The Tyranny of the Rate of Return

Richard Robbins

In January of 2019, the culture jamming group Yes Men pranked Blackrock Investment Management by sending out an email to its clients purporting to be from CEO Larry Fink. It announced that the fund, heavily invested at the time in fossil fuel energy, would no longer invest in companies not in accord with the Paris climate agreement. Fink quickly responded in his real letter to investors when he said that Blackrock’s duty is to realize the highest rate of return for customers, regardless of the environmental consequences: “Our firm is built to protect and grow the value of our clients assets,” Fink wrote.

“…In many cases, I or other senior managers might agree with that same cause – or we might strongly disagree – but our personal views on environmental or social issues don’t matter here. Our decisions are driven solely by our fiduciary duty to our clients.” (Jolly, 2019).

Some may criticize Fink for his seeming indifference to the environmental and social externalities of his investments, but he is expressing the overwhelming and largely unanimous sentiment of wealth and fund managers that their primary goal, indeed duty, is to realize the highest rate of return for their clients whatever the consequences. Herein lies what may be one of the central questions of our time: since the rate of return on investments requires perpetual economic growth (see Baker, Delong, and Krugman 2006), but national and global economic growth is slowing and will continue to do so, how have the likes of Larry Fink managed to keep the rate of return on investments relatively steady over the past century? (see Piketty 2014; Jorda and Knoll 2017)

The Power of Investors and the Rate of Return

By 2021, Wealth managers such as Fink globally are expected to control some $70 trillion USD, equal to the present total GDP of all the countries in the world. Add to this, the investable assets of pension funds and insurance companies, (approximately $100 trillion USD) (OECD 2014), money controlled by banks and other private investors, and the more than $30 trillion USD held in untaxed offshore accounts, the amount of money that must find a place to grow in 2018 exceeded $300 trillion USD and is projected to reach $399 trillion USD by 2023 (Credit Suisse 2018). Furthermore, these investable assets are held by a tiny percentage of the population. As of 2016, the top 1 percent owned almost 56 percent of all income generating assets, the top 10% over 90 percent, leaving everyone else with only 9.2 percent (Wolf 2017, Table 1).

Historically the rate of return on investments, adjusted for inflation, runs from four to six percent (Piketty 2016). This rate of return requires, again, continued growth of the economy (see Baker, Delong, and Krugman 2006) , with 3 percent a year generally assumed to be the minimally accepted rate. But economic growth is slowing (see Figures 1 and 2); consequently, where does the “new” money, that is money above what is invested, come from? Why isn’t the rate of return on investments declining, as one would expect?

The Continuing Difficulties of Maintaining the Rate of Return

Most economists generally agree that national and global rates of economic growth are declining and will continue to do so (see Piketty 2014: 52-53), although they offer different reasons for the decline. However there are some obvious reasons.

Figure 1

Figure 2

First, the rate of growth is exponential, not arithmetic. For example, between 1990 to 1995 there was about a 3.6 percent annual increase in trees consumed in the United States (Howard 2007). In actual trees that amounted to an increase of about 1.5 million trees felled over the period. If the same 3.6 percent was maintained from 2005 to 2010 the number would be 2,550,000 trees, more than a million more. The same problem applies in the case of automobiles. Overall production in the 18 years between 1999 and 2017 went from some 56 million cars to over 97 million cars, an increase of 41 million cars and an average yearly growth rate of 2.8 percent. If the industry maintained the same 2.8 percent growth rate over the next 18 years, it would need to produce 58 million more cars over the same period (OICA 2017).

But exponentiality is not the only problem. Maintaining a compound rate of growth requires institutional investors and banks to compete to find more and more profitable investment opportunities, the competition for these investments lowering the expected rate of return. Consequently, the task of wealth managers seeking opportunities for clients to realize an acceptable rate of return relative to risk becomes increasingly difficult. As one investor put it, “If you ask me to give you the one big bargain out there, I’m not sure there is one.” Investment advisors are increasingly telling their clients to “lower their expectations” (cited in Dobbs et al 2016).

Juggling the Economic Rules: Who Determines National and Global Economic Policy

Capital controllers, that is wealth managers, banks, insurance companies, pension funds, etc., have enormous power. They decide, essentially, who gets the money. Martin Gilens and Benjamin I. Page (2014) systematically examined policies enacted in the United States by elected officials, comparing them with those desired by the great majority of citizens. They conclude that policymaking is dominated by powerful business organizations and a small number of affluent Americans, and that when:

“… a majority of citizens disagrees with economic elites and/or with organized interests, they generally lose. Moreover, because of the strong status quo bias built into the U.S. political system, even when fairly large majorities of Americans favor policy change, they generally do not get it.” (2014: 22-23)

Given the economic and political power of investors and the economic interests of governments (not to mention politicians), it is no surprise that policy initiatives overwhelmingly favor their interests even when they clearly are counter to the interests and quality of life of the vast majority of the population. Examples of ways that government action can ensure the maintenance of the rate of return include the following:

 • Control inflation: Since the rate of return varies inversely with the rate of inflation, keeping inflation low is of special interest to investors. This job is assigned to central banks which control inflation largely by regulating interest rates, that is the price of money. If the rate of inflation threatens to increase, generally above a specific target rate—2 % for most major central banks—the bank will raise interest rates. While this benefits investors, it harms almost everyone else by effectively reducing the amount of money in the economy, decreasing economic activity, and, most importantly, raising the unemployment rate, traditionally the major measure used by central banks of inflation. Higher inflation rates (and most economists agree that major economies can function well with rates well above 2 percent) also increase the velocity of money—that is the spending rate—effectively raising the money supply.

 • Lower taxes on the wealthy: the rate of return on investments also varies inversely with the rate of taxation. In most major economies not only have taxes on the rich been reduced over the past 30 years (falling from some
70 percent to 20 percent in the United States), but wage income is taxed at a higher rate than income from investments. Clearly this benefits the wealthy, but reduces the amount of money available for poverty and
hunger reduction, remediation of environmental degradation and enforcement of environmental regulations, infrastructure repair, building of hospital and schools, education costs, care of the elderly, and so on.

 • Keep labor costs low: Since the rate of return, particularly on equity instruments (e.g. stocks), varies with the cost of labor, governments have worked to undermine the power of labor, encourage outsourcing, and subsidize automation.

 • Facilitate financialization and privatization: Since the amount of money to be invested keeps increasing, more ways must be found to invest it. Government functions, for example, can be privatized, or other new investment opportunities can be created. In the United States, student debt is a perfect example—an investment that is generally guaranteed by the government and protected from bankruptcy, but that leaves people beginning careers heavily indebted. In anthropological terms, it is effectively a reverse dowry.

 • Allow the externalization of costs: Another way of maintaining the rate of return on investments is to allow corporations and financial institutions to pass on the costs of money creation to the general public or to future generations. Climate change, fresh water depletion, and other forms of environmental despoliation are the best of numerous examples. While benefiting investors, it threatens the health and well-being of everyone else.

 • Allow the concentration of corporate ownership: This increases the power of corporations and financial institutions to control prices, but also grants them the power that accrues to too-big-to-fail institutions, as well as the power to influence, control, and challenge governments and undermine democratic institutions.

• Expand and enforce laws and regulations regarding the repayment of debt: With the massive expansion of debt and debt instruments (e.g. government and corporate bonds, mortgages, credit cards, student debt, etc.) now approaching $250 trillion, governments can pass legislation that makes debt necessary (e.g. discourage wage growth) and make the avoidance of debt repayment (e.g. bankruptcy), more difficult. Governments can also join together to facilitate the assumption of sovereign debt (e.g. World Bank), but also insure that these debts are repaid (e.g. the workings of the International Monetary Fund).

Can We Escape the Tyranny of the Rate of Return?

With the expected rate of return dominating investment decisions and government policy we court disaster. We get the continuing despoiling of the environment, disastrous changes to our climate, growing inequality, concentration of power in the hands of a few along with political unrest and conflict. Trying to maintain the rate of return at historic levels given the inevitable slowing of economic growth requires the transfer of resources from the bottom to the top and the endless plundering of the commons. Is there a way out?

The obvious answer is to reexamine and modify the policy decisions listed above to align more closely with the majority (see e.g. Atkinson 2015). The problem, of course, is that would require a significant change in the global power structure in which capital is virtually unchallenged.

History may be the best place to look for a solution. In the United States there were at least two periods where the seemingly inevitable rise of plutocracy stalled. The first was the progressive era from the 1890s to the 1920s, which was marked by widespread social activism, higher voter turnout and political reform directed largely at the rising power of corporations and driven by the economic depressions of the late nineteenth and early twentieth centuries.

The period from the mid-1930s to the early-1970s marked the second pause in the rise of the plutocrats. The depression of the 1930s and the election of Franklin D. Roosevelt provided the impetus for legislation to regulate banks, and came close to undoing the right of banks to create money and returning it to the government (Phillips 1992; Benes and Kumhof. 2012). More importantly, it expanded the rights of workers to organize and spurred the growth of unionization in the United States. Arguably the power of unions in the United States, and specifically the threat of workers to strike, was responsible for the rise of the middle class (Pizzigati 2012) and the retreat of the plutocrats. Then in the 1980s the Federal Reserve Bank in the United States hiked interest rates, thus making debt more expensive, and then, building on a host of neoliberal measures, crushed the power of unions.

The question is whether there exists a source of power analogous to the power of labor that can effectively challenge capital?

One consequence of the quest for investment opportunities is the exponential growth of debt including household, corporate, financial and sovereign debt. As we mentioned above some 80 percent of all investment instruments are debt instruments. Theoretically, of course, with debt-money there is no limit to the amount of debt countries, corporations, financial institutions and private citizens can assume and, globally, now approaches $250 trillion USD.

Given the role of debt in an economy struggling to find more sources of investment, I suggest that the old division between capitalists and laborers is being superseded by the division between creditors and debtors. With debt having largely replaced laborer as the source of plutocratic wealth, the threat to withhold debt payments would be the equivalent to the withholding of labor. The debt strike would supplant the labor strike. Furthermore debt strikes have several advantages over labor strikes or other forms of resistance. First, the withholding of debt payments is not illegal. Second, while potential debt strikers might fear a loss of credit, if enough people participate creditors are not likely to want to disqualify them from future borrowing. Third, the infrastructure to repossess thousands of homes or automobiles doesn’t exist. Finally, debt strikes are nonviolent.

Without debtors laboring to sustain the income streams that flow disproportionately to the few, and above all honor their debts, the economy would cease functioning. Lest the idea of a debt strike seem utopian, let me point out that capital does strike when threats to its rate of return rise. Furthermore the debt strike was endorsed as a political tool when at least 30 members of the U.S. House of Representatives and 33 U.S. Senators, attempting to force budget cuts, voted in 2013 against the government repaying its debt obligations. A pledge from only 20-25 percent of debtors to threaten to withhold payments would probably suffice to gain recognition and action. Such an action would have to be accompanied by specific demands: governments must reclaim the power to create money, form public banks, forgive student and Third World debt, guarantee a minimum income, etc. (see e.g. Di Muzio and Robbins 2016: 126-134). Without such truly radical measures, meaningful change will not be effected.

 

About the Author

Richard Robbins
SUNY Distinguished Teaching Professor
Department of Anthropology
SUNY at Plattsburgh

Email: robbinrh@plattsburgh.edu
On the Web at: https://www.plattsburgh.edu/academics/schools/arts-sciences/anthropology/faculty/robbins.html

 

References

Atkinson, Anthony B. 2015. Inequality: What Can Be Done? Harvard University Press

Baker, Dean, J. Bradford DeLong, and Paul Krugman. 2005. Asset Returns and Economic Growth. Brookings Papers on Economic Activity 2005(1): 289–330.
https://www.brookings.edu/wp-content/uploads/2005/01/2005a_bpea_baker.pdf

Benes, Jaromir and Michael Kumhof. 2012. The Chicago Plan Revisited. IMF Working Paper 13/202; August 2012
https://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf
accessed July 25, 2016.

Credit Suisse. 2018. Global Wealth Report 2018: 60.
https://www.credit-suisse.com/about-us/en/reports-research/global-wealth-report.html

Di Muzio, Tim, and Richard H. Robbins. 2016. Debt as power. Manchester: Manchester University Press.

Dobbs, Richard, Tim Koller, Susan Lund, et al (2016) Why Investors May Need to Lower Their Sights | McKinsey & Company.
https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/why-investors-may-need-to-lower-their-sights
accessed April 10, 2017.

Gilens, Martin, and Benjamin I. Page (2014) “Testing theories of American politics: Elites, interest groups, and average citizens.” Perspective on Politics 12: 564-581

Howard, James L. (2007) ‘U.S. Timber Production, Trade, Consumption and Price Statistics 1965 to 2005′. Research Paper FPL-RP-637. United States Department of Agriculture.
https://www.fpl.fs.fed.us/documnts/fplrp/fpl_rp637.pdf

Jolly, Jasper. 2019. World’s Biggest Investor Accused of Dragging Feet on Climate Crisis. The Guardian, May 21.
https://www.theguardian.com/business/2019/may/21/blackrock-investor-climate-crisis-blackrock-assets
accessed May 21, 2019.

Jorda, Oscar and Katharina Knoll. 2017. The Rate of Return on Everything, 1870–2015. Federal Reserve Bank of San Francisco, Working Paper Series: 01–123.

Jordà, Òscar, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor. 2018. The Rate of Return on Everything, 1870-2015. Cesifo Working Papers no 6899
https://www.nber.org/papers/w24112

OECD (2014) Pension Markets in Focus.
http://www.oecd.org/daf/fin/private-pensions/Pension-Markets-in-Focus-2014.pdf

OICA (2017) International Organization of Motor Vehicle Manufacturers: Production Statistics.
http://www.oica.net/category/productionstatistics/2017-statistics/
accessed October 31, 2018.

Phillips, Ronnie. 1992. The ‘Chicago Plan’ and New Deal Banking Reform. Working Paper No. 76, The Jerome Levy Economics Institute of Bard College.
http://www.levyinstitute.org/pubs/wp/76.pdf

Piketty, Thomas (2014) Capital in the Twenty-First Century (Cambridge, MA: Belknap Press).

Pizzigati, Sam. 2012. The Rich Don’t Always Win: The Forgotten Triumph Over Plutocracy that Created the American Middle Class, 1900-1970. Seven Stories Press

Wolff, Edward N. 2017 Household Wealth Trends in the United States, 1962 to 2016: Has Middle Class Wealth Recovered? Working Paper, 24085. National Bureau of Economic Research.
https://www.nber.org/papers/w24085

Leave a Reply

Your email address will not be published. Required fields are marked *