The Corporate Choice

During Obama’s first year in office, the United States experienced the most damaging episode of disinvestment since World War II: nonfinancial businesses were sitting on $2 trillion in capital, while banks kept another $1 trillion. Companies were holding cash at rates not seen in half a century. A Bloomberg report found that “companies that are spending . . . have largely chosen to increase dividends and buy back stock” rather than hire more workers, increase wages, or invest.

This was not simply an automatic market response to low demand. Obama himself recognized that businesses were making a discretionary choice. His February 2011 speech at the Chamber of Commerce, according to the Wall Street Journal, offered “tax breaks and other government support for exports and innovation” in return for domestic investment.

Three initiatives to “repair relations with corporate America” represented Obama’s side of the bargain: first, he renewed the Bush tax cuts on the wealthy and lowered corporate tax rates; second, he continued his predecessors’ deregulatory agenda, contrary to his campaign promises; and, finally, he enhanced export opportunities and investment privileges through new trade agreements with South Korea, Colombia, and Panama, and later pursued the Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP).

These policies did little to address unemployment and low consumer demand, and were not meant to do so. They were instead a response to unrelated corporate demands. Obama’s promotion of trade/investment treaties — presented as a means to “make sure” business was “hiring” — makes this apparent. Trade agreements can only produce new hires if they increase production, if that production takes place in the United States, and if it requires expanding the workforce. In practice, neoliberal trade agreements tend to reduce employment.

The fact that these policies did not directly address disinvestment demonstrates the power of capital strikes: policies unrelated to a crisis’s initial cause can be pushed through if the relevant corporations make these unrelated policies a condition for ending their strike.

Preventing Unfavorable Legislation

The capital strike threat prevents policymakers from seriously considering many popular and sensible reforms. Many such provisions never even appeared in drafts of the Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank). As bailouts continued, the Obama administration ruled out any legislative option that would either force banks to absorb their losses or place them under government control.

The administration carefully calibrated its public language to avoid even the suggestion that it might pursue such options. In his 2014 memoir, Treasury Secretary Timothy Geithner asserted that “loose language stoking fears about haircuts [i.e., forcing creditors to take losses] or temporary nationalization [involving direct government administration] could be instantly destabilizing” — to the flow of investment capital, that is.

The administration also refused to consider size limitations or restructuring policies, despite regulators’ and economists’ conviction that too-big-to-fail financial institutions cause chronic destabilization. A 2013 bill that would have imposed higher capital reserves requirements on larger banks and the oft-discussed restoration of Glass-Steagall — which would have separated commercial banking from riskier investment activity — also disappeared.

Again, the administration crafted its language to avoid scaring business. In 2014, when Obama made an extemporaneous remark about potentially “restructuring the banks themselves,” White House spokespersons moved quickly to reassure bankers that no such initiatives were being discussed.

These cases are not exceptional. In her 2012 memoir, Sheila Bair, chair of the Federal Deposit Insurance Corporation (FDIC) from 2006–2011, recounted constant warnings from industry representatives that “our regulatory initiatives would hurt lending.” She went on:

Throughout my tenure at the FDIC, that was the standard refrain from industry lobbyists virtually anytime we tried to rein in risky practices or ask the industry to pay for the costs of bank failures.

Such threats would shape the Dodd-Frank Act, eliminating or watering down various other proposed regulations.

While the threats’ specifics varied, they shared a basic message: we will withhold investment in the real economy if certain reform measures are even considered. Disinvestment from Main Street — and the threat that the strike might spread to new areas — wielded tremendous power, ensuring that certain proposals were taken off the table from the start.

Shaping Implementation

The strike threat does not end when proposals become law, because implementation still requires negotiation. After Obama signed Dodd-Frank, executive branch agencies began writing the 390 rules that would make the new law operational. Since most rules required multiple regulatory agencies to agree, Wall Street had multiple chokepoints to block or weaken key provisions. As Timothy Geithner conceded in his memoir, “The affected agencies all had congressional defenders looking out for their turf, as well as influential supporters in the financial industry.”

The hoarded $1 trillion in capital made Wall Street’s voice particularly loud during this process. Jamie Dimon, JP Morgan CEO, invoked this power when he asked, “Has anyone looked at the cumulative effect of all these regulations, and could they be the reason it’s taking so long for credit and jobs to come back?” In other words, he and his cohort would hold onto their money until they were immunized from the regulations they disliked.

In 2014 the industry publication American Banker observed that Dimon’s comment had become “a rallying cry by the industry” during the rulemaking negotiations, a threat repeatedly conveyed to government deliberators. Time and again, the threat of a capital strike weakened specific aspects of the new law.

Consider the fight over capital reserve requirements, or ratios. Over-leveraging — that is, the failure to maintain sufficient reserves to buffer against possible crash — had played a major role in the 2008 crisis. Dodd-Frank mandated an increase in reserves, but did not specify an exact level. Speaking for a consortium of eighteen major lenders in 2013, Financial Services Forum CEO Rob Nichols delivered one of many disinvestment threats: “There is a tradeoff with higher capital ratios, and that is the impact on lending and economic growth.” Many studies have shown that increasing reserve requirements would have little or no automatic impact on bank lending, particularly after the first year. Thus, Nichols wasn’t predicting an automatic market response, but rather threatening a continued political strike to extract regulatory relaxation.

Dodd-Frank also required banks to retain 5 percent of the risk associated with loans guaranteed by mortgaged property like homes and automobiles, better known as securitized loans. The rule was supposed to prevent lenders from granting a risky loan only to sell it off to an uninformed investor who would then have to face the default, foreclosure, and declining value.

American Banker spoke for the financial community when it promised that banks would respond to this reform by passing the costs on to the consumer in “the form of higher interest rates and fees.” Securitized loan costs would skyrocket, excluding a vast number of borrowers and continuing the disinvestment in the mortgage markets.

In both cases, these threats substantially weakened Dodd-Frank’s reach. Sheila Bair was overruled when she rebutted the banks’ predictions about higher capital ratios. And the final risk-retention rule included exemptions for an ever-expanding category of “qualified residential mortgages” — a big victory for loan securitizers. This outcome largely fulfilled Barney Frank’s own fear that “the exception [could] eat up the rule.”

Shadows and Substance

In the midst of the last great US financial crisis, philosopher John Dewey lamented that “politics is the shadow cast on society by big business.” Government “is an echo” and at times an “accomplice . . . of the interests of big business.” In one sense, Dewey’s point was hardly original, for Marxists, anarchists, and even some liberals had long denounced capitalist influence over government. As early as 1776, Adam Smith had complained that England’s “merchants and manufacturers” were “the principal architects” of trade policy, their interests “carefully attended to” by politicians.

But Dewey added a further insight: “the attenuation of the shadow will not change the substance.” In other words, electing new politicians will not disrupt business’s fundamental control over state policy. Even governments elected with an anticorporate mandate, from Chile in the early 1970s to Venezuela and Greece more recently, have been unable to escape the wrath of the capital strike.

Dewey’s analysis calls for the elimination of concentrated economic power — that is, the elimination of capital’s capacity to disrupt a nation by withdrawing investment. Only by targeting the “substance” of corporate power — rather than its shadow, the government — can major progressive change be achieved and sustained.

Expanding on this insight, we believe that progressive social movements should directly target business elites. They are the main enemies of change, but they also have the power to facilitate reforms if they face sufficient pressure. If movements can alter capitalists’ cost-benefit calculations, government action favorable to popular interests becomes much more likely.

Workers’ rights movements in the 1930s and civil rights struggles in the 1960s succeeded largely by exerting pressure on business owners, who eventually supported progressive policy reforms as a way of cutting their own losses. Business elites’ structural power was greatly mitigated — and in fact harnessed to movement goals — when activists imposed high enough costs.

Ultimately, the capital strike teaches us that reform is not enough. Power over investment brings power over the political process. Eliminating the capital strike therefore requires the radical democratization of economic ownership and control in society: an end to private capital and illegitimate power in all its forms.

That day is still a long way off. But building grassroots movements that focus our analysis, energy, and anger on the substance of the problem can contribute to that goal in a way that focusing on the shadow of elected government cannot.