Translated from MSZ 2-1982

Reaganomics

Freedom has its price

What this consists of and who pays for it is documented in a year of Reganomics.

In the USA, the use of the political and economic power of the USA to reorganize the globe comes in the guise of a new type of economic policy. For the goal,

“to make America so strong that no generation of young Americans will ever again have to bleed to death on foreign battlefields or beaches,”

the economy is put in the service of a military buildup:

“Our incentive-minded tax policy and our security-based defense programs are right and necessary for long-run peace and prosperity, and must not be tampered with in a vain attempt to cure deficits in the short-run.” (budget statement by R. Reagan, February 8, 1982)

Of course, the nation has to pay a lot for “the greatest military buildup in peacetime.” From now on, only the military will be allowed to argue about what the main imperialist power needs specifically in order to be able to do what it wants in the world. Objections that this could be too expensive for the nation are rejected by the administration: It responds to warnings about the limitations of the budget with a program of expansion in the interests of “national security.” It therefore organizes the production of national wealth as a means of making itself independent of budgetary restrictions on its policies. The economic implementation of this program is called “Reaganomics” – as if a particularly clever variant of economic control had been invented in competition with Keynes and Friedman. But it is much simpler than that. The confirmation of the unconditional supremacy of the USA means that both its external power as well as its economic prosperity must be made indisputable. Reagan does not want to tolerate the idea that his arms buildup program could possibly have some adverse effects on the economy – after all, he is practising political economy in the strictest sense: he is so sure of his political power that by announcing this dual mandate to society, it seems to him that its fulfilment is in principle already guaranteed. He is right about that – because he doesn’t need to worry about whether he will be provided with sufficient funds for the gigantic expansion of his budget, just as he doesn’t need to worry about whether his multinationals, which are anchored all over the world, might lay down their arms in the face of the interest burden. He obtains money by requesting it from all over the world and denying it to all unproductive recipients at home. There is no great palaver about an “austerity budget” and the “real” rescue of the social safety net by means of deep cuts, and it would also be ridiculous in view of the proud emphasis that the government intends to spend billions and billions, but no longer for purposes that were common in the past:

“National defense is the only category of federal spending where the government has budgeted for major increases.... Of course, this has significant economic implications.” (Quarterly Report, Summer 1981)

High interest rate policy...

In terms of interest rates, Reagan continues the policy of his predecessor Carter, with the major difference being that he steps it up a notch. Given the certainty that an ever-growing national debt is now looming, the whole capital-owning world is clamoring to own American debt notes. No wonder: What in the world could be a safer capital investment than the credit of a nation whose credit is also world money, which secures access to sources of wealth all over the world?! The high interest rates in the USA, for which the central bank is responsible to ensure that the state has unhindered and regulated access to borrowable money at all times, also ensures the constant inflow of wealth from all over the world seeking investment in the USA:

“Despite the weakness of the Wall Street stock market, historically high interest rates and huge currency fluctuations, the securities holdings of German banks in the USA have no shortage of orders.” (Handelsblatt, January 5, 1982)

Only the “despite” is an invention. The interest rate is only of interest as the difference between the price of money lent and borrowed, and it has long been clear that the USA can “afford” the highest. And that is precisely why currencies have been “fluctuating” in the direction of rising dollar rates for some time now. The banks are the first to reap huge profits from this whole business:

“The reasons cited by Wall Street analysts for the explosion in bank profits are increases in net interest margins, better earnings from the credit card business, and foreign exchange and bond trading.... Chase has earned so well that even Poland’s failure to pay back the interest on a 100 million loan hasn’t even mattered.” (Handelsblatt, January 25, 1982)

With government debt and central bank policy working together to ensure that interest rates in the USA are not only high, but remain so, a whole new freedom has opened up for the business of the banks. In any case, anyone who wants to pay for a loan has to pay at least as much for it as the state. After all, the state does not show up on the credit market like any competitor: it determines the price at which its securities are issued, and its debt instruments provide the banks with a constantly growing basis for new lending. They can afford to be selective about interest rates, loan terms, and maturities. This means that the profiteers of loan capital are sorting borrowers according to new criteria. One type of citizen immediately loses out: those for whom credit is not a means of doing business, but is intended to finance anticipated consumption that would otherwise be unaffordable:

“Slowing economic activity, high interest rates and an increase in delinquencies have forced (!) banks and finance companies to reject loan requests that they would have readily honored a few years ago.” (US News and World Report, 1/25/1982)

Such people have always paid interest rates that deserves to be called usurious because they have no profitable business to offer as “collateral,” but merely access to (as yet) non-existent income, because lack of money forces them to pay any interest rate. Meanwhile, the interest rate limits on small loans and mortgages set in most individual states have long since been overtaken by the new perspectives of the business:

“Lenders blame the credit crunch on laws that limit interest rates on consumer and small loans. That’s why lending has come to a standstill in some states. In some states, the limit for second mortgages is below the prime rate.” (ibid)

From the point of view of profitable investment, it is not people who have to sell their house or can no longer afford a car who are in distress. It is the smaller savings banks and mortgage banks that are in an “interest rate squeeze” because, as borrowers themselves, they have to pay more interest than they are allowed to charge on their mortgages. This creates new opportunities for the concentration of financial capital: the government allows loss-making credit institutions to merge with more powerful banks and even occasionally pays out their depositors; savings banks are allowed to participate in the general lending business without restrictions and to pay higher interest rates on current and savings accounts. So, for a small fee, the deposits of ordinary citizens are also made available without restriction to meet the growing credit needs of the state and capital, which means that they no longer have to count on credit. The banks also know how to differentiate between their borrowers from the business world:

“Almost 70% of the 1,905 largest American companies have access to credit rates that are below the respective prime rate. ... this trend has intensified considerably in the last year, a development which is not least due to the increasingly fierce competition from foreign banks operating in the USA.” (Handelsblatt, November 22,1981)

And once again we see that the old phrase “What’s good for General Motors is good for the USA” retains its validity (and vice versa):

“It is seen as a real sensation in Eurobank circles that a large proportion of all new loans on the Euro market, namely around 25%, flowed to the USA. Last year, American industrial borrowers borrowed 50 billion dollars from the Eurobanks. In 1980, the figure was only 6 billion...” (Frankfurter Allgemeine Zeitung, January 19, 1982)

No wonder that in the face of such offers the “Eurobanks” are discovering that their existing borrowers from all over the world can’t compete with American customers in terms of “ability to pay”!

The dollar’s exchange rate is rising again and is having a positive effect not only on the national credit, but also on the cost of American security around the world, on the price of business loans and imported raw materials, and on the prospects of foreign capital investment for US companies.

There is obviously no lack of demand for the abundant flow of credit. So little, in fact, that the banks are making a lot of additional business from this demand, which somehow infuriates the ideologues of business:

“Long-term lenders are dictating the conditions like never before. Not even half of the new bonds issued this year are likely to have maturities of more than 10 years... With variable rates, subscription and conversion rights and profit participation, even the best bond issuers have to make their paper more attractive. After all, they are in ever fiercer competition with Uncle Sam.” (Handelsblatt, January 24, 1982)

Anyone would like to have problems like that! Obviously there is a lot of profit to fight over – after all, it stays in the family. Such credit conditions make for all kinds of easy prey:

“Medium-sized and smaller companies, some with highly specialized technology, are increasingly falling victim to the recession spreading across the USA and the very high interest rates. Financing difficulties and sluggish sales are making them easy prey.” (Handelsblatt, 20.2.1982)

It’s obviously not true that there is no longer any business to be done with the “highly specialized technology.” The devaluation of the capital invested there opens up new prospects for the buyer in terms of cost reduction and market share, and the credit that had caused “financing difficulties” for the seller is flowing again. A preliminary conclusion from the business world:

“Despite capital costs of 15-20%, there are masses of buyers, most of whom are offering cash. The sellers’ difficulties are pure gold for the buyers: they see the purchase of fully utilized businesses as an opportunity to consolidate their own business position, expand market share or move into new areas.” (Business Week, 8/24/1981)

The business world is therefore reporting “record mergers” in the USA, and the government is doing its part by relaxing legal restrictions on capital mergers. Capital is thus overhauled to exploit every cost advantage that capital size offers; and this can’t be underestimated in times of high interest rates, because the size of capital increases the sheer amount of capital returns and thus provides capital with the means to reinvest without additional interest costs; after all, according to the logic of capitalist cost accounting, any interest that an entrepreneur does not have to pay off is calculated as a cost advantage.

A politically guaranteed interest rate also opens up completely different business opportunities – a circumstance that brings professional observers to wax almost lyrically.

“The financial world has undergone a true revolution in recent times. The range of investment opportunities for investors worldwide has become increasingly diverse and colorful. In the USA in particular, there seems to be no limits to the ingenuity (!) of financial managers. Be it the financial futures markets with their explosive growth in turnover, be it the new gold (options) exchanges or new bond variants...” (Handelsblatt, 2.9.1982)

The state-decreed expansion of the money capitalist sector, including its decoupling from industrial business, is causing speculative “fever” and inventiveness to swell enormously, but at the same time is also making industrial capital pay a double bill: In the face of increased competition with interest, profit has to advance to new dimensions – which “degrades” some people from factory owners to shareholders in corporate money capital, but does not make them poorer – and a new kind of virtuosity is required in handling “free reserves" (extraordinary returns from securities investments and creating “optimal liquidity”).

“The strong fluctuations in interest rates in recent years have led to such a strong expansion of trading in interest rate securities since 1970” (or perhaps the other way around?, but it doesn't matter) “that this now practically dominates the traditional commodity futures exchanges. In addition to speculators, companies are now also trying to hedge against the extremely sharp changes in US interest rates in recent years.” (Handelsblatt, 3.18.1982)

If you continue to be one of those people who include interest as a cost in the price of goods, then you can still earn money from them with any amount of money that is available and need not worry about “sales slumps”!

Despite everything, there is a persistent rumor in the business world that all this “cannot go well”:

“The scary thing about this development is that it flies in the face of all economic experience. The American economy is still in a recession with no sign of an upturn. There is neither additional (!) investment nor consumption, so the gigantic need for money is a mystery to experts.” (Handelsblatt, 1.25.1982)

Of course it’s not. These guys just can’t stop comparing the business that can currently be done with money capital with that which “used to” be considered normal during the boom and crisis. What are experts supposed to think when, on the one hand, they believe that speculation is a symptom of the fact that a “healthy contraction” should now be gradually initiated, and on the other hand, that a drop in orders and bankruptcies are a signal to the state that accumulation must be promoted? So they indulge in theoretical horror without any practical panic, discover the danger of an “economic collapse” (Washington Post), flirt with the possibility of a “depression” (Time), and yet really don’t know what criticism they should actually make of the state’s solicitude for its capital:

“The tragedy of the Reagan administration’s program is that every single element is to be affirmed, the reduction of government spending as well as the tax relief, the strengthening of defense, and the anti-inflationary course of monetary policy.” (Handelsblatt, 2.8.1982)

Ok then!

... and its state compensation

After all, the Reagan administration is not simply exposing its favorite citizens to the effects of high borrowing costs. To ensure that the high interest rate policy guarantees uninterrupted business for money lenders, the US government simultaneously ensures that every entrepreneur who boosts his profit production accordingly can afford the interest. To this end, the Reagan administration has launched its “Economic Recovery Program.” This consists on the one hand of an overall 25% reduction in income tax, spread over 3 years, and on the other hand of radical tax relief for reinvested profits. And to ensure that the profit from these gifts can be full utilized, the tax law contains the unique invention of allowing companies that cannot “save” taxes on profits because they have not made any to “sell” their tax savings: By selling machinery or the like to a company that can claim it as an investment, and then borrowing it back from the company, it brings cash to one and tax relief to the other.

This tax reduction program was supplemented
– by additional tax breaks for new oil exploration techniques, the further liberalization of oil prices and the promised liberalization of gas prices;
– the removal or relaxation of all kinds of environmental, air, noise, health and other sefety regulations; – through tax rebates and price exemptions for transportation, railroad and aviation companies.

The results: a new boom in national energy production, accompanied by the purchase and/or merger of oil and energy companies; the construction of new pipelines which, like new mining and oil production projects, were previously restricted in part by national environmental regulations. The USA has thus come a good deal closer to its goal of a “national” energy supply: Energy companies are doing business in the USA with domestic energy, thus helping to accelerate domestic accumulation and reduce the cost of oil imports – the OPEC conference has, after all, responded accordingly. The radical subordination of the transportation sector to the point of view of how the costs it incurs for capital can be turned into a source of profit for the transport companies has led to the bankruptcy of various airlines, the closure of unprofitable local transport routes that only bring workers to work on the one hand, and to massive wage cuts and layoffs in these sectors on the other. No wonder that “Handelsblatt” is praising the USA to its readers as an El Dorado for direct investment!

The costs of exploitation

are falling not only because capital is cutting wage costs through rationalization and layoffs, because unions are now without exception prepared to accept wage cuts, and because companies are fueling competition between unionized and unorganized workers. They are also falling because credit costs and price increases provide the average American with compelling reasons to take any job he can get. And thirdly, they are falling because the third leg of Reagan’s economic stimulus consists in the consistent elimination of all costs for the faux frais of the capitalist mode of production, thus depriving the exploited material of any prospect of even halfway making ends meet without a job without becoming a criminal. In this respect, the US government knows no bounds: While the newspapers are full of maudlin stories about bums, the unemployed, and malnourished children, the new budget contains further proposals to cut food stamps, medical care, rent and heating subsidies, local job creation programs, etc. Reagan has even expanded these policies into a program all his own to peddle to his political clientele: the “New Federalism,” the substance of which is simply to eliminate the costs of poverty by leaving its relief to the individual states, which may then decide that they can no longer continue existing programs.

When it comes to “staff cuts,” the government is setting a good example:

“Last year, the number of federal government employees fell by 40,000, despite a substantial increase in civilian personnel in the Defense Department” (US News, 1/25/1982);

due to the reduction in financial assistance to states and local governments, 30,000 state employees and 246,000 city workers have lost their jobs. Of course: where the corresponding tasks are ommitted in this way, the activities of, for example, occupational safety authorities can be brought to a virtual standstill without changing the law. Which does not mean that there is not also a huge job creation program in government services:

“Military manpower levels, which were depressed just two years ago, have improved dramatically, largely due to better pay and widespread unemployment. For the first time since conscription was abolished in 1973, all branches of the armed services met their enlistment goals in 1981.... In 1981, 80% of recruits were high school graduates, compared with only 54% in 1980.” (US News and World Report)

Future investments of the 80s

State credit policy, tax cuts and lowering the costs of exploitation material tells capital how and in which sectors business will be done in the future. Where the consumption of the working class is restricted, other and new business opportunities open up for capital that manages to adapt to this in good time. And where the military and energy are given top priority in government spending, every entrepreneur knows which orders to look out for and how to prepare his capital for them.

In any case, “Reaganomics” emphatically refutes one ideology: that the purchasing power of the masses is the yardstick for the “health” of an economy. What not so long ago was commented on as a “transitory stage” toward a “restoration” of the average American’s accustomed standard of living has now established itself as a universally recognized, established fact: a little house of one’s own, however small and inexpensive, and a tin sled are no longer among the things one takes for granted in life, to which one earns a right with sufficient (and that normally means: lifelong) hard work. This means that the industries that used to rely on the demand for these items as a secure basis for their business are having to change their ways.

The timber and construction industries are in a “permanent crisis” – and not just because mortgages are becoming unaffordable. In the USA, too, the construction industry has not just made profits by building houses for people who cannot afford one: loan subsidies for the relevant financing institutions and for the construction industry itself have ensured that it is still possible to do business in this sphere. According to a commission set up by Reagan, a quarter of homeowners in the lower income bracket of those who have one at all are now paying 50% of their income on rent – reason enough for the government to declare that the subsidy system has failed and that the government no longer intends to “privilege” the construction industry in the future. The industry is drawing the right conclusions from the bankruptcies of small construction companies and the associated unemployment:

“Bright spots next year will be office construction, which is expected to increase by 15%, and military facilities, which are expected to increase by 13%... The industry involved in building mobile homes expects a 10% increase in sales due to increasing expansion in the ‘sunbelt’, where 70% of all mobile homes are located. The high price of standard homes will make these housing options even more attractive.” (U.S. Industrial Outlook 1982)

The things people “like” when they are forced to!

The continuing basis of the auto industry’s business is the fact that in most areas of the USA you have to own a car to get to work every day. Which company will profit from this and to what extent will only become clear once the “Japanese” have conquered 20% of the US car market and the large American companies have decided to regain the lead in the USA after successfully accumulating on all other markets in the world. Accordingly, all US companies have been rationalizing their production from the ground up over the past three years. The result: with 1.3 million workers, the same number of units are produced today as in the past with half a million more; by outsourcing parts production to cheaper suppliers who pay below union wages, closing plants and reopening them in the “sunbelt,” capital has secured the appropriate home position.

On this basis, business is currently being done with the systematic transformation of the market: production stockpiles which are projected for 150 days are used for speculating on market fluctions and the speed of capital turnover; the capacity to expand and reduce production at any time is becoming the decisive means of competing with each other; and the speed of capital turnover is becoming a lever for cost advantages with the help of dealer discounts, sales credits, and other measures. At the same time, car stockpiles and the company’s own reserve army are successfully serving as a means of blackmailing the United Automobile Workers, whose membership is currently around 25% unemployed. In the meantime, all the companies have put the collective agreement which was due to expire in September 1982 up for negotiation. And what Chrysler forced through in 1981 with massive government support for the new debt in the form of an absolute wage cuts, Ford now manages to achieve at the negotiating table with the UAW in the spring: the current wage rate remains constant for a period of 30 months, the quarterly adjustment to the inflation-adjusted increase in the cost of living index no longer applies, the social benefit subsidies, e.g. health insurance subsidies, are reduced and the annual working hours are extended by 10 days of previously paid annual leave. And this absolute increase in work for absolutely less pay – a carefully estimated savings for Ford of 1 billion dollars – is granted by the UAW with 73% approval of its membership without anything in return:

– Of Ford’s own reserve army of workers made redundant for an indefinite period, only those who have worked at Ford for 15 years will receive 50% of their – reduced – final salary for the rest of their lives.
– The scope for further redundancies remains fully intact because the “normal” migration (why was this included in the contract with 10% unemployment and as high as 15.8% in the automotive industry?) and plant closures due to sales difficulties are expressly authorized.
– The so-called profit sharing is firstly the promise to extensively use those who are still allowed to work and secondly only comes into effect when Ford’s pre-tax profit reaches 2.3% of sales on the American market, where Ford has just lost 6% of the US market.

Wait! The UAW did promise itself something in return – namely that the car manufacturers should “seriously consider” passing on the cost advantages they have skimmed off in lower car prices. They will certainly do this if it proves to be a favorable means of beating the foreign competition from the field.

The highly derisive and envious short commentary in “Wirtschaftswoche” (3.5.82):

“The American automobile workers have been softened up.... The remaining employees of the particularly battered Ford brand have now practiced wage sacrifices for job security, more out of fear than reason, with the dubious promise in their pockets that one day they will share in the profits.”

Capital, on the other hand, can rely on its class interest when calculating the effects of rationalization and falling demand in other industries:

“Although a poor car economy normally has an immediate impact on steel companies, the industry performed better than a year ago because demand from the oil and gas sector for pipelines and pipes remains buoyant. Also (!!) higher operating performance of the steel plants contributed to the better result.” (Handelsblatt, 11.3.1981)

After all, what good is the best demand if it is not suitable for its own accumulation? And in this respect, the American steel industry, as a national basic industry in the USA as in other capitalist states, can be assured of special state support. With the “trigger price mechanism,” the state protects its steel industry on the domestic market from “unfair competition,” which automatically sets in when prices from other suppliers reach a certain level. The dumping actions initiated shortly before Christmas by the major American steel companies against their competitors from the EC differ from those of two years ago in one respect: While back then the aim was to win support from their own government for a fundamental rationalization programme – a demand that the Carter administration had already met with investment aid, relaxation of environmental protection regulations, allowances for basic research and state subsidies for company unemployment payments, and which the unions supported with wage restraint and “productivity deals,” the aim now is to secure the sole benefit from the success of these programs:

“US Steel has systematically modernized its steel capacities in recent years and created new capacities for the manufacture of products that are not affected by the economic downturn and from which good profits are made.” (Frankfurter Allgemeine Zeitung, 12.11.1981)

It is therefore particularly annoying that the Europeans are supplying their own steel buyers with seamless tubes, etc., when, according to their own statements, their own capacities are only being used 50%! And this is precisely because sales and profits have already risen enormously with the new capacities, profits that allowed U.S. Steel, among others, to take over Marathon Oil. The hypocritical disappointment of the unions –

“We gave up entitlements so U.S. Steel could overcome capital shortages and build new steel mills, and now they're buying into oil for this much money” –

are countered with a sense of reality:

“Maybe they’ll make money in oil and then have more to spend on steel.” (Business Week, Dec. 7, 1981)

Because demand – this is absolutely certain with Reagan’s rearmament program – is just the beginning. The uneasiness that professional observers of economic policy like to express when they examine high interest rates, declining growth rates, and unemployment immediately disappears when they look at what the American government is spending all that money on. It’s pretty much irrelevant whether one wants to see the arms buildup as good for the economy –

“For the big military contractors, rearmament will be a goldmine. Many of them have excess capacity due to the recession and they are already revamping unused edges. Boeing, for example, which has been hit hard by the decline in domestic air travel, is already working on the cruise missile.” (Time, 3/22/1982) –

or if the economic situation is good for the arms buildup because it provides the necessary “capacities”: In any case, it turns out that the US government has somehow excelled at having lots and lots of weapons built just when it is gearing up its economy to do just that. The way the government

“gives the industrial base (!) a lot more confidence to make the necessary capital investments” (Weinberger),

is shown by the new good relationship between the navy and shipyard capital:

“Currently, the Navy is improving its procurement policy and the modalities of its implementation. Shipyards are given the opportunity to make higher profits; they can keep 50% of all cost savings below the contract price and must bear 50% of all cost increases above the contracted price. Advance payments will be accelerated overall and first year deposits will be increased.” (Business Work, 10.19.1981)

Just as this is not a normal transaction between suppliers and buyers of a product who haggle over the price, in capitalism an entrepreneur is not bossed around to deliver the desired product: With additional incentives to reduce costs and the generous allocation of the corresponding capitals for this order, capital is given every means at its disposal to turn the cheap production of weapons into a business for itself. It is no wonder that the relevant branches of industry get the idea that all these offers could simply “overwhelm” them if the state does not give them a little more support:

“A rapid, massive mobilization of capacity will undermine us. If the Department of Defense isn’t concerned about the state of the American machine tool industry, it damn well better be.” (James Gray, president of the National Toolbuilders Association, according to Time, March 22, 1982)

The reason for the complaint: in the face of increasing imports of machine tools into the USA, this branch of industry is remembering its national rask:

“A backlog of orders from domestic producers will automatically send more orders abroad.” (ibid.)

A completely new discovery: that the “health” of an industry can also be jeopardized by too many orders! But that’s the way it is in the world of capital, where every deal someone else makes is a loss for you. The US government has already taken the first steps in the right direction. From the 1982 financial year, stainless steels, vehicles for the military’s administrative sector and protective clothing for chemical warfare must be purchased in the USA, whereas previously there was an exception to the rule that purchases were made from abroad if the American supply was insufficient or too expensive. Conversely, the USA’s own arms exports are increasingly being used as a means of passing on the costs of its own armaments to friends and allies:

“Weapons transfers (!) to friends and allies are a very cost-effective means of spreading American military power overseas.... Selling advanced weapons systems abroad spreads the cost of research and development and lowers the cost to the U.S. armed forces.” (US News and World Report, 3/8/1982)

An ideology of the Carter era, namely that American weapons could tempt foreign potentates to escapades in their regions of the world, no longer applies: after all, it is precisely the supply of weapons that ensures that these escapades turn out in the supplier’s favor.

No wonder that the USA, which “was able to further extend its lead in world trade last year” (Frankfurter Allgemeine Zeitung), is suddenly discovering “trade barriers” all over the world.