Who's to Blame for the Brave New Economy?

Prosperity Squandered

For three decades, the economy has increasingly become more unequal and more precarious for ordinary people. During the same period, risks that used to be absorbed by large, stable employers or social programs have been transferred back to individuals and families.

Meanwhile, the financial economy has become steadily more speculative and corrupt, as insiders, often with severe conflicts of interest, extract wealth from the real economy. The dot-com bust of 2000-2001 was the result of those conflicts -- accountants who were supposedly guardians of honest books colluded with management to pump up stock values and deceive investors; stock "analysts" compensated on the basis of their success in duping the dumb money.

But no sooner did Congress pass a mild corrective measure in the Sarbanes-Oxley Act of 2002 than the scams mutated into new forms. Unregulated hedge funds and private equity companies took excessive risks with borrowed money. Mortgage companies did end runs around lending standards. As this article goes to press, the credit crisis is already the most serious since the Great Depression with the Federal Reserve acting as enabler -- and it remains to be seen how well the broader economic effects will be contained.

In my book, The Squandering of America, I demonstrate that the increasing economic insecurity for ordinary Americans and the increasing financial risks to the entire economic system are two sides of the same coin. And the coin is the deliberate dismantling of the mixed economy, with the complicity of many Democrats as well as Republicans. This process is not only bad for broadly shared prosperity, but bad for economic efficiency and the stability of the system itself.

Even today, the hidden depression of flat or declining living standards is not a major topic of political debate. Too few politicians are serious about re-regulating an unstable and unjust market economy.

Why does market fundamentalism still hold sway?

First, there is the mistaken premise that we can't "afford" the social investment that we need. But as Barney Frank, chairman of the House Financial Services Committee, memorably put it, on Sept. 10, 2001 we couldn't afford the Iraq War, yet Congress somehow found the money. The job of politics is to set national priorities, and we need dramatically different ones.

Second, we have had a 30-year unnatural experiment in financial deregulation, and deregulation flunked. We need to make the financial economy of bankers and brokers once again the servant, not the master, of the real economy of workers and entrepreneurs. This is not just about equity; it is about solvency. Yet both parties are reluctant to challenge Wall Street.

Third, globalization of capital and commerce makes the project of managed capitalism far more difficult, institutionally and politically. It was the nation state that balanced pure capitalism with regulation and social investment. There is no global government, and financial interests have far more influence than ordinary citizens in transnational rule-setting bodies such as the World Trade Organization and the International Monetary Fund. "Free trade" versus "protectionism" is not a helpful distinction. The real issue is laissez faire versus a mixed, balanced economy.

So long as the Supreme Court defines money as speech, financial special interests will have disproportionate influence on both parties, and will sidetrack reform. But the antidote to money is people. Economic progressives like Sens. Sherrod Brown and John Tester, who won election in improbable places, show that we rebuild a progressive majority by articulating pocketbook interests of ordinary people. When leaders offer citizens democratic politics as an avenue of redress, people can be a stronger force than Wall Street.

The Economy Transformed

Of all the nations of the world, America is assumed to best exemplify the idea that capitalism and democracy are mutually reinforcing, or at least fundamentally compatible. But something has happened over the last several decades to challenge that assumption. Free-market capitalism has triumphed. Yet democracy, in key respects, has weakened.

While the stock market has soared and consumers have received better and better deals, these gains have been accompanied by widening inequalities of income and wealth, heightened job insecurity, the loss of vibrant Main Streets, and environmental hazards such as global warming.

Strictly speaking, these are not failings of capitalism. Capitalism's role is to enlarge the economic pie. How the slices are divided and whether they are applied to private goods like personal computers or to public goods like clean air is up to society to decide. This is the role we assign to democracy -- to accomplish what can only be achieved by citizens joining together with other citizens to determine the rules of the game, to seek the common good over and above individual goods. Yet democracy is struggling to perform these basic functions.

As I explain in my new book, Supercapitalism, since the 1970s we in our capacities as consumers and investors seeking the best deals have done significantly better, wielding enormous power. But as citizens seeking the common good, we've lost ground. The institutions that used to negotiate to spread the wealth and protect what we valued in common have all but disappeared -- among them, labor unions, regulatory agencies, and local political organizations. At the same time, intensifying competition among companies has spilled over into politics, causing a corporate arms race in which platoons of lobbyists with piles of campaign money pursue laws that will give companies competitive advantage over their rivals. In short, democratic capitalism has been replaced by supercapitalism.

Wal-Mart has brought down prices on a wide range of items to lower than they'd otherwise be, benefitting its customers and investors. But many of us, as citizens, are appalled at Wal-Mart's low pay, its power to force suppliers to cut their own payrolls and outsource abroad, and its decimating effects on Main Streets. The executives of Wal-Mart or any other large company are doing what they're supposed to do according to the current rules of the game. The real question is whether and how those rules should be changed. If government were as sensitive to our citizen values as it is to us as consumers and investors, it could, for example, enact laws making it easier for employees to unionize, requiring all large companies to give their employees health insurance, protecting Main Street retailers from the predations of big-box retailers, and raising the minimum wage high enough to give all working people a true "living" wage.

All such measures would have the likely effect of causing Wal-Mart and other large companies to raise their prices and reduce returns to investors, but that shouldn't rule out such reforms. Personally, I'd be willing to sacrifice some of the benefits I get as a consumer and investor in order to achieve these social ends -- as long as I knew everyone else were, too, if those were the new rules of the game. But how to effect them? The money that companies such as Wal-Mart are pouring into Washington and every other major capital gets in the way. This is the heart of the matter: We must make the rules -- rules that reflect our values as citizens as well as our values as consumers and investors.

Kuttner Responds:

Dear Bob,

Your book and mine begin with similar premises. As you put it, "Free market capitalism has triumphed. Yet democracy has weakened." And we reach similar conclusions: Our politics has been captured by corporate lobbyists and the power of K Street's money. In turn, "cynicism about democracy" is at risk of becoming "a self-fulfilling prophesy" -- making it harder to take back our politics.

You also very appropriately warn against "corporate social responsibility" as a panacea. This discussion is brilliant, original, and cuts through a lot of wishful nonsense. The job of corporations, you quote Milton Friedman, is to make a profit. So if we as citizens want to balance corporate goals with civic and distributive ones, that battle must be won in the political arena, not by corporate do-gooding. To all this, I can only say, Amen.

Yet between premise and conclusion, you and I trace somewhat different odysseys. After issuing a disclaimer -- "The story I will tell is not technologically deterministic" -- you go on to interpret the corporate takeover of American politics and the widening inequality substantially as a story of technology.

You write that the power shift was caused neither by globalization, nor deregulation, nor a decline in civic life: "The real explanation involves the way technologies have empowered consumers and investors to get better and better deals -- and how these deals, in turn, have sucked relative equality and stability, as well as other social values, out of the system."

Here I must respectfully disagree. Exhibit A is Western Europe, which has had access to the same technologies as the U.S. Yet because Europe's social institutions are anchored in very different policies, Europe has not had America's widened inequality or weakened popular institutions (though social democracy there is certainly under siege).

Second, the new ability of global capital to play nations off one another to curtail decent social, tax, wage, and regulatory policies has indeed made it much harder to sustain managed capitalism in one country. As I argue in The Squandering of America, the challenge of harnessing capitalism in the public interest is now global as well as national.

Further, I am a little wary of formulations such as this one, which is a key theme of your book: "The fact is, most of us are consumers and investors, and as such are benefiting enormously from supercapitalism."

Bob, you once wrote a celebrated and prescient piece on the statelessness of the modern corporation, titled "Who is Us?" I would now ask you, in the spirit of Tonto's epic question to the Lone Ranger, "Who is We?" In truth, investments and other net gains from the new economy are very narrowly concentrated. The financial elites who have gained immensely as investors, and the consumers who benefit modestly from Wal-Mart's lower prices, are not the same people.

Americans are not an undifferentiated "we." Nor are Americans just consumers and investors; they are also workers. The power shift of supercapitalism has put a terrible squeeze on wages, incomes, and job security. And contrary to your assertions, I'm not sure that corporate CEOs, almost by definition, earn their outsized pay. You offer astute and original insights into the economic dynamics of a hyper-competitive economy, and that alone makes your book must-reading. But I don't share your analysis of what drove the distributive shift, or the schizophrenia you attribute to an undifferentiated we. However, you are eloquent on the need for us to take back our politics. Taking back our democracy will entail popular struggle against corporate hegemony, just as it did in the very different technological eras of the 1890s and the 1930s. We can agree on that.


Bob K.

Reich Responds:

Dear Bob,

I like your book, too, and agree with much of it. But our readers are probably less interested in where we agree (and even less moved by how impressed we are by one another's arguments) than in where and how we disagree.

In explaining the dire state of economics and politics in 21st-century America, you blame "the elite capture of politics," and their "deliberate" dismantling of the mixed economy. I think you're wrong. Although I've spent the better part of my adult life criticizing business elites and Wall Street (and, while in office, battling them), they're not to blame.

American CEOs and Wall Street financiers are no more greedy or less socially responsible than they were 30 or 40 years ago. As a group, they've always been greedy and never been particularly socially responsible. Something changed to make their greed and lack of social concern far more dangerous to our economy and democracy. What was it? Technologies that four decades ago began knitting the global economy together -- cargo planes, container ships, satellite communications technologies, and, eventually, the Internet. Also technologies that began to displace labor and undermine the economies of scale on which mass production (and labor unions) had been premised -- such new technologies as numerically-controlled machine tools, robotics, computer-aided design and manufacturing, and automated equipment.

As I argue in Supercapitalism, these technologies have given consumers and investors a far wider range of choice than ever before, along with easy access to comparative information about goods and services. And it's our newfound abilities as consumers and investors to get great deals that's the real culprit -- pushing corporations and financial institutions into far more intense competition than ever before. Among the results: outsourcing abroad, automating many routine jobs here in America, fighting unions, and all too often violating human rights abroad.

You ask why Western Europe retains more of a social safety net and has less inequality than the United States when it's had access to the same technologies. The answer, I think, is that America has led the way technologically. In addition, Europe was far to the left of the U.S. when the transformation began, so it has more ground to traverse as it moves in our direction. But both Europe and Japan are following along the same supercapitalist path toward widening inequality and the dismantling of many social institutions. Just look at what Sarkozy is up to, in France of all places.

You suggest that global capital can now play off nations with decent social policies, leading a race to the bottom. But who, exactly, is "global capital?" I participate in the pension plan available to most university teachers called TIAA-CREF, which has been scouring the world in search of high returns -- putting pressure on companies, wherever headquartered, to cut costs. So, in a sense, "global capital" is me -- and perhaps you. While it's true that investment gains of the new economy are narrowly concentrated, more than half of American households own some shares of stock, and those shareholders are determined to get the best deal they can with their holdings. The consumers who have benefited from the lower prices of the global and increasingly technological economy aren't necessarily the rich who have made a killing as investors, but there's still enough overlap to make most of us complicit.

That complicity doesn't make the social consequences right, but it makes coping with them more complicated. We have to deal with some trade-offs. A living wage of $20 an hour, for example, is likely to make some of the personal services you and I buy more expensive. A law banning American high-tech companies from colluding with the Chinese in violating human rights may slightly reduce the returns to your and my pension plans. Democracy is where we're supposed to address these trade-offs. The tragedy is we can't, because we as citizens can't be heard above the din of corporate lobbyists seeking to advance their own firm's or industry's competitive position through public policies.

That's where we need to place our efforts -- in protecting democracy from supercapitalism. While some short-term political gains might be had in conjuring up a supposed conspiracy of business and financial elites against the rest of us, it's the wrong target. And genuine reform won't happen if our aim is misdirected.

All best,

Bob R.

Kuttner's Rebuttal

Dear Bob,

Let's see if we can narrow our agreements and disagreements. I don't think you've engaged my contention that in the past three decades financial elites have become much more serious, systematic, and ideologically single-minded about dismantling the mixed economy; or acknowledged how they captured much of the Democratic Party, as well as the Republican Party, for their agenda of reverting to mostly laissez-faire capitalism with only a modest safety net and as little financial regulation as possible.

Our debate is over why this occurred. I don't contend that today's elites are more greedy, but that they're less constrained. They've had greater success in deliberately weakening countervailing institutions such as the labor movement and government regulation. Globalization helps them do end runs around democratic constraints. We agree that one instrument of this attack is increased corporate and Wall Street lobbying. But lobbying is a tactic, not the essence of a power shift.

You are right that in some cases, technology facilitated this shift. The technology of a globalized, internet economy does make it harder, other things being equal, to operate a managed form of capitalism in one country. The fact that our European friends still pull it off has more to do with your observation that they were further left to begin with. That meant that universal institutions, like national health insurance (and a counterpart ideology), were in place and harder to dislodge than the incomplete patchwork of safety-net protections in the U.S. For all of Sarkozy's bluster, he is far more of a Gaullist -- economic nationalism plus welfare state -- than a neo-liberal. But, yes, I agree that Europe is also under assault, albeit at a slower pace, from similar global forces.

Globalization has made it harder to constrain capital, and that's one reason why income distribution has worsened in the U.S. The premise that "we" are torn because we benefit as well as suffer from globalization needs to be disentangled. In truth, the distribution of the benefits is wildly unequal -- most go to the top. "Our capacity as consumers and investors to get great deals," as you write, is true only on average. As the income-distribution figures show, the net result is a great deal for the top, an insecure deal for the middle, and a raw deal for the bottom.

We do have more choices, but it is possible as a consumer to like Italian shoes or Chinese computers or shares in the Indian stock market and still believe as a citizen and worker that we need a managed form of capitalism worldwide. The institutional and political (and ideological) challenge is to inject public-interest, pro-worker, and pro-consumer regulation into a market system that is global.

You're partly right that this will entail some trade-offs. But that can be overstated. The amount of money that actually goes to pay the worker who makes a pair of running shoes in China -- a few cents on the dollar -- is so small compared to what's taken by the rest of the distribution chain that decent wages would hardly blip the retail price. Don't forget that consumers and workers alike gained during the domestic postwar boom, as long as productivity kept rising, because power relations were more symmetrical. Distribution of the total gains remains a political question.

I also have trouble with your contention that CEOs, almost by definition, earn their outsized pay because the stakes of succeeding are now so much higher. In fact, many of them don't; pay and corporate performance don't correlate well. Many others cash in big by manipulating stock bonuses and options, and by engineering mergers. Most students of CEO pay, both left and right, have concluded that the roughly eightfold increase in the ratio of CEO pay to worker pay has a lot more to do with "shifting norms." A less polite phrase would be a power shift, enabled by corporate boards stacked with the CEO's cronies.

As recent financial events underscore, what's at stake if we fail to constrain runaway supercapitalism is not just our broadly distributed prosperity but our solvency. We are in full agreement on the need for a struggle to take back our political capacity to constrain capital and restore democracy.


Bob K.

Reich's Rejoinder:

Dear Bob,

But to make your argument convincing you need to offer an explanation for why financial elites became "more serious, systematic, and ideologically single-minded about dismantling the mixed economy" over the last three decades, and not before. Why, in your view, did they grow "less constrained?" Why did they become successful in "deliberately" weakening counter-vailing institutions starting in the late 1970s and not, say, in the 1950s? My understanding of history is that America's financial elites have wanted to dismantle the mixed economy and weaken countervailing institutions at least since the progressive era in the first decades of the 20th century, when federal and state governments first began regulating markets in the public interest. You refer to "globalization" -- but globalization didn't just happen. As I've noted, advanced transportation and communication technologies that came on stream in the 1970s made it possible for American consumers and investors to get great deals from all over the world. This is what changed.

I completely agree with you that it's possible for us as consumers or investors to like the great deals we get on foreign-made shoes, Chinese computers, or shares in the Indian stock market while at the same time believing as citizens that we need a more managed form of capitalism, at home and even worldwide. That's precisely my point. We haven't faced the cognitive dissonance between what we want as consumers and investors, on the one hand, and what we want as citizens on the other.

We didn't have to face this dissonance in the middle decades of the 20th century because our choices as consumers and investors were far more limited then. Yes, wages rose for almost every income group then, but I don't agree that consumers did particularly well. If we wanted a car, we had only the Big Three to choose from; if we wanted a telephone, we had only Ma Bell; if we wanted to put our savings somewhere, we had some local banks. Now that we have a world of choice, we as consumers are doing far better. So are we as investors, to the extent we have pension plans and 401(k)s. But as citizens who value job stability, good middle-class wages, vibrant Main Streets, and a more equal distribution of income and wealth than we have now, we're doing worse. (By the way, I don't think current levels of CEO pay are morally or socially justifiable, and I argue for a much higher marginal income tax on the highest earners -- which also include movie celebrities and private-equity fund moguls.)

All this means we have to face some difficult trade-offs and hard political choices. But there's no way we're going to have a halfway intelligent political debate about these trade-offs and choices until and unless we stop vilifying corporations, CEOs, financial elites, and even Wal-Mart. These institutions aren't our nemesis. They and their ilk did not do this to America, Bob. We all had a hand in it.

All best,

Bob R.

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