How To Break A Capital Strike? Full Employment

If banks want to threaten capital strikes, the government should fight back by putting people to work and taking power away from banks.

Last week, Massachusetts Attorney General Martha Coakley announced she would be suing the five biggest mortgage servicers over robo-signing. The very next day, GMAC Mortgage said it would withdraw most of its lending in the state. It offered up the excuse that “recent developments have led mortgage lending in Massachusetts to no longer be viable.” What recent developments would those be? Asking mortgage companies to adhere to the rule of law?

This could be called, as Matt Stoller was quick to point out, a capital strike — a lender refusing to lend in protest of government policy. A capital strike is a theoretical situation in which lenders decide to shut down the economy by refusing to invest and hire workers in reaction to government intervention that forces them to make bad business decisions. Sound familiar? While banks saw their profits rise to $29 billion in the first three months of 2011, a 66.5 percent increase over the same period last year, the loans they gave out declined at the end of 2010 and hiring has been sluggish. They’re not investing and hiring.

Wall Street is not in all probability actually on a capital strike. Besides the fact that the idea of all the firms getting together and executing an organized action is far-fetched, the reason they’re not investing and hiring is because the economy (and therefore demand) sucks, not because the government hasn’t given them enough backrubs. While the term “capital strike” used to be thrown around on the far left, the John Boehners of the world are now using it as a threat against enacting any government policy that might hurt the business sector’s feelings. The idea is that if the government enacts too many regulations, raises taxes too high, and otherwise does things that business doesn’t like, we risk them shutting down the economy.

Capital doesn’t have a great reason to be on strike. Think times are bad? Firms are making a third more profit than they did before the recession. Feel overburdened by regulation? Only the large corporations are worried about new regulations — small businesses aren’t feeling affected. Taxes got you down? Taxes on corporate earnings are at a 60-year low.

So besides GMAC’s targeted action, it’s highly unlikely that Wall Street has gotten together and decided to strike against the government. What’s more likely, as Peter Frase suggests at Jacobin, is that the threat of a strike is having the same effect:

[J]ust as in a labor strike, sometimes you don’t actually have to go out on the picket line: you just have to convince the other side that you’re ready and willing to strike. Just as a union might use a strike authorization vote to increase its leverage at the bargaining table, so the right’s economic propaganda is designed to tilt the political playing field away from labor and toward capital.

This is what John Boehner claims to be so worried about and what makes so many inveigh against Obama’s supposedly anti-business policies. If we don’t placate Wall Street, it’ll shut down the whole economy! Do what it wants so that no one gets hurt!

But as Frase points out, just because a group goes on strike — be it labor or capital — doesn’t mean we have to give in to their demands. When workers strike, management can either negotiate or try to break the strike. So if we follow the capital strike logic and assume that capital is threatening a strike (whether or not it would really do so), the government, as management, has the choice to negotiate or break the strike.

Wall Street got us in this mess. Why should we give in to its threat to strike? Instead, the government can break it — and the best way would be for it to spend money in pursuit of full employment. It would seem on first glance that full employment would be in the best interest of the banks: employed people can spend more money on goods, increasing demand, greasing the wheels of the economy and therefore profits. Yet we can look back to the 1930s and 40s to understand why full employment could be the best tool for breaking capital’s grip on our politics.

FDR also faced a slowdown in investment and called it a capital strike meant to take down his presidency and the New Deal. Roosevelt’s Assistant Attorney General Robert Jackson himself said the slowdown in investment was a “general strike — the first general strike in America — a strike against the government — a strike to coerce political action.” The New Deal was a concerted effort to get people back to work. Why was capital so dead-set against it? In 1943, economist Michal Kalecki asked the same question: “The entrepreneurs in the slump are longing for a boom; why do they not gladly accept the synthetic boom which the government is able to offer them?” His answer had two important points. Firstly, if raising employment is left solely to the laissez-faire market, then “capitalists [have] a powerful indirect control over government policy.” Anything to shake their confidence has to be avoided. Once the government takes over that function, though, that power is diminished. Secondly, those capitalists also lose power when workers aren’t as dependent on their current employer for a job. If under full employment a worker is almost guaranteed work, he has much better leverage to demand higher wages, better benefits, etc. from his employer. Either way, banks will lose their hold over the economy.

Breaking the threat of a capital strike in this way is a win-win. It first and foremost puts people back to work. But it also has the nice effect of loosening Wall Street’s stranglehold on politics. Its power will diminish. Sounds good to me.

Bryce Covert is Editor of New Deal 2.0.

Cross-Posted From The Roosevelt Institute’s New Deal 2.0 Blog

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.

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