Financial versus Non-financial Profit Rates over the Keynesian-Neoliberal Shift (Duménil and Lévy, 2001)
Why, then, does neoliberalism continue in the face of its disastrous consequences? Duménil and Lévy (2001, p. 578) argue that “neoliberalism is the ideological expression of the return to hegemony of the financial fraction of the ruling classes.” American economic decline may explain the dramatic shift towards neoliberalism. A number of metrics indicate that American economic power is in decline, which leads to a profit squeeze for capitalists (Wallerstein, 1996, pp. 90-91). As with the Netherlands and Britain in earlier centuries, American capitalists facing diminishing profits due to increased competitor productivity initiated neoliberal financial reforms (Zakaria, 2008). Due to the explosion of finance, “a new upward trend of the profit rate is apparent after 1982” (Duménil & Lévy, 2001, p. 589) (Figure 1a and 1b).
For much of the past forty years, America has faced trade deficits, which have increased significantly as a percentage of GDP since 1991.The balance of trade is just one aspect of the broader index of balance of payments. Since 1991, America has also faced rapidly growing balance of payment deficits, which indicate that net capital is flowing out of the country. Theoretically, large balance of payments deficits cannot continue indefinitely. Eventually creditors will lose confidence in American solvency and drive up interest rates and inflation. When that may happen is a matter of great dispute and rhetorical bluster.
Trade deficits can be partially mitigated through the operation of currency markets. Since 1945, the dollar has been the global reserve currency (Wallerstein, 2003), which has resulted in immense benefits for United States financiers and detriment to domestic industry via increasing valuation of the dollar relative to other currencies. In times of crisis, the United States has been protected from capital flight and has instead enjoyed relatively high capital inflows as nervous central banks, institutions and investors buy Treasury bonds. Because of increased demand, these bonds can be sold at lower interest rates during global or regional recessions, which thus create future profits for the United States government. Indeed, “using a conservative estimate of 10 percent as the average percent difference between [social development returns and bond yields], the actual cost to developing countries of holding the reserves [in Treasury bonds] is in excess of $300 billion per year” (Stiglitz, 2006, pp. 245-250).
Paradoxically, artificially high valuation of the dollar exacerbates trade deficits, as exports from the United States become comparatively more expensive and imports relatively less so (Leahy, 1998, p. 814). The difference, then, is in whom the policies effect: bondholders and financiers, in the case of the benefits, and domestic (particularly, manufacturing) labor, in the case of the harms.
American manufacturing profitability is consequently waning. In addition to artificially high dollar valuation, three other factors contribute to the shift from manufacturing to finance for profits (Wallerstein, 2000, pp. 261-262). First, technology disseminates from the United States to the other core members and, eventually, the semi-periphery. Since other countries can pirate intellectual property (something TRIPS is designed to address) and do not need to invest as heavily in research and development, their products may be cheaper than those from the core, especially in the absence of protectionist barriers. Secondly, domestic social welfare programs, including the minimum wage, decrease comparative advantages in industry through higher labor costs. Finally, more stringent environmental laws similarly squeeze profits.
References
Duménil, Gérard and Dominique Lévy. Winter, 2001. “Costs and Benefits of Neoliberalism: A Class Analysis.” Review of International Political Economy 8(4), pp. 578-607.
Leahy, Michael. 1998. “New Summary Measures of the Foreign Exchange Value of the Dollar.” Federal Reserve Bulletin 84, pp. 811-819.
Stiglitz, Joseph. 2006. Making Globalization Work: The Next Steps to Global Justice. W.W. Norton.
Wallerstein, Immanuel. 1996. Historical Capitalism with Capitalist Civilization. Verso.
Wallerstein, Immanuel. 2000. “The Three Instances of Hegemony in the History of the Capitalist World-Economy,” pp. 253-262 in The Essential Wallerstein. New Press.
Wallerstein, Immanuel. April 1, 2003. “The End of the Beginning.” Commentary 110.
Zakaria, Fareed. May/June, 2008. “The Future of American Power: How America Can Survive the Rise of the Rest.” Foreign Affairs 87(3), pp. 18-43.
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