Saving Capitalism Read online

  ALSO BY ROBERT B. REICH

  Beyond Outrage

  Aftershock

  Supercapitalism

  Reason

  I’ll Be Short

  The Future of Success

  Locked in the Cabinet

  The Work of Nations

  The Resurgent Liberal

  Tales of a New America

  The Next American Frontier

  AS EDITOR

  The Power of Public Ideas

  AS CO-AUTHOR, WITH JOHN D. DONAHUE

  New Deals

  THIS IS A BORZOI BOOK

  PUBLISHED BY ALFRED A. KNOPF

  Copyright © 2015 by Robert B. Reich

  All rights reserved. Published in the United States by Alfred A. Knopf, a division of Penguin Random House LLC, New York, and distributed in Canada by Random House of Canada, a division of Penguin Random House Ltd., Toronto.

  www.aaknopf.com

  Knopf, Borzoi Books, and the colophon are registered trademarks of Penguin Random House LLC.

  Library of Congress Cataloging-in-Publication Data

  Reich, Robert B.

  Saving capitalism : for the many, not the few / Robert B. Reich.—1st United States edition.

  pages cm

  Includes bibliographical references and index.

  ISBN 978-0-385-35057-0 (hardcover : alk. paper)—ISBN 978-0-385-35058-7 (eBook) 1. Capitalism—United States. 2. Democracy—Economic aspects—United States. 3. Income distribution—United States. I. Title.

  HB501.R359 2015

  330.973—dc23

  2015001873

  Cover image: So Rad/Shutterstock

  Cover design by Joe Montgomery

  v4.1

  a

  In fond memory of John Kenneth Galbraith

  There are two modes of invading private property; the first, by which the poor plunder the rich…sudden and violent; the second, by which the rich plunder the poor, slow and legal.

  —JOHN TAYLOR, An Inquiry into the Principles and Policy of the Government of the United States (1814)

  Contents

  Cover

  Also by Robert B. Reich

  Title Page

  Copyright

  Dedication

  Epigraph

  INTRODUCTION

  PART I THE FREE MARKET

  1 The Prevailing View

  2 The Five Building Blocks of Capitalism

  3 Freedom and Power

  4 The New Property

  5 The New Monopoly

  6 The New Contracts

  7 The New Bankruptcy

  8 The Enforcement Mechanism

  9 Summary: The Market Mechanism as a Whole

  PART II Work and Worth

  10 The Meritocratic Myth

  11 The Hidden Mechanism of CEO Pay

  12 The Subterfuge of Wall Street Pay

  13 The Declining Bargaining Power of the Middle

  14 The Rise of the Working Poor

  15 The Rise of the Non-working Rich

  PART III COUNTERVAILING POWER

  16 Reprise

  17 The Threat to Capitalism

  18 The Decline of Countervailing Power

  19 Restoring Countervailing Power

  20 Ending Upward Pre-distributions

  21 Reinventing the Corporation

  22 When Robots Take Over

  23 The Citizen’s Bequest

  24 New Rules

  ACKNOWLEDGMENTS

  NOTES

  INDEX

  Introduction

  Do you recall a time when the income of a single schoolteacher or baker or salesman or mechanic was enough to buy a home, have two cars, and raise a family? I do. In the 1950s, my father, Ed Reich, had a shop on the main street of a nearby town, in which he sold women’s clothing to the wives of factory workers. He earned enough for the rest of us to live comfortably. We weren’t rich but never felt poor, and our standard of living rose steadily through the 1950s and 1960s.

  That used to be the norm. For three decades after World War II, America created the largest middle class the world had ever seen. During those years the 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.

  Then, the CEOs of large corporations earned an average of about twenty times the pay of their typical worker. Now they get substantially over two hundred times. In those years, the richest 1 percent of Americans took home 9 to 10 percent of total income; today the top 1 percent gets more than 20 percent.

  Then, the economy generated hope. Hard work paid off, education was the means toward upward mobility, those who contributed most reaped the largest rewards, economic growth created more and better jobs, the living standards of most people improved throughout their working lives, our children would enjoy better lives than we had, and the rules of the game were basically fair.

  But today all these assumptions ring hollow. Confidence in the economic system has declined sharply. The apparent arbitrariness and unfairness of the economy have undermined the public’s faith in its basic tenets. Cynicism abounds. To many, the economic and political systems seem rigged, the deck stacked in favor of those at the top.

  The threat to capitalism is no longer communism or fascism but a steady undermining of the trust modern societies need for growth and stability. When most people stop believing they and their children have a fair chance to make it, the tacit social contract societies rely on for voluntary cooperation begins to unravel. In its place comes subversion, small and large—petty theft, cheating, fraud, kickbacks, corruption. Economic resources gradually shift from production to protection.

  We have the power to change all this, re-creating an economy that works for the many rather than the few. Contrary to Karl Marx, there is nothing about capitalism that leads inexorably to mounting economic insecurity and widening inequality. The basic rules of capitalism are not written in stone. They are written and implemented by human beings. But to determine what must be changed, and to accomplish it, we must first understand what has happened and why.

  For a quarter century, I’ve offered in books and lectures an explanation for why average working people in advanced nations like the United States have failed to gain ground and are under increasing economic stress: 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.

  My solution—and I’m hardly alone in suggesting this—has been an activist government that raises taxes on the wealthy, invests the proceeds in excellent schools and other means people need to get ahead, and redistributes to the needy. These recommendations have been vigorously opposed by those who believe the economy will function better for everyone if government is smaller and if taxes and redistributions are curtailed.

  While the explanation I have offered for what has happened is still relevant, I’ve come to believe it overlooks a critically important phenomenon: the increasing concentration of political power in a corporate and financial elite that has been able to influence the rules by which the economy runs. And the governmental solutions I have propounded, while I think still useful, are in some ways beside the point, because they take insufficient account of the government’s more basic role in setting the rules of the economic game. Worse yet, the ensuing debate over the merits of the “free market” versus an activist government has diverted attention from several critical issues: how the market has come to be organized differently from the way it was a half century ago, why its current organization is failing to deliver the widely shared prosperity it delivered then, and w
hat the basic rules of the market should be.

  I have come to think that the diversion of attention away from these issues is not entirely accidental. Many of the most vocal proponents of the “free market”—including executives of large corporations and their ubiquitous lawyers and lobbyists, denizens of Wall Street and their political lackeys, and numerous multimillionaires and billionaires—have for many years been actively reorganizing the market for their own benefit and would prefer these issues not be examined.

  It is my intention in this book to put these issues front and center. My argument is straightforward. As I will elaborate in Part I, 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 middle 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. The consequence has been a market organized by those with great wealth for the purpose of further enhancing their wealth. This has resulted in ever-larger upward pre-distributions inside the market, from the middle class and poor to a minority at the top. Because these pre-distributions occur inside the market, they have largely escaped notice.

  In Part II, I show 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.

  As I will show, CEOs of large corporations and Wall Street’s top traders and portfolio managers effectively set their own pay, advancing market rules that enlarge corporate profits while also using inside information to boost their fortunes. Meanwhile, the pay of average workers has gone nowhere because they have lost their aforementioned countervailing economic power and political influence. The simultaneous rise of both the working poor and non-working rich offers further evidence that earnings no longer correlate with effort. The resulting skewed pre-distribution of income to the top inside the market has generated demands for larger downward redistributions outside the market through taxes and transfer payments to the poor and lower-middle class, but such demands have simply added fuel to the incendiary debate over government’s size.

  As I elaborate in Part III, the solution is not to create more or less government. The problem is not the size of government but whom the government is for. The remedy is for the vast majority to regain influence over how the market is organized. 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.

  As I will explain, the biggest political divide in America in years to come will not be between the Republican and Democratic parties. It will be between the complex of large corporations, Wall Street banks, and the very rich that has fixed the economic and political game to their liking, and the vast majority who, as a result, find themselves in a fix. My conclusion is that the only way to reverse course is for the vast majority who now lack influence over the rules of the game to become organized and unified, in order to re-establish the countervailing power that was the key to widespread prosperity five decades ago.

  While this book focuses on the United States, the center of global capitalism, the phenomena I describe are increasingly common to capitalism as practiced elsewhere around the world, and I believe the lessons drawn from what has occurred here are as relevant to other nations. Although global businesses are required to play by the rules of the countries where they do business, the largest global corporations and financial institutions are exerting growing influence over the makeup of those rules wherever devised. And 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.

  I believe that if we dispense with mythologies that have distracted us from the reality we find ourselves in, we can make capitalism work for most of us rather than for only a relative handful. History provides some direction as well as some comfort, especially in America, which has periodically readapted the rules of the political economy to create a more inclusive society while restraining the political power of wealthy minorities at the top. In the 1830s, the Jacksonians targeted the special privileges of elites so that the market system would better serve ordinary citizens. In the late nineteenth and early twentieth centuries, progressives enacted antitrust laws to break up the giant trusts, created independent commissions to regulate monopolies, and banned corporate political contributions. In the 1930s, New Dealers limited the political power of large corporations and Wall Street while enlarging the countervailing power of labor unions, small businesses, and small investors.

  The challenge is not just economic but political. The two realms cannot be separated. Indeed, the field on which I draw in this book used to be called “political economy”—the study of how a society’s laws and political institutions relate to a set of moral ideals, of which a fair distribution of income and wealth was a central topic. After World War II, under the powerful influence of Keynesian economics, the focus shifted away from these concerns and toward government taxes and transfers as means of both stabilizing the business cycle and helping the poor.1 For many decades this formula worked. Rapid economic growth generated widespread prosperity, which in turn created a buoyant middle class. Countervailing power fulfilled its mission. We did not have to attend to the organization of the political economy or be concerned about excessive economic and political power at its highest rungs. Now, we do.

  In a sense, then, this book harkens back to an earlier tradition of inquiry and a longer-lived concern. The book’s optimism is founded precisely in that history. Time and again we have saved capitalism from its own excesses. I am confident we will do so again.

  * * *

  1 The emergence of economics as a discipline distinct from political economy began in 1890 with the publication of Alfred Marshall’s Principles of Economics. The new discipline sought to identify abstract variables applicable to all systems of production and exchange and paid little or no attention to the distribution of those resources or to a specific society’s legal and political institutions. The study both of economics and of many other aspects of society thereafter began shifting from historically specific political, moral, and institutional relationships to more universal and scientific “laws.” John Maynard Keynes’s General Theory of Employment, Interest, and Money (1936) dominated American economic policy from the end of World War II until the late 1970s.

  · PART I ·

  The Free Market

  1

  The Prevailing View

  It usually occurs in a small theater or a lecture hall. Someone introduces me and then introduces a person who is there to debate me. My debate opponent and I then spend five or ten minutes sparring over the chosen topic—education, poverty, income inequality, taxes, executive pay, middle-class wages, climate change, drug trafficking, whatever. It doesn’t matter. Because, with astounding regularity, the debate soo
n turns to whether the “free market” is better at doing something than government.

  I do not invite this. In fact, as I’ve already said and will soon explain, I view it as a meaningless debate. Worse, it’s a distraction from what we should be debating. Intentional or not, it deflects the public’s attention from what’s really at issue.

  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.” In this view, whatever inequality or insecurity the market generates is assumed to be the natural and inevitable consequence of impersonal “market forces.” What you’re paid is simply a measure of what you’re worth in the market. If you aren’t paid enough to live on, so be it. If others rake in billions, they must be worth it. If millions of people are unemployed or their paychecks are shrinking or they have to work two or three jobs and have no idea what they’ll be earning next month or even next week, that’s unfortunate but it’s the outcome of “market forces.”

  According to this view, whatever we might do to reduce inequality or economic insecurity—to make the economy work for most of us—runs the risk of distorting the market and causing it to be less efficient, or of producing unintended consequences that may end up harming us. Although market imperfections such as pollution or unsafe workplaces, or the need for public goods such as basic research or even aid to the poor, may require the government to intervene on occasion, these instances are exceptions to the general rule that the market knows best.

  The prevailing view is so dominant that it is now almost taken for granted. It is taught in almost every course on introductory economics. It has found its way into everyday public discourse. One hears it expressed by politicians on both sides of the aisle.

  The question typically left to debate is how much intervention is warranted. Conservatives want a smaller government and less intervention; liberals want a larger and more activist government. This has become the interminable debate, the bone of contention that splits left from right in America and in much of the rest of the capitalist world. One’s response to it typically depends on which you trust most (the least): the government or the “free market.”