City Lit: Bare Markets

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A French minister attending the recent summit of industrial powers was asked what he thought of America’s booming economy. He was unimpressed. “An economy should work for everyone in the society,” he said. “Not just the financiers.”

Those capable of looking past the low unemployment statistics and the excitement of an unbridled stock market see that this economy is not working well for most workers. Inequality of income and wealth is at its greatest point since the 1920s. Incomes of the bottom half of wage earners have fallen during the last 20 years while those of the top 5 percent have doubled. Surveys show that half of U.S. wage earners are either carrying worrisome amounts of debt, questioning their job security, working in temporary positions or heading toward retirement with few resources.

Yet our nation’s cultural heroes are CEOs and entrepreneurs, and the goal-oriented language of business pervades every realm of life. Wall Street–the “capital of capital”–is celebrated as the heart of our productive economy.

In his new book, Wall Street, Doug Henwood challenges the hallowed assumption that this financial center generates real productive investment. As editor of the Left Business Observer, Henwood has been associated with socialist ideals. But actually he is a seasoned critic of all economic orthodoxy–both right and left.

For example, he criticizes the leftist contention that globalization lies at the root of problems such as wage stagnation. America has spent the last century integrating into the global economy, and yet most of our international trade continues to be with northern industrialized nations rather than the developing south, Henwood notes. Thus, labor and other activists should not hesitate to exert political pressure for social change on the enormous percentage of the U.S. economy still rooted in the domestic market.

Wall Street is an excellent road map through the financial district. It is a guide for everyone who wants to challenge the argument that the securities industry as we know it is central to building and maintaining a healthy, sustainable economy.

Henwood questions the popular notion that stock markets serve society well by efficiently steering savings toward deserving and productive investments. Rather, he argues, the system is “stupefyingly expensive, gives terrible signals for the allocation of capital, and has surprisingly little to do with real investment.”

While most people think of the stock market as the arena where money is raised to fuel our nation’s businesses, Henwood shows that most entrepreneurial capital is in fact found elsewhere. Large firms finance their growth internally, through profits and cash flow generated by instruments such as tax breaks. The great majority of small companies are founded and financed by individuals, their families and local investors–and they rarely become big enough to go public.

Indeed, over the last 15 years, U.S. nonfinancial corporations have retired over $700 billion more in stock than they raised, thanks to takeovers and management buybacks. Henwood argues that for the most part, all Wall Street investors do is speculate on a pool of stock that was issued long ago–while adding layers of wasteful, unproductive transaction costs as brokers skim big fees.

Henwood also examines the rising levels of consumer debt. He argues that lower- and middle-income people are borrowing money to maintain their standard of living even as their buying power erodes. Consumer debt, he says, is a tool of the rich, “a way to sustain mass consumption in the face of stagnant or falling wages.” It helps to “nourish both the appearance and reality of a middle-class standard of living in a time of polarization.”

Unfortunately, from my perspective as an activist working on wage fairness issues, Henwood’s book fails to prescribe what could be done to reign in Wall Street and create an economy where wealth is more evenly and productively dispersed.

In a brief section entitled What is (Not) to Be Done, Henwood evaluates strategies that have been tried and finds them wanting. Efforts to reform the economy through social investing, creating alternative local currencies or democratizing the Federal Reserve can do little to change the allocation of wealth and offer “no significant challenge to the social order.” He is disdainful of so-called socially responsible investing, although he respects small programs that invest in worker ownership programs and the community land trust movement.

The author is most excited by efforts to “tax the fat boys,” using European-style levies to break up the over-concentration of wealth and generate revenue for social spending.

Sophisticated economics readers may find some sections of Wall Street to be merely a survey of existing theory and literature, spiced with Henwood’s signature irreverent comments. And I wouldn’t recommend Wall Street for beginners as it requires at least a basic grasp of economics.

But this book is useful for those seeking to educate the broader public. Wall Street frames important arguments that help counter the all-pervasive “market good, government bad” mentality.

The heart of Henwood’s argument is that America’s power elite wrote the rules governing our economy, and it is now time for workers, communities and consumers to change them. An economy should work for everyone, Henwood believes, not just the financiers.

Chuck Collins is co-director of United for a Fair Economy, a national organization working to address growing income and wealth inequality, based in Boston.