Saving Capitalism from the Capitalists

Capitalism is in crisis. Who says so? Bernie Sanders, a 77-year old millionaire white male senator from rural Vermont, a state that established a single-payer health care system and then abandoned it for requiring untenable tax increases. Alexandria Ocasio-Cortez, a 29-year young telegenic Hispanic congresswoman from New York who had become a leader of the new very Left-leaning and a thorn in the side of moderate Democrats. And many in the media, for whom “Capitalism is in Crisis” is a gripping headline. But more gripping than accurate.

Karl Marx predicted that a vast reserve army of the unemployed and capitalism’s internal contradictions would bring it down. America’s version of capitalism, a mixture of markets and regulation, exhibits neither. The ranks of the reserve army have been depleted: the unemployment rate is 3.8%. Capitalists who would immiserate the working class if only they could are being forced by persistent labor shortages to offer higher wages to woo staff from competitors. And America’s healthy economic growth belies the notion that internal contradictions are at play. For those, see:

  • the former Soviet Union, where Sanders spent part of his honeymoon,
  • Venezuela, from which capitalists fearful of expropriation and workers fearful of starvation are fleeing in droves,
  • East Germany, when it could no longer keep its inhabitants walled in,
  • Cuba, home to charming decades-old cars because no one can afford the Toyotas and Volkswagens available to them on international markets.

Donald Trump’s description of America as a nation in need of being made great again was, and is, simply wrong. The downtrodden masses in America don’t feel, well, downtrodden. A recently conducted poll by the Gallup organization found that 86% of Americans are “very (56%) or somewhat (30%) satisfied” with most aspects of their lives: “your education”, 93%; current housing, 88%; personal health, 87%; “your standard of living, all the things you can buy and do”, 84%; “your job or the work you do”, 79%; your household income, 77%. The one earlier survey, in 1995, was not strictly comparable but suggests that levels of satisfaction have increased since then. No surprise, since annual per capita personal income has increased since then by 288%, or from $23,600 to almost $54,000 last year, after adjusting for inflation. Unlikely performance for a system in crisis. Nevertheless, other Gallup polls show that 66% of Americans are somewhat (23%) or very (43%) dissatisfied with the way income and wealth are distributed. No use telling them that a rising tide raises all boats, both rowboats and yachts. Those in the smaller craft, feel destabilized by the wake of the larger, even if their own boats are more lavishly fitted out than ever before.

The “somewhat and very dissatisfied”, urged on by capitalism’s critics, look with anger at the pay gap between bosses and workers, a statistic most economists believe is a meaningless measure of inequality, but is easily understood and therefore is politically potent. Equilar, a compensation consultant, reports (preliminary) that the median chief executive last year earned 254 times his or her median employee. Trade union statisticians put the ratio much higher (347), and the left-leaning Economic Policy Institute estimates that in 1989 the figure stood at only 58-to-1.

“Politicians know that this is an issue that really strikes a chord with people across the political spectrum,” thinks Sarah Anderson, a political scientist at the Institute for Policy Studies, which styles itself a “progressive think tank”. It seems she is right: about half of Americans (47% for, 48% against, 5% no opinion) favor having the federal government take steps to limit the pay of executives at large companies. It is not that most Americans object to people earning large sums of money. Few begrudge Jeff Bezos, who has given them the option of never seeing the inside of a retail establishment again, his enormous wealth. Great entrepreneurs such as Bill Gates are widely admired. Few of the working stiffs in the stands boo Bryce Harper because he held out until the Philadelphia Phillies came up with a $113 million, 13-year contract. Or LeBron James, a recent pause in his string of successes notwithstanding, for negotiating a four-season, $154 million contract that brings him $500,000 every time he sets a sneaker on the court. Pay and performance are clearly related.

It is the corpocracy that attracts attention. Corporate compensation systems are opaque and, worse, rife with conflicts of interest. Compensation consultants eager to please their CEO clients in order to obtain additional assignments make recommendations to boards of directors chummy with the CEO and eager that “their” CEO not earn less than the median for CEOs in comparable companies. No CEO below the average seems to be the received wisdom.

It is difficult for shareholders to deny high-flying (in private jets) executives their hearts’ desires. Almost 90 years ago Adolf Berle and Gardiner Means pointed out what economists have come to call the principal-agent problem. Scattered shareholders cannot control actions by the managers when those actions are not in the interests of the shareholder-owners of the business. It is only recently that institutional investors, with large blocs of voting stock, have begun to force companies to be more transparent about how executive compensation is determined, and to relate pay to performance, admittedly not an easy thing to do.

It is also difficult to deny that in many ways the system is “rigged” against the middle class and the poor. Powerful lobby groups extract favorable tax treatment for wealthy hedge fund operators and property developers, corn growers in Iowa receive subsidies from politicians eager for votes in the crucial Iowa caucuses, relatively affluent purchasers of Teslas receive tax credits for their decisions to parade their green credentials before their peers. Little wonder that only 11% of Americans tell Gallup pollsters they have a “great deal or quite a lot of confidence” in congress, less than they have in big banks (30%) the medical system (36%) and, no surprise here, the military (74%). And that 52% of millennials, 65% of whom have college or other postsecondary educations, say they would prefer to live in a 52% OF socialist (46%) or communist (6%) country than a capitalist one (40%). The promises of free health care, free college education, student-debt forgiveness, cradle-to-grave benefits, and higher taxes on the “rich” are falling on receptive ears. Not for them Margaret Thatcher’s warning, “Socialist governments traditionally do make a financial mess. They always run out of other people’s money.” Of course, talking to a pollster and walking the walk are two different things. The millennials who pine for life in a socialist paradise are not forming caravans to make their way to Venezuela, or even to Sweden, which they imagine to be a socialist system that works, or to Cuba, where their access to the internet and their Facebook “friends” would be severely limited by the authorities.

Capitalism is not doomed to be consigned to the ash heap of history quite yet. For one thing, there is no rival system capable of producing and distributing such enormous material wealth. The typical household classified as “poor” by the US government in 2013 had a car, air conditioning, two color televisions, cable or satellite TV, and a microwave oven according to Robert Rector of the Heritage Foundation. It has more living space than the average non-poor European. And 92% of Americans with incomes of less than $30,000 own a cell phone. “The American bottom is indeed better than the middle in most places on Earth,” concludes The Economist.

For another, capitalism has historically demonstrated an amazing ability to incorporate reforms without destroying its driving innovative force. When the Great Depression hit, and many eyes turned to the competing economic systems on offer – Hitler’s National Socialism, Mussolini’s Fascism, Stalin’s Communism — Franklin Roosevelt reined in the big banks; provided electricity to the under-served; created useful jobs for many, from artists to planters of trees; and created a legal system that allowed trade unions to balance the bargaining power of employers. To the surprise of those who expected to see masses of unemployed veterans peddling apples – the fruit, not yet iPhones — the economy emerged from WWII with renewed dynamism. American firms now account for 57 of the world’s 100 most valuable listed firms.

Time for another round of reform. Capitalism must be saved from the capitalists. One of that breed, hedge fund operator Ray Dalio, writes, “I believe that all good things taken to an extreme can be self-destructive and that everything must evolve or die. That is now true of capitalism.” There is little doubt, failing reform of the current wasteful redistribution system, that will mean somewhat more income redistribution, a pejorative in board rooms and clubs around the country.

Policymakers will have to look at the world through the eyes of those who do not run hedge funds, or develop properties, or manage banks when deciding whether to enact a $15 minimum wage, when backing features of the tax code that lower the effective tax rate on high earners such as Bernie Sanders and winners of the sperm lottery such as Donald Trump Jr. And force a reconsideration of the incentive systems that have produced scandals at Wells Fargo, Boeing, Goldman Sachs, Equifax, JP Morgan Chase, and other companies, perhaps giving weight to social considerations: Shell Oil is developing a system that gears compensation in part to executives’ ability to reduce greenhouse gas emissions.

Capitalists, who have the political clout to push these reforms, will have to ask themselves whether and how to accommodate new pressures for reform of capitalism. That might mean exercising a bit of self-restraint, a bit of modesty in appraising the value of their contributions to society, and using some of the political clout they undeniably have, to press for significant reform, perhaps not on the scale of FDR’s restructuring of the American economy, but significant nevertheless. That’s something they have avoided doing for too long.