President George W. Bush, British Prime Minister Gordon Brown
Can Capitalists Save Capitalism?
JAN. 20, 2015
The New York Times
The Opinion Pages
Contributing Op-Ed Writer
Key Democrats have reached agreement on a set of policies known
as “inclusive capitalism”: a forceful market-oriented economic agenda intended
to counter inequality, restrain the accrual of vast wealth at the top and
provide the working and middle classes with improved economic opportunities.
From the White House to Congress to liberal think tanks, recent Democratic
proposals would substantially alter the rules of the marketplace. These include
major revisions of the tax code, legislation to pressure corporations to
increase pay to match productivity growth and an expansion of refundable tax
credits to include low-income workers as well as households making as much as
$80,000 a year.
According to a report by the former Treasury secretary Lawrence Summers and Ed
Balls, a top British Labor Party politician, unless there is serious government
intervention, inequality and a lack of financial resources among those in the
bottom half of the income distribution will result in “insufficient aggregate
demand – too little spending by consumers and businesses to keep gross domestic
product at its capacity.” Developed nations “need new social and political
institutions to make 21st century capitalism work for the many and not the few,”
Summers and Balls wrote.
“Inclusive capitalism,” according to its advocates, seeks “to make our economic
system more equitable, more sustainable and more inclusive.” It is an
international movement that has now made its way into Democratic Party circles.
Mark Carney, the Canadian governor of the Bank of England, articulated a
fundamental premise of inclusive capitalism in a speech delivered in Britain
last May: “Just as any revolution eats its children,” Carney said, “unchecked
market fundamentalism can devour the social capital essential for the long-term
dynamism of capitalism itself.” Among the attendees at the conference in London
in May were such Democratic and liberal luminaries as Bill Clinton; Eric
Schmidt, executive chairman of Google; and Summers, who served President Obama
as a top economic adviser.
Two of the earliest advocates of inclusive capitalism were the late C.K.
Prahalad, professor of business at the University of Michigan, and Stuart L.
Hart, professor emeritus of strategic management at Cornell. In a widely cited
2002 article, “The Fortune at the Bottom of the Pyramid,” Prahalad and Hart
argued that powerful corporations could — must — improve the conditions of the
world’s poor by promoting commercial activity, employment opportunities, access
to credit, and wealth creation among those at the bottom of income distribution
– a group they refer to as the fourth tier, the world’s poorest four billion
Prahalad’s core thesis was that the poor could be the engine of the next round
of global trade and prosperity. If we stop thinking of the poor as victims or as
a burden and start recognizing them as resilient and creative entrepreneurs and
value-conscious consumers, a whole new world of opportunity will open up.
The concept of inclusive capitalism has expanded over the past 13 years to apply
to those at the bottom and middle of the ladder in developed nations, including
the United States. The fundamental “inclusive capitalism” argument is that
business enterprises lose profit-making opportunities when consumers have little
money to spend. Inadequate purchasing power among the many threatens
corporations and poses a direct danger to the top 1 percent, and, indeed, to
As testimony to the power of the concept of “inclusive capitalism,” President
Obama in his State of the Union address called for the enactment of tax policies
designed to provide a larger share of market-driven economic growth to the
working and middle classes. In a May 7, 2014, speech in Dublin, “Global Lessons
for Inclusive Growth,” Jason Furman, chairman of the Council of Economic
Advisers, outlined central elements of the White House agenda. Administration
policies, Furman argued, would result in “higher median incomes, lower poverty
rates, and broader, more inclusive growth.”
Representative Chris Van Hollen, ranking Democrat on the House Budget Committee,
outlined additional inclusive capitalism policies in “An Action Plan to Grow the
Paychecks of All, Not Just the Wealth of a Few.”
The Summers-Balls report – “The Report of the Commission on Inclusive
Prosperity” – is the most comprehensive summary. This report, which uses the
phrase “inclusive capitalism” more than a dozen times, was published by the
Center for American Progress, a Democratic think tank founded by John Podesta –
Bill Clinton’s former chief of staff who in February will join Hillary Clinton’s
exploratory presidential campaign.
Those pressing the Democratic Party to take more populist stands contend that
the lack of a persuasive Democratic economic program contributed to, or drove,
devastating losses in the 2014 elections in states as diverse as North Carolina,
Maryland, Iowa and Colorado. According to an Oct. 13, 2014, Gallup pre-election
survey, voters believed Republicans were better equipped to handle the economy
than Democrats by 50 percent to 39 percent.
If policies grounded in “inclusive capitalism” become central to the party
platform, it will mark the party’s strongest commitment to the economic
interests of working- and middle-class Americans since Franklin Roosevelt’s New
Deal. The new agenda stands apart from Lyndon Johnson’s War on Poverty, which
was focused primarily on the “Other America” of the very poor.
The most damaging contemporary American trend that the proposals seek to counter
is the sharply declining share of national income flowing to labor, and the
parallel increase in the share flowing to owners of capital. This trend, which
accelerated sharply in 2000, is shown in Figure 1, a graphic produced by the
“We need to share the wealth,” said Senator Charles E. Schumer, chairman of the
Senate Democratic Policy and Communications Committee and a leading proponent of
the party’s focus on economics.
Schumer, in an interview, voiced strong enthusiasm for the Summers report. “It
could bring together the left and center and even parts of the right,” Schumer
In his State of the Union address, Obama put it this way: “Let’s close loopholes
so we stop rewarding companies that keep profits abroad, and reward those that
invest in America.”
His plan calls for the imposition of new taxes on the wealthy and on major
financial institutions, totaling $320 billion over 10 years. The money would be
used to finance tax cuts and credits for low-to-moderate-income men and women,
and to make attendance at community colleges tuition-free.
Not only would Obama raise capital gains tax rates from 23.8 to 28 percent for
couples making more than $500,000 in taxable income, but he would eliminate a
provision in tax law that allows the very rich to avoid taxation on much of the
wealth passed on to their children and he would end a current exemption from
taxation on the increase in the value of stocks, bonds and other assets when
passed on through inheritance.
This exemption, technically called the “stepped up basis,” is crucial to the
unrestricted intergenerational transfer of wealth, a practice that many
liberals, and even some conservatives, contend conflicts with equality of
opportunity. The Obama plan additionally calls for a .07 percent fee on
financial institutions with more than $50 billion in assets that would produce
$110 billion in revenue over 10 years.
Van Hollen, in turn, would raise revenues by imposing a transaction tax on stock
trades. He would use the money to finance a $1,000 tax credit for workers making
less than $100,000 annually, a $20,000 deduction for two-earner families, an
annual $250 payment to those who put at least $500 into an approved retirement
pension plan, and to substantially increase child care tax credits.
Van Hollen would also bar large corporations from deducting C.E.O. and other
corporate compensation over $1 million unless employees got pay raises
reflecting increases in worker productivity and the cost of living.
The Summers-Balls report includes many of the proposals outlined by Obama and
Van Hollen. Balls warned on his blog that “unfettered markets and trickle-down
economics are leading to increasing levels of inequality, stagnating wages and a
hollowing out of decent, middle income jobs.”
Their report addresses four major economic developments broadly undermining
wages and working conditions:
First, that “increasing global economic integration has also meant increased
competition for many workers who produce tradable goods and services.”
Second, that “advances in robotics and artificial intelligence have put
intermediate-skill jobs at risk in what economists call a hollowing out of the
Third, that “Major corporations have opted to use subcontracting to perform
basic functions, and many workers are now classified as independent contractors,
eroding basic labor law protections.”
And fourth, “corporations have come to function much less effectively as
providers of large-scale opportunity. Increasingly, their dominant focus has
been on maximization of share prices and the compensation of their top
In addition, Summers and Balls argue that competition in the banking sector has
broken down and “will need interventions to support the reasonable functioning
of the free market.”
What do these points actually signify in practice? In a section titled “U.S.
Policy Response,” Summers and Balls call for making parent companies responsible
for the working conditions of employees of subcontractors; adopting government
policies favoring employee stock ownership so that workers benefit from the
growing share of national income flowing to capital as opposed to wages; and
imposing tough and costly sanctions on employers who use illegal tactics to
Not stopping there, Summers and Balls call for a substantial boost in the
$24,000 pay ceiling under which employees must get time and a half for overtime
work beyond 40 hours a week; increased infrastructure spending of $100 billion a
year, or $1 trillion over 10 years; and strengthened provisions in trade
agreements guaranteeing collective bargaining rights and basic environmental
protections to reduce the movement of American companies to countries with the
lowest labor standards.
Among their other proposed policy initiatives are creation of an income tax
credit for those with moderate pay levels. It would start at $23,260 for joint
filers with children, just where the current earned-income tax credit phases
out. At $85,000, the credit would diminish, reaching zero at $95,000. They would
also change the mortgage interest and property tax deductions into tax credits.
Deductions inherently provide larger benefits to those in higher tax brackets.
Credits provide equal benefits to all who qualify.
Republican leaders in Congress have already stiff-armed these proposals.
In response to Obama’s plan to tax the wealthy to boost breaks for the working
class, Michael Steed, spokesman for the speaker of the House, John A. Boehner,
said in a statement, “More Washington tax hikes and spending is the same old
top-down approach we’ve come to expect from President Obama that hasn’t worked.”
“The president needs to stop listening to his liberal allies who want to raise
taxes at all costs and start working with Congress to fix our broken tax code,”
Senator Orrin Hatch, chairman of the Senate Finance Committee, said in a
Taken together, the Obama, Van Hollen, and Summers interpretations of “inclusive
capitalism” are a victory for the left of the Democratic Party. This is
especially the case for the Economic Policy Institute, which has been conducting
a lonely fight for stronger legislative and regulatory initiatives to counter
Josh Bivens, the research director at E.P.I., said in an email that the
proposals did indeed “look like a shift in the Democratic Party on economic
policy.” He said his hope was that “the next two years becomes a competition
about who is willing to be the most aggressive in trying to boost
Dean Baker, co-director of the Center for Economic and Policy Research, called
the Obama plan “a pretty big deal. Raising the capital gains tax rate and ending
the stepped-up basis at death are changes that almost exclusively hit the
wealthy, and they amount to a fair bit of money.”
While none of the proposals, or their advocates, acknowledge this explicitly,
one of the objectives of the evolving Democratic economic agenda is to get back
support among whites without college degrees – the polling shorthand version of
what is sometimes still called the white working class.
In 2014, these voters, who made up 36 percent of the electorate, cast their
ballots for Republican House candidates by a 30-point margin (64-34 percent).
This was nearly double the 16-point Republican margin among white college
Inclusive capitalism has its critics on the left, nicely summed up by the
Guardian columnist Nafeez Ahmed. He argued last May that the inclusive
capitalism movement represented “less a meaningful shift of direction than a
barely transparent effort to rehabilitate a parasitical economic system on the
brink of facing a global uprising.”
Andrew Grove, founder of Intel, put the push toward “inclusive capitalism” in a
more positive light. “Our generation has seen the decisive victory of
free-market principles over planned economies,” he told the Economist in 2012.
“So we stick with this belief largely oblivious to emerging evidence that while
free markets beat planned economies, there may be room for a modification that
is even better.”
While the new agenda has no chance of passage in the Republican-controlled
Congress, Democrats plan to use the tenets of inclusive capitalism in the 2016
elections. One Democratic goal in putting specific policies forward is to use
them as wedge issues to force Republicans to choose between their affluent
backers and their supporters in the white working class. This will be no easy
task because a decisive majority of whites without college degrees has been
voting against Democratic candidates for two decades, making it very difficult
for the party to break what has been a Republican hammerlock since 1994.
In Orange County, Calif., the probation department’s “supervised
electronic confinement program,” which monitors the movements of low-risk
offenders, has been outsourced to a private company, Sentinel Offender Services.
The company, by its own account, oversees case management, including breath
alcohol and drug-testing services, “all at no cost to county taxpayers.”
Sentinel makes its money by getting the offenders on probation to pay for the
company’s services. Charges can range from $35 to $100 a month.
The company boasts of having contracts with more than 200 government agencies,
and it takes pride in the “development of offender funded programs where any of
our services can be provided at no cost to the agency.”
Sentinel is a part of the expanding universe of poverty capitalism. In this
unique sector of the economy, costs of essential government services are shifted
to the poor.
In terms of food, housing and other essentials, the cost of being poor has
always been exorbitant. Landlords, grocery stores and other commercial
enterprises have all found ways to profit from those at the bottom of the
The recent drive toward privatization of government functions has turned
traditional public services into profit-making enterprises as well.
In addition to probation, municipal court systems are also turning collections
over to a national network of companies like Sentinel that profit from service
charges imposed on the men and women who are under court order to pay fees and
fines, including traffic tickets (with the fees being sums tacked on by the
court to fund administrative services).
When they cannot pay these assessed fees and fines – plus collection charges
imposed by the private companies — offenders can be sent to jail. There are many
documented cases in which courts have imprisoned those who failed to keep up
with their combined fines, fees and service charges.
“These companies are bill collectors, but they are given the authority to say to
someone that if he doesn’t pay, he is going to jail,” John B. Long, a lawyer in
Augusta, Ga. active in defending the poor, told Ethan Bronner of The Times.
A February 2014 report by Human Rights Watch on private offender services found
that “more than 1,000 courts in several US states delegate tremendous coercive
power to companies that are often subject to little meaningful oversight or
regulation. In many cases, the only reason people are put on probation is
because they need time to pay off fines and court costs linked to minor crimes.
In some of these cases, probation companies act more like abusive debt
collectors than probation officers, charging the debtors for their services.”
Human Rights Watch also found that in Georgia in 2012, in “a state of less than
10 million people, 648 courts assigned more than 250,000 cases to private
probation companies.” The report notes that “there is virtually no transparency
about the revenues of private probation companies” since “practically all of the
industry’s firms are privately held and not subject to the disclosure
requirements that bind publicly traded companies. No state requires probation
companies to report their revenues, or by logical extension the amount of money
they collect for themselves from probationers.”
Human Rights Watch goes on to provide an account given by a private probation
officer in Georgia: “I always try and negotiate with the families. Once they
know you are serious they come up with some money. That’s how you have to be.
They have to see that this person is not getting out unless they pay something.
I’m just looking for some good faith money, really. I got one guy I let out of
jail today and I got three or four more sitting there right now.”
Collection companies and the services they offer appeal to politicians and
public officials for a number of reasons: they cut government costs, reducing
the need to raise taxes; they shift the burden onto offenders, who have little
political influence, in part because many of them have lost the right to vote;
and it pleases taxpayers who believe that the enforcement of punishment —
however obtained — is a crucial dimension to the administration of justice.
As N.P.R. reported in May, services that “were once free, including those that
are constitutionally required,” are now frequently billed to offenders: the cost
of a public defender, room and board when jailed, probation and parole
supervision, electronic monitoring devices, arrest warrants, drug and alcohol
testing, and D.N.A. sampling. This can go to extraordinary lengths: in
Washington state, N.P.R. found, offenders even “get charged a fee for a jury
trial — with a 12-person jury costing $250, twice the fee for a six-person
This new system of offender-funded law enforcement creates a vicious circle: The
poorer the defendants are, the longer it will take them to pay off the fines,
fees and charges; the more debt they accumulate, the longer they will remain on
probation or in jail; and the more likely they are to be unemployable and to
And that’s not all. The more commercialized fee collection and probation
services get, the more the costs of these services are inflicted on the poor,
and the more resentful of the police specifically and of law enforcement
generally the poor become. At the same time, judicial systems are themselves in
a vise. Judges, who in many locales must run for re-election, are under intense
pressure from taxpayers to cut administrative costs while maintaining the
efficacy of the judiciary.
The National Center for State Courts recently issued a guide noting that while
the collection of fines and costs is “important for reasons of revenue,” even
more important is the maintenance of “the integrity of the courts.”
In dealing with more serious crimes involving substantial sentences, the rising
costs of maintaining and building new prison facilities has prompted many state
governments, and even the federal government, to turn to the private prison
This industry, which began to grow in the early 1980s, now faces significant
problems. As incarceration rates drop, and as some states adopt more lenient
sentencing practices, the industry is struggling to find new ways to fill vacant
Take the Corrections Corporation of America, which is listed on the New York
Stock Exchange and reported revenues of $1.69 billion in 2013. The firm
describes itself as “the nation’s largest owner of privatized correctional and
detention facilities and one of the largest prison operators in the United
States behind only the federal government and three states.”
In its 2013 annual report, C.C.A. was clear about the problems facing the
company: “under a per diem rate structure, a decrease in our occupancy rates
could cause a decrease in revenue and profitability. For the past three years,
occupancy rates have been steadily declining in C.C.A. facilities, from 90
percent in 2011, to 88 percent in 2012 and 85 percent in 2013.”
These numbers reflect the brutal math underlying profit margins in private
prisons. The “revenue per compensated man-day” for each inmate rose by 35 cents
from $60.22 in 2012 to $60.57 in 2013. But expenses “per compensated man-day”
rose by 70 cents from $42.04 to $42.74, for a net decline in operating income
for each inmate from $18.18 a day to $17.83.
In combination with declining occupancy rates, the result was a dip in total
revenue from $1.72 billion in 2012 to $1.69 billion in 2013.
The founders of C.C.A. include Tom Beasley, a former chairman of the Tennessee
Republican Party. One of its early investors was Honey Alexander, who is married
to Senator Lamar Alexander, Republican of Tennessee. Alexander, according to the
Sunlight Foundation, has received in excess of $63,000 from C.C.A. employees and
the company PAC since his election to the Senate in 2002.
Poverty capitalism and government policy are now working on their own and in
tandem to shift costs to those least equipped to pay and in particular to the
least politically influential segment of the poor: criminal defendants and those
delinquent in paying fines.
Last year, Ferguson, Mo., the site of recent protests over the shooting of
Michael Brown, used escalating municipal court fines to pay 20.2 percent of the
city’s $12.75 million budget. Just two years earlier, municipal court fines had
accounted for only 12.3 percent of the city’s revenues.
What should be done to interrupt the dangerous feedback loop between low-level
crime and extortionate punishment? First, local governments should bring private
sector collection charges, court-imposed administrative fees and the dollar
amount of traffic fines (which often double and triple when they go unpaid) into
line with the economic resources of poor offenders. But larger reforms are
needed and those will not come about unless the poor begin to exercise their
latent political power. In many ways, everything is working against them. But
the public outpouring spurred by the shooting of Michael Brown provides an
indication of a possible path to the future. It was, after all, just 50 years
ago — not too distant in historical terms — that collective action and social
solidarity produced tangible results.
On Wednesday, Howard Schultz, the chairman and chief executive
of Starbucks, will take the podium at his company’s annual meeting and talk
about the importance of morality in business.
Yes, morality. I don’t know that he’ll use that exact word. But there can be
little doubt that in recent years, especially, Schultz has been practicing a
kind of moral capitalism. Profitability is important, he believes, but so is
treating customers, employees and coffee growers fairly. Recently, Schultz has
defined Starbucks’s mission even more broadly, creating programs that have
nothing at all to do with selling coffee but are aimed at helping the country
recover from the Great Recession.
In the speech, Schultz plans to make a direct link between Starbucks’s record
profits and this larger societal role the company has embraced. He will make the
case that companies that earn the country’s trust will ultimately be rewarded
with a higher stock price. “The value of your company is driven by your
company’s values,” he plans to say.
I bring up Schultz and Starbucks because this week we saw a different kind of
American capitalism on display — the “rip your eyeballs out” capitalism of
Goldman Sachs. In the corporate equivalent of the shot heard round the world,
Greg Smith, a former Goldman executive, wrote an Op-Ed article in The Times as
he was walking out the door in which he described a corporate culture that
values only one thing: making as much money as possible, by whatever means
necessary. According to Smith, Goldman views clients as pigeons to be plucked
rather than customers to be valued. Goldman traders vie to see how much profit
they can make at the expense of their clients, even if it means selling them
products that are sure to “blow up” eventually. “It makes me ill how callously
people talk about ripping their clients off,” Smith wrote.
In the wake of Smith’s article, plenty of people raced to Goldman’s defense.
Michael Bloomberg, New York’s billionaire mayor, whose company sells Goldman
expensive computer terminals, went to Goldman Sachs’s headquarters in a show of
support. The editors of his eponymous firm published an editorial that
mercilessly mocked Smith. They and others pointed out that Goldman clients are
big boys who can take care of themselves. Even some clients agreed. “You better
not turn your back on them,” one Goldman customer told The Financial Times. Yet,
he added, “They are also highly competent.”
But there’s a reason Smith’s article has struck such a chord. It is the same
reason that Goldman Sachs, despite having come through the financial crisis
largely unscathed, has become the target of such astonishing venom, described as
a vampire squid and the like. The reason is that the kind of amoral,
eat-what-you-kill capitalism that Goldman represents is one that most Americans
instinctively find repugnant. It confirms the suspicions many people have that
Wall Street has become a place where sleazy practices are the norm, and where
generating profits in ways that are detrimental to society is the ticket to a
successful career and a multimillion-dollar bonus.
Goldman bundled terrible subprime mortgages that helped bring about the
financial crisis. Smelling trouble, it unloaded its worst mortgage bonds by
cramming them down the throats of its clients. It secretly allowed a
short-seller, John Paulson, to pick some especially toxic mortgage bonds that
were bundled and sold to Goldman clients — with Paulson profiting by taking the
“short” side of the trade. Just recently, Goldman had to admit that one of its
investment bankers had acted as a merger adviser to the El Paso Corporation
while holding stock in Kinder Morgan, which was trying to acquire El Paso. It
would be hard to imagine a more blatant conflict — yet no one at Goldman
bothered to tell El Paso.
These practices may not be illegal, but can you really say they represent the
values that we want to see on Wall Street or in our corporations? I can’t.
And Goldman shouldn’t either. What has been amazing is that, despite three years
of nonstop criticism — including Congressional hearings and settlements with the
government — Goldman has not changed one iota. That is another reason Smith’s
article resonated. It confirmed that suspicion as well. Goldman’s response to
every controversy these past three years has been to bury them in a blizzard of
public relations. And this has been its response to the Smith article,
releasing, for instance, a companywide e-mail from Lloyd Blankfein, its chief
executive, insisting that Goldman does, too, care about clients. Consistently,
Goldman’s attitude has been: This, too, shall pass.
So far, though, it hasn’t. And maybe, just maybe, it won’t. Maybe the time has
come for Blankfein to watch what Howard Schultz is doing at Starbucks.
Sometimes, the best way to do well really is to do good.
March 13, 2012
The New York Times
By THOMAS L. FRIEDMAN
David Rothkopf, the chief executive and editor-at-large of
Foreign Policy magazine, has a smart new book out, entitled “Power, Inc.,” about
the epic rivalry between big business and government that captures, in many
ways, what the 2012 election should be about — and it’s not “contraception,”
although the word does begin with a “C.” It’s the future of “capitalism” and
whether it will be shaped in America or somewhere else.
Rothkopf argues that while for much of the 20th century the great struggle on
the world stage was between capitalism and communism, which capitalism won, the
great struggle in the 21st century will be about which version of capitalism
will win, which one will prove the most effective at generating growth and
become the most emulated.
“Will it be Beijing’s capitalism with Chinese characteristics?” asks Rothkopf.
“Will it be the democratic development capitalism of India and Brazil? Will it
be entrepreneurial small-state capitalism of Singapore and Israel? Will it be
European safety-net capitalism? Or will it be American capitalism?” It is an
intriguing question, which raises another: What is American capitalism today,
and what will enable it to thrive in the 21st century?
Rothkopf’s view, which I share, is that the thing others have most admired and
tried to emulate about American capitalism is precisely what we’ve been
ignoring: America’s success for over 200 years was largely due to its healthy,
balanced public-private partnership — where government provided the
institutions, rules, safety nets, education, research and infrastructure to
empower the private sector to innovate, invest and take the risks that promote
growth and jobs.
When the private sector overwhelms the public, you get the 2008 subprime crisis.
When the public overwhelms the private, you get choking regulations. You need a
balance, which is why we have to get past this cartoonish “argument that the
choice is either all government or all the market,” argues Rothkopf. The lesson
of history, he adds, is that capitalism thrives best when you have this balance,
and “when you lose the balance, you get in trouble.”
For that reason, the ideal 2012 election would be one that offered the public
competing conservative and liberal versions of the key grand bargains, the key
balances, that America needs to forge to adapt its capitalism to this century.
The first is a grand bargain to fix our long-term structural deficit by phasing
in $1 in tax increases, via tax reform, for every $3 to $4 in cuts to
entitlements and defense over the next decade. If the Republican Party continues
to take the view that there must be no tax increases, we’re stuck. Capitalism
can’t work without safety nets or fiscal prudence, and we need both in a
As part of this, we will need an intergenerational grand bargain so we don’t end
up in an intergenerational civil war. We need a proper balance between
government spending on nursing homes and nursery schools — on the last six
months of life and the first six months of life.
Another grand bargain we need is between the environmental community and the oil
and gas industry over how to do two things at once: safely exploit America’s
newfound riches in natural gas, while simultaneously building a bridge to a
low-carbon energy economy, with greater emphasis on energy efficiency.
Another grand bargain we need is on infrastructure. We have more than a $2
trillion deficit in bridges, roads, airports, ports and bandwidth, and the
government doesn’t have the money to make it up. We need a bargain that enables
the government to both enlist and partner with the private sector to unleash
private investments in infrastructure that will serve the public and offer
investors appropriate returns.
Within both education and health care, we need grand bargains that better
allocate resources between remediation and prevention. In both health and
education, we spend more than anyone else in the world — without better
outcomes. We waste too much money treating people for preventable diseases and
reteaching students in college what they should have learned in high school.
Modern capitalism requires skilled workers and workers with portable health care
that allows them to move for any job.
We also need a grand bargain between employers, employees and government — à la
Germany — where government provides the incentives for employers to hire, train
and retrain labor.
We can’t have any of these bargains, though, without a more informed public
debate. The “big thing that’s missing” in U.S. politics today, Bill Gates said
to me in a recent interview, “is this technocratic understanding of the facts
and where things are working and where they’re not working,” so the debate can
be driven by data, not ideology.
Capitalism and political systems — like companies — must constantly evolve to
stay vital. People are watching how we evolve and whether our version of
democratic capitalism can continue to thrive. A lot is at stake here. But if “we
continue to treat politics as a reality show played for cheap theatrics,” argues
Rothkopf, “we increase the likelihood that the next chapter in the ongoing story
of capitalism is going to be written somewhere else.”
January 25, 2012
The New York Times
By MARK LANDLER
WASHINGTON — President Obama did not mention Mitt Romney on
Tuesday evening, but he didn’t need to. Mr. Romney, whom the president’s aides
still view as his most likely opponent in the fall, was the unspoken adversary
in Mr. Obama’s call for a more equitable society — the natural foil for his
proposals to level the playing field for middle-class Americans, from taxes to
When Mr. Obama talked about levying a millionaires’ tax, he might have been
referring to Mr. Romney’s newly released tax return, which disclosed he paid a
tax rate of 13.9 percent on income of more than $20 million in 2010.
When he referred to his administration’s bailout of the auto industry, noting
that “some even said we should let it die,” he could have been talking about Mr.
Romney’s argument that the carmakers should have been allowed to fail. And when
he said he would oppose “any effort to return to the very same policies that
brought on this economic crisis in the first place,” he could have been
referring to Mr. Romney’s call for a rollback of regulations on Wall Street.
Nine months before he faces the voters, Mr. Obama seized what is likely to be
one of his most prominent platforms of the year to draw a bright line between
himself and Mr. Romney — and, in the process, try to appeal to those frustrated
by the deepening economic divide.
Gone was the soaring language of his last State of the Union address, when the
president spoke of winning the future — a challenge he likened to “our
generation’s Sputnik moment.” With the tents of the Occupy protesters catching
snow in American cities, he was tapping into a national sense of grievance.
“When Americans talk about folks like me paying my fair share of taxes, it’s not
because they envy the rich,” Mr. Obama said, answering Mr. Romney’s charge that
the president engages in the “bitter politics of envy.” “It’s because they
understand that when I get tax breaks I don’t need and the country can’t afford,
it either adds to the deficit or somebody else has to make up the difference.”
It is a theme he has struck repeatedly as his campaign has geared up, and
nowhere more forcefully than last month in Osawatomie, Kan., where he invoked
the spirit of Theodore Roosevelt, a Republican aristocrat who nevertheless broke
up monopolies and campaigned for a progressive income tax.
Mr. Obama’s appeal on Tuesday, studded as it was with the policy proposals that
fill these addresses, did not match that populist fury. But in the august
setting of the Capitol, squaring off against an often-hostile Congress, the
president rolled out an election-year message that offers voters a stark choice
between his vision and what he paints as the Darwinian approach of Mr. Romney
and other Republicans.
To some extent, Mr. Obama was also aiming his words at Florida, where Mr. Romney
and the rest of the Republican field are competing in a primary next week over
the right to challenge the president.
Every word in a State of the Union address is carefully chosen. So it was no
accident that when the president discussed the auto industry and the future of
American manufacturing, he said: “What’s happening in Detroit can happen in
other industries. It can happen in Cleveland and Pittsburgh and Raleigh.”
Those cities happen to be in Michigan, Ohio, Pennsylvania and North Carolina —
battleground states totaling 69 electoral votes.
But much of the president’s message was clearly intended to push back at his
Republican rivals and their critiques of his record.
Lest anyone forget Mr. Romney’s background at Bain Capital as an avid buyer and
seller of companies, Mr. Obama offered a paean to permanence — to companies
built on a sturdy foundation of manufacturing and skilled workers. These
businesses, he said, are the basis of a competitive economy.
Mr. Obama also seemed to have Mr. Romney in mind when he announced new housing
assistance and declared that “responsible homeowners shouldn’t have to sit and
wait for the housing market to hit bottom to get some relief.” Last year, Mr.
Romney went to Nevada, the state hardest hit by foreclosures, and told a Las
Vegas newspaper that the housing market needed to bottom out.
Mr. Obama also said he would oppose efforts to repeal financial regulations, and
he drew a direct link between the policies of his predecessor, George W. Bush,
and the economic mess that has consumed his own presidency.
In recent weeks, Mr. Obama has had a useful surrogate in Newt Gingrich, the
former House speaker, who has accused Mr. Romney of destroying jobs while at
Bain and pressured him to release his tax returns.
But Mr. Gingrich, whose victory in the South Carolina primary has turned him
into a real competitor, did not escape a few jabs Tuesday night. Mr. Obama
called for new rules to reduce the influence of lobbyists. Left unsaid was Mr.
Gingrich’s disclosure on Monday that he had been paid $1.6 million to advise the
mortgage giant Freddie Mac.
Mr. Romney was not silent on Mr. Obama’s big day, earlier laying out his own
case for leadership in a speech at a shuttered factory in Tampa, Fla. He argued
that his 25 years in business had given him the skills to turn around the
economy. The president, Mr. Romney said, “puts his faith in government; we put
our faith in the American people.”
“Ours is the party of free enterprise, free markets and consumer choice,” he
said. “The Republican Party stands for personal responsibility and equal
opportunity. We don’t demonize prosperity; we celebrate success.”
Mr. Obama countered that he had turned things around, pointing to the revived
auto industry, a recovering economy and three million private-sector jobs. And
he flatly rejected the contention of Mr. Romney, Mr. Gingrich and other
Republicans that he is presiding over a country in decline.
“Anyone who tells you otherwise,” the president said, “anyone who tells you that
America is in decline or that our influence has waned, doesn’t know what they’re
write about Occupy Wall Street, some readers ask me if the protesters really are
half-naked Communists aiming to bring down the American economic system when
they’re not doing drugs or having sex in public.
The answer is no. That alarmist view of the movement is a credit to the
(prurient) imagination of its critics, and voyeurs of Occupy Wall Street will be
disappointed. More important, while alarmists seem to think that the movement is
a “mob” trying to overthrow capitalism, one can make a case that, on the
contrary, it highlights the need to restore basic capitalist principles like
To put it another way, this is a chance to save capitalism from crony
I’m as passionate a believer in capitalism as anyone. My Krzysztofowicz cousins
(who didn’t shorten the family name) lived in Poland, and their experience with
Communism taught me that the way to raise living standards is capitalism.
But, in recent years, some financiers have chosen to live in a government-backed
featherbed. Their platform seems to be socialism for tycoons and capitalism for
the rest of us. They’re not evil at all. But when the system allows you more
than your fair share, it’s human to grab. That’s what explains featherbedding by
both unions and tycoons, and both are impediments to a well-functioning market
When I lived in Asia and covered the financial crisis there in the late 1990s,
American government officials spoke scathingly about “crony capitalism” in the
region. As Lawrence Summers, then a deputy Treasury secretary, put it in a
speech in August 1998: “In Asia, the problems related to ‘crony capitalism’ are
at the heart of this crisis, and that is why structural reforms must be a major
part” of the International Monetary Fund’s solution.
The American critique of the Asian crisis was correct. The countries involved
were nominally capitalist but needed major reforms to create accountability and
Something similar is true today of the United States.
So I’d like to invite the finance ministers of Thailand, South Korea and
Indonesia — whom I and other Americans deemed emblems of crony capitalism in the
1990s — to stand up and denounce American crony capitalism today.
Capitalism is so successful an economic system partly because of an internal
discipline that allows for loss and even bankruptcy. It’s the possibility of
failure that creates the opportunity for triumph. Yet many of America’s major
banks are too big to fail, so they can privatize profits while socializing risk.
The upshot is that financial institutions boost leverage in search of supersize
profits and bonuses. Banks pretend that risk is eliminated because it’s
securitized. Rating agencies accept money to issue an imprimatur that turns out
to be meaningless. The system teeters, and then the taxpayer rushes in to bail
bankers out. Where’s the accountability?
It’s not just rabble-rousers at Occupy Wall Street who are seeking to put
America’s capitalists on a more capitalist footing.
“Structural change is necessary,” Paul Volcker, the former chairman of the
Federal Reserve, said in an important speech last month that discussed many of
these themes. He called for more curbs on big banks, possibly including trimming
their size, and he warned that otherwise we’re on a path of “increasingly
frequent, complex and dangerous financial breakdowns.”
Likewise, Mohamed El-Erian, another pillar of the financial world who is the
chief executive of Pimco, one of the world’s largest money managers, is
sympathetic to aspects of the Occupy movement. He told me that the economic
system needs to move toward “inclusive capitalism” and embrace broad-based job
creation while curbing excessive inequality.
“You cannot be a good house in a rapidly deteriorating neighborhood,” he told
me. “The credibility and the fair functioning of the neighborhood matter a great
deal. Without that, the integrity of the capitalist system will weaken further.”
Lawrence Katz, a Harvard economist, adds that some inequality is necessary to
create incentives in a capitalist economy but that “too much inequality can harm
the efficient operation of the economy.” In particular, he says, excessive
inequality can have two perverse consequences: first, the very wealthy lobby for
favors, contracts and bailouts that distort markets; and, second, growing
inequality undermines the ability of the poorest to invest in their own
“These factors mean that high inequality can generate further high inequality
and eventually poor economic growth,” Professor Katz said.
Does that ring a bell?
So, yes, we face a threat to our capitalist system. But it’s not coming from
half-naked anarchists manning the barricades at Occupy Wall Street protests.
Rather, it comes from pinstriped apologists for a financial system that glides
along without enough of the discipline of failure and that produces soaring
inequality, socialist bank bailouts and unaccountable executives.
It’s time to take the crony out of capitalism, right here at home.
OBAMA needs to go big. Jeffrey R. Immelt, chairman of the president’s Council on
Jobs and Competitiveness, may have suggestions, but considering that Fortune 100
companies have killed 2.9 million jobs in America over the past decade while
adding 2.4 million abroad, that may not be the best input. I’m an entrepreneur
and I’m creating jobs. Here are eight suggestions:
Significantly reduce Sarbanes-Oxley regulations for public companies with
revenues under $500 million. My company went public last year and spends $3
million to $4 million a year in additional insurance, accounting and legal costs
stemming from compliance with Sarbanes-Oxley financial reporting.
Reinstate Glass-Steagall and eliminate Dodd-Frank. Get commercial banks back to
being banks, and get investment banks back to raising capital and trading.
Reinstating Glass-Steagall would force the “too big to fail” banks to divest
assets, something Dodd-Frank does not address.
Raise rates on short-term capital gains and lower rates on long-term capital
gains. Hedge funds and private equity investors should not be rewarded for
short-term capital gains that produce enormous market volatility. Raise the
short-term capital gains rate to 35 percent, and lower the long-term rate (over
one year) to 10 percent.
Provide companies with the confidence that if they invest in the United States,
they aren’t going to face increased wage and benefit costs. Businesses will not
invest if they don’t know the actual cost they will bear to comply with health
care, consumer protection, banking and environmental regulations. The president
has created a regulatory landscape that scares investors and is making chief
executives hoard cash.
Require any mortgage originator who sells a mortgage to Fannie Mae or Freddie
Mac to take a first-loss position, meaning that if the loan goes bad, the
originator, not Fannie or Freddie, is responsible for the first 5 percent loss,
and then shares losses with Fannie or Freddie up to 20 percent.
Means-test Social Security. Many wealthy Americans do not need benefits. Give
them a tax deduction to the value of their estate for their accumulated
Make serious cuts in Medicare and Medicaid. The health care bill sent the
message that we will insure every American and cover every disease. We cannot
afford that type of health care. Americans need to take responsibility for their
health and realize that life choices (smoking, overeating, etc.) may produce
health conditions that are not covered.
Identify 100 major infrastructure projects that will put this country ahead of
our competition and put people to work building high-speed trains, highways,
water pipelines, irrigation canals and alternative energy sources. Borrow as
much money as the government possibly can to fund this investment. At 2 percent
interest, it’s a good investment.
Walker is chief executive of Walker & Dunlop,