Saving Capitalism: For the Many, Not the Few

 

Robert Reich, “Saving Capitalism: For The Many Not The Few,” Alfred A. Knopf, 2015, 219 pp.

In the three decades following WWII, the US economic rewards were balanced between the well-to-do and middle-class workers; (Note: these are the only three decades this balance existed)  During these three remarkable decades, CEOs of large corporations earned an average of approximately twenty times the pay of their typical worker, it’s now 200 times. We have returned to the income inequality excesses last experienced in the “gilded age,” when Teddy Roosevelt fought against those imbalances by breaking up the “Trusts.”  We have had other historical periods of extreme imbalance that required action to save capitalism and democratic government: During the Jacksonian Age, property requirements determining eligibility to vote were eliminated; during the Great Depression, FDR’s New Deal legislation sanctioned Unions and initiated Social Security.  These retrenchments allowed countervailing forces to emerge and balance the political-economic power of the wealthy and avert the totalitarian responses of Communism and Fascism that Europe experienced.

After 1980, the allocation of economic rewards bally-hood as meritocratic don’t match the reality in which most live and work.  The playing field is tilted toward those who have the resources and power with no countervailing opposition.  Robert Reich, Clinton’s Secretary of Labor, analyzes our political-economic system through the lens of five items:  Property, monopoly, contracts, enforcement, and bankruptcy and how these are politically influenced.  In the 50s power was balanced between countervailing forces of unions, community groups, and manufacturing, banks, etc.  Then beginning in the 80s the rules have been shaped by large corporations, Wall Street, and wealthy individuals, with little countervailing forces opposing them.  Whenever these rules are formulated it is a choice between a market organized for broadly based prosperity or one designed to deliver almost all gains to a few at the top.  All third world countries’ economies are organized for the benefit of those at the top.

 My Notes:

Pg. xif:  For three decades after WWII, America created the largest middle class the world had ever seen.  During those years the (real) earnings of the typical American worker doubled, just as the size of the American economy doubled.  Over the last thirty years, by contrast, the size of the economy doubled again but the earnings of the typical American went nowhere.  Put simply, globalization and technological change have made most of us less competitive.  The tasks we used to do can now be done more cheaply by lower-paid workers abroad or by computer-driven machines.

Pg. xiiifff:  Markets depend for their very existence on rules governing property (what can be owned), monopoly (what degree of market power is permissible), contracts (what can be exchanged and under what terms), bankruptcy (what happens when purchasers can’t pay up), and how all of this is enforced.  Such rules do not exist in nature.  They must be decided upon, one way or another, by human beings.  These rules have been altered over the past few decades as large corporations, Wall Street, and wealthy individuals have gained increasing influence over the political institutions responsible for them.

Simultaneously, centers of countervailing power that between the 1930s and late 1970s enabled America’s idle and lower-middle classes to exert their own influence—labor unions, small businesses, small investors, and political parties anchored at the local and state levels—have withered.  This has resulted in ever-larger upward re-distributions inside the market, from the middle class and poor to a minority at the top.  As these re-distributions upward are inside the market and not visible like food-stamps, they have largely escaped notice. 

In Part II, the author shows what this has meant for the resulting distribution of income and wealth in society.  The meritocratic claim that people are paid what they are worth in the market is a tautology that begs the questions of how the market is organized and whether that organization is morally and economically defensible.  In truth, income and wealth increasingly depend on who has the power to set the rules of the game.  CEO’s of large corporations and Wall Street’s top traders and portfolio managers effectively set their own pay, while also using inside information to boost their fortunes. 

In Part III the author claims the solution is not to create more or less government.  The problem is whom the government is for and who is setting the rules.  This will require a new countervailing power, allying the economic interests of the majority who have not shared the economy’s gains.  The current left-right battle pitting the ‘free market’ against government is needlessly and perversely preventing such an alliance from forming.

The growing insecurities and cumulative frustrations of average people who feel powerless in the face of economies (and market rules) that are not working for them are generating virulent nationalist movements, sometimes harboring racist and anti-immigrant sentiments, as well as political instability in even advanced nations around the globe.  (Remember this book was written in 2015, before Trump).

Pg. 3f:  Few ideas have more profoundly poisoned the minds of more people than the notion of a ‘free market’ existing somewhere in the universe, into which government ‘intrudes.’  According to this view, whatever we might do to reduce inequality or economic insecurity—to make the economy work for more of us—runs the risk of distorting the market and causing it to be less efficient.  Yet, a market—any market—requires that government make and enforce the rules of the game.  In most modern democracies, such rules emanate from legislatures, administrative agencies, and courts.  Government doesn’t intrude on the ‘free market.’   It creates the market.  As Hobbes said: “In nature (without government) life of man is solitary, poor, nasty, brutish, and short.”

8f:  In order to have a ‘free market,’ decisions must be made about:

Property	What can be owned
Monopoly	What degree of market power is permissible
Contract	What can be bought and sold, and on what terms
Bankruptcy	What happens when purchasers can’t pay up
Enforcement	How to make sure no one cheats on any of these rules

The rules can be designed to maximize efficiency (given the current distribution of income and wealth in society), or growth (depending on who benefits from that growth and what a society is willing to sacrifice to achieve it, such as fouling the environment.

Pg. 11:  In 2010 the Supreme Court in Citizens United v. Federal Election Commission ruled 5-4 that corporations are people under the First Amendment, entitled to freedom of speech thereby invalidating the 2002 McCain-Feingold Act which had limited spending by corporations on political advertisements.

Pg. 17:  Historian Adam Hochschild has noted that by the end of the eighteenth century well over three-quarters of all people alive in the world were in bondage of one kind or another, slaves or serfs.  In parts of the Americas and Africa, slaves far outnumbered free persons.  By the end of the nineteenth-century slavery was outlawed almost everywhere in the world although it still continues, illegally, in many places around the world.  

Pg. 28:  Property, the most basic building block of the market economy, turns on political decisions about what can be owned and under what circumstances.  Due to the increasing wealth and political influence of large corporations, as well as the subtlety and complexity of the contours of intellectual property, these political decisions have tended to enlarge and entrench that wealth and power. 

Pg. 30ff:  Monopoly.  Big companies dominate the American economy.  Intellectual property, network effects, natural monopolies, expensive R&D, fleets of lawyers to litigate against potential rivals, and armies of lobbyists have created formidable barriers to new entrants.  The rate of new businesses have halved between 1978 and 2011 as the new giants gained control.  And that trend has been immune to which party has occupied the White House or controlled Congress.

Consider that by 2014, the US had some of the highest broadband prices among advanced nations, and the slowest speeds, nearly 40 percent slower than Hong Kong or South Korea.  And many Americans could not afford any internet access.  By 2014 more than 80 percent of Americans had only one single cable company Internet.

Pg. 40f:  Unlike the old monopolists, who controlled production, the new monopolists control networks and have enough influence to keep antitrust at bay.  (These networks are banks, financial investing, pharmaceuticals, cable internet, and TV, social media, print media, etc.)

Pg. 59f:  Bankruptcy.  Trump Plaza opened in Atlantic City in 1984.  Thirty years later it folded leaving one thousand employees without jobs.  Trump, meanwhile, was on Twitter claiming he had “nothing to do with Atlantic City” and praising himself for his great timing” in getting out of the investment.  The US Constitution (Article I, section 8, clause4) authorizes Congress to enact ‘uniform Laws and the subject of Bankruptcies throughout the US,” and Congress has done so repeatedly—in 1800, 1841, 1867, 1898, 1938, 1978, 1994, and 2005.  Over the last two decades, every major US airline has been through bankruptcy at least once, usually in order to renege on previously agreed-upon labor union contracts.  (Student debt is exempt from bankruptcy codes, in fact, even social security payments to ex-students can be garnished.  Chapter 13 of the bankruptcy code prevents homeowners from declaring bankruptcy on mortgage loans for their primary residence)

Pg. 64:  In 2013 Detroit was the largest city ever to seek bankruptcy protection, looking to shed $7 billion of its debt.  In the end, the investors holding 2005 issued certificates lost big, but many retirees had their pensions trimmed considerably, along with costly reductions in their health care benefits.  (Makes me wonder when Chicago will go this route).

Pg. 68:  Enforcement.  An interesting NRA response to enforcement occurred after a 2004 court decision awarded the relatives of eight people shot by a sniper near D.C., $2.5 million from the maker and seller of the rifle used in the shootings resulted in Congress enacting the Protection of Lawful Commerce in Arms Act, sharply limiting the liability of gun manufacturers, distributors, and dealers for any harm caused by the guns they sold.  Enforcement is a very political determined element.

Pg. 71:  An even quieter means of rescinding laws is to riddle them with so many loopholes and exceptions that they become almost impossible to enforce.  Another is to not fund the agency that enforces items, and hire the enforcers when they leave government. 

Pg. 92:  In the bull market from 1994 to 2014 (the downturn from 2008 to 2011 notwithstanding), the richest 1 percent of Americans owned 35 percent of the value of American-owned shares, both directly and indirectly through their pension plans.  The richest 10 percent owned more than 80 percent.  The bottom 90 percent owned just 19.2 percent, directly or directly.  In 2014, more than two-thirds of Americans were living from paycheck to paycheck.

Pg. 97:  CEO’s pay in America’s large corporations over the last three decades, relative to the pay of average workers went from a ratio of 20 to 1 in 1965, to 30 to 1 in 1978, 123 to 1 in 1995, 296 to 1 in 2013, and over 300 to 1 by 2015.

Pg. 108f:  Wall Street’s five largest banks held 45 percent of America’s banking assets by 2014, up from 25 percent in 2000.  They are certainly too large now to fail.

Pg. 114:  Starting in the early 1980s, the median household’s income stopped growing altogether, when adjusted for inflation.  In 2013, the typical middle-class household earned $51,939, nearly $4,500 below what that household earned before the start of the Great Recession in 2007.  By 2013, the median household was earning less than it did in 1989, nearly a quarter of a century before.  Since 1979, the nation’s productivity has risen 65 percent, but worker’s median compensation has increased by just 8 percent. [pg. 123].  In 1980, more than 80 percent of large and medium-sized firms gave their workers defined-benefit pension, now the share is below one-third. 

Pg. 120f :  Corporations were transformed by legal and institutional organization of the financial markets from protecting interests of stakeholders to protecting interests of shareholders.  In 1974 Congress enacted the Employee Retirement Income Security Act.  Before then, pension funds and insurance companies could only invest in high-grade corporate and government bonds.  The 1974 act changed that, allowing pension funds and insurance companies to invest their portfolios in the stock market and thereby making a huge pool of capital available to Wall Street.  In 1982, another large pool of capital became available when Congress gave savings and loan banks permission to invest their deposits in a wide range of financial products, including junk bonds. 

A radically different vision of corporate ownership erupted with these changes.  It came with corporate raiders who mounted hostile takeovers, wielding high-yield junk bonds.  They used leveraged buyouts and undertook proxy fights against the industrial statesmen who in the raider’s  view, were depriving shareholders of the wealth that properly belonged to them, assuming shareholders were the only legitimate owners of the corporation and that the only valid purpose of the corporation was to maximize shareholder returns.  Even where raids did not occur, CEOs felt pressured to maximize shareholder returns for fear their firms might otherwise be targeted. 

 Pg. 129:  After the legendary Treaty of Detroit in 1950, when Big Business and Big Labor agreed to share productivity gains in exchange for labor peace, the rate of unionization increased dramatically, as did wages and benefits.  By the mid-1950s almost a third of all employees in the private sector of the economy belonged to a union.  Starting in the late 1970s the process went into reverse with globalization combined with labor-replacing technologies, as well as the shift in corporate mission toward maximizing shareholder returns.

Pg. 154ff:  Most redistributions in recent years have been upward from consumers, workers, small businesses, and small investors to top corporate and financial executives, Wall Street traders and portfolio managers, and the major owners of capital assets (the author calls these predistributions).  This upward redistribution is mostly invisible.  The main conduits for it are hidden within the rules of the market—property, monopolization, contract, bankruptcy, and enforcement—rules that have been shaped by those with substantial wealth and political clout.  A small portion is later redistributed downward to the poor through taxes and transfer payments (which are highly visible).  The problem is that there is no longer any significant countervailing  force to constrain or balance the growing political strength of large corporations, Wall Street, and the very wealthy.  The middle class and poor—and the economic interests they encompass—have little or no agency.

Pg. 160:  (We are now in a repeating historical period where inequality of wealth is widening, destroying the middle class).  A sequence of events began in the late 1970s, when innovation—including container ships, satellite communications, new materials, computers, digital technologies, and, eventually the Internet—spawned a new economy, along with great fortunes centering in a relatively few giant companies and individuals, and the resurgence of Wall Street.

 Pg. 169:  Some have argued that the average citizen never had much direct political power in America.  However, after WWII, political scientists explained that American democracy through “Interest group pluralism,” accounted for America avoiding the totalitarianism of Communism and Fascism.  There was an overlapping membership among organized interest groups and Americans belonged to several such groups, (trade unions, Veteran associations, political parties, etc.) which in turn conveyed their members’ preferences to political leaders.  These overlapping groups stabilized democracy while allowing for peaceful change. But by the 1980s these countervailing power centers were beginning to wither.  Many of the organizations have been replaced by national advocacy organizations, typically headquartered in Washington.  “Membership” no longer means active engagement as the local and state levels; it means little more than an individual’s willingness to send money in response to mass solicitations.    

Pg. 176:  In the 1970s, only about 3 percent of retiring members of Congress went on to become Washington lobbyists.  In recent years, fully half of all retiring senators and 42 percent of retiring representatives have turned to lobbying.  Also, a large portion of the American public no longer even bothers voting.  Only 58 percent of eligible voters cast their ballots in the 2012 presidential election.

Pg. 193ff:  To correct the imbalances this book documents will require shortening the lengths of patent and copyright protection, for example, and pay-for-delay agreements banned, as they are in most other advanced economies.  Patents could not be extended by means of small or cosmetic changes in products or processes, and pharmaceutical companies would be prohibited from advertising their prescription brands, as had been the rule in the US.  Antitrust would be returned to its original purpose and would be used to bust up cable monopolies, prevent oligopolies such as now exist in the provision of credit cards, contain the size of giant hospital chains, and limit the market power of large high-tech companies over networks and standard platforms.  Insurers would no longer be exempt from antitrust laws, so they could not fix prices, allocate markets, or collude over terms.  Wall Street’s giant banks would be limited so that none could hold more than 5 percent of the nation’s banking assets, have any role in the pricing of commodities, or play a dominant role in initial public offerings of stock.  Glass-Steagall would be resurrected so that investment banking’s wagers on stocks and derivatives would be separated from commercial banking’s more staid and secure lending of commercial deposits as they were between 1933 and 1999.  Contract laws and regulations would prohibit corporations from binding their employees, contractors, or franchisees to forced arbitration.  All forms of insider trading would be prohibited including any use by corporations of corporate buybacks to pump up share prices and cash in on stock options and awards, as had been the rule before 1991.  The minimum wage would be raised to half the median wage and thereafter adjusted for inflation. 

Pg. 198:  Why should shareholders take prominence over employees and communities?  Corporations are nothing more than collections of contracts and property rights.  They are not ‘owned’ by shareholders the way ordinary goods are owned.  Shareholder ownership is a legal fiction.  So is the idea that CEOs and other corporate executives have a fiduciary duty to maximize the value of corporations’ shares of stock.  Corporate charters, issued by states, require no such thing. 

Pg. 207:  We are faced not just with labor-replacing technologies, but with knowledge-replacing technologies.  The combination of advanced sensors, voice recognition, artificial intelligence, big data, text mining, and pattern-recognition algorithms is generating smart robots capable of quickly learning human actions, and even of learning from one another.  The model of the future seems likely to be unlimited production by a handful for consumption by whoever can afford it.

Pg. 219:  The coming challenge is not to technology or to economics.  It is a challenge to democracy.  The critical debate for the future is not about the size of government; it is about whom government is for.  The central choice is not between the ‘free market’ and government; it is between a market organized for broadly based prosperity and one designed to deliver almost all the gains to a few at the top.  The pertinent issue is how to design the rules of the market so that the economy generates what most people would consider a fair distribution on its own, without necessitating large redistributions after the fact.