The Great Risk Shift: Understanding American Capitalism

The bailout of the banking industry was the result of decades of Reagan policy making carried out by both Democratic and Republican neoliberals that shifted risk from corporations to the American public.  It is only the tip of iceberg. This shifting of risk is the flip side of the coin to wage stagnation and deflation that acts to increase the debt and loses of the American people.

To understand, why this is the case requires an understanding of what risk is.  This is not an easy task.  However, to have a working definition, let's just say that risk is the chance in any given transaction for one to be a winner or a loser. It is the concept of working the odds. What are the  odds that you will obtain a job that will cover your debt from college?  What are the odds that you will have enough money to pay for health care premiums and save money? What are odds of bank failure if they are too big to fail?

To understand, why this is the case requires an understanding of what risk is.  This is not an easy task.  However, to have a working definition, let's just say that risk is the chance in any given transaction for one to be a winner or a loser. It is the concept of working the odds. What are the odds that you will obtain a job that will cover your debt from college?  What are the odds that you will have enough money to pay for health care premiums and save money? What are odds of bank failure if they are too big to fail?

If you want to understand what is happening in American capitalism, the point is that corporations have been putting their finger on the scale through government policy  to shift the odds in their favor against you. It is not that there can not still be winners amongst the American people. It is that the finger on the scale makes that increasingly unlikely.  That finger on the scale increases cost for you even as it stagnates or deflates your wage. Thus, making savings less likely.

For example, extremely high premiums, means the risk of no savings. The cost of education combined with stagnant wages means that the chances of you finding a job to pay your debt are decreased.  Who should be responsible for the risk of mortgages that were not well conceived? The banks or you? Or both? Who is in the best position to ascertain risk? Banks or you? Which side should government favor? Banks or you when it comes to requiring a market where players are actively considering risk? These are all questions lost in Reaganism.

The odds are against you. If a bank is too big to fail, the odds are that the American government will not allow that bank to fail because the banks can rely on their impact on the rest of the economy to take risky actions that they would not otherwise take. This is risk for the American public in a nutshell.

Let's discuss one more example of how placing the finger on the scale of policy shifts the risk to you- changing bankruptcy law. By making it more difficult for Americans to discharge debt, it makes it more difficult to negotiate with creditors regarding that debt. Indeed, it makes it more likely that creditors will take larger risks by offering you more debt that they need not worry whether you can afford since their is less risk to them.

This is the perversity of the risk shift. It encourages corporations like banks to take on unhealthy risks such as in the sub-prime mortgage market, and, more importantly regarding the near collapse last year, to play this risk even further in the derivatives markets. In each instance, the cost of the failed transaction is shifted from the large corporation to you.

This risk comes up in many ways. Some are obvious such as those that I already describe, and some, are not so obvious. For example, take NAFTA, the North American Free Trade Agreement, and similar global policy making, this is an example of subtle (and some might argue not so subtle) risk shifting from the corporation to the American people.  These policies subject American workers to the risk of corporations shopping around for countries with the the most favorable labor and environmental laws when the workers are attempting to negotiate with their employers.  What does American labor obtain in return for this shifting of risk?  Lower wages due to the worker wanting not take the chance that they will ship the jobs abroad.

Most shifting of risk is so invisible that we do not even think of them as such. Who realizes that our lack of a diversified economy in favor of consumer based economics shifts the risk to us because we are more subject to the upheavals of the business cycle of booms and recessions? Who thinks about how the relative strength of consumer protection laws affects risk? Who realize that tort reform shifts risk to us? Do you think about the lack of energy diversification and its impact on your ability to not be impacted by oil cartels?  Who thinks about how risk of war increases, and thus, the necessary increase of debt, caused by the need for greater foreign entanglement? These are, of course, liberal arguments.

There are conservative ones as well that point to the problem with shifting risk. How free can  investors truly be if corporate interest backed by government policy denies investors the ability to address the managers of the company's taking huge profits while companies are failing?  How do our securities laws help them when corporate packed courts makes suing the culprits behind such behavior more difficult?
Of course, most Americans are not particularly concerned about being ideologues. So, how much more economically safe can they be when their pensions and other retirement activities are made that much more difficult because of the decreasing social safety net by their government combined with the instability of financial markets in which they may have placed their meager savings?

These shifting risks are not limited to workers. They may also apply to starting businesses. What business will start if they can not afford healthcare for workers? Who can address the risk of Walmart using pricing based on free rider economics?
The core element of risk management beyond not taking any risks is to hedge against risk. That's what is missing from modern American capitalism for the average American.  We want a diversified economy that includes manufacture because it decreases risk for all Americans. We want energy diversification because decreases the risks of oil pricing being a factor in our economy.

Capitalism is about winners and losers, but when the system is so constructed as to not have a real floor, it means people are less likely rather than more likely to take risks. Who will take the risk of starting that new business, when they fear that going without health care insurance will bankrupt them? Who will take on the risk when they have student debt to repay that is beyond their capacity to service it? Ultimately, the point here is that this is how this risk shifting eats away at business innovation and technical development. It eats away at American capitalism.
There are many social mobility and income inequality reasons to address risk shifting, but there are also some basic business reasons to do so.

However, the basic point being that we have as one writer states limited liability to protect corporations regarding risk, but we do not have a similar concept for American families.  If you want to understand the three sides of the issue that shapes the American economy- risk, cost and wages-- begin with understanding how risk works to bend the balance in favor of increasing cost while reducing wages.

Ultimately here, we are discussing how our democracy is becoming  a plutocracy. The tool of the transformation is risk shifting. Corporate interest push government policies that shift the risk to you, and, also socialize corporate risk. This is not just at the federal level. A quick practical example of this at the state and federal level are subsidies offered to sporting franchises to relocate to a particular location.  How much risk is the owner of the team truly taking on if they are given hundreds of millions in subsidies? But, of course, the big one on the table right now is the shifting of risk regarding the increased cost of health care premiums in the form of the government mandating that we take insurance for the private sector without a means of cost containment. This shifts the risk once again to American public.

I can not begin to cover the complexity of the risk issue here. I hope you will do more reading.  There are a lot of recommend sources, but I would start here to begin seriously understand the issues:

Recommended Books:

The Great Risk Shift" by Jacob S. Hacker

"Too Big to Fail" by Andrew Ross Sorkin

Recommended sites:

Naked Capitalism

Risk Calculator

Tags: capitalism, cost, Debt, Democrats, neoliberalism, Reaganism, Republicans, Risk, wages (all tags)

Comments

5 Comments

Good Work/ add links please to recommended sites

by molly bloom 2009-10-26 10:17AM | 0 recs
Re: Good Work/ add links please to recommended sit

I may go through to look for more blogs that I read:

http://www.nakedcapitalism.com/
http://www.calculatedriskblog.com/

by bruh3 2009-10-26 11:57AM | 0 recs
I have recced

But you present a very incomplete picture.

The other side of the coin is "reward".  It may be acceptable to take on a higher risk, even if taht risk is being shifted onto me by someone else, if the expected reward also goes up.  For instance, in the case of NAFTA, increased free trade benefits everyone...even those workers who take on an increased risk of layoffs.

by Ravi Verma 2009-10-26 10:42AM | 0 recs
Re: I have recced

The problem is that the too big to fail corporations have it rigged so they get all the rewards and the public takes all the risks.

Why wouldn't they try to maximize their earnings by making risky bets when they know that the public will bail them out?

by tpeichel 2009-10-26 10:57AM | 0 recs
Free trade hasn't benefited everyone

in the case of NAFTA. Look at the economic history: Mexico's growth rate has dipped under NAFTA. Growth in the U.S. has been bubble-dependent, up and down but long-term not as good as in the 'pre-free-trade' golden age of 1945-1973. Of course we don't know the influence of free trade in all the various on economies, but a belief that free trade must be beneficial depends on belief in free trade theory and must avoid looking at real economic track records.

Btw, tried to rec this diary but the button was unavailable.

by fairleft2 2009-10-26 11:25AM | 0 recs

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