Economic Insecurity and the Institutional Prerequisites for Successful Capitalism

Abstract

In this paper, which marks the fiftieth anniversary of the Employment Act of 1946, Distinguished Scholar Hyman P. Minsky and Visiting Scholar Charles J. Whalen search for reasons to account for the difference between economic performance in the period from 1946 to 1966 and performance from 1966 to the present. The authors discuss a number of economic problems that arose during the later period, including slower growth, stagnant earnings, rising financial instability, and increasing inequality. Minsky and Whalen acknowledge that factors such as globalization and technological change have undoubtedly played a role in the split performance. However, an often overlooked, but important factor is the evolution of the U.S. financial structure during recent decades. The authors explain that a key component of that evolution has been the rise of "money manager" capitalism. Important features of money manager capitalism are increased financial fragility (lower margins of safety in indebtedness and a greater reliance on debt relative to internal finance) and the introduction into the financial structure of a new layer of intermediation. In particular, managers of pensions, trusts, and mutual funds currently control the largest share of the liabilities of corporations. These managers are judged by only one criterion: how well they maximize the value of funds. As a result, business leaders have become increasingly sensitive to the stock market valuation of their firm. Minsky and Whalen assert that current economic problems require that we reconsider how to measure economic success. In the early postwar period American policymakers could focus on overall economic growth, unemployment, and inflation. These measures, however, are no longer sufficient as indicators of citizen well-being given existing wage stagnation and widespread employment insecurity resulting from longer employment searches, increased dependence on multiple job holdings, and the explosive growth in part-time and contingent work.

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