Winston Churchill once said, “No one pretends that democracy is perfect or all-wise. Indeed, it has been said that democracy is the worst form of government except all those other forms that have been tried from time to time.”
What about capitalism? Has it survived because it is the most imperfect economic system, except for all the others?
Hedge fund billionaire Ray Dalio has been sounding the alarm of late that the western, free market, American model of capitalism is no longer working for most Americans.
In a recent Linked In commentary he said, “I think that most capitalists don’t know how to divide the economic pie well and most socialists don’t know how to grow it well, yet we are now at a juncture in which either a) people of different ideological inclinations will work together to skillfully re-engineer the system so that the pie is both divided and grown well or b) we will have great conflict and some form of revolution that will hurt most everyone and will shrink the pie.”
Dalio was talking about the 1930s collapse of markets and Great Depression—when Roosevelt’s New Deal came to the rescue, employed millions of the unemployed and helped US win WWII. It was the last time income inequality had increased to the level it is today as shown in this well-known graph, and the last time “people of different ideological inclinations” worked together.
In the words of Marriner Eccles, Roosevelt’s Federal Reserve Chairman during the Great Depression, “As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth … to provide men with buying power. … Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. … The other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.”
We have the same situation today; partly as a result of the just-ended Great Recession, which was comparable to the Great Depression because of the $trillions in American households’ lost wealth yet to be recovered.
The Great Recession was a market failure caused by the housing bubble, but also by government policies that kept employees’ wages from rising with the increases in productivity—hence the return to record income inequality. For instance, collective bargaining labor laws were weakened in the 1980s. Today there are 26 so called ‘right-to-work’ states that restrict workers rights and union collective bargaining in some way.
This was accompanied by deregulation of whole industries in the name of globalization that loosened oversight and regulations controlling corporate behavior, unleashing the worst form of capitalism—cutthroat capitalism where the profit motive overrode all social obligations to take care of those less fortunate, which made it more difficult for ordinary Americans to climb the success ladder.
Dalio’s graph portrays who benefited from the 2001 and 2007 Great Recession. It wasn’t the employees, as employees’ share of US corporate sales plummeted from almost 76 percent of corporate revenues to 68 percent in 2017. Employees lost the most, in other words, and have yet to climb back above the 70 percent that prevailed from the 1970s to 2000.
And hence comes Ray Dalio’s dire threat: “The previously described income/wealth/opportunity gap and its manifestations pose existential threats to the US because these conditions weaken the US economically, threaten to bring about painful and counterproductive domestic conflict, and undermine the United States’ strength relative to that of its global competitors.”
So we need to find ways to escape repeating the history of the 1930’s and World War II that followed. Put another way, how do we rebalance the power structure that skewed incomes and wealth upward, and put the US at the bottom rankings of developed countries in services provided to its citizens—like educational opportunities, health outcomes, and chance for upward mobility?
Dalio’s answer is to identify leaders who believe greater equality of opportunity is the way to save capitalism, and who will in turn form public-private partnerships that include businesses, philanthropists (such as Dalio) and government to coordinate the planning of such partnerships via recommendations of a “bipartisan commission to bring together skilled people from different communities to come up with a plan to reengineer the system to simultaneously divide and increase the economic pie better.”
But who are those leaders? Philanthropists such as Bill Gates, Warren Buffett, and Dalio are already participating. And there are enlightened corporate leaders that don’t belong to ALEC, the right wing American Legislative Exchange Council lobby responsible for crafting the right-to-work laws that currently suppress both voter rights and worker salaries in many of the red states.
Princeton’s Nobelist Sir Angus Deacon says good luck in bringing together those different communities Dalio talks about in a Project Syndicate article: “I think that community is a casualty of an elite minority’s capture of both markets and the state…The genie of meritocracy cannot be put back in the bottle.”
And Nobel economist Paul Krugman once joked it may take another extremely dire event, maybe an alien invasion, before Americans will unite again in a common cause as they did with the New Deal and WWII.
Where will we find the political leaders? He doesn’t mention large ideas like the Green New Deal, which some of our younger leaders—and even Presidential candidates—are advancing. The bottom line is it will take very big ideas to tackle such “existential threats”. Let’s not forget global warming that the US Pentagon had said is already endangering our national security.
Harlan Green © 2019
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen