The following paper was published in Almanach 2021/2022, edited by Concilium Civitas. You can read the original publication, in Polish, here.
With new rules that curb corporate power and boost public power, we can
rightsize markets, reduce inequality, and create more broadly shared prosperity.
Felicia Wong, President, Roosevelt Institute
We measure the productivity of so many companies, and are awed at the impressive numbers of cars per worker, per day, per unit of production. We measure how many tons per hectare are the present yields of soy beans, rice or sugar cane. Even we, as university professors, are required to produce a number of papers, interesting or not, so long as they represent so many points in the different evaluation systems. In a professors’ meeting-room in Harvard, someone placed a tiny note at the bottom of the crucifix hanging on the wall: “He was a great teacher, but he didn’t publish”. Crucified.
But not so with financial institutions. What would the productivity of money be? The assets of BlackRock, Standard and State Street, three American private corporations, amounted to 19 trillion dollars in 2020, equivalent to the United States’ 2019 GDP, while the world is gasping at the boldness of Biden aiming to invest 3.9 trillion dollars in the next 10 years. The government plan is detailed in how much it would raise productivity, employment and returns on the long term. What is the productivity of the asset management industry? The dividends for shareholders is what is measured and claimed, but what is the productive contribution?
Luiz Awazu, deputy-director of the Bank for International Settlements (BIS), a coordination institution for central banks, considers that “central banks are doing their job in the pandemic, but they will never be development banks. Each has a role to play. Central banks have no silver bullet, they will not save the world alone, but they can have a coordination role for the different actors, mainly in the private sector and civil society.” Central banks certainly can provide money to other financial institutions, and as we have seen during the 2008 crisis and the subsequent funding of banks through Quantitative Easing, huge sums of public money have been transferred to private banks, to balance their accounts, but with no attached requirements to make the money useful.
In so many statements at the time of the crisis, Barack Obama said he hated to reward irresponsibility with public money, but that he had to. The trillions transferred to banks could have been transferred to the indebted home-owners, who would pay the banks and keep the homes. The banks would have ended up having the money and families keeping their homes. As it is, the SIFIs, Systemically Important Financial Institutions, know they are too big to fail, and too big to jail. Free market with no risk, and so many tax havens.
Do we want the banks to “be solid”? Certainly, but also productive. In other words, they should earn their profits by stimulating economic activity, not by draining it. Lehman Brothers was highly rated by the risk-evaluation agencies, suggesting it was solid. What are they measuring? By lending money it did not have, the bank managed high-risk profits, and no institution ever evaluated whether what it was doing was economically useful. The general idea that took ground, is that if they make profits, it means they are contributing to the economy. They are supposedly “making the money work”. If it works, it should show the results, not only for them, but for the economy. And ‘the economy’ means much more than just profits, it also means jobs, reduced inequality, environment protection.
The money these financial institutions manage is not theirs, they have been entrusted with it by private persons or by companies, and their responsibility should go much beyond paying a few percent to the owners. The money they are entrusted with, or the money they emit through leverage, is part of the overall savings of society, and it is everybody’s business that the money is productively invested. Money management is not an end in itself, it is a means. No matter how much money we emit, either through government or through leverage in private banks, society will not be richer, unless the money is invested in goods and services that improve social well-being and sustainable development. Does anyone question the social and economic productivity of financial institutions? They should show what they are funding, and with what multiplying effects, what positive impact for society. Not just how much they are paying shareholders.
I had been advising the Banco do Nordeste (BNB), a public development bank for the poorer northeastern region of Brazil. Among the programs developed during the Lula administration, was the funding of microcredit for small-scale agriculture. The bank organized decentralized follow-up on the credit, and funded technical support for the producers, so they not only could buy better equipment, but were also trained in the corresponding technologies. Instead of elegant buildings to attract customers, the bank bought motorcycles for its agents to reach the poorer parts of the region, so as to provide credit and assistance according to the different needs. The result was that the money did come back, but much more wealth was generated at the family level, and an improved permanent production capacity resulted.
At the Banco do Brazil Foundation, we followed up a production diversification program in rural areas, adding honey and other products to improve income, also with credit and technical support. This goes far beyond credit, for transformation into final products demands larger equipment, and this is possible only in the regional cities, not individually. Thus, the producers not only diversified production, but also got to understand the conditioning and commercialization process, instead of depending on middlemen (atravessadores). It implies funding, training in more income-generating production, but also breaking the isolation, generating a new production culture. It is not just credit, it is economic and cultural change.
We are all familiar with innumerous similar initiatives throughout the world, but they depend on scattered initiatives, political ups and downs, individual leadership. Muhammad Yunus even got a Nobel prize for the Grameen Bank initiative, but significantly a Peace Nobel Prize, not the economic one, which is granted by the Bank of Sweden. The idea we want to stress in this short paper, is that banks and other financial institutions must be brought down to business, and show they are socially useful, and not just a rent-extraction machine for shareholders.
We do not lack financial resources. Bringing big numbers down to earth helps in understanding their dimension. World GDP, US$85 trillion in 2020, for a population of 7.8 billion, means that what we produce every year is equivalent to US$3,600 per month per four-member family. The numbers can be fine-tuned, we would speak of Net National Income, but the basic issue is that what we produce in the world is more than sufficient to ensure everybody has access to a basic economic quality of life. A very modest reduction of inequality would be sufficient, not to mention that money at the bottom of the pyramid stimulates growth: in Brazil 1 real of Bolsa Família generates 1,5 real in GDP growth. But Bolsa Família is less than 0,5% of GDP, and the economy is stalled.
Crédit Suisse publishes the world data for private wealth (not income), and the basic figure is that accumulated wealth presently represents US$80,000 per adult. A two-adult family would on average have US$160,000 in household wealth. But as we know, 26 adults in the world own more of this wealth than the poorer half of the world population, 3,9 billion. The problem is not only that they did not produce this wealth, but that they dramatically mismanage it. Basically, they use it to extract more wealth. The owner of a solitary 1 billion, buying some papers that pay 7% a year, is earning US$190,000 a day. On the following day he will earn 7% on a billion plus 190 thousand, generating the financial snow-ball effect. The bigger the fortune, the faster it grows. Not by producing anything, just trusting the money with BlackRock, Goldman&Sachs or any other asset management corporation. A huge gap has been created between the money management industry and productive investment, what we presently call the ‘real economy’.
The amounts in the hands of money managers are big. According to the Unctad World Investment Report for 2021, “Four groups of upstream institutional investors have an important role to play in driving sustainable investment and have a strong institutional interest in doing so: the first two, pension funds and sovereign wealth funds (SWFs) managed reported global assets of $52 trillion and $9.2 trillion, respectively, in 2021. The second two, insurance companies and banks, manage assets but primarily provide financial services for their clients in the form of risk management products and loans. The investable assets of insurance companies reached $32.9 trillion in 2018, and those of banks reached $155 trillion in 2019.” That they have a “strong institutional interest” in driving sustainable investment is obviously Unctad opinion. They have interest in making more money.
Mariana Mazzucato makes it clear: “The financial sector now accounts for a significant and growing share of the economy’s value-added and profits. But only 15% of the funds generated go to businesses in non-financial industries. The rest is traded between financial institutions, making money simply from money changing hands, giving rise to the phenomenon Hyman Minsky called “money manager capitalism”. To put it another way: when finance makes money by serving not the real economy but itself.
Only 15% of the funds going back to the real economy is a deep transformation comparing to the “thirty golden” years after the war, when finance was basically funding productive investment, and being rewarded with part of the profits generated by producers. Finance and production, even if with tensions, worked hand in hand. Epstein and Montecino, in a study on The High Cost of High Finance, estimated that in the US only 10% of the money earned by financial intermediaries got back into the real economy. This is the essence of financialization. When the financial corporations extract more than the productivity the funding generated, the system is flawed. Money ceases to be productive. Marjorie Kelly and Ted Howard call it ‘extractive capitalism’.
Ellen Brown calls it techno-feudalism: “Industrial capitalism has largely been displaced by ‘finance capitalism’, in which money makes money for those who have it, ‘in their sleep’. As economist Michael Hudson explains, unearned income, not productivity, is the goal. Corporations take out cheap 1% loans, not to invest in machinery and production, but to buy their own stock earning 8% or 9%; or to buy out smaller corporations, eliminating competition and creating monopolies. Former Greek Finance Minister Yanis Varoufakis explains that “capital” has been decoupled from productivity: businesses can make money without making profits on their products.” Without generating jobs, either.
Environmental and social catastrophes are spreading, and inequality is reaching extreme levels. But banks are doing good. What we have in tax-havens, 20 trillion dollars according to the Economist low figure, is 200 times more than what the Paris World Conference on Climate decided, and is barely able, to raise (100 billion). According to the Economist, commenting on the 15% tax on multinational’s profits being discussed in 2021, “the share of American multinationals’ foreign profits booked in tax havens has risen from 30% two decades ago to about 60% today.”
Fraud in medication, food that causes obesity even in children, shady businesses in vehicle emissions, pesticides and antibiotics in our food, contaminating rivers and seas – nothing is off-limits, since paying bank interest rates and dividends to financial investors and shareholders is an absolute priority in resource destination. The truth is the outrage is growing. The economic, environmental and social impacts that corporations generate are their responsibility. After 40 years of irresponsible neoliberalism, are there new hopes? Corporate image manipulation is a long-standing tradition. But it is also a fact that corporations, especially banks, are feeling the heat of social indignation, as catastrophes become more visible and protests gain space, particularly concerning environment.
Even in the face of the corporate world’s defensive statements, the scandal of huge unproductive wealth, while over 10% of the world population suffer in hunger, and the ecological disasters are spreading, as well as more recently the pandemic, are stimulating new contributions that change the way economics is being presented and taught. These new ideas are gaining ample visibility. They are comfortably classified as “heterodox”, but they work, unlike the known orthodox views, which fundamentally justify corporate interests and have led us to the current state of things.
With the pandemic, the absurdity of so much technological progress, accumulated wealth, trillions in the hands of asset managers, while humanity faces dramatic inequality, ecological disasters and a growing political chaos, is evidence that our problems are not economic, in the sense of lack of resources, of the need of more growth, but of lack of social and political organization. The tone is changing, the pressure is mounting. How long shall we cling to the ‘invisible hand’ fairy tale? The ‘free markets’ are in the hands of world-scale giants, and no longer free, while public policies and planning have been banned as undemocratic. In management terms, we presently have neither fair market competition nor rational planning. And we should have both.
Hazel Henderson goes to the point: “Financial asset managers of mutual funds, pension funds, endowments and sovereign wealth funds are still largely operating on obsolete textbook models and algorithms ignoring today’s new risks to our living biosphere and life-support systems.” The idea of ethical markets does not seem an illusion, but a necessity. “More progressive tax policies, including on income, wealth, corporations, property and other forms of rent income, could help address income inequalities. Regulating private financial flows will be essential to steering private finance toward these broader social goals. Curtailing restrictive business and predatory financial practices will be key to reigning in corporate rentierism and crowding in private investment to productive activities included in the green economy.”
Paul Dembinski stresses the same necessity of finance being guided by social results, not stock markets: “Good news from stock markets may also be explained by the fact that liquidity generated by central banks and governments in response to the crisis is “captured” by financial markets and diverted from its targeted destination in real economy…The present situation is an opportunity to correct the distortion and bring financial markets closer to the economy by proposing “new rules of the game” to “de-financialize the economy”. This could be done by introducing “a transaction tax and a capital gains tax on trading” to reduce high frequency trading or by “banning the massive use of buybacks and stock options that corporations regularly promote in order to artificially boost their performances in the short term, not to mention a ceiling on dividends pay-outs.” He quotes Oskar Ugarteche: “This dynamic can hardly be turned around unless, I believe, new rules of the game are set and the economy becomes de-financialized.”
One could have hoped the pandemic would bring some solidary reactions from the financial corporations. The above mentioned Crédit Suisse report is sober: “Wealth differences between adults widened in 2020. The global number of millionaires expanded by 5.2 million to reach 56.1 million. As a result, an adult now needs more than USD 1 million to belong to the global top 1%…The ultra-high net worth (UHNW) group grew even faster, adding 24% more members, the highest rate of increase since 2003. This in a period when GDP was falling and unemployment soaring. Crédit Suisse presents itself as “the leading wealth manager”. Michael Hudson sums it up: “These dynamics are different from those of industrial capitalism, and indeed undercut the industrial economy by diverting income from it to pay the financial sector and its rentier clients.”
Measuring what really matters, separating what is productive investment and what is financial speculation is part of national accounts in China, for example, which works with numbers like total Aggregate Financing to the Real Economy, AFRE. Calling every financial move ‘investment’ is self-serving for finance. In French the difference between ‘investissements’ (real economy) and ‘placements financiers’ (moving money around) is quite clear. Thomas Piketty brought this discussion down to earth. We must measure what matters, and show that huge fortunes in the hands of unproductive institutions drain the economy.
Deepening inequality also generates political chaos. We may have been surprised at so many poor Americans voting for Donald Trump, but it was in great part a ‘negative vote’, against politics, in the depth of frustration. The graph below shows how in the last three decades the 10% richest Americans radically expanded their share in wealth (top dark area), while the following 50% to 90% bracket only had moderate progress, but the lower 50% is barely visible at the bottom of the graph, a mass of the population practically excluded from economic progress. This was before the pandemic, which as we know accelerated gains at the top.
Moral indignation in economics is considered to be unscientific. Allow me some moral outrage as the planet is awash in financial resources, top level technologies, updated statistics on every dimension of our potentials and disasters, and even a step by step instructions guide in the 2030 Agenda, while well-trained and prosperous speculators in Wall Street chant Greed is Good. Forget Milton Friedman: The business of business involves social and environmental responsibility. Peter Drucker had it quite clear: there will be no healthy enterprise in a sick society. We must rationally face the necessity of new rules, a new Bretton Woods, or what has been called the Global Green New Deal. And the clock is ticking.
 Felicia Wong – Why a sea of change in economics is happening now – Roosevelt Institute – 10/07/21 https://rooseveltinstitute.org/2021/07/06/once-in-a-lifetime-why-a-sea-change-in-economics-is-happening-now/
 Interview in Exame, July 16, 2021
 Crédit Suisse – Global Wealth Report 2021 – https://www.credit-suisse.com/about-us-news/en/articles/media-releases/global-wealth-report-2021-202106.html
 UNCTAD – World Investment Report 2021 – p.32 – https://unctad.org/webflyer/world-investment-report-2021
 Mariana Mazzucato – The Value of Everything: making and taking in the global economy – Hachette Book Group, New York, 2018, p. 136
 Gerald Epstein and Juan Antonio Montecino – Overcharged: The High Cost of High Finance – The Roosevelt Institute, July 2016 – http://rooseveltinstitute.org/overcharged-high-cost-of-high-finance/
 Marjorie Kelly and Ted Howard – The making of a democratic economy – Berrett-Koehler, Oakland, CA, 2019 – Foreword by Naomi Klein
 Ellen Brown – How America went from Mom-and-Pop capitalism to Techno-feudalism – Scheerpost, May 18, 2021 – How America Went From Mom-and-Pop Capitalism to Techno-Feudalism (scheerpost.com)
 Economist, June 2, 2021 – Twilight of Tax Havens – https://www.economist.com/finance-and-economics/2021/06/01/twilight-of-the-tax-haven; Economist, May 15, 2021 – What would a new system for taxing multinationals look like – https://www.economist.com/finance-and-economics/2021/05/13/what-could-a-new-system-for-taxing-multinationals-look-like?itm_source=parsely-api
 Hazel Henderson: Transition to Science Based Investing 2019-2020 – p.3 https://www.ethicalmarkets.com/wp-content/uploads/2019/05/2019-2020-GTS-Full-Report.pdf
 Kevin P. Gallagher Richard Kozul-Wright – 2019 – in Unctad – A new multilateralism for shared prosperity: Geneva Principles for a Global Green New Deal – p. 26
 Michael Hudson – The rentier resurgence and takeover: finance capitalism vs industrial capitalism – January, 2021 – https://michael-hudson.com/2021/01/the-rentier-resurgence-and-takeover-finance-capitalism-vs-industrial-capitalism/
 PWC – China Economic Quarterly Q3 2020 – https://www.pwccn.com/en/research-and-insights/china-economic-quarterly-q3-2020.html
 Share of total wealth by wealth group 1990-2019 – https://www.visualcapitalist.com/5-undeniable-long-term-trends-shaping-societys-future/