In this three-part series, I lay out an alarming picture of how dependent the U.S. economy has become on bubble cycles, suggesting that capitalism has taken on a different and dangerous form unrelated to the capitalism of Adam Smith, and I look for ways to open the discussion about moving to a more democratic and sustainable kind of capitalism. Part two picks up the thread of how we got to where we are.
Big Government, Big Business, Big Finance: The Bubble Capitalism Playbook
When we left off last time, I was saying that the American economy has shifted from one of value creation to one of value consumption. This is an unsustainable model when it comes to growth, and a downward spiral was set up that has made it impossible to achieve the so-called American Dream -- that is, improving one's lot and status in life through hard work and ingenuity, thanks to the opportunities that exist in the U.S. Sadly, this seems no longer to be the way.
I would suggest that capitalism's founder Adam Smith's "invisible hand" is indeed invisible to most of society. However, that invisible hand now belongs to big business, finance and government - to whom it is very visible indeed.
Sailing into the 1980s on the tailwinds of the golden age, the titans of business and masters of finance, now addicted to such momentous growth, could not accept a slowing rate of demand which would by definition reduce the rate of growth. Thus, they created several innovations in an attempt to stimulate growth. One such idea was stock-based compensation (stock options), promising outsized pay for outsized performance. Paradoxically, in many cases it has re-defined real growth as simply "making the numbers, however we must." And of course, the new masters of the universe now residing in a handful of "too big to fail" financial institutions not only added to the pressure on businesses to deliver -- they too needed to find ever more creative ways to gin up growth.
And the third component (following big business and big finance), of what would turn out to be a deleterious cycle of "bubble" formation (up-leveraging worthless value) and the creation of an unlevel playing field, was the complicity of big government. As the financial industry, with its armies of the "best and brightest" in kind of a creative Nirvana, began engineering hundreds of new instruments--not for investing, but for "betting," insuring, hedging and swapping--it required that the government relax its rules and regulations to create what the masters of finance proclaimed would be healthier and freer markets.
With little urging, the government complied. Ironically, instead of freer markets and a more democratic, meritocratic capitalism delivering greater real growth (as a result of the convergence of these three entities), instead it led to real though invisible hands manipulating capitalism, often creating bubbles of worthless value. And as we've witnessed, when these bubbles pop, their creators at the top of the pyramid get bailed out, and those on the bottom are left with worthless residue, certainly nothing any American would be dreaming for.
Understanding the Playbook
Capitalism, therefore, as envisioned by its founder, based on competitors winning or losing in the real marketplace of supply and demand, has given way to market expectations of what the top- and bottom-line "numbers" must be for winning or losing. And of course it is fueled by stock-based executive compensation.
Thus, big business has a strong incentive to do whatever is necessary to make those numbers, and the financial industry thrives on market expectations and market volatility. Winning in this marketplace is often achieved more by trading value than building it.
Of note, just as our value creation in manufacturing as a percentage of GDP gave way to value consumption, now at 73 percent, the financial sector doubled its share of GDP during the period between the early 1980s and today from 4 percent to 8 percent. And its share of all domestic corporate profits soared from 16 percent to a whopping 41 percent.
So, the game of expectations is trumping the "real" game of capitalism -- and the invisible hands of big finance, big business and big government are tipping the playing field in their favor. Meanwhile, the American Dream is beginning to look like the American Nightmare for far too many.
From Land of Opportunity to Barren, Deflated Wasteland (the Current Scenario)
So into the U.S. consumption machine we go. It's now fully driving our economy. And we must meet our "numbers expectations"--double-digit, quarter-on-quarter growth. How do we do it?
Well, we can engineer financial strategies to stoke ever-higher levels of consumption. Whoa! What do you mean by "engineer" financial strategies? Well, how about providing unlimited credit to any consumer who wants it--no questions asked, nor credit rating needed--or promoting credit to those who are not even asking for it?
Just keep 'em buying, whatever it takes. You got it: freely available credit, and when the economy collapses like it did in 2008, under the weight of a total credit market debt that was almost 400% higher than our GDP (versus about 160% in the 1940s), our government can jump in and play its part to perpetuate our now clearly consumption-driven economy. They can print money, trillions of dollars of it, and just throw it out there, hoping to keep consumers borrowing and consuming. The notion is that businesses will take advantage of borrowing "free" money (low-interest rates) to invest in growth, hire more workers, and by extension generate more disposable income -- thus encouraging more spending on consumption.
Well, so much for that notion. The financial giants have borrowed the "free" bucks and are using them not to invest in building new value, but rather to trade value for higher profit-taking (much of it through "speed trading"). And companies have never had so much cash sitting on the sidelines--trillions, literally--that they have not used for expansion in the U.S., much less to hire more workers.
Why? Because there is not sufficient demand to invest in new plants, equipment, or more workers. Hmmm! Seems like we need another bubble. Let's come back to it next time and see if there might be a way out of this mess - or at least a way to think differently about it.
This is part two of a three-part series.
About Robin Lewis
Robin Lewis has over forty years of strategic operating and consulting experience in the retail and related consumer products industries. He has held executive positions at DuPont, VF Corporation, Women's Wear Daily (WWD), and Goldman Sachs, among others, and has consulted for dozens of retail, consumer products and other companies. He is co-author of The New Rules of Retail (Palgrave MacMillan, 2010). In addition to his role as CEO and Editorial Director of The Robin Report, he is a professor at the Graduate School of Professional Studies at The Fashion Institute of Technology.