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The “New Economy” and the Speculative Bubble: An Interview with Doug Henwood

an Interview with Doug Henwood

Doug Henwood, author of Wall Street: How It Works and for Whom (Verso, 1997) and publisher and primary author of the newsletter Left Business Observer, is a frequent contributor to Monthly Review. Doug was interviewed earlier this year for the San Francisco Bay Guardian by another good friend of ours, Christian Parenti—author of Lockdown America (Verso, 1999, reviewed in last month’s MR). At the end of February we asked a few additional questions of Doug. The composite interview follows.

Q: What do you think of the much-used term “globalization”?

Doug Henwood: I think it’s very imprecise and used to mean many things. On the left, “globalization” is used instead of “capitalism,” or “imperialism,” or some combination of the two. In some ways this is an uncritical embrace of vocabulary that comes out of the ruling class. Look at the World Bank or mainstream pundits: they all talk about the “inevitability of globalization.” Many on the left just take that term—whatever exactly it means—and put negative signs in front of it. They don’t really sort through what the term itself means or what the critical approach of an oppositional movement should be.

Also, I think “globalization” presumes a past, innocent, “localized” age when things were nicer. And it identifies the process of internationalization itself as the enemy rather than the capitalistic, imperialistic, exploitative aspects of that internationalization.

Internationalism is something progressives should embrace. I thought we liked cosmopolitanism, and intercourse of all kinds among the people of the world.

Q: So why the use of this term, “globalization”?

DH: People are very timid about using words like “capitalism” and “imperialism.” We’re told they’re very out of fashion now. But I don’t think a mushy and misleading substitute terminology is acceptable. People should call things by their names and start thinking of things by their names. Luckily, I see more of a willingness on the part of troublemakers to do just that.

Once you start to understand capitalism, you see that it’s always been an international and internationalizing system. Maybe we can say the pace of that has picked up, but I don’t think there is anything particularly newly international about the political economy today.

For example, levels of capital flows and international trade in the late 19th century were by some measures higher than they are today. A hundred years ago you had the age of outright imperialism, which was certainly a sort of globalization. This has always been a global system, a world system. To posit this utopia when everything was really groovy and “local” is misleading, historically and politically.

Q: Some would concede your point but argue that the sheer quantity of international transactions and communication has led to a qualitative shift.

DH: Certainly things have speeded up. But the shift from a world in which information and capital could only flow at the speed of weeks—transatlantic ocean voyages, for example—to the era of the telegraph was a much bigger shift than anything we’ve seen today. That change compressed the whole world timescale from weeks into seconds. Going from seconds to nanoseconds is faster, but is it really more radical or important than changes in the past?

We’re used to thinking in a global way because of the telegraph. We inherited a whole way of global thinking that was created ex nihilo then. The same with the telephone, the photograph, jet travel—these all had to do with creating a proverbial “global village.” We’re not now entering some new kind of hyperspace severed from what went before it.

And although the international movement of capital and goods may take different technical forms today, the basic social relations of the world economy are still very much the same. There are still owners who employ, control, and profit from workers. There are still imperial centers dictating policy to and demanding service from the colonized periphery. There’s still the debtor-creditor relation, which is one of dominance and submission.

Q: Where does wealth come from in capitalism?

DH: I’m very old-fashioned. I think that wealth—whatever kinds of transformations it goes through—fundamentally originates in the exploitation of labor and nature in the production process. So workers produce wealth that’s then expropriated—taken—by the owners of capital. It may not be expropriated directly by capitalists the way it was in the 19th century—often you can’t point to a single plant owner and say, “I work for him, and my work makes him rich”—but it’s still the same set of social relations.

It’s a lot more institutionally complicated now; wealth goes through all these financial markets, all these transformations from commodities to money to stocks back to money and commodities and so on. Those who produce wealth, say, in a sweatshop making clothes for the Gap, are geographically distant from those who control and accumulate wealth via stocks, bonds, their trust funds, whatever. But still, fundamentally, workers produce wealth; capitalists and financiers expropriate it.

Q: You’re finishing another book, called A New Economy.? Could you tell us about that?

DH: The whole New Economy discourse of the last three or four years—which may be fading now that the dot-com stocks have collapsed and the economy is looking a little recessionish—holds that computer and communications technology have so turned the world upside down that all the old rules don’t apply. Supposedly, we’ve entered a period of “prosperity for all” because governments are now powerless; finance has been “democratized” a wonderful “spontaneity” has moved to center stage; there’s been an end to the business cycle. Supposedly, we’ve entered a period of tremendous productivity growth, and there’s never been anything like it before.

In fact, there’s been a lot of things like it. And the current rhetoric is very similar to past rhetoric that’s come late in long bull markets. There’s something about an exuberant stock market that leads to this euphoria about “new eras.”

The past has seen at least three such periods over the last century. Around 1900, 1901, there was a bubble craze jacked up with all the turn-of-the-century fever: a sort of calendar superstition mixed with technophilic exuberance. Likewise in the late 1920s just before the bust and then in the late 1960s, there was more “new era” hype. At least the current mania is beginning to wane as the markets sink and the dot-com roadkill mounts.

The popular writing of all these periods is always remarkably similar. It’s this “technologically driven transformation of life that renders everything else obsolete.” There are always claims of a new era of understanding among the peoples of the world because of new technologies. Peace, love, understanding, and commerce.

In the 1960s the chair of the Federal Reserve, William McChesney Martin, viewed the new-era rhetoric as something to worry about, as a dangerous signal that people were too exuberant. It was too much like 1929. That’s a very antispeculative, old-fashioned central banker kind of temperament. These days, Alan Greenspan is the leading proponent of the New Economy thesis; he promotes it at every opportunity he can get. So the exuberance has filtered to much higher levels of the ruling class than in the past.

Q: Given this culture’s hallucinatory fixation on finance and speculation, it is worth asking a very basic question: What fueled the latest stock market boom?

DH: I would say this bull market has had several stages. It started in August 1982, with fairly little interruption since; there was the ’87 crash, but that didn’t last all that long, and by formal standards the recession that followed wasn’t too serious. So the bull market began just as the great Volcker squeeze was ending. Paul Volcker took over at the Federal Reserve in 1979, and he almost immediately drove interest rates from around 7 percent to over 18 to 20 percent, which created a very deep recession. The official reason for this was to end inflation and rising wages.

Recession cured other problems as well. The commodity-producing countries were forming cartels and driving prices higher. General rebellion was going on in the southern part of the world. The United States had lost the Vietnam War. There was a lot of talk of loss of imperial power. At home in the United States there were a lot of wildcat strikes. It was a time of the “blue collar blues,” when it looked like the working class was saying “fuck you” to work, “fuck you” to the boss. That sort of attitude was reproduced around the world. There were strikes in Italy. A lot of worker protest and militant action going on in Europe.

There was a famous report of inflation put out by the [Organization for Economic Cooperation and Development] some time in the late ’60s or early ’70s that described economic inflation as inseparable from the fact that there were so many people in the streets.

Q: In other words, there was inflation not just of currency but of expectations.

DH: Exactly! And that’s what Volcker dealt with at around the same time Thatcher took office and did the same in England. He tripled U.S. interest rates and created a very deep recession. Then Reagan came into office, breaking unions and promising to rebuild the imperial military machine; he launched a mass assault on the welfare state. Discipline was reasserted: unions were broken, and there was a general reassertion of capitalist power over labor on a national and a global scale. This assertion of ruling-class power, I would say, was very successful.

The recession in the early ’80s scared the hell out of the working class in the United States and around the world. The tougher attitude on the part of the Reagan administration—the invasion of Grenada being one example—really took the starch out of the Third World’s progressive talk about a “new economic order.” It was clear the United States was going into a big military buildup and would be much more assertive militarily and politically.

All these things took hold in the early ’80s. That had the effect of ending the long slide in the U.S. profit rate which started in the early ’70s. The profit rate started rising. There was a massive upward redistribution of income because of that higher profit rate, because of the tax and regulatory changes here and elsewhere. From the point of view of the stockholding class, these were getting to be wonderful times.

So the bull market at first was a very rational reaction to all this: profits were rising, so the market would rise. It was becoming a very good time to be an owner of capital. That set of circumstances prevailed throughout the 1980s.

Q: To use the mainstream language, stock values rose because stock earnings rose, thus the stock market of the 1980s was rational?

DH: Yeah. Then you had that period, around ’89 to ’93, the George Herbert Walker Bush years, when the economy was pretty flat and the financial markets were sort of troubled. You had the Gulf War in there. But then after that was over, the whole thing resumed again. And then when Clinton came to power, aside from him raising taxes on the top percent of the population, which is one of the few good things he did, it was clear then that there was no political challenge at all to the rule of capital. Whatever troublemaking or social democratic tendencies that remained in the Democratic Party had been pretty much defeated and purged, thanks in no small part to Clinton, one of the founders of the Democratic Leadership Council.

There was the end of any threat of a national health insurance program after Clinton’s disaster. And financial orthodoxy completely took over the Democratic Party, so there was just no institutionalized way of resisting the agenda of the bull market and the free traders. Wall Street and the stockholding classes were very happy about that, so they continued to buy stocks.

But sometime around 1995 or so, things stopped being quite so rational and started getting irrationally exuberant. The public began investing in a big way. The upturn in profits slowed down—profitability numbers actually peaked in ’96, and they’ve been going down a little bit since then.

So the last four or five years have been mainly just the bull market feeding off itself in classic bubble fashion. The market goes up because the market goes up, and people have just been getting more and more exuberant and more and more bubblish.

Q: What about the role of so-called flight capital coming from abroad in fueling the U.S. stock market?

DH: It’s certainly had an impact. The Asian economic crisis had a significant economic role in that a lot of the capital that had been heading toward Asia pulled out and headed toward the United States. The Mexican crisis of ‘94 had a similar effect: a lot of money exited Latin America and came to the U.S. The stagnation in Japan and western Europe has also contributed to the flow of money here and thus overvaluation in the markets.

This tremendous inflow of foreign capital—two or three hundred billion dollars a year for the last several years—has helped propel our expanding economy. That’s kept markets rising; it has kept consumers being able to spend beyond their means.

And at a political, rather than a financial, level I think the effects of the collapse of the Eastern bloc have certainly contributed to the confidence of the capitalist class. There’s no significant challenge to their rule now. Whatever the faults of the Soviet Union, at least it was an embodiment of the idea that you could do things differently. The loss of that alternative model is very cheering to capitalists around the world, who use that collapse to discredit any kind of state regulation of the economy or any remotely redistributive policies. So it’s been a great ideological boost. And certainly Russian flight capital has injected a lot of cash: a lot of cash came out of Asia, Latin America, eastern Europe, and the former Soviet Union and came to the United States’ stock markets. All these calamities elsewhere have produced wonderful results for the American ruling class.

Q: Can the large and enduring deficit in the current account balance of payments last forever? Would a truly bear market reverse the flow of capital to the United States or at least significantly reduce the inflow? What are the potential problems if this develops?

DH: That’s one of the big questions, and it has been for a long time. This first became a problem in the 1980s, and it was then the subject of much public worry. The deficit narrowed in the early 1990s, and then widened again to massive levels—and since the deficit has to be financed, the U.S. net foreign debt increased every year. You don’t hear much public worry about it anymore. One reason for that, I suspect, is that it was convenient in the 1980s and early 1990s to talk about the “twin deficits”—the federal budget deficit and the trade or current account deficits. But the current account deficit persisted, widened even, despite the federal government’s going from red ink to black. Since the problem could no longer be blamed on a profligate public sector, but had to be blamed instead on the revered private sector, it became inconvenient and you no longer heard about it.

Of course it can’t last forever, but how long it will last is hard to tell. There’s no magic point at which a deficit or a debt level becomes predictably dangerous. When things get hairy is when creditors get nervous, stop rolling over old loans and extending new ones. If it happened suddenly, it would provoke a deep recession in the U.S., with unpredictable and possibly severe consequences for the rest of the world, especially Latin America, which has grown considerably more dependent on exporting to U.S. markets over the last 20 years.

Q: Eyes are fixed on the dangers to the economy when stock markets take a major dive. Perhaps even more fragility lies in the incredible speculation in derivatives, foreign currency, etc. Thus far, the U.S. government plugged the holes promptly and energetically in the credit crises of the past 30 years. But as the rubber band of world financial speculation stretches, what is the likelihood of the rubber band becoming too thin for rescue?

DH: I think one of the true innovations that capitalism has created since the end of World War II is the successful management of financial crises. In the First World, governments have repeatedly bailed out failing banks. Many Americans are, of course, familiar with the savings and loan crisis of the late 1980s, but there were many similar crises, many much larger in relative terms, in Western Europe at roughly the same time, and in Japan today. The Third World debt crisis of the 1980s, and subsequent financial panics, have been managed by shifting most of the costs of adjustment onto the debtor countries themselves, shielding First World creditors from significant loss, and First World economies from significant recession or worse. When will this magic run out? I just don’t know, though it’d seem reckless to bet against it, given this track record. Even Japan, which has been unable to restart its economy after its bubble burst in 1989, has endured a long stagnation but no collapse. It’s quite possible that the U.S. is in the early phases of something like that, though we don’t realize it yet.

Q: Consumer expenditures have been exceeding income by far. For consumption to just stay at the same level, let alone increase, debt has to increase. Without a severe tightening of belts, debt has to grow just to service past debt. A similar situation holds for corporations as well. Banks are becoming wary about the likelihood of old debts being repaid.

What would result from a ballooning of nonperforming debt?

DH: This is a very serious problem. There’s some evidence that creditors started getting a lot more cautious in late 2000 and early 2001. If they stay that way, and refuse to extend loans to riskier borrowers, then all the Fed easing in the world won’t jump start the economy. As with the international situation, debt becomes a serious problem when the new money spigot gets turned off, and indebted households and businesses have to start servicing their debts out of current income rather than relying on fresh infusions of credit. The seizing-up of the credit machinery helped create the depression of the 1930s and the Japanese stagnation of the 1990s.

In a lot of ways, there are no modern precedents for the kind of economic situation we’re in right now in the United States. The (never very adequate) safety net has been shredded, which, aside from its savage human consequences means that the old “automatic stabilizers” aren’t as automatically stabilizing anymore. It used to be that welfare and unemployment insurance put a floor under personal income, so that in addition to keeping people from starving when they were thrown out of work, these mechanisms kept some buying power flowing to keep the broad economy afloat. Now, there’s no more welfare entitlement, and a smaller share of the unemployed are eligible for jobless benefits than in earlier cycles. Also, no one believes in using government spending to counteract a downturn; Bush is proposing a big tax cut, but it’s skewed heavily toward the rich, and wouldn’t take effect for quite a while. This is one of many ways the early 21st century resembles the late 19th.

Q: Any last comments?

DH: I guess one of the more depressing aspects of political life in the last 20 years has been this absolute sense of resignation on the part of so much of the left. But it seems to me in the last couple of years that defeatism is being reversed. There seems to be a growing confidence. The development of this anti–World Trade Organization, anti-World Bank movement—regardless of my reservations about the standard analysis among many of the movement’s putative “leaders”—is just wonderful to see. And I find that in talking to people who are involved in protest, they’re really open to all kinds of truly radical ideas. So I think maybe this very long period of reaction that we’ve been living through for the last several decades may be finally coming to an end. While I’m sort of a temperamental pessimist, I’ve certainly not felt so optimistic about politics in a long, long time.