The headlines coming out of Europe all tell us the same thing: the voters are fed up with austerity; they want growth. Is that really what these elections were all about? Nicolas Sarkozy was defeated by Francois Hollande, a Socialist party candidate, in a near-rout. In Greece, the two centrist parties which form the current government polled less than half the votes they received in the last election. It is unclear if they can even form a coalition government. If so, they will have to draw on either the far left party or the neo-fascists on the right to get a majority vote in parliament.
These two elections were as much about Germany as they were about domestic issues, as serious as those were (unemployment in France is 10%, and 20% in Greece). Germany is the instigator for austerity imposed on the periphery countries, and now imposed as well on its core partners such as France. Germany wants more cutbacks in social spending, it wants higher taxes on the average citizen, and it wants friendlier policies for corporations, but only in places like Greece, Italy, Spain, and Portugal, which are considered chronic over-spenders. It also wants you to ignore the fact that Germany was one of the first countries to violate the 3% debt/GDP rule that it insisted upon when the euro was founded. Germany wants everyone to see the world the way Germans see the world: Germans are thrifty, efficient, makers of excellent export products, and prudent about the use of debt. Most everyone else, especially in southern Europe and on the periphery, are spendthrifts, indolent, unproductive, and living off government welfare.
The voters in France and Greece were not so much opposed to austerity, as they were opposed to German-style austerity, which is good for just about everyone but the Germans. People don’t like the sanctimoniousness, the pressure tactics, and the begrudging help that constitutes German leadership in the EU. But there is something even more to it than that. What is really galling to people is that there is one class that has been exempt from any of the pain of the past four years, and that is the rentier class. This is an old term first used by Karl Marx, but which has been revived lately by respectable economists because it is the best descriptor of the organizations and people who benefit from the austerity policies so beloved by politicians.
The rentier class are people who earn their living off dividends and interest income, plus gains in the stock and bond markets. In Marxists terms, they are parasites, contributing nothing productive to society in the way of jobs, economic growth, economic stability, or the equitable distribution of wealth. In fact, they do the reverse of all this, by stifling growth, destroying jobs, and channeling wealth to a tiny minority that today is increasingly referred to as the 1%.
The concept of the rentier class disappeared from economic discussions with the fall of Communism and the thorough discrediting of Marxism and its tendencies to evolve into economic totalitarianism. Respectable, mainstream economists find it odd that they have to resort to a hoary phrase like rentier class, long thought buried “in the dustbin of history” with the demise of Marxism. Unfortunately, there is no more appropriate term, and even then, the concept of a rentier class is very limiting if one thinks simply of rich people cashing in their dividend checks on a daily basis.
For one thing, the dividend payout ratio for most major global corporations has fallen to an all-time low in recent years and is only now beginning to increase. Most corporations pay less than 2% of their earnings in dividends; the long term average is around 6%. Growth companies in the technology sector traditionally pay no dividends at all, forcing the shareholders to rely on capital appreciation of their company stock to earn any profit on their investment. Nor is the bond market a sufficient source of income these days, with interest rates near zero on short term government debt, and below 2% p.a. on debt issued by large corporations.
How, then, does the rentier class make their money? We mentioned the reliance on capital appreciation of stock holdings, and it is noteworthy that stock markets in the US, for example, are approaching or exceeding the highs seen in 2007 just before the crash, despite an economy that is barely out of the 2007 trough. This hasn’t happened by accident. What has propelled the US stock markets higher are two forces: exceptional growth in corporate income, and deliberate manipulation of the stock market by the Federal Reserve. The commonality between both these developments is the enormous amount of liquidity, in the form of bank reserves, that has been fed into the economy by central banks. The reserves are injected directly into the banking system when central banks buy up the shaky loans and investments banks have made, and provide them with “good money” in the form of Federal Reserve Fed Funds, or in the form of US Treasuries. A second method used is through the Zero Interest Rate Policy, in which banks are encouraged to borrow money from the Fed at 0% and invest it at a profitable interest rate spread.
In theory, and in past practice, the banks are supposed to invest this money in the productive elements of the economy. In this recession, that has not happened. The money has gone into commodity speculation, especially in oil, foodstuffs, and precious metals. Corporations have been able to borrow from the banks, but not consumers, because consumers are now considered very poor credit risks. Corporations, in turn, are hoarding the money they borrow rather than putting it into expanding their businesses or hiring new workers. Corporations are sitting on record amounts of cash, and the only time it is ever used is when the company wants to buy back its own stock to increase the price. Not a week goes by without some major company announcing yet another stock buyback program.
The Federal Reserve encourages all this. It has said very explicitly that it wants to see stock markets “higher than they otherwise would be.” It says that a higher stock market will encourage consumers to spend money and help the economy grow, but it doesn’t really believe this will happen. There is no evidence that this “wealth effect” exists, or if it does, it does not persist for very long. What is evident, though, is that the rentier class benefits enormously from these policies, because the rentier class is synonymous with the executive class than runs corporations.
To join this class you must be appointed by other members of the executive elite. Your odds of being selected are fairly good if you are recently graduated from an elite university, because most such students already come from the executive class. Their parents are corporate chieftains or hedge fund managers or bank executives, all of whom have the money to groom their children into executive material. Consequently, the pool of individuals who are allowed to run corporations has narrowed substantially over the years to incumbents and their children, which is precisely how more and more wealth is being concentrated in the pockets of 1% of the population.
Sometimes this system operates out in the open, in what can be described as the Luke Russert phenomenon, named after the scion of a prominent US newscaster who died unexpectedly. His son at age 23 was immediately granted an important and highly visible job at the television network involved, in order to carry on the Russert “brand”. The fact that young Luke Russert had no journalism qualifications was irrelevant – he had brand identity. In a similar fashion, Chelsea Clinton has recently been given a prominent television job despite having no experience in journalism. Her only qualification is that of daughter of an ex-President of the United States.
Usually, though, the nepotism and favoritism extended to children of the rentier class is done behind the scenes, and appears in public only by accident. If it weren’t for the recent disgrace of the Chinese Communist Party official Bo Xi-lai, no one outside of his class of fellow billionaires would know that his son, Bo Gua-gua, was studying at Harvard, having previously studied at Oxford. Bo Xi-lai is known as a Chinese “princeling”, the son of one of the men who joined Mao Tse-tung on the Great March. He has lived a favored existence merely because of his birth, and obviously has seen no conflict in passing such favoritism down to his children.
It is men like Bo Xi-lai who enjoy lecturing everyone else about the need to rein in their spending in tough times. He was even a hypocrite enough to call for a return to the austere policies of Mao Tse-tung, knowing full well that such policies would never apply to party officials like him, since he has privately been able to amass a fortune off China’s growth in ways that most certainly are corrupt and illegal. Greeks reading about men like him, or Frenchmen who follow the news, would recognize the type: the oligarch who knows what is best for everyone, secure in the knowledge that the system now operates to ensure that oligarchs will thrive no matter what.
Is it any wonder French voters have had enough of Nicolas Sarkozy and his fashion model trophy wife (a necessary accoutrement for billionaires and aspiring oligarchs), or Silvio Berlusconi and his sex scandals, or the Papandreou family that handed down the office of Prime Minster from father to son as if it were a birthright? How much longer will the British public abide David Cameron, who has been shown to be the perfect sycophant to Rupert Murdoch, a man so immoral even the British government has been obliged to declare him unfit to run a major corporation.
Heaven help the rentier class if moral fitness were now to become a qualification for membership. That would mean the men who run major corporations would no longer be able to engage in global labor arbitrage, which has put millions and millions of workers in the west out of a job and shifted employment to low-paying slave labor in Asia. The entire Apple business model would collapse under such a change, which is bad enough for Apple, because the company has recently been revealed to be the poster child for another corporate practice that borders on the immoral – tax avoidance. Apple pays less than 10% of its income in taxes, using schemes that are “perfectly legal” because the company lobbied Congress to make them legal. Otherwise, they used to be illegal. The average American worker pays well over 10% in income taxes and payroll deductions for Social Security and other welfare programs.
If morality were to enter the picture, hedge fund and leveraged buyout companies would no longer be able to engage in the business of equity extraction, whereby they prey on weak corporations, load them up with enormous debts, and then steal the cash by declaring special dividends for themselves. Morality would dictate that bankers would not be able to obtain jobs as regulators, as part of a revolving door between the industry and the regulators that effectively turns the regulators into industry lapdogs.
Morality would require the press to start reporting on these issues, rather than play along in the game of oligarchy by writing worshipful and uncritical accounts of the men who run the business world. Morality would force corporate money out of politics and put an end to the idea that corporations have individual rights. Morality would reinstate discipline to capitalism, meaning that those businessmen who make bad investments and display unsound judgment pay a price through the loss of their jobs and wealth. Badly run companies and banks would be allowed to fail, and not be propped up by taxpayer money through bailouts. Regulators would actually regulate, and political leaders like Barack Obama would see to it that corporate malefactors would be investigated, prosecuted, and then sent to long jail terms if found guilty of crimes.
Isn’t this really what these elections were about? It’s not that voters want an end to austerity; most people recognize that emerging out from a suffocating pile of debt is going to be very painful and hurt everyone’s standard of living. What voters want is that this burden be shared by the people who have most benefited in the past from this system of oligarchy, who are manipulating the system currently to avoid any harm to themselves, and who show not the slightest concern about the burdens imposed on 99% of the population. Voters want real capitalism back, and they want the political system restructured so that it focuses on the interest of 99% of the population, and not exclusively on the 1%. Despite what Paul Krugman writes, it is not clear that voters want yet another massive expansion of government debt. Most people are already alarmed at the enormous increases in debt that governments and central banks have taken on as a response to the global depression (and Krugman is right in calling it a depression).
Why not redirect existing government spending away from propping up a corrupt, oligarchic economic structure? Take away the bailouts. Outlaw the equity extraction businesses, the never-ending fees banks charge consumers merely for the “luxury” of having a checking account, and the stock option programs that allow executives to leverage up their personal income by focusing only on maximizing short term company profits. Forbid regulators from working in the industries they regulate. Investigate and prosecute corruption, including the sort of voting corruption that allows oligarchs like Vladimir Putin to stay in office. Make nepotism illegal in government and public businesses, since the rentier class obviously has no shame about promoting the interests of their children. Restore risk to capitalism by exposing those who manage the system to personal loss of wealth for the mistakes they make.
This is why Francois Hollande was elected President of France. The voters used their ballot to send a man to the Elysee Palace who will do just these things, and restore capitalism to a system that works for everyone, not a tiny minority. There are business executives smart enough to welcome these changes, in part because they are tired of operating in an oligarchic economy that is greased by unfair advantages, but most of all because they understand the voters of today are reaching for the ballot to enact necessary change. If that necessary change does not come about, the voters of tomorrow may well be reaching for other tools.