It’s Up to Capitalists to Save Capitalism

Capitalism is under threat. No, not from Xi Jinping and his alternative model, an economy managed by a Communist Party elite that has no use for such things as market forces and dissenting voices. America has in the past seen off threats from alternative systems – Mussolini’s Fascism, Hitler’s National Socialism, Lenin and Stalin’s Communism, even Sweden’s Third Way. All had their day in the limelight, all proved unable to provide the levels of material well-being and freedom that America’s variant of capitalism churned out, adopting reforms as needed, often over the objection of the capitalists who failed to hear the sound of approaching tumbrils.

We find ourselves in an analogous although not identical situation today. We are coming off a Great Recession and have entered the broad, bright uplands of an economy growing again, and at a rate that has brought unemployment down and wages up, all without a sign of inflation. Yet, 52% of millennials, aged 23 to 38, would prefer to live in a socialist (46%) or communist (6%) nation.

That might be because millennials are approaching or entering middle age in worse financial shape than any living generation ahead of them, in good part because they became of working age during the Great Recession, not a time when job opportunities were abundant. But even the richest among them are unhappy with the American system. These fortunate ones have formed Resource Generation, an organization for young people in the top 10% of either income earners or wealth holders. They style themselves “class traitors” who challenge the “lie of meritocracy … the core belief that people deserve all of the money that they have.” So we have a cohort some of whose members feel deprived and insecure, and others who feel obscenely well-off and guilty.

Some of these millennials are among the modern-day capitalists – I use that term loosely – who have a slightly better ear for tumbrils. That group, or “class” as the class-warriors prefer, may hear that sound but nevertheless is restricting itself to virtue-signaling: calls for modest increases in their own tax rates, stepped up philanthropy, and speeches demonstrating that “we care,” delivered in Davos. All the while ducking the issue of the more fundamental reforms that might preserve the best of capitalism by eliminating its worst features.

The new, harder left of the Democratic Party and Donald Trump agree on one thing – the American economic system is rigged. Songstress Billie Holiday pointed that out long before the academics turned their attention to the problem of inequality: “Them that’s got shall have, Them that’s not shall lose, So the bible said and it still is news.”

Start with inheritance. The modest level of taxes on inheritance gives the winners of the sperm lottery a head start in life not available to sons and daughters of the middle class. The children of the Buffetts, the Gateses, the Zuckerbergs and the Trumps might be able, but there can be no denying that such talents as they have are not the sole reason for their financial status, or that their relatively elevated economic condition is not the result of an equal-opportunity system. The role played by inequality of inherited wealth in creating inequality of income was laid out, not always well but with force, by Thomas Piketty in the book cited herein.

Nor can there be any doubt that monetary policy favours “them that’s got.” The Federal Reserve’s solution to the Great Recession was to keep interest rates low, driving up the price of assets – homes, shares, horses, art – and depressing the incomes of “them that’s not got” –small savers. The tax structure also contributes to inequality. Consider property developers, who almost never pay income taxes – quite legal under the tax code – and accumulate fortunes in the tens and hundreds of millions, a situation compounded by features of the recent tax cuts engineered by the rigger-in-chief. Or corporations such as Amazon and Facebook that pay little or no taxes in the U.S. Or billionaire hedge fund operators whose ordinary income is taxed at the lower capital-gains rate.

Companies such as Apple and Starbucks will continue to move profits from the country in which sales occur to the more tax-friendly venues of a sunny Caribbean island to rain-soaked Dublin, while Joe the Plumbers pay where they earn. But the Joes do not have the lobbying clout to eliminate their disadvantage, and so far the capitalists have made no move to surrender their advantage to some sort of tax-at-point-of-sale.

Unfortunately, unless our capitalists are willing to throw their political weight behind basic reforms of the tax system, and redirect the efforts of their lobbyists on K Street, those reforms will not happen.

The well-off could also call for an end to their favourite programs – more immigration and free trade. The Lindsey Group reckons that every one-million low-wage immigrants drive down wages of the low-skilled by 7%. And free trade, a rallying cry for most capitalists, has costs that are borne largely by those least able to bear them, and benefits for many who are least in need of them.

Then there is the question of executive compensation. Corporate boards, often stocked with friends (or cronies, to use the language of critics) of the CEO, do not seem to be able to rein in executive compensation. Wells Fargo’s board allowed the executives they are supposed to supervise to put in place incentive schemes that led to abuses so pervasive that regulators have prohibited the bank to grow until it gets its house in order. In March, the board of Boeing gave CEO Dennis Muilenburg a 27% compensation increase for 2018, to $23.4 million, for his stellar performance, among other things, speeding sales of the flawed 737 Max jetliner. CEO Dennis Muilenburg reports directly to board chairman Dennis Muilenburg.

Economists can and do sneer at the metric contained in the 2010 Dodd- Frank law: the ratio of CEO compensation to the pay of the company’s median worker. But when Roy Disney’s grand-
daughter rails at “the naked indecency” of Disney CEO Bob Iger’s $65 million compensation because it is “1,424 time the median pay of a Disney worker,” she uses a comparison that voters, unschooled in the use of the infinitely more sophisticated gini coefficient, understand.

It is now up to capitalists to save capitalism by supporting reforms as fundamental as those introduced by Franklin Roosevelt. Otherwise, the left, shouting “inequality,” will replace our system of regulated capitalism with government control – not necessarily ownership – of the commanding heights of the economy. Too late, critics of the current system will find that government control results in levels of inequality that make even unreformed capitalism look almost egalitarian. North Korea’s rotund Kim Jong-un who, thanks to the state’s food allocation system, does not appear compelled to share his countrymen’s diet of what Amnesty International calls “wild foods” such as grass and tree bark. Venezuela’s Nicolás Maduro and his lieutenants remain in the best of health behind the walls of Fort Tiuna, with its tennis courts, bowling alley and private medical facilities, while few medicines are allocated to the nation’s masses and only 10% of hospitals have fully functioning emergency and operating rooms. In America, the President, faced with allocating the cost of his tariff war with China, has decided that $16 billion should go to farmers in key voting states and nothing to hard-pressed consumers saddled with tariff-induced higher prices. The inequalities of the capitalist system, even in its current state, pale into insignificance when compared with those of an all-mighty state.

Voluntary redistribution – philanthropy – by corprocrats using shareholder money for urban redevelopment and other projects is useful. Support by billionaires for modest increases in their marginal tax rates reflects a realization that the tax system is insufficiently progressive. But such “virtue-signaling” is no substitute for reforms that can, as in the past, produce a capitalist system preferred to all the others on offer.