Debt, Democracy, and the Public University

by Bob Meister,

Wheeler Hall, UC Berkeley, December 7, 2011: This panel has been asked to talk about how far we've come since the Fall of 2009--and where we're headed.

I

When I spoke in Wheeler Hall two years ago today, December 7, 2009, I asked Berkeley students to connect the dots between their ever-rising tuition, widening income gaps in California, and the then-dominant belief that educational attainment both explains and justifies these gaps.

For some years, I said, the University of California has been accepting credit for rising inequality (rather than blaming, e.g., capitalism) by arguing that our changing income distribution simply reflects the rising premium that college degrees command in the job market--the so-called “education premium.”

The idea of an “education premium” that would keep on rising was also, of course, the basis for making degrees from public universities tuition-funded rather than taxpayer-funded. Why should those taxpayers who have been left behind continue to pay for a system of public higher education that has become an engine for reproducing and expanding the income disparity between the college-educated and everyone else? And why shouldn't students at public universities be willing to borrow whatever it costs to hedge against being on the wrong side of a growing income gap?

Here we have the kernel of a funding model that allowed public universities to raise prices far faster than the growth of the economy or of median incomes--their prices were, rather, geared to the rapid growth of income inequality This is what allowed both publics and for-profits to think that they could charge higher tuition to a very much larger student body, thus expanding their total revenue from enrollments much faster than taxpayer funding would have allowed.

My argument in 2009 was that in California this funding model reflected a period of transition (1978-98) from a defense-based economy to high tech--a period when all income growth was in the top 20% of wage earners, which just happened to be the percentage of the population targeted by public universities.

The model did not, however, fit the period of 1998-2008--a time of runaway financialization when almost all income growth has been in the top 1% and debt taken on by the top 20% should be considered a form of sub-prime lending (aka “financial aid”) that funded a tuition bubble in higher education that had been leveraged on Wall Street to finance the rapid growth of debt-funded higher education in both the public and for-profit sectors.

I warned in 2009 that focusing on the links between UC privatization, student debt and Wall Street might divide Berkeley students who would rather live in a more equal California from those who are here to benefit from rising inequality, but that we should welcome this debate rather than avoid it. Public higher education has always been a safe space for Americans talk about the issues of class reproduction and class mobility without ever mentioning class—and certainly without discussing class struggle against underlying economic inequality.

My conclusion was that this must change, and that we could not win our struggle to restore the California Master Plan unless public higher education could be defended, once again, as a driver of equality rather than inequality—and thus a partial corrective to the worst tendencies of capitalism.

Then, after I finished, there was a vote to occupy Wheeler Hall, which troubled many of my faculty friends. They believed in their heart of hearts that there would be a backlash against this Occupation--and that backlash against Berkeley radicals in the '60s had contributed to the rise of Ronald Reagan and the decline of public support for free higher education (along with much else that we cherish). Would radicals at Berkeley be blamed for what would later become the Tea Party movement? And for the dark night of reaction that might follow? In 2009 the general public had no models for distinguishing between an “occupation” that was a legitimate form of student protest and an end-of-term campus party that refused to disband. Even the students occupying Wheeler Hall that day were still trying to figure out what “an occupation” really was.

II

That was before Tahrir Square established, once and for all, the political significance of repossessing public space; it was before the Euro Crisis and the massive protests against austerity throughout the EU (and especially in Greece) reopened the question of who in the world should pay for not devaluing the U.S. dollar as the unit of global account.

It was also before we knew (for sure) that Obama was afraid to find out whether he had Wall Street over a barrel or vice versa.

And it was certainly before there was an Occupy movement joined the jobless and homeless in parks (while bringing their own tents), while articulating how it was the fear of proletarianization that had driven students to take on massive, unpayable, debt--just as it had been the fear of homelessness (living in those parks) that drove workers to take on loans that reached 145% of income in 2008. To pay for these debts Americans denied themselves an ever increasing portion of what would have been their future disposable income in an era when their incomes were stagnant or falling.

Who could have imagined, just two years ago, that we would have the first student movement in memory that has (so far) not produced a backlash, but rather ever-growing popular support?

Who could have dared hope that connecting student debt with other forms of dispossession and foreclosure (including foreclosed futures)--would become a new narrative of what used to be called “the acquisitive society,” and that is now a society in which the need for education, housing and healthcare  have become the basis for new forms of indenture/bondage that encumber lifetime earnings and threaten even middle income families with destitution.

Today, most middle-income Americans pay a higher percentage of earnings for debt service than they pay in taxes; many pay more in debt service than Scandinavians pay in taxes to support their still-robust welfare state that provides education, housing and healthcare.

So, after-debt taxable income has become a foreground issue for mobilizing an American left in much the way that after-tax spendable income has been the foreground mobilizing the American right.

III

As the anti-Wall Street movement grows, those of us who study capitalism as an historically-bounded system are racing to make theory catch up with practice.

Careful readers of Marx have always known that the worker who is debt-free but uncreditworthy--and who thus lives entirely off cash wages paid in advance--has rarely existed except in theory. Most wage laborers have had to live on some kind of credit while advancing their labor to the capitalist. And a general analysis of capitalist exploitation must show why this works out on terms favorable to the employer by explaining how the unemployed and the under-employed (Marx's “reserve army” of labor) are partially supported outside the labor market itself.

In 20th Century capitalism the welfare state (high taxes and high government spending) was used to subsidize low-wage workers and support the unemployed and underemployed in countries that we thought of as “developed.” This was possible because of a much lower cost of labor in “underdeveloped” countries, where workers were supported by a subsistence sector that actually grew as the domestic labor market produced export goods that few domestic workers could afford. We on the left used to call this global phenomenon “the development of underdevelopment.” Its peak was in the era after colonialism and before the financial industry achieved global dominance over other industries.

A distinctive feature of 21st Century capitalism is that poor people throughout the world are increasingly supported by credit markets that sell them loans. These loans are not merely consumer goods (wage goods) purchased in slow motion. They are also investments by the financial services industry in the borrower’s future income streams from all sources--not just wages for work but also benefits and other transfer payments.

As soon as these personal loans enter global capital markets, a portfolio of such loans (along with the associated risk of default) becomes one raw materials used to manufacture other financial assets (securities). These in turn can be further leveraged as the collateral for an increased flow of capital into the credit market that then makes new loans available, partly to refinance, at a higher principal, old loans that could not otherwise be paid off. The growth of such financial assets--overproduction in the financial sector--is what causes the supply of credit to increase.

What makes the demand for credit increase?

One factor is that the same financial institutions that produce an oversupply of credit have forced the welfare state to introduce austerity programs that force people to rely on loans to finance their need for education, healthcare and housing.

So here's what the financial markets say to government: “You will not be able to borrow at reasonable cost unless you back your loans with higher tax rates. The alternative is to lower spending by cutting services, which individuals will now have to finance with private debt.”

And here's what the same financial market say to individuals: “You won't be able to pay your debt service or refinance your principal if taxes go up--every dollar of tax increases will reduce your borrowing by multiples of that amount. And you will need this extra borrowing power if your incomes are stagnant and you have to pay for services that were once funded by taxes.”

These two scripts are already on the minds of everyone living through 2011. Our challenge in 2012 is to talk back in ways that address the double squeeze that finance puts on states and individuals.

IV

As of December 2011 the Occupy movement has focused on our relations to capitalism through personal finance, and not mainly in the workplace. It knows that the liquidity of the financial system depends upon highly standardized forms of lending that allow loans to be traded as commodities and pledged as capital to secure other loans.

These standard loan agreements often allow a relatively small non-payment to automatically trigger both a higher principal and a higher interest rate, giving lenders large rewards for even slightly greater risk, while subjecting borrowers to various forms of dispossession if they do not accept, and even welcome, these self-executing features of their loan documents as a way to stay financially afloat.

As long as more credit continues to be available to refinance bad debt the financial system can indefinitely postpone the need to recognize serial insolvencies that would require write-downs of capital assets to a fraction of their present value. This scenario is avoided by redescribing the danger of insolvency as the market’s need for “an infusion of liquidity” so that existing debts can be rolled over.

Ordinary borrowers are beginning to understand that the standardized forms of credit that underlie our fragile financial system could almost certainly be disrupted through spontaneous or organized collective actions, many of which are legally supportable. (One very early gesture in this direction is http://www.occupystudentdebtcampaign.org/). This makes it possible for Occupy movement, or some future version of it, to voluntarily create the same kinds of liquidity crisis that the banks threaten to impose upon us whenever they face what analysts call “heightened uncertainty.”

When you hear such warnings, it’s important to know that the financial literature distinguishes between the “risk” that people can’t pay debt service and “uncertainty” about whether they are willing to do so. Market “uncertainty” is thus a precise technical description of the effect that a movement like Occupy Wall Street would have if many people came to see their debts to the financial industry as a malleable artifact of political institutions rather than a personal and moral obligation.

Protest movements that create too much financial uncertainty are normally crushed by the state—but this is less likely if they also pose a political threat to the state itself. It might then have to broker a class compromise in much the way it did in early 20th century Europe, when coal miners and railway workers could, through collective action, block off the supply of energy to industrial economies.

V

At the end of 2011 we may be entering another such moment of historical opportunity.

The usual result of a financial (banking) crisis like 2007-2008 is a revenue crisis for the state, which produces a political reaction against the state rather than the people who caused the financial crisis. We saw this in the impact of the Tea Party movement on the 2010 election.

But in 2011 we have developed a large-scale social movement that has implicitly answered the Tea Party by focusing on the right targets (banks) and on the right problem--the financialization of the public sector and of our public life.

As our movement becomes a greater threat to the private power of finance, it will be suppressed by public power, which always rises to defend the interests it truly serves unless its own use of force is also challenged. We have thus seen police use pepper spray on students in a public space at a public university for non-violently protesting the power of banks. And we have seen the banks’ own private security contractor (Kroll) brought in by the university to “investigate” what happened. When such outrages occur, protest movements against the financial sector must also become movements for political rights, such as the right to free speech, in the few public forums that remain.

In defending our very right to protest, however, we must be careful not to lose our focus on the reason for our protest. We protest over the question of economic justice and private power. It is this, and not the question of free speech, that gives our movement ever-growing support.

VI

That said, I want to conclude by making four political points that, for me, are becoming urgent as our movement grows and political repression increases.

1.    The appointment of William Bratton to investigate the Davis pepper spray incident was an unintended gift from Mark Yudof that allows us to connect additional dots—namely the link between the privatization of public universities, the financial services industry and the national security industry.

Since 9/11 the US defense industry of the Cold War has morphed from being mainly in the military hardware business into a new role as global provider of security services that enables government and corporations throughout the world to outsource intelligence, policing, background checks, construction of secure sites and various operations that may need to be deniable—as well as the public relations efforts necessary to support such deniability.

Most Americans do not know that there is a huge domestic market for services provided by the defense industry (which also outsources security for the military itself in Iraq and Afghanistan, where paramilitary contractors outnumber soldiers.) The Department of Homeland Security is a major market for such services, as are banks and other private corporations engaged in controversial activities around the world.

The fastest growing market for the defense and security services industry is in the area of local government and public agencies that feel threatened by political protests, such as the Occupy movement, and that have reporting and other obligations under the Patriot Act. Former LA Police Chief William Bratton was hired to build this market for Kroll Security by its parent company, Altegrity, a defense contractor that is itself now owned by a private equity firm that also invests in both for-profit higher education and financial services. (Regent Richard Blum, the husband of Senator Dianne Feinstein, has also been in all these businesses.)

There isn't time for me to say much more about the role of paramilitary contractors in managing and suppressing domestic protest. I'll simply point out that if Homeland Security, the banks, the cities and our public universities outsource their security to the same private firms, they can avoid a lot of regulatory requirements that protect free speech, including the requirement of disclosure. Let me also say that the security industry rivals the financial industry in its secrecy, and that its size is one of its secrets.

So, the fact that UC is imbricated with these security companies, and that its relations with them have not been disclosed, is part of what we need to protest in 2012.

2.    My second, somewhat broader, point is that (what used to be merely) the defense industry is being hired by banks  because the financial stability of banks and of the dollar itself is seen by the Obama administration as itself a matter of national security. Kroll, and companies like it, advise about these choke points in the financial system (and also the Internet and other data systems) as points of vulnerability to terrorist attacks without distinguishing between whether they are attacked by sabotage or mass protest. They rationalize intrusions on protected free speech and political action by pointing out that “innocent” protests (especially when taken over by “outsiders” and “anarchists” with an “agenda”) can become genuine threats to the economy, and that everyone should be afraid of the consequences.

From the perspective of a national security consultant there is no ultimate difference between threats posed by a terrorist and by collective action except for the fact that the latter is likely to have more popular support that needs to be effectively counteracted (perhaps by suggesting possible infiltration by hackers and would-be terrorists). This is what it means for public spaces that were once considered “free” to have been invaded (occupied?) by private security companies—our new Pinkertons--who defend overtly private interests against movements claiming to reoccupy and repossess those spaces for the public.

3.    My third point is that we need to think hard about my previous two points when we talk about extending the Occupy movement into something like a General Strike. My fellow political theorist Tim Mitchell points out that General Strikes became imaginable when coal miners and railway workers controlled the choke points in the economy. They extracted political concessions (such as the Welfare State) by threatening to sabotage industrial capitalism, and ultimately, to shut it down—a threat that became less imaginable when oil companies and oil states controlled the new choke points.

There are clearly opportunities for sabotage in financial capitalism, mainly at the points at which the liquidity of credit markets can run dry. These opportunities have thus far been exploited by the suicide bombers on Wall Street, who threaten to blow themselves up, along with the rest of us, by cutting off credit if their political uncertainty becomes too great—or if anyone suggests that they have the value of their financial assets written down, perhaps by something as simple as devaluing the dollar to stimulate the U.S. economy.

If and when the Occupy movement approaches the point of a debtors’ revolt and/or a General Strike in the credit markets, it will need to be aware that the choke points it identifies in the banking system may, indeed, become the very points of vulnerability that companies like Kroll are hired to protect.

How do we identify, and act upon, such vulnerabilities in ways that require open collective action and the legitimacy of a mass movement? How do we distinguish our tactics from hacking, sabotage or terrorism that require secrecy and that could also bring the system down? Identifying our movement with seizures of power that are not intrinsically connected with a struggle for justice (and could just as well be used by terrorists) could turn the general public, once again, into terrified supporters of politicians who would defend the system we have at all costs.

4.    My final point is that there's an elephant in the room--the 2012 Presidential election. Will Obama run as the guy who can crack down on the Occupy movement because Geithner persuades him that the banking system is so vulnerable to attacks that the prudent thing is to occlude the distinction between effective protest (the kind that Rei Terada calls speech out of its proper place) and acts of financial sabotage. This is a question we will inevitably face in 2012 as the movement marches from public parks to banks and foreclosed homes while Obama tries to run for reelection as the only true Republican in the race.

What should we expect of Obama at such moments?

There's not just a Tea Party any more. But our President--and he is ours--is still acting as though he needs to make accommodations only on his Right.

Why don't we demand something more of him, starting now, that can become an issue in this election?