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Toronto Star, July 6, 1999
Thomas Walkom
If the economy is so rosy, why are
things so grim? THE ECONOMIC boom, we are told, continues. Production continues to grow; the stock market is rocking. Asia is bouncing back and the big, powerful U.S. economic engine chugs along in one of the longest periods of continuous growth since 1945. But at ground level, where most of us live, the world still seems a precarious place. Wages lag. Big, profitable companies continue to lay off staff. The unemployment rate is falling but good jobs are still hard to find. The Kingston Rd. motel strip is chockablock with homeless families. How can things be so rosy yet so grim? Jim Stanford proposes an answer to this question. An economist with the Canadian Auto Workers, he is youngish, articulate, whipsmart and, unlike many in his profession, able to write in a known language. Those who know clothes say he dresses well. Indeed, if his views were more mainstream, he would probably be a household name on the biz-media circuit, a kind of male Sherry Cooper. What Stanford has written is a book called Paper Boom. Its central argument is that there are two economies in Canada: a real one which produces the things that people use - such as homes, cars, health care, roads; and a paper, or financial, one. This real-financial/productive-unproductive distinction is not original with Stanford. Adam Smith, and Karl Marx made similar points. So too did John Maynard Keynes and the curmudgeonly American theorist of conspicuous consumption, Thorstein Veblen. Like his predecessors, Stanford writes at a time when the system seems out of joint. For as he points out, the theory of financial intermediation so beloved by the teachers of first-year economics courses doesn't work in practice. That theory holds that banks, mutual funds, stock markets and their like exist to service the real economy, that they channel savings into productive investments. But in practice, the real economy finances itself. Most corporations use their retained earnings to finance new investments. The savings of ordinary citizens are, by and large, channelled into the homes they own. What, then, does the financial sector do? According to Stanford, the answer is not much. The stock market, he points out, ends up financing not real productive investment but get-rich-quick schemes, particularly mergers and acquisitions. In the 1990s, for example, only 5 per cent of the money raised on the Toronto Stock Exchange went into companies which wanted to finance new businesses. Instead, most stock exchange activity focuses on speculation - trading existing shares back and forth. The beneficiaries from this frenzy of trading are not those companies in the real, wealth-creating economy. Certainly, they are not the workers in these companies (who often must be laid off to pay for expensive takeovers, as journalists at The Toronto Sun found when they were swallowed by Quebecor Inc.) Curiously, individual investors don't even necessarily benefit. In 1998, those who invested in Canadian mutual funds did worse on average than those who didn't. And they paid mutual fund managers hefty fees for the privilege. As Stanford notes, these managers ``were paid good money to reduce, on average, the value of their clients' portfolios.'' Rather the beneficiaries are the high rollers in the financial industry, corporate captains paid in stock options and the still tiny percentage of people who own most of Canada's wealth. In fact, the very success of the financial economy has hindered the real economy. Stanford argues that there has been a slump in real productive investment in Canada since the 1980s, thanks in large part to deliberate government policy. This included a high-interest-rate regime designed in part to protect from inflation the abstract wealth of those who dominate finance. The mechanisms of this regime led to what Stanford calls a policy of ``permanent recession'' and the gradual attrition of the real economy. While Stanford writes from the left, he is politely dismissive of many of its shibboleths. Corporate profits, he says should not be the focus of the left's ire. In fact, given its crucial role in the real economy, investment by big business should be encouraged. He is equally bemused by the left's curious love affair with small business people (most of whom hate anything that smacks of socialism). Stanford points out that small businesses are the pilot fish of the economy; they need the big corporate sharks to survive. Stanford does call for a public investment system to bypass the paper economy. But his solutions are less interesting than his analysis of the problem. Paper Boom is a wide-ranging, provocative and surprisingly readable look at the malaise of the current economy. It's co-published by James Lorimer and the Canadian Centre for Policy Alternatives. Thomas Walkom's column appears Tuesdays. ***********************
I didn't know the exact figure for productive investment
through the stock market but suspected it had become rather small. It is
astonishing to think of all that frenetic activity and gazillions of dollars
traded, and seemingly only five per cent fulfils a role in the real economy. To
my mind this makes a good case for governments drawing a lot of their revenue
from an Equities Sales Tax rather than a GST or an income tax.
VM
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