Moral hazard and the vampirism of oligarchs

I keep hearing that high unemployment is due to a lack of demand, due to deleveraging.[1] Households, it is said, have taken on more debt than they can handle, with the drop in housing prices inhibiting them from earlier practices of using their homes as ATMs to fuel spending.[2] Let’s make no mistake:

The recovery is faltering. Our economy is growing at annual rate of just 1.8 percent. Manufacturing just grew at its slowest pace in 20 months. More than 44 million Americans – one in seven – rely on food stamps. Employers hired only 54,000 new workers in May, the lowest number in eight months. Jobless claims increased to 427,000 in the week ended June 4. The unemployment rate rose to 9.1 percent. Nearly half of all unemployed Americans have been without work for more than 6 months. About 25% of all teenagers who are looking for work are unemployed. Eight-and-a-half million Americans are underemployed – i.e. working part-time because their hours have been cut or because they can’t find full-time work. There are, on average, 4.6 unemployed people for every 1 job opening. And even if all the open positions were filled, there would still be 10.7 million people looking for work.

The Case-Shiller index shows that the housing market has already double-dipped.

Case-Shiller index
Fig. 1: Case-Shiller index

And, because of the huge shadow inventory of yet-to-be-foreclosed homes, Robert Shiller, a co-creator of the index, thinks home prices could easily fall another 15-25% before bottoming out. If he’s right – and I suspect he is – this spells the end of the recovery. As prices continue to decline they create hidden losses elsewhere in the economy, hurting not just homeowners but the financial institutions that hold their mortgages. The list goes on and on.[3]

Keynesians, such as Paul Krugman and Robert Reich, argue that government must step in, hire people whom businesses will not, and spend money which consumers will not.[4] In this light, the Obama administration’s economic stimulus was recklessly inadequate, “fail[ing] to sufficiently improve the economy, making Keynesian economics the subject of ridicule and scorn.”[5]

Various measures of unemployment since 1994
Fig. 2: Various measures of unemployment since 1994

I can’t fault their analysis in so far as it goes. And it is ridiculous to think, as conservatives advocate, that corporations that already have plenty of cash will use any more tax breaks to hire in this country.[6] The evidence is clear that when corporations create jobs, so-called “free” trade policies encourage them to open up those opportunities almost anywhere except in the United States.[7] As I pointed out last month:

Money instead facilitates the rich in relocating ever more jobs overseas. According to the Economic Policy Institute, “As of 2010, U.S. trade deficits with Mexico totaling $97.2 billion had displaced 682,900 U.S. jobs.”[8] That is for Mexico alone. Multinational corporations

cut their work forces in the U.S. by 2.9 million during the 2000s while increasing employment overseas by 2.4 million, new data from the U.S. Commerce Department show. That’s a big switch from the 1990s, when they added jobs everywhere: 4.4 million in the U.S. and 2.7 million abroad.[9]

Yet the elite of this country, for whom so-called “free trade” opens access to markets around the world, insist that these agreements create jobs—just the other day, White House Press Secretary Jay Carney credited President Obama with pursuing three “free trade” agreements which he said “will produce 70,000 jobs, create or support 70,000 jobs in America”[10]—as if, even if true, Wal-Mart jobs were any substitute for manufacturing jobs, and as if, even if true, 70,000 jobs were of significance against the 31 million that are needed.[11] Scott Sernau of Indiana University in South Bend writes of a new international division of labor:

Those who can control global markets and global production can garner a world of profits, benefiting from both the cheapest inputs of labor and resources and the largest markets afforded by the entire planet. In contrast, those whose skills are now replicated by workers around the world find themselves competing for jobs and wages with the entire planet.[12] [13]

But that so much manufacturing has moved overseas has another implication, that even if U.S. consumer spending in this country were to magically pick up, it would mostly benefit only corporate bottom lines, that benefits for the economy overall would be muted. If, for instance, I respond as economists would like by purchasing a computer, I will likely find it has been made in China. Hewlett-Packard, whose labor practices in China are—to put it mildly—suspect,[14] and its shareholders may profit, but it is hard to see how that does much good for the U.S. economy. Likewise, if I purchase an “American-made” car, many of its components will have been made overseas. Even many of Obama’s green jobs rely on foreign manufacturing.

For an economic system of exchange to function, people must 1) have the opportunity to be productive, and 2) actually be productive. In the United States, this is simply no longer the case. So-called “free” trade policies have fatally undermined the economy, which means that any hope for a significant increase in government revenue from taxation in an expanding economy is unlikely to be fulfilled, particularly when for ideological reasons we refuse to insist that corporations and the wealthy pay a fair share.

Thus, in a way, the deficit hawks become correct. If we accept the premise that a particular form of debt must be paid, while ignoring a broader understanding of debt that reckons for the social and environmental costs of corporate greed,[15] then it indeed follows that government spending must be severely slashed. After all, we can no longer afford to pay for the damage wrought by the rich. But to do so is to reward the very people who have created this disaster through socially and environmentally reckless practices.

And it is a downward spiral. Instead of remedying egregious injustices in education caused largely by funding disparities which inform poor children (prominently of color) that they are not worthy of investment,[16] we will invest less in education for everyone else as well. That may well suit conservatives who hated school,[17] but it condemns more and more of all of our children to be qualified only for jobs that don’t pay a living wage, don’t pay rent. That means the 19.42 percent of the labor force (calculated by subtracting employed persons from an estimate of labor market size based on the maximum labor force participation rate to date, all using non-seasonally adjusted numbers[18]) that is now underemployed or unemployed can only grow as fewer and fewer people are able to afford less and less.

But all this results from a limited understanding of debt whose constrictions benefit a powerful few:

People respond to incentives, and incentives are determined by costs and benefits. Because insurance changes the costs of misfortune, insurance should change people’s behavior. They should make less effort to avoid misfortune, and this change in behavior is called moral hazard. For example, if an accident costs a person $1000 but insurance pays $900, the insured person has less incentive to take steps to avoid the accident or misfortune.[19]

One of the charges against the bank bailout was that by protecting financial institutions from the consequences of their own actions, it created moral hazard.[20] Yves Smith, for example, castigates it as “a case of crony capitalism and kleptocracy, plain and simple.”[21] And as we observe skyrocketing profits on Wall Street in the face of Main Street gloom,[22] it is hard to disagree. But in fact, capitalists fail to recognize that a refusal as well to hold corporations to account for so-called “external costs,” those social and environmental costs they think government should pay for rather than corporations, is a creation of moral hazard which dates to the Industrial Revolution and accounts for vast ecological and social problems. Even setting that aside,

Robert Rector and Katharine Bradley of the Heritage Foundation, a conservative research organization, estimate that federal welfare spending amounted to $491 billion in fiscal 2008. (They don’t explain what specific programs they included in this estimate, and I’ll try to unpack it in a future post.) Even their extremely high estimate remains far below estimates of the total of $2.5 trillion spent on financial bailouts this year. The libertarian Cato Institute often emphasizes the issue of corporate welfare, but it’s remained remarkably quiet so far on the topic of bailouts.[23]

Corporations and the wealthy who even only in financial terms have profited immensely from policies that widen the gap between the very wealthy and everyone else[24] owe much, much more to the rest of us than what they’re paying. And for capitalist libertarians to cast the poor as parasites is pure hypocrisy.

The justification for much of this [corporate] welfare is that the U.S. government is creating jobs. Over the past six years, Congress appropriated $5 billion to run the Export-Import Bank of the United States, which subsidizes companies that sell goods abroad. James A. Harmon, president and chairman, puts it this way: “American workers…have higher-quality, better-paying jobs, thanks to Eximbank’s financing.” But the numbers at the bank’s five biggest beneficiaries–AT&T, Bechtel, Boeing, General Electric and McDonnell Douglas (now a part of Boeing)–tell another story. At these companies, which have accounted for about 40% of all loans, grants and long-term guarantees in this decade [the 1990s], overall employment has fallen 38%, as more than a third of a million jobs have disappeared.[25]

Capitalist welfarists divert attention from their own behavior by comparing the poor to leeches while they act as vampires in a system that demands more and more austerity from the poor and working classes both in Europe and in the United States, all to ensure that the wealthy get paid on time.[26] But the rest of us should be wondering when we’re going to get paid.

  1. [1]Paul Krugman, “Debt, deleveraging, and the liquidity trap,” Vox, November 18, 2010,
  2. [2]Charles Hugh Smith, “The Red Queen Of Deleveraging Trumps Bernanke’s Plan To Reignite The Goldilocks Economy,” Business Insider, January 10, 2011,
  3. [3]Stephanie Kelton, “Time to panic? You Betcha,” New Economic Perspectives, June 10, 2011,
  4. [4]Paul Krugman, “No, We Can’t? Or Won’t?” New York Times, July 10, 2011,; Robert Reich, “How to Get Washington’s Attention,”, June 1, 2011,
  5. [5]Kelton, “Time to panic?”
  6. [6]Paul Krugman, “Corporate Cash Con,” New York Times, July 3, 2011,
  7. [7]David Magee, “The Divergent Paths of Wall Street, Main Street,” International Business Times, July 5, 2011,
  8. [8]Robert E. Scott, “Heading South: U.S.-Mexico Trade and Job Displacement after NAFTA,” Electronic Policy Institute, May 3, 2011,
  9. [9]David Wessel, “Big U.S. Firms Shift Hiring Abroad,” Wall Street Journal, April 19, 2011,
  10. [10]Jay Carney, “Press Briefing by Press Secretary Jay Carney,” White House, June 2, 2011,
  11. [11]David Benfell, “Cold buildings and hot air: the Main Street choice between empty and hateful words” June 3, 2011,
  12. [12]Scott Sernau, Worlds Apart: Social Inequalities in a Global Economy, 2nd ed. (Thousand Oaks, CA: Pine Forge, 2006), 46.
  13. [13]David Benfell, “An Anarchist in Sacramento: A Reflection on How Our Social Structure Threatens our Survival,”, June 6, 2011,
  14. [14]China Labor Watch, “Tragedies of Globalization: The Truth Behind Electronics Sweatshops,” July 12, 2011,
  15. [15]David Benfell, “Talking about debt,”, September 8, 2009,
  16. [16]Jonathan Kozol, Savage Inequalities: Children in America’s Schools (New York: Harper Perennial, 1991).
  17. [17]Thomas Frank, What’s the Matter With Kansas? (New York: Holt, 2005).
  18. [18]David Benfell, “Cold buildings and hot air: the Main Street choice between empty and hateful words,”, June 3, 2011,
  19. [19]Robert Schenk, “Insurance,”, n.d.,
  20. [20]but see Tito Cordella and Eduardo Levy Yeyati,” International Monetary Fund [Working Paper], August 1999,
  21. [21]Yves Smith, “Summer Rerun: Geithner and Summers as Obama’s Cheney and Rumsfeld,” Naked Capitalism, July 9, 2011,
  22. [22]Magee, “The Divergent Paths of Wall Street, Main Street.”
  23. [23]Nancy Folbre, “Welfare for Bankers,” New York Times, April 20, 2009,
  24. [24]Jacob S. Hacker and Paul Pierson, Winner-Take-All Politics: How Washington Made the Rich Richer—And Turned Its Back on the Middle Class (New York: Simon and Schuster, 2010).
  25. [25]Donald L. Bartlett and James B. Steele, “Corporate Welfare: Corporate Welfare,” Time, November 9, 1998,,9171,989508,00.html
  26. [26]John Lanchester, “Once Greece goes…” London Review of Books 33, no. 14, July 14, 2011,

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