Income Dynamics, Economic Rents and the Financialization of the ...

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the banking industry but also a crisis of U.S. capitalism. It was also perceived as a failure of Keynesian macroeconomic policies which provided no clear explanation or solution for the "stagflation" of the time. We document the rise of neoliberal policy model and the solutions proposed to control inflation and stimulate the finance sector. Lastly, we analyze the related devel- opments in the era of deregulation to outline the systematic reconfiguration of the U.S. economy. Problems: Stagflation and the Economic Crisis of the 1970s One can point to the era around 1980 as a watershed in the orientation of the US federal government toward the economy in general and economic regulation in particular. The economic crises of the 1970s centered around the OPEC inspired rise in oil prices, the perceived rise in union and consumer power, the end of US manufacturing’s global hegemony, and the birth of a low-growth high-inflation macro-economy. This configuration of threats led to the mobilization of the large firm corporate sector to push for economic deregulation, lower taxes, and a smaller state (Miller and Tomaskovic-Devey 1983). These shifts were interpreted at the time as a crisis of US capitalism and led to the mobilization of corporate actors to reinvent the system (Vogel 1986). Econom- ic deregulation in particular was the goal of the business mobilization of the late 1970s (Useem 1983). During this period of recapitalization it is clear that the largest banks and insurance companies were central to large firm leadership networks (Mintz and Schwartz 1985). In the financial sector this crisis was initially defined in terms of what came to be called stagflation --the joint occurrence of slow or no economic growth and high inflation. Slow growth led to fewer outlets for domestic investment. Inflation undermined the traditional banking prac- tice of borrowing money from customers and lending it to investors. Stagflation led to a sharp drop in bank profitability (see the late 1970s in Figures 2 and 5). In response, the Federal Re- 16
serve Bank, led by Paul Voker, fought inflation by rapidly increasing interest rates (Krippner fc, Epstein and Jayadev 2005). This tight monetary policy slowed down inflation in the early 1980s and lured foreign capital to invest in US interest bearing bonds. Together low inflation and high interest rates created the conditions for high real interest rates and so high profits for banks, insurance companies and any entity extending credit to consumers and non-financial corporations (Epstein and Jayadev 2005). While tight monetary policy stabilized the income of the finance sector by taming inflation, it was the resulting deregulation that fundamentally shifted the basic structure of the economy to favor the financial sector. 10 There is now a scholarly consensus that this crisis was followed by a period of deregulation and emerging neoliberal policies that created the financialization of the US economy. Why this happened is to some extent disputed. Some authors have assumed that the centrality of the finance sector to the corporate elite coupled with the sector’s clear monetary gains from market deregulation suggest that deregulation was a result of the political efforts of the finance sector (e.g. Crotty 2005). This account would be consistent with the agentic-political model of rent cre- ation proposed by Sorenson. Others point to political entrepreneurs within the state itself (Prasad 2006); neoclassical economists as intellectual and technical entrepreneurs when traditional Key- nesian economists, who assumed a stable and positive association between inflation and economic growth, failed to explain the cause of stagflation (Davis 2009; Fourcade-Gourinchas and Babb 10 In the early 1980s conflicts between an inflation fighting Federal Reserve chief Paul Volker and a deficit spending Ronald Reagan were resolved with a massive influx of foreign capital, particularly from Japan, funding deficits and initiating a continuous stream of foreign capital to feed debt based consumption by consumers, corporations, as well as the US federal government (Krippner fc). 17
Page 1 and 2: Income Dynamics, Economic Rents and
Page 3 and 4: “I think everybody a few years ag
Page 5 and 6: economic sociology and political ec
Page 7 and 8: tion but since the two trends are l
Page 9 and 10: their profits as taxable income. Th
Page 11 and 12: While we have established that the
Page 13 and 14: ployees, a lower capital share of i
Page 15: income dynamics, which should follo
Page 19 and 20: anks profitability, the second and
Page 21 and 22: Together these shifts in the instit
Page 23 and 24: nancial engagement of non-financial
Page 25 and 26: count suggests a certain happenstan
Page 27 and 28: The other finance sector industries
Page 29 and 30: from the society overall. The emplo
Page 31 and 32: as dramatic. In the Security indust
Page 33 and 34: egulatory relaxation and a general
Page 35 and 36: occurred if finance sector actors h
Page 37 and 38: of total national profits in the fi
Page 39 and 40: swaps. Clearly, the market and poli
Page 41 and 42: Our analysis points to the federal
Page 43 and 44: ents from other actors in the econo
Page 45 and 46: Krippner, Greta. 2005. “The Finan
Page 47 and 48: Stockhammer, Engelbert. 2004. “Fi
Page 49 and 50: %GDP 10 15 20 25 30 35 Figure 1. Fi
Page 51 and 52: Ratio 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1
Page 53 and 54: %Profits 0 5 10 15 20 Figure 5. Fin
Page 55 and 56: Ratio 1.0 1.5 2.0 2.5 3.0 Figure 7.
Page 57 and 58: Table 1. Summary of Institutional A
Page 59 and 60: Appendix A. Industry classification
Page 61 and 62: Appendix B. Sector and industry shi

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