mainly because we don’t know how to live without it.  We don’t know how to live unguarded, without protecting ourselves against the future by accumulating something, anything, in the present—by storing up emotional as well as economic assets, withholding from the present one way or another.  The psychoanalysts call it repression, the economists call it saving, the rest of us call it common sense.

As a matter of historical fact, our character structures are built on a profound fear of the future that makes spending seem both irrational and immoral.  That’s why we still haven’t figured out how to recognize an economy of abundance: like the hunters and gatherers from the archaic past, we still know, down deep, that famine waits for us on the other side of the feast, and we behave accordingly.  We don’t know what to do about the plenitude of consumer culture except to denounce it as the cause of the current crisis and the solvent of our souls, because the structure of our character is still determined, and disfigured, by the scarcity we’ve only recently conquered.  An archaic urge to accumulate—that old profit motive, call it saving for a rainy day—overrules the evidence of economic abundance and enforces austerity of every kind, fiscal, familial, and psychological.  The same archaic urge also lets us believe that “entitlements” are a moral problem because they provide income without effort, something for nothing.

But how can I claim that more spending is good for the economy, the environment, and your soul?  How can I suggest that the alternative—more saving, more austerity—means both material and psychological disaster?  Make it a practical question: How does an embrace of consumer culture address the manifold crises of our time?

I’ll answer in the first person.  We promote economic recovery and we smooth out the boom-bust cycle of the last quarter century—we create the conditions of more balanced growth—by redistributing income away from corporate profits, toward wages and thus consumer spending.  We work on three assumptions here.  First, increased private investment doesn’t drive growth, and indeed can’t do so, because net additions to the capital stock are unnecessary to improve productivity and increase output, or—put it another way—because the capital stock in question is composed of human capital nurtured, for the most part, by public spending, mainly on education.

Consumer spending drives growth, let’s face this basic fact and get on with planning an economic future in compliance with it.  Let’s also face another basic fact: public spending doesn’t crowd out private investment, not any more than so-called residential investment—consumer spending on homes—is a drain on private enterprise.  And here’s another basic fact: there is nothing new about poverty; what is new is that we have the techniques and the resources to get rid of it.  I’m quoting Martin Luther King, Jr., who understood that economic abundance meant we could afford to be our brother’s keeper.

Our second assumption, and this follows from the first, is that we can’t leave superfluous profits—surplus capital—in the hands of traders, analysts, and CEOs who define the purpose of investment as merely monetary gain, and who will therefore pursue it in whatever market it’s available, no matter how risky, exploitative, or bizarre.  We can’t do so any longer because we know from hard experience that if we do leave it to them—the proverbial 1%—catastrophe follows.  Let’s not continue to reward them for destroying rather than creating value.  The time has come for our very own perestroika.

Our third assumption in advocating redistribution is that we have socialized financial capital by insuring deposits through the FDIC and bailing out the big banks; meanwhile we have socialized investment, more generally, by using tax codes, incentives, interest rates, state-funded worker training—also regulation by government agencies as well as NGOs—to make the market a means to the end of publicly-debated social goals, not an economic end in itself.  So it’s time that we, the people, the 99%, take responsibility for what is, practically speaking, already in our grasp.  The private sector has tried to socialize the risk of investment, and not always at the expense of the public good.  It’s time that we socialized the return on private investment, in keeping with broader purposes than the bottom line.

From this angle, a more equitable distribution of income looks eminently practical and immediately necessary.  Put it this way.  To do the right thing—to seek social justice through a more perfect union, to de-center and democratize decisions about our future—is to do the best we can for economic recovery and for long-term growth.  We’re not distracting ourselves from the real economic issues by contemplating redistribution.  We speak as realists, not idealists, not optimists, and not do-gooders, when we claim that an increasingly unequal distribution of national income is bad for business—bad for the future of market freedoms—or when we insist that liberty and equality go together in the American Dream.

That’s the thing about this dream, it keeps telling us that our ethical principles, which remind us of what we ought to be doing, aren’t necessarily at odds with our historical circumstances, which remind us of what we’ve actually been doing.  As Americans, we seldom notice this contradiction between “ought” and “is” because we’re so used to remaking ourselves in the name of an ideal we barely understand: that’s why we call it a dream, because it describes what we want to be, not what we are.  In times of crisis, though, we do notice, we wake as if from this dream and we start asking how to resolve the contradiction.  Sometimes we come up with remarkable answers.

Often enough, not always by any means, those answers lead us toward a more democratic society—usually by de-centering and democratizing decisions about the future.  It happened in the 1740s and 50s with the Great Awakening, when itinerant preachers robbed invested ministers of their doctrinal authority, then again in the American Revolution when rag-tag militias and committees of privates taught George Washington how to fight a war of liberation.  And then again during a great Civil War, when mere slaves taught free men and women the price of freedom, and then—once again—a hundred years later when black people stood up for human rights, civil rights, the rights of everyone.

There’s no predictable outcome from this kind of grass-roots radicalism, whether of the Left or the Right.  But as Americans we’re accustomed to it because we believe in the sovereignty of the people, not the state or the cabinet or the Parliament or the party.  We’re used to periodic uprisings of the unruly, the unlettered, and the unwashed among us.  We look to them for harbingers of the future because, unlike most of the intellectuals in our midst, they don’t long to live in the past.

So now, when we face an economic crisis of extraordinary proportions, and when we ask ourselves what we can do about it, we can look in their direction and say that what we need is more democracy—more people who are more involved in more decisions about what we want to be as a nation and a people, and as individuals, in the future.  Economic recovery comes by way of consumer spending, and long-term, balanced growth comes by way of more such consumer spending, not more saving and investment.

So let’s admit that we don’t need the traders, analysts, and CEOs to lead the way toward renewed prosperity.  This 1% is as superfluous and superannuated as the landed nobility had become by the end of the 17th century.  Let’s empower consumers and de-center decisions about the future: let’s give the 99% a vote when it comes to the allocation of economic resources as well as political office.

Let’s realize that the price of liberty is equality.  But don’t think that this price is a cost to be subtracted from the benefit of freedom, as if these two imperatives are incompatible.  In the American scheme of things—we all have this dream—liberty thrives only where equality becomes possible, only when social mobility becomes normal and social justice enlarges market freedoms.




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7 responses to “What I Told the Hedge Fund Managers in Miami

  1. William Neil

    Professor Livingston:

    I think this the clearest exposition of your views I’ve seen yet. I like this speech very much. The left’s reaction to a “newcomer,” especially economists who say they are on the left, doesn’t surprise me from my own first hand experience as a non-professional writer about the political economy, approaching 1,000 pages over the past four years. By writing as you do about the old virtues of savings, thrift and investment, and their semi-obsolescence due to changing economic and social conditions, you’re fanning the always smouldering embers which lie in the joint bed where economics meets religion, all that is summoned up by the old term “the Protestant Ethic.” I know the terrain, I’ve written about it in an essay entitled “Sinners in the Hands of an Angry Market.”

    I do seek one clarification that perhaps might help you among professional economists. I’ve read your book, and the additional notes and graphs in the Appendix, and maybe I missed something; but where you might clarify things would be not on the subject of net and fixed capital investment, I think you are pretty clear about that and anyone who follows the improvements in compter/computing power and the software that comes out every year can grasp your point that productivity can go up without plant expansion. But the missing clarification seems to me to be in the area of long term Research and Development, the old “R & D,” which some observers has said has been going down since the rise of finance over the productive economy in the past 30 years, and the accompanying focus on short termism in so many aspects of economy. One thinks of all the states setting up venture capitalism of their own, saying the private market isn’t doing enough, and so many states trying to incubate “bio-tech” clusters, and also trying to imitate the success of Silicon Valley. Perhaps you have spoken to the government’s large role in R & D already, but I think this is the area which may be causing some confusion because you haven’t given it emphasis, and have implied that productivity increases and efficiency in plant and equipment seemingly runs on a form of auto-pilot today.


  2. Well stated, Jim. This is a valuable audience, and you have addressed it with intelligence and tact – and without moralizing, demonizing, and Leninizing (the latter three perhaps explaining why you have not yet found an audience on the left).

    I can only add a small grace note to your observations with a joke (if people on the left laugh, you may have opened a dialogue with them).

    A woman gets married, for the fourth time, and on her wedding night says to her new husband, “you must be gentle; I am still a virgin.”

    The new husband is incredulous: “How can that be?” he asks.

    She replies: “Well, my first husband had been wounded in the war, and could not consummate our marriage.”

    “And my second husband, it turned out, was gay.”

    “What about the third?” asks Number 4. “I met him, and he seemed healthy and straight.”

    “Yes, he was,” says the woman, “But, well, he was a Socialist, and he was always telling me how great it was going to be.”


  3. Jim: Have you ever seen, or heard of, a book by Mortimer Adler called *The Capitalist Manifesto* (1958)? Adler co-wrote it with Louis O. Kelso. They wrote a follow-up called *The New Capitalists* (1961). Adler discussed some of the contents of both in this 1958 interview with Mike Wallace (near the bottom of the link, transcript available). – TL

    • I haven’t seen the Adler book, tell me more. Wow, there were a lot of capitalist manifestoes published in the 50s. I’m thinking of Rostow and the modernization crowd, but it’s an even broader stream than that.

  4. Thanks for this, which is an important clarification in its own right. I agree with you that government-sponsored or seeded research and development is a crucial component of improved total-factor productivity. And emphasizing it would place me in the Solow-Abramovitz-Fabricant camp of theorists and economic historians who define exogenous technological change rather than capital formation as the key to this improvement. Beyond that, it would alert readers to the simple fact that “investment” in the National Income and Product Accounts includes government spending.

  5. Jim,

    I’m helping prepare for my son’s birthday party (today) this morning, so I can’t leave a long comment. Instead I’ll offer links that explain the thrust of the Adler-Kelso plan:

    1. “Louis Kelso Made Simple” by David A. Spitzley .
    2. The Wikipedia page on Kelso.
    3. A brief article about Kelso by his spouse (I believe).
    4. And here’s a copy of *The Capitalist Manifesto*.

    Adler would come to call this “universal capitalism”—involving EVERYONE owning equity shares, somehow justly distributed. But it is also known EOP or ESOPs. Apparently Walter Reuther offered something like this to Ford employees in the 1950s. The goal, in relation to this post and your book, was to increase consumption ability by all citizens.

    – TL

  6. Pingback: “Private investment for profit is not the engine of growth we think it is” | Modern Monetary Realism

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