Ponzi Solitaire, Immanuel Wallerstein, Commentary no. 286, August 1, 2010

http://www.iwallerstein.com/ponzi-solitaire/

Reading newspapers can be a startling experience. On July 26 this year, U.S. papers ran two quite contradictory stories. In the first news article, USA Today reported on its quarterly forecast of economists. The headline read: “Economists’ optimism wanes.” It seems that the combination of “turmoil in Europe, lackluster job growth, a weak housing market and a slowdown in factory output” make it very unlikely that the United States can recover the lost 8.5 million jobs “at a more-than-glacial pace.” In addition, they fear “global financial instability.”

So, quite reasonably, they are not optimistic. One could say that the economists’ congenital optimism about the world market has finally hit the hard rock of reality. Some of us came to this conclusion a lot earlier. So how is it possible that, the very same day, the New York Times ran a front-page story about the “surging profits” of U.S. industries?

The answer is again in the headline: “Industries find surging profits in deeper cuts.” It is not that the industries are selling more products. They are indeed selling fewer. But they have been cutting costs – that is, they have been firing workers.

They have found that, if they fire enough workers and make the remaining workers work harder, they may have fewer sales but they have greater profits. This is called a “triumph of productivity.” Ethan Harris, chief economist at Bank of America Merrill Lynch, is quite honest about it: “Companies are squeezing their labor costs to build profits.”

However, as the Times notes, the result is that “the benefits are mostly going to shareholders instead of the broader economy.” And the industries do not intend this to be a temporary solution. For even if sales improve, they are not planning to hire more workers. On the contrary, according to one chief executive of a large firm, “the last thing we’re worried about is when we are going to have to add more capacity.” Rather, we’re “reconfiguring our entire operational system for greater flexibility.”

So, have U.S. industries (and industries elsewhere in the world) found the magic bullet that will enable them to expand profits ever into the future? You’ve got to be kidding. In the 1920′s Henry Ford famously paid his workers higher wages than was the norm because, he said, he wanted them to be his customers. His successors at Ford today have reduced their North American work force by over 50 percent in the last five years. More profits – but fewer customers.

There’s the little problem of what Keynes and Kalecki wrote about – effective demand. In any medium-run calculation, if there are not enough customers, there will not be enough sales, and very soon the profits will dry up. The industries that are increasing their profits by reducing their work force and squeezing their remaining laborers are going to have surging profits for a very short run until they run into the hard brick wall of serious deflation. And then they’ll crash.

Can’t they see this? Sure, some can, but they are operating on the hedonistic principle of eat, drink, and be merry, for tomorrow we may die. It might be called “Ponzi solitaire.” In ordinary Ponzi schemes, the operator bilks other people until the house of cards collapses – as it did for Bernie Madoff. In Ponzi solitaire, you bilk yourself until you crash. And just as the investors in an ordinary Ponzi scheme (potential victims) hope that the crash will come only after they have gotten their profits, so the players of Ponzi solitaire (industry executives) hope they’ll escape with their personal profits before the whole industry collapses. Good luck!