Saving Capitalism: For the Many, Not the Few

The Preliminaries

• For three decades after WWII, the US created the world’s largest middle class and the economy doubled, as did the typical worker’s salary.
  • In the last 30 years, the economy doubled again, the typical salary rose 10.2%, and CEO pay rose 937%.
• The idea that a “free market” exists somewhere in the wild, into which the government “intrudes,” is a fabricated logic.
  • In this view, whatever inequality or insecurity the market generates is assumed to be the natural consequence of impersonal “market forces.”
  • Yet, there is no “free market” without government.
    • Government, influenced by wealthy interests, generates the rules that create markets, and these ever-changing rules are not neutral.
  • The “free market” myth prevents people from examining changes to the rules.
    • Those with disproportionate influence over these rules are the largest beneficiaries; they are the most vehement supporters of the “free market.” 
    • They have lobbying prowess, lawyers, jobs for public officials who write the rules, pricey PR campaigns, and think tanks to confirm their positions.

Five building blocks of capitalism

Property: what can be owned

• The ways the government decides what constitutes property are constantly evolving—who influences their evolution?
• Intellectual property is the key building block of the new economy.
  • Unless inventors can earn from their products, many won’t bother. So property rights are necessary.
  • What’s the proper balance between giving inventors enough ownership to spur motivation and giving the public affordable access? 
  • Legislatures, courts, and administrative agencies decide, and they are influenced by moneyed interests.
• For example, the US spends more on medications per person than any other developed country, even though Americans take fewer medications, because:
  • The law bars the US government from negotiating lower costs.
  • The drugs are patented, and the temporary monopolies often last beyond when the patents are supposed to run out.
    • The Patent Office renews patents on the basis of insignificant changes to the originals that technically make them new and therefore patentable.
  • Drug companies pay generic drug manufacturers to delay cheaper versions, which generates huge profits for both companies.
    • These profits come from consumers, health insurers, and government agencies paying higher prices than would otherwise be the case.
  • Drug companies claim they need these profits for research and development.
    • They spend billions on advertising, marketing, and lobbying.
• The critical issue is how the government organizes the market.
  • Due to the increasing wealth and political influence of large corporations, as well as the complexity of intellectual property law, these political decisions enlarged and entrenched that wealth and power in favor of the corporations.

Monopoly: what degree of market power is permissible

• Substantial market power provides strong incentives to invest and innovate, but raises consumer prices. What’s the best trade-off? 
  • Such decisions typically are buried within antitrust laws, as enforced by administrative agencies and interpreted by prosecutors and courts.
• For example, in 2014, the US had some of the highest broadband prices among advanced nations, and the slowest speeds.
  • Those in Stockholm, Sweden have high-speed service that costs $28/month. Fiber lines were leased to private operators, which resulted in intense competition. The project now brings millions in revenue to the city.
  • In the US, big cable operators have ensured that there’s no competition, no incentive to invest in fiber networks, and no need to lower prices for consumers.
    • They spend millions each year lobbying and contributing to political campaigns. They also provide post-government jobs to officials. All this results in, among other things, prohibiting cities from providing broadband as in Stockholm.
• The critical issue is how the monopoly is organized.
  • Due to political effects of concentrated economic power, the efficacy of antitrust laws has wilted, leading to stronger and more unbreakable monopolies.

Contract: what can be bought and sold, and on what terms

• Any system of exchange requires rules, which emerge from legislatures and courts.
  • For example, it’s hard to buy guns in Canada, but the National Rifle Association lobbies to ensure that Americans can buy assault rifles.
• Political power determines what can be traded and how.
  • Buyers and sellers have no real alternatives when a large corporation’s contracts are filled with conditions that deny meaningful choice.
  • One common contractual employer provision is the requirement to take any grievances to an arbitrator, often picked by the company, with no option to appeal to a court. 
    • This eliminates the need for the corporation to go through public trials, regardless of how worrisome or damaging the claims are against it.
• The critical issue is how these contract rules are made and who has the most influence over those making them.
  • State and federal lawmakers once sought to protect vulnerable consumers, employees, and borrowers by setting limits on certain contractual terms. 
    • Corporations and banks have whittled away these protections.

Bankruptcy: what happens when people can’t pay

• Bankruptcy is the system used for finding the right balance: allowing debtors to reduce their IOUs to a manageable level under the eye of a bankruptcy judge.
• For example, in the 2008 crash, billions in funding went to protect big banks, and banks received $83 billion low-interest loans from the Federal Reserve.
  • The real burden fell on homeowners, but the bankruptcy code made it extremely difficult for most homeowners to declare bankruptcy.
  • Some members of Congress tried to amend the code to allow distressed homeowners to use bankruptcy.
    • The financial industry lobbied heavily to stop this, the amendment didn’t pass, and more than five million people lost their homes.
• The critical issue is who gets to use bankruptcy and for what types of debts.
  • The “free market” doesn’t offer solutions—power interests do.

Enforcement: how to make sure no one cheats

• Property must be protected and contractual agreements must be enforced.
• Enforcement has been undermined in several ways.
  • Moneyed interests can squelch a law they dislike by making sure Congress doesn’t appropriate enough funds to enforce it.
    • The IRS has been hollowed out in this manner, which means less enforcement, less revenue, and less likelihood that the wealthy will be audited.
  • Make campaign contributions to state judges and attorneys general elections. 
    • Studies have found that the more donations judges receive from businesses, the more likely they are to rule in favor of business litigants.
• The critical issue is what property merits protection, what market power is excessive, and what to do when a party can’t pay.
  • These decisions are reconsidered repeatedly by the legislature and judges.

The Meritocratic Myth

One broadly held assumption is that individuals are rewarded in direct proportion to their efforts and abilities; the US is a meritocracy.

• This overlooks the legal and political institutions defining the market.
• It lures people into thinking nothing can or should be done to alter what people are paid because the market has decreed it.

The hidden mechanism of CEO pay

• CEO pay has soared over the last three decades relative to the pay of average workers; a ratio of 20:1 in 1965 to over 300:1 in 2014. As did the pay of executives.
  • Almost all of it was deducted from corporate income taxes.
  • One justification is that the stock market has soared, and a CEO must maximize shareholder returns.
    • But unless the company did better than the market, there’s no reason to suppose the CEO did anything to justify the escalating pay.
• CEOs play large roles in making appointments to their corporations’ board of directors.
  • All boards want to demonstrate that they’re willing to pay generously, so pay packages move upward. Boards usually consist of other CEOs.
• CEO pay is often in the form of corporate stock.
  • They use their earnings to buy back stock, which pumps up share prices.
  • Corporations don’t have to announce when they’re actually doing this. So, share prices rise without investors knowing that buybacks are the cause.
  • CEOs can use their inside knowledge of when the buybacks will occur and how large they’ll be in order to time their own stock sales.
  • When CEOs take out their stock, they’re taxed as capital gains, which are taxed at a significantly lower rate than income.
  • This drains money from research and development, worker retention, etc.
• CEOs don’t create jobs, Their customers, including well-paid employees, create jobs by buying their goods, which expands the company.
• One study compared 1,500 large companies with other companies in the same field. 
  • The 150 companies with the highest-paid CEOs returned 10% less to their shareholders.
  • The longer a highly paid CEO was in office, the more the firm underperformed.
  • For example, Martin Sullivan got $47 million when leaving AIG. Under his watch, the company’s share price dropped by 98% and American taxpayers contributed $180 billion to support his firm.

The declining bargaining power of the middle

• For three decades after WWII, the middle class expanded, and as its purchasing power rose, the economy grew faster, spawning new investments.
  • In the late 1970s, wages flattened. Much of the middle class became poorer.
• The standard explanation is “market forces,” such as globalization and technology.
  • But it doesn’t account for why it happened so suddenly, or why other advanced economies facing similar forces didn’t succumb as readily.
• This transformation resulted in a redistribution upward due to changes in the legal organization of corporations and financial markets.
• CEOs began to see their primary role as driving up share prices. The easiest way to do this was to cut costs in payrolls. Share prices soared, as did CEO compensation.
• The demise of unions
  • 50 years ago, General Motors was the nation’s largest employer, and the average wage was $35/hour (adjusted for inflation). Now, with Walmart, the average wage is $11/hour. 
    • GM had a strong union, and the bargains those unions struck raised the wages and benefits of non-unionized workers as well.
  • Today, fewer than 7% of the private sector workers are unionized, which puts unionized firms at a competitive disadvantage.
    • Walmart and major fast-food chains are aggressively anti-union. Many of their tactics are illegal under the National Labor Relations Act, but Congress had cut money for enforcing the act. 
• The result is a steady decline in unions, which parallels the decline in the share of total income going to the middle class.
  • The underlying problem isn’t that working Americans are “worth” less, but that they lost bargaining power.

The rise of the working poor

• There’s a substantial increase in the number of people working full-time who are still poor. Decades ago, it was rare for a full-time worker to be impoverished because so many middle-class jobs paid well.
  • The median age of fast-food workers in 2014 was 28, and more than a quarter had children and were the major breadwinners. 
  • 52% of fast-food workers depend on some form of public assistance. 
• Wages at the bottom have continued to drop.
  • The decline had a great deal to do with lack of economic and political power. CEOs profited by slashing costs and forcing workers to accept lower wages.
• The federal minimum wage has been steadily eroded by inflation. 
  • The National Restaurant Association and the National Retail Federation, among others, have lobbied against any increase.
  • Multiple wide-ranging studies demonstrate that few if any jobs would be lost if minimum wage increased at least to its 1968 level, adjusted for inflation.
• There are many gains from a higher minimum wage.
  • There would be more sales and growth, and thus more jobs.
  • The government spends almost $7 billion in aid to fast-food workers; a higher minimum wage would significantly reduce this.
    • That $7 billion is in effect a subsidy that taxpayers pay large corporations for their failure to pay its workers enough to live on.
  • Wage gains rarely raise the price of the products because industries must keep their prices low to stay competitive.
    • Wage gains that low-paid workers receive will likely come out of profits, which will reduce CEO compensation.
• The poor remain poor because they lack political power to get the resources needed to realize that opportunity.

Countervailing power

• The problem isn’t the top’s power or influence per se. It’s the comparative lack of power or influence on the other side. There’s no longer any significant countervailing power to balance the growth of large corporations, Wall Street, and the very wealthy.

The decline of countervailing power

• The preferences of the average American have a statistically non-significant impact upon public policy. Lawmakers instead respond to the policy demands of wealthy individuals and moneyed business interests.
  • By 2012, campaign donations from the richest 0.01% constituted 40% of all contributions to federal elections.
    • The rich have very different priorities from average Americans. 
• But, decades before, unions won legislation, as did unorganized workers and small farmers through farm cooperatives.
  • In the 1980s, centers of countervailing economic power began to wither.
  • The loss of American workers’ economic power has compounded the loss of their political power, which has accelerated the loss of their economic power.

Restoring countervailing power

• Moneyed interests don’t want the curtain of the “free market” lifted because that would expose their influence over the rules, and people could find a common economic cause.
  • Some who are now typically on the right of the political spectrum—family businesses and the white working class, for example—have much in common with working women and urban professionals, typically on the left. 
    • They all pay more for medicine, broadband, food, credit card debt, and insurance than they otherwise would if corporations hadn’t shaped the market.
• First, reform campaign finance to get big money out of politics (unlimited contributions to super PACs), and require full disclosure of all political expenditures.
• Second, impose reforms that would reduce or eliminate revolving doors between government service and Wall Street, large corporations, and lobbying firms.
• Third, require expert witnesses and think tanks to disclose all sources of outside funding.
• Fourth, end the upward redistributions of wealth currently embedded in market rules.
• Fifth, shorten the lengths of patent and copyright protection.
• Sixth, antitrust should not only achieve market efficiency, but also reduce the exceedingly high political influence of powerful companies. large aggregates of power.
• Seventh, prohibit corporations from binding their employees to forced arbitration.
• Eighth, define fraud to prohibit all forms of insider trading, including any use of corporate buybacks to pump up share prices.
• Ninth, raise the minimum wage.
• Tenth, workers could form a union by a majority up-or-down vote, giving them more bargaining leverage.
• Eleventh, in international trade agreements, protect the wages of American workers.
• Twelfth, educational resources shouldn’t depend on local property taxes.
• Thirteenth, lower the pay for CEOs and raise the pay for workers.
  • Create a corporate tax rate dependent on the ratio of CEO pay to the median worker. Lower ratio, lower corporate tax rate, and vice versa.

• The subterfuge of Wall Street pay and how a hidden subsidy provides them with millions in profits
• How the weakening of countervailing power threatens capitalism
• Deeper analysis of alternatives to shareholder-focused corporations
• Why it’s crucial to move away from a property-tax method of funding public schools, and instead utilize methods to send more money to underperforming schools
• The rise of the non-working rich and how legislative changes ensure that their money isn’t taxed (the Walmart heirs have more wealth than the bottom 40% of Americans)
• The long-lasting effects of more efficient technology on the economy
• Example after example of how corporations, Wall Street, and wealthy individuals remolded each building block of capitalism to benefit themselves at the expense of workers