Can Capitalism Be Fixed?

The top tier of wealthy families has scraped off most of the increase in income.

Is socialism the answer?

In the U.S., the Progressive wing of the Democratic Party is increasingly turning to socialism. Democratic Senator Bernie Sanders has long described himself as a socialist. In 2016 he came close to winning the Party’s nomination for President.

Today’s progressive darling is newbie politician Alexandria Ocasio-Cortez, who also describes herself as a socialist. She supports Medicare for All, free college tuition, an enhanced minimum wage and the rest of the menu of government benefits espoused by socialists. Tom Perez, Chair of the Democratic National Committee, enthusiastically described Ocasio-Cortez as “the future of the Democratic party.” A new batch of Democratic candidates has also aligned itself with socialism.

In this post I focus on the situation in the U.S. But Israel faces similar economic challenges and, as in the US, a vocal political opposition that favors socialist-style redistributionist policies.

Emerging Socialism in the US

This is an odd time for socialists to come out of the closet.

The socialist economy of Venezuela has collapsed, millions have fled the country and those who remain face hunger, lack of medical care, scarce consumer goods, and violence. Nicaragua, which has a government that is at least partly socialist, is experiencing poverty and a citizens’ revolt. The supposed government of the people has used repression and violence to quell the uprising.

It is hard to make a case for socialism, given its dismal track record. But capitalism in the US today has also failed to deliver.

My parents came to the US in the late 1940s as penniless Holocaust survivors. Neither parent had an education beyond high school. And they faced many barriers due to their poor command of English and lack of ties in their adopted country.

Despite that, after a decade of hard work they managed to buy a home. We had a family car. Work benefits made health care affordable. And I made it through eight years of college and graduate school with help from my parents as well as scholarships and teaching assistant gigs.

We lived the American Dream.

Somewhere in the 1980s that all changed.

Today I live in a small city where only an elite few can afford to buy a home. Rents are so high in the city that many people must live in distant towns and suburbs and commute to work. Most students can afford a college education only by taking on crushing student loans that will take years to pay off…if they can be paid off at all. And the situation in my town is replicated today in towns and cities across the country.

Meanwhile, in today’s colleges and universities, over-paid administrators have padded their own salaries and ranks by raising tuition and fees which are funded in large part by a government that is not minding the store.

In the workplace, union membership is lower and union power is weaker, leaving workers with little bargaining power to garner a just portion of corporate profits or to ensure decent working conditions. Federal and local “right to work” laws, as well as a recent Supreme Court decision, have dealt a further blow to worker unions.

The dream of owning a home is less and less achievable as real incomes stagnate and speculators and foreign buyers drive up residential real estate prices. The housing collapse of 2008—caused by dishonest investment banks and mortgage brokers—has led to a tightening of lending standards that make homeownership less affordable. And a broken immigration system has led millions to move to the US. This has caused increased demand for housing. New construction has not kept pace with the need, putting further pressure on housing prices.

For many Americans today the American Dream of their parents is dead.

What Happened?

Massachusetts Senator Elizabeth Warren has offered an explanation for the current disparity between rich and poor in the US.¹ In the past forty years the American economy has grown. But unlike the pre-1980s period, in today’s economy, the top tier of wealthy families has scraped off most of the increase in income. Meanwhile, the income of other Americans has stagnated.

In Warren’s view, as the wealthy class becomes richer, they are able to use their money to influence politicians to pass laws that enable them to grow even richer. Today large corporations spend millions on Washington lobbyists. These lobbyists funnel campaign contributions to elected politicians. In turn, politicians pass laws that make it difficult for smaller businesses to compete with the large corporations, thus further entrenching the wealthy class.

This all takes place in an environment supported by corruption. In a recent speech outlining her views, Warren gave the example of Congressman Billy Tauzin. In the early 2000s, Tauzin proposed an expansion of Medicare to cover the cost of prescription drugs. This would benefit both the public and the pharmaceutical companies. Patients would be able to afford medications and the pharmaceutical companies would increase sales. But Big Pharma wanted more. On their behalf, Congressman Tauzin pushed through a law that prohibits the government from negotiating drug prices with the pharmaceutical companies. This has assured huge profits for the Pharma industry and greater costs for taxpayers and consumers.

How much did Big Pharma pay for this legislation? We know that over $200,000 in campaign contributions to Congressman Tauzin didn’t hurt. Shortly after the legislation passed, Tauzin declared he would not seek reelection. Several months after that, he became CEO of PhRMA, the pharmaceutical industry’s largest lobbying group—-with an annual salary of two million dollars.

This sort of revolving door—between retired Washington politicians and regulators—and highly paid positions in the industries they regulate—-is a fixed feature of Washington corruption. No doubt the former Congressman will use his connections on Capitol Hill to ensure that a pliable Congress continues to give Big Pharma what it wants.

It is hard to escape the conclusion that Big Pharma’s money bought government policy.

Everyone benefits except consumers and taxpayers, who will continue to pay for the industry’s outsize profits.

According to Warren, prior to 1980, strong federal legislation and enforcement of business rules ensured that working people received a large share of the growth in corporate profits:

There are times that parts of the markets worked better. Look at it this way: 1935 to 1980, a time when there’s much more emphasis on worker power. Union membership is going up. There’s more aggressive regulation of markets, more enforcement of antitrust laws. The Securities and Exchange Commission had just been created and was a strong cop on the beat. Glass-Steagall was strictly enforced, FDIC insurance had gone into place. And you watch: GDP goes up 1935 to 1980 and the 90 percent of America—everybody outside the top 10 percent—gets 70 percent of all new income growth.

But sometime after 1972, there was an explosive growth in the corporate lobbying industry. Before the 1970s corporate lobbyists were a small group. But today corporations spend billions on Washington lobbyists who provide hundreds of thousands of dollars in campaign contributions to politicians who depend on these funds to finance reelection campaigns and thus, to remain in office. Washington is now home to over 11,000 registered lobbyists who work on behalf of wealthy corporate interests. Today’s politicians cannot survive without this money and they are beholden to it. This is largely why corporate profits have skyrocketed while the real income of workers has stagnated.

Senator Warren’s Solutions

In a recent speech and a Wall Street Journal article², Elizabeth Warren laid out the key features of her proposed Anti-Corruption and Public Integrity Act. I have summarized these below: 

1. Eliminate financial conflicts of interest among members of Congress, cabinet secretaries, judges and other senior government officials. These officials will be banned from owning and trading individual stock. (They can still own aggregate investments such as mutual funds.) The bill will end the revolving door between Congress and the regulatory agencies on one hand, and the businesses they regulate. This is achieved by a number of means such as limiting the ability of companies to influence federal policies by hiring former federal officials, and outlawing corporate bonuses to executives who serve in government positions to benefit their corporation.

2. A lifetime ban on lobbying by all former federal officials, including members of Congress and agency directors. Outlawing of campaign donations to candidates and incumbents. A ban on lobbying by foreign entities.

3. Disclosure of financial conflicts of interest for all public officials. For those government officials who conduct studies or write rules, disclosure of personal or corporate conflicts of interest. Establish an Office of Public Advocate to represent the public’s interest when regulations and legislation are written. 
4. Ensure ethical conduct and transparency for all judges. The Supreme Court will adhere to ethics rules that apply to all other federal judges. Livestreamed audio of court proceedings to be made available to the public.
5. Create a new anti-corruption agency that will enforce ethics laws. Increase the independence and power of Congress’ Office of Ethics. 

6. Better open records laws and enhanced disclosure. More detailed disclosure of the financial and tax records of candidates and elected officials. Lobbyists and politicians required to fully disclose sources and destination of lobbying monies. More robust federal open records laws. Greater disclosure by federal contractors.

 Senator Warren has also proposed an Accountable Capitalism Act that would require the Boards of Directors of large corporations to fill forty percent of board seats with employees. The intent is to encourage corporations to pursue policies that are not only good for the company’s bottom line, but that also share profits with workers.

Challenges Ahead

Warren’s proposals are worth considering.

But these proposals have their downside. Are they feasible in the current political climate? After all, many stakeholders are making out like bandits under the current system. These stakeholders include corporate executives, shareholders, lobbyists, and current and former government officials. Will these actors be willing to relinquish their advantage for the lesser rewards and uncertainty of a new system? Will they be able to use their current economic leverage to convince the public to oppose change? Are voters sufficiently motivated to understand the complexities of what Warren has proposed? And will they act to support change?

Other concerns:³

Will Warren’s reforms discourage talented individuals from serving in government? If so, will government officials find it difficult to locate and hire the experts who are a necessary part of policy making in complex industries? What about individuals and small businesses? Will these reforms stymie their ability to be heard by government policy makers?

Will corporations find ways to avoid the new requirements by moving their operations overseas? Or threatening to do so?

Despite glaring economic disparities it is unlikely that Americans will accept a socialist economic system. It is even less likely that socialism would solve what ails America.

Most Americans understand that a capitalist system is necessary for our continued freedom and prosperity. They also know that this system, which has worked well for most of our history, is now broken. Senator Warren has suggested a set of reforms that would bring greater regulation of large corporations as well as robust enforcement of rules governing corporate behavior.

There is evidence that rules and enforcement have worked well in the past. But will they work going forward? No one can know the answer to this question in advance. Still, rampant government corruption and wide economic disparities call our attention: something must be done. Senator Warren’s proposals are a good place to start.

Footnotes

1. Website of Senator Elizabeth Warren. Warren Delivers Speech on Comprehensive Plan to End Corruption in Washington. August 21, 2018. Retrieved August 29, 2018 from:https://www.warren.senate.gov/newsroom/press-releases/warren-delivers-speech-on-comprehensive-plan-to-end-corruption-in-washington
2. Warren, E. Companies Shouldn’t Be Accountable Only to Shareholders. Wall Street Journal, August 14, 2018. Retrieved August 29, 2018 from:

https://www.wsj.com/articles/companies-shouldnt-be-accountable-only-to-shareholders-1534287687

3. I thank my friend Gordon Mullin for alerting me to potential pitfalls of Elizabeth Warren’s proposals. I have drawn some of the ideas below from Gordon’s comments.