The coronavirus has proved that capitalism needs more than the mild medicine called “reform”; it needs judicious regulation if it is to survive. Not the growth-stymying regulation of the Obama years. But the sensible sort of regulation that that same President signed into law to restore stability to the financial sector. Proving there is regulation, and there is regulation. We now need the sort that will prevent capitalists from destroying capitalism.
The survival of capitalism depends on its acceptance by a majority of people working, buying, selling and, in the end, dividing the wealth created by the system in a manner generally regarded as “fair”. Definitions of that elusive concept vary, but repeated proof that the system is unfair, rigged, loaded in favour of the wealthiest and hence most powerful, is obvious to the untutored eye now that COVID-19 has removed all blinkers. Also obvious is that the moral underpinnings that Adam Smith and more recently historian Gertrude Himmelfarb argued are necessary to the proper functioning and acceptance of capitalism, have been eroded. No, not by Bernie Sanders, not by the increasingly left-surging Democratic Party, try as they might, but by capitalists and their functionaries. As Pogo memorably put it, “We have met the enemy and he is us.”
If capitalists – I am using the term loosely and broadly — understand that patience with the distorting effect of the inextricable combination of wealth and political power has been exhausted, the change will produce a new, updated version of market capitalism. If not, capitalists will bring down the system that has enriched them and, indeed, much of the world.
Relief measures adopted in the face of the virus are designed to provide relief to the small businesses that are the realization of the dreams of the risk-taking, upwardly mobile, and jobs for millions. Imperfect but, along with the vigorous action by the Federal Reserve and its chairman, massive enough to prevent the tumbrils from rolling down Wall Street, Park Avenue and Beverly Hills.
But only if the funds were distributed as intended. The cash goes mostly to big banks, to be lent to small companies, the loans to be forgiven if the money was used to prevent lay-offs. These funds, which fall far short of demand for that cash, were supposed to be paid out in the order in which applications are received, first come, first served. Still tone-deaf after all these years (pace Paul Simon), the banks decided to lend to their own customers first. Since firms with established banking connections are unlikely to be the smallest, hardest-pressed businesses that are the intended beneficiaries of the tax-payer bailout, this tilted the playing field away from your corner pizzeria. Senator Marco Rubio might be on to something if he receives meaningful responses to his requests to a dozen banks for information on whether their lending procedures favored their larger customers.
There is worse. A 19th century New York political boss, who plundered New York City of somewhere between $30 million and $200 million and died in jail, once said, “I seen my opportunities and I took ’em.” The capitalists confronted with opportunities, these created by the CARES Act and very legal, also saw their opportunities.
Shake Shack, the NYSE-listed, 189-store, 8,000- employee burger chain, applied for and received a $10 million loan from a fund intended for mom-and-pop stores, while mom-and-pop couldn’t even get their applications processed. Quite legal: Shake Shack treated each store as a separate business, average size 45 employees, as the rules drafted by Steven Mnuchin’s Treasury permit. After a public outcry the company returned the money and raised $150 million in the capital markets.
The Los Angeles Laker NBA basketball team, valued at around $4 billion, was more modest. Its millionaire owners received a $4.6 million loan, but when one of the team’s biggest fans, one Steve Mnuchin, pronounced himself “not a big fan” of the loan and called it “outrageous” they, too, handed back the cash. It is not known whether that act of self-denial threatened the team’s ability to meet its obligation to LeBron James, on the books for an annual payout upwards of $37 million.
Perhaps the examples posing the longest-term threat to the capitalist system are the positions taken by the private educational institutions that are the moral exemplars of the next generation of business leaders. Two such – there are others – are Sidwell Friends School in Washington, D.C., most recently tutor to the children of Presidents Obama and Clinton, and Brentwood School in Los Angeles, attended by two of Mnuchin’s children. These institutions, their endowments and unneedy parent body notwithstanding, applied for and received loans. Again, they were legally entitled to participate in the program, which leaves open the important question of whether they should not have left the cash for needier institutions.
Mnuchin now says that borrowers “that had liquidity” must repay or face criminal prosecution. But the vagueness of the guidelines for eligibility makes the success of such actions highly uncertain. Megan Jeschke, identified by The New York Times as “a defense lawyer” at Holland & Knight, finds “some ambiguity” in the certification guidelines, and ambiguity is the meat on which the legal profession’s Caesars feed. Mnuchin has set the table for a fee-fest for the profession if their clients choose to assert their right to the funds aimed at small businesses, regardless of the effect of such a position on the standing of capitalism as practiced in America.
In a display of what Nobel Memorial Prize winner Joseph Stiglitz calls “the political power of concentrated wealth”, the better-off also unleashed their lobbyists on the legislators of both parties to slip benefits into the hastily drafted legislation. The New York Times estimates that those bills contain $174 billion in tax breaks for the rich, including a provision that allows millionaires to use losses incurred in 2018, 2019 and 2020 to reduce income taxes paid in the previous five years. Not a provision likely to benefit the owner of the local barber shop. That was of little concern to the lobbyists, whose ample incomes have made the suburbs of Washington among the highest-income areas in America. Perhaps ending the ability of businesses to deduct lobbyists’ fees as a business expense would help a tiny bit.
Then there are the corporations now being bailed out either directly or by obtaining loans unavailable to them without government – taxpayer – help. Many have used cash to buy back shares, operating as if rainy day funds are for sissies. If profits are to go to shareholders and executives, losses to the taxpayers, perhaps taxpayers should be given a voice on the boards of companies imposing those risks on them. No risk-imposition without representation.
The larger corporations’ defense of their efforts to deal themselves in on the relief programme – the vagueness of the eligibility rules — is a confession that absent very specific and detailed government instructions they are at a loss how to behave, devoid of an understanding of the moral underpinnings of capitalism as described by Smith.
When capitalism was being challenged by Fascism, National Socialism and Soviet Communism, Franklin Roosevelt transferred large dollops of power from what his cousin Teddy had called malefactors of great wealth to workers and to the state, restoring confidence in market capitalism. When financial engineers and bankers almost brought down the international financial system in 2008, policy makers imposed regulations that transferred a large measure of control from bank board rooms to the board room of the Federal Reserve System and to other government institutions, resulting in a more robust financial sector.
In both cases the capitalists were lucky that their opposition to change was largely ineffectual. Let’s hope they are equally lucky when the flaws in the current system are addressed.