How Subsidized Capitalism Hurts Innovation

Last week I posted on our more active university blog about how subsidized capitalism damages both the funding and popular understanding of the central role of public services in building economies and societies.

The post was just a first poke for the new year into a huge hole in Anglo-American capitalism's theory of itself.  This theory ignores the extent to which it has spent the conservative 1980-2010 period absorbing public resources into its own revenues. Most of this theory's public apologists denounce public spending, which has helped massively reduce their tax obligations -- tax avoidance has become a major profit strategy -- while justifying private appropriation as putting public money to better use.

The New York Times has a good example of the problem.  Caterpillar is spending $426 million building a new factory in North Carolina.  It has gotten the state to pay $51 million in various incentives, including $5.3 million in direct costs to train future Caterpillar workers.  Since most of the training is being done by a local college called Forsyth Tech, the state is footing other costs as well.

This suggests serious weakness in the economic theory itself.  The co-founder and longtime CEO of Intel, Andy Grove, wrote a while back that "the U.S. has become wildly inefficient at creating American tech jobs." Intel spent $3600 in adjusted dollars for every job it had 10 years after its founding.  This cost has exploded to $100,000 per job at some of the country's most successful high-tech companies -- Genentech, Google, etc. Here's the chart that accompanied the article:

The cost of each new Caterpillar job in North Carolina is $130,000 - well above Google's cost.  But that is only the state of North Carolina's contribution.  Add in the company's own investment in the new facility, and you get an incredible $1.2 million per job.  Caterpillar is very inefficient at creating jobs, and has gotten North Carolina to pick up some of the excess cost.

The use of the chart above isn't entirely fair, since the 392 jobs is this Caterpillar plant's immediate workforce and not the workforce 10 years out.  But the point of the new plant is to use technology to suppress workforce growth, suggesting future growth will be limited. And the huge cost per job can only be justified, if at all, through some extraordinary and unlikely tech-fueled level of productivity.  These are not obviously sustainable jobs, and the article points out that some of the same workers in the new state training program have been burned before by hit-and-run companies.

The problem with the expected public subsidy of capitalism has several parts. The first is that U.S. federalism has put states and local jurisdictions in competition in a "race to the bottom" to offer the weakest union protects, weakest safety requirements, lowest wages, and highest subsidies. Yes there are practical limits to all this and no not all firms are slave-driving exploiters of labor and plunderers of the public purse.  But the downward spiral is the logic of the system, and a well-paying company with good labor conditions (that support creativity) in New Jersey or Minnesota is vulnerable to competition from cheap operators in states like, well, North Carolina.

The second problem is deeper, and Andy Grove points it out.  U.S. companies are less efficient at creating jobs, he says, because the country has spent the last few decades shipping manufacturing know-how overseas, attached to the jobs it has shipped over there.  Grove focuses on the capacity for "scaling," which is the way that a good invention becomes an industry that supports lots of employment. The million little problems that must be solved require complex knowhow that is housed in people. Solutions require an entire, "effective ecosystem in which technology knowhow accumulates, experience builds on experience, and close relationships develop between supplier and customer." When this ecosystem is already established as it famously is in a place like Silicon Valley, new jobs are generally less expensive to create.  When you don't have that ecosystem, they cost a lot and, just as importantly, they are less secure.

Universities are central to an innovation ecosystem, and constantly cutting their budgets weakens the ecosystem as a whole.  But interestingly, cuts ironically drive up the cost of new jobs rather than lowering them (usually defined as lower taxes).   A weaker innovation ecosystem can destroy a new industry before it gets started.  Grove's example is lithium-ion batteries for the next generation of electric cars and trucks.

The U.S. lost its lead in batteries 30 years ago when it stopped making consumer electronics devices. Whoever made batteries then gained the exposure and relationships needed to learn to supply batteries for the more demanding laptop PC market, and after that, for the even more demanding automobile market. U.S. companies did not participate in the first phase and consequently were not in the running for all that followed. I doubt they will ever catch up. 

Subsidized capitalism conceals the real problem, which is the weakening of the overall social environment in which innovation and sustainability take place.   It has been weakened by social underinvestment.   Grove calls explicitly for jobs policy -- for "jobs-centric" leadership.

We won't get something that intelligent because both parties like to shovel public money toward private firms, even when it means taking public funds away from the social ecosystem on which the firms depend.

To wrap up, subsidized capitalism kills two birds with its one big stone.  First, it hurts public services. Subsidized capitalism has enabled the takeover of the charter school movement by education companies whose existence depends entirely on taxpayer funding.  The same goes for-profit university-company sector, which depends so totally on federal loan money that it pipes through its student-customers that the government has had to cap their receipt of federal funds as a share of total revenues at 90%.  This sector sells educational services, but makes its money by not spending revenues on education, and produces bad educational results.  The bad drives out the good, as the for-profit sector's existence convinces many policymakers that they can get away with spending less public money on real-thing public education.   The same has happened to transportation. A somewhat funny example is Chicago outsourcing its parking meters, which historically helped pay for street improvements.  More seriously, the UK House of Commons's Treasury Committee published a study last August, 20 years into its "Private Finance Initiatives" experience that included privatizing its rail system.  The committee found among other things that PFI deals typically added 40% to the service costs.

The second victim of subsidized capitalism is the private sector itself.  Demanding tax reduction with one hand and receiving taxpayer funding with the other, corporate America has ignored the role of public funding in building the advanced society on which its own survival depends.  After nearly 40 years of this, in 2012, it's not clear that the U.S. will ever catch up.

Wall Street Dissidents Backstop the Occupation

A crucial development in 2011 has been the way the Wall Street has managed to alienate so many of its natural supporters among economists, top economic journalists, and financial professionals.

Lots of mainstream finance commentators finally went ballistic over the state of financial policy.  The most interesting group are the professional investors who have turned on their masters. I get to them at the end of the list of dissidents.

The Angry Keynesians.  Paul Krugman is Exhibit A, a 1990s liberal free-trader where strong state intervention was the exception more than the rule, but who opposed the Bush tax cuts and for the ten years since has railed tirelessly about every replay of deregulatory trickle-down business-led plutonomics. He summarized the Bush Years as "The Big Zero,"   denounces  "The Austerity Delusion,"  "The Urge to Purge,"   "Cockroach Ideas," among many others.   The "Economic Bleeding Cure" is a classic of this genre.

Fortunately, physicians no longer believe that bleeding the sick will make them healthy. Unfortunately, many of the makers of economic policy still do. And economic bloodletting isn’t just inflicting vast pain; it’s starting to undermine our long-run growth prospects.

Keynesians care about the development of society, and are confused and enraged by the casual blowing off of these concerns by policymakers in the US and the EU alike.  "Well, this is a miserable step in the wrong direction" says  Jeffrey Sachs, starting a denunciation of both parties in the US.  "From a self-preservation angle, this is lunacy," notes David Dayen.  

Nicholas Kristof alienated some Occupier supporters with a somewhat patronizing attempt to suggest demands, but he is also the author of the excellent summation "Our Banana Republic," voicing anger at policy suports for social devolution.  But you know these people.


Prophetic Re-regulators.  This group consists of high-end experts in technical domains -- mortgage industry regulation, complex credit instruments, international banking relationshiops -- who have become relentless and sometimes furious bloggers. They focus on the non-improvement of the financial system itself -- not so much on its social effects as its continuing rottenness, now propped by massive government subsidies (a 0.16% interbank funds rate for example) and complicity in the perpetuation of the shadow banking system that caused the problem in the first place.  You know most of these folks too:  the sober Simon Johnson and James Kwak at the Baseline Scenario, Dayen on housing, and Yves Smith at the remarkable Naked Capitalism on housing, banking as a criminal enterprise, and idiotic political dynamics that are forcing a choice between shooting the economy (Republicans) or bleeding it to death (Dems).  

Cassandras of Systemic Failure.  The lead people here are in Europe, with Martin Wolf at the front of the pack. These are a mixture of journalists and economists who accept the need for "adjustment" of the most crisis-ridden economies -- read drastically lowered living standards for the 99 percent -- but think politicians aren't being smart or independent enough to manage even that.  Wolf recently predicted a lost decade unless governments simply cranked up the printing press and created money, denouncing sadism towards populations along the way. He often points out that economic failure was not caused by bad behavior but by not very enlightened market judgements, e.g. public debt burdens that were lower in Ireland and Spain than in France and Germany.  This is the Japan Syndrome writ large by pro-capitalists who see that financial corruption and momentum have undermined the systems that made capitalism stable for a while.

Raging Traders. These are working investors, many of whom write blogs to attract customers to their investment business, which often consists of selling their trading advice.  Post-facto posts are the sign over the entrance meant to encourage signing up for the live action inside the tent.   These people trade every day,  feel shafted and betrayed, and are absolutely furious.

Here's the boss of Phil's Stock World on the horn last December talking about Obama's capitulation on the tax cut extensions.  Remember, Phil likes numbers.

Good job Congress!

Way to take it from your new Republican Masters! Not since Jack sold his cow for some magic beans has a deal like this been made by our "leadership" where families earning between $35,000 and $64,000 go $7,800 further into debt to get a $613 tax break while families earning between $5M and $10M get $38,590 and families earning $50M to $100M get $380,590 and families (or Corporations, of course) earning $500M to $1Bn get $3,859,000 or about 12,590 times more than the average middle class family but, then again, they deserve it because – they are that much better than you are!

Face it, unless you are in an income category where your tax benefit has 5 digits, you are what George Orwell (who worked in England’s Ministry of Propaganda) called a "Prole." In 1984 the Proles (proletariat) were the vast majority of the populace, the working class of Oceana. Though the proles are the majority, they are unimportant. The Party explicitly teaches that the Proles are "natural inferiors who must be kept in subjection, like animals". As one of the Party Leaders observes: "the relative freedom of working-class people is merely a symptom of the contempt in which they are held". . . .

You’re not going to be any trouble are you? Enjoy your $613, little people. That’s what, about a month’s worth of gasoline and cable TV? Congratulations on your voting acumen – you certainly have gotten the Government that you deserve! . .. . 

Congressman Ryan Paul . . .  points out: "Whose money is this after all?" It’s not your money that your family is going $7,800 further into debt to protect – it’s THEIR money. THEY earned it and THEY are darned well going to keep it. "Hey," you might say, "I work for THEM – didn’t I make that money and isn’t this OUR country that’s in debt and needs responsible fiscal policy?" Well, that’s just Commie talk and you’d better watch yourself – we’ve already sent your name of to HomeSec so consider yourself on notice…

The Proles in this country are dumb enough but what amazes me is the people who support the tax cuts thinking you are "one of THEM" when "they" look at you the same way you step over a homeless man in the streets. $858Bn is the NATIONAL Debt that we are taking on to fund these cuts. The cuts work out to about 0.75% of your income and your family share of the additional debt burden is $7,800 so, unless you are making AT LEAST $1M PER YEAR as a corporation or individual, this tax cut is a net loss for you. Once you clear that $1M hurdle, it’s all gravy flowing uphill to your plate! Even better if you are a "Corporate Citizen" – you have no real debt obligation to this nation because, like Haliburton and many, many others – you can simply move whenever you want – to avoid taxation AND prosecution!

As Bloomberg proclaims today "It’s a Great Time to Be Rich,"

You can often read this kind fury on Phil's blog. The "Long Con" is a fascinating example for its somewhat Marx-like systematicity.  Phil makes his money every day by betting on the blindly destructive greed and cowardice of financial and political leaders, which he describes as such.

Here's another professional financial advisor, Adam Lass, the editor of Wealth Daily, writing about Wealth Preservation During Depression

The central bankers want us to think their fountains of unlimited imaginary money are our sole hope of escaping yawning pits of economic hell. For these apparatchiks, it's all about hanging on to the levers of power any way they can.

The private bankers claim that if we just turn them loose from the stranglehold of post-crash regulation — and allow them to tangle the world in a impenetrable web of insanely profitable derivatives and bonds again — they will plant our feet firmly on the road to financial nirvana.

To these guys, you and I are just foot soldiers and cannon fodder. Our jobs, homes, wealth, and health? Collateral damage.

 Here its class war on Wall Street, not just between Wall Street and Main Street.

My final example is from the Wall Street Examiner, where Lee Adler states, "I Stand with the Protestors."  It is a howl of rage that starts like this:

We as a society must stop pretending. Most of us think that we still have money in the bank to protect, so we go along with the game of extend and pretend. For some of us, the game has already ended. The rapacious zero interest rate policy that I call Bernankecide has already robbed millions of savers of their life savings. This is the reality that has yet to hit home for many Americans who are content to wallow in the status quo. Unfortunately, the longer it takes for them to wake up, the worse their, and our, fate will be.

My mother and millions of other senior citizens are among the victims of the game that policy makers and those who empower them are playing. Their life savings are gone because Bernankecide, the financial genocide of the elderly, forced them to spend their principal. Now the government is indirectly confiscating 8% of my income because I must support my mother. That percentage is likely to grow as her health deteriorates.
Millions of other boomers are in the same boat. They are forced to pay this immoral hidden tax because Ben Bernanke decided that the innocent must pay for the sins of the guilty. While Bernanke’s ZIRP goes on allowing the banksters to continue to collect their fat bonuses, it steals the savings of millions of Americans, eliminates their disposable income, and cuts the spending power of millions of others who must now support those rendered destitute. The guilty benefit, and the innocent are punished.

Bernanke knows that, yet he continues to side with the criminal bankers in support of the financial genocide of the super elderly, and their children, the baby boomers who must increasingly support them.

Adler identifies himself in effect as Wall Street's 99 percent - screwed by the investment Bigs and with no end in sight.

In the late 1990s I wrote an article called "Business Civil Wars."  It was clearly premature.  Occupy Wall Street has brought this last group to the surface, and they are providing endless detail about the contradictory social relations within finance capitalism itself.