Earlier this week, I tried to explain what the Bain debate is really about. It’s not about capitalism vs. “socialism.” It’s about choosing what kind of capitalism we want. It’s about the future, and deciding what kind of economy we want. It’s about deciding who and what our economy is for. It’s about something most Americans can understand a lot more readily than the financial engineering that drives private equity. It’s about something President Obama is already talking to Americans about.
It’s about choosing what’s going to drive our economy: greed or fairness.
Greed Wasn’t Good
According Paul Krugman (a featured speaker at this year’s Take Back the American Dream conference — despite David Brooks’ “fairy tale” of America as a land of “lazy managers and slacker workers” forty years ago, until “square-jawed, tough-minded buyout kings like Mitt Romney and the fictional Gordon Gekko came to the rescue, imposing financial and work discipline” — greed wasn’t good.
For the alleged productivity surge never actually happened. In fact, overall business productivity in America grew faster in the postwar generation, an era in which banks were tightly regulated and private equity barely existed, than it has since our political system decided that greed was good.
What about international competition? We now think of America as a nation doomed to perpetual trade deficits, but it was not always thus. From the 1950s through the 1970s, we generally had more or less balanced trade, exporting about as much as we imported. The big trade deficits only started in the Reagan years, that is, during the era of runaway finance.
And what about that trickle-down? It never took place. There have been significant productivity gains these past three decades, although not on the scale that Wall Street’s self-serving legend would have you believe. However, only a small part of those gains got passed on to American workers.
So, no, financial wheeling and dealing did not do wonders for the American economy, and there are real questions about why, exactly, the wheeler-dealers have made so much money while generating such dubious results.
The underlying rules Krugman refers to are the old post-Great Depression regulations designed to prevent another crash (and ensuing depression), most of which where whittled away. In another post, Krugman uses charts to illustrate his points about productivity, competitiveness, and inequality.
Fairness and Growth
It turns out that Gordon Gekko wasn’t necessarily wrong. He just didn’t finish his sentence. Greed is good for a few people, but not for everybody.
And that, I think, explains why everyone on the right knows, just knows, that great things happened after the forces of greed were unleashed. Great things did indeed happen to their patrons. For ordinary Americans, not so much.
That’s where fairness comes in, and why Robert Reich says President Obama needs to start talking about fairness — and why fairness is essential to growth.
Fairness isn’t inconsistent with growth; it’s essential to it. The only way the economy can grow and create more jobs is if prosperity is more widely shared.
The key reason why the recovery is so anemic is so much income and wealth are now concentrated at the top is America’s the vast middle class no longer has the purchasing power necessary to boost the economy.
The richest 1 percent of Americans save about half their incomes, while most of the rest of us save between 6 and 10 percent. That shouldn’t be surprising. Being rich means you already have most of what you want and need. That second yacht isn’t nearly as exciting as was the first.
It follows that when, as now, the top 1 percent rakes in more than 20 percent of total income — at least twice the share it had 30 years ago — there’s insufficient demand for all the goods and services the economy is capable of producing at or near full employment. And without demand, the economy doesn’t grow or generate nearly enough jobs.
None of this is fair, says Reich. Wall Street is part of the problem, because it’s responsible for much of the concentration of wealth at the very top, an much of the distress felt by the other 99% of us since the 2008 meltdown
The One Percent
That concentration of wealth didn’t just happen overnight. Andrew Leonard writes that in that forty years, the nature of the financial sector changed as “the venture capital and private equity buyout industries have grown dramatically, from basically nothing to becoming crucial drivers of corporate formation and growth.” Along the way, government has “lavished” both sectors with lenient tax policies, including massive cuts to the capital gains tax. (This is why Mitt Romney’s tax rate is just 14%, and why Jimmy Buffett pays a lower tax rate than his secretary.)
The result wasn’t the trickle-down prosperity bonanza that Americans were promised way back at the start of the Reagan era. The reason being that, as Reich pointed out, the rich save most of their income — including taxes. When they do put that money to use, they invest it in ways that make them even richer, but do next to nothing for our economy (like investing it in emerging markets overseas). Basically, the rich put their money to work making even more money for them, instead of using it to put more Americans to work.
And it worked, for them. Between 1979 and 2007, after-tax income for the top 1 percent grew by 275 percent, according to the CBO, more than doubling their share of national income over the last three decades. Much of that increase can be traced to increases in executive compensation and financial sector compensation trends, as income increases at the top were largely driven by households headed by industry executives and financial sector executives or workers. According to an EPI study, CEO compensation grew more than 725 percent from 1978 to 2011, while the income of the average private sector worker grew just 5.7 percent over the same period. Now we know where the missing gains from increased productivity went.
That kind of money buys a lot of the kind of policy Krugman describes as policies that serves the interests of the wealthy — and serves to turn the wealth into the uber wealthy.
Most research shows that a rapid rise in the top tiers of income started around the 1970s. There are various theories as to what kicked off the trend. But experts tend to agree on one thing: The continued upward trajectory for America’s wealthy elite, which far outpaces that of the average American worker, was helped in large part by public policy.
“Deregulation of the financial sector seems to have created greater risk for the economy as a whole, and pushed up incomes at the top,” said Jacob Hacker, Yale political science professor and co-author of the book “Winner-Take-All Politics.”
That’s not all. According to both Krugman and Leonard, the 1 percent — and Wall Street’s “Masters of the Universe” in particular — have invested some of their wealth here at home. Krugman writes that the super-wealthy have used the “immense power and wealth at their disposal” to but “policies that serve their interests.” Leonard sees those policies bearing fruit in things like a ridiculously low tax rate for capital gains, and what Harold Meyerson describes as the “grotesquely unfair” but “perfectly legal” selective disclosure behind the Facebook IPO debacle.
The Rest of Us
Over the last few decades, Leonard writes, Wall Street and the 1 percent have enjoyed quite a return on investment.
Because here’s the thing: Over the past 40 years, the venture capital and private equity buyout industries have grown dramatically, from basically nothing to becoming crucial drivers of corporate formation and growth. Last year, venture capital firms invested $32 billion in new start-ups in the U.S. while private equity funds raised over $100 billion for buyout activity. All along the way, government policy lavished both sectors with extraordinarily lenient tax policy — including massive cuts in the capital gains tax and the so-called carried interest rule that allows Mitt Romney to fork over only 14 percent of his income to the IRS — which has allowed financiers of every stripe to vastly increase their individual wealth. But over that same period, income inequality has grown and the average worker’s wages have stagnated, while the cost of healthcare and education has skyrocketed.
Facebook’s IPO and Bain Capital’s track record end up telling us exactly the same thing. State-of-the-art American capitalism works very efficiently for the 1 percent, and leaves just crumbs for the rest of us. Efficiency is good for them, but not for us. That’s quite the achievement.
For the rest of us, America is increasingly no longer the land of opportunity. Downward mobility is the trend most likely to dominate the next decade, as the middle class is thinned out. Already it’s harder for Americans to rise from lower economic rungs, and Americans enjoy less economic mobility than our peers in Canada and most of Western Europe. (Though Austerity may effectively put the breaks on upward mobility in Europe, too.) Among American men alone, 42 percent of those raised in the bottom fifth of incomes stay there as adults. Just 8 percent at the bottom fifth rose to the top fifth, compared to 12 percent of Britons and 14 percent of Danes.
It turns out, Wall Street was a big part of the problem. The drivers of economic inequality — from the loss of manufacturing jobs, to wage stagnation and the decline of union membership — have their roots in the very deregulation bought and paid for by Wall Street’s one percenters. Multinational corporations invest abroad, make and sell their goods abroad, while slashing wages at home, increasing their profits, and paying little to no taxes. Much of the increases in income at the top come from investments in overseas ventures, and profits derived from reduced labors costs due to outsourcing (which drives layoffs, paycuts, etc., at home).
Leonard connects the dots to include the the private equity model of capitalism.
The private equity model of capitalism results in eerily similar outcomes for workers. One of the ways in which the new private equity owners of a firm streamline costs is through “business process outsourcing” — a bloodless phrase that means, in practice, hiring cheaper workers (either domestically or abroad) on a contract basis to perform tasks previously kept in house. Call center support operations move to the Philippines or Bangalore. Manufacturing goes to China. Et cetera.
All of these measures clearly succeed in cutting costs in the short run, which is important, because the new owners have added a lot of debt to the company’s bottom-line that needs to be paid off. But they’re not the same as making investments in the future. It’s not analogous to pouring money into research and development or taking risks developing new markets. Short-term “efficiency” is easy to maximize at the expense of long-term growth but it’s a very open question as to whether the benefits of that efficiency are broadly shared.
The result is what Meyerson called “dysfunctional capitalism” — an economic system that, “when left to its own devices and when regulated by rules that powerful interests have shaped, tilts grotesquely toward the rich and their institutions.” In other words, the result is a “Bully Economy,” in which “the strong do what they can, and the weak endure what they must.”
Choosing Fairness
It’s been said a lot, but it bears repeating. The debate over Bain and private equity really comes down to a question Meyerson asks at the end of his column: “The question is, will it be allowed to continue its drift toward benefiting fewer and fewer of our fellow Americans?”
That’s the question President Obama has put at the center of this election.
… [T]he reason this is relevant to the campaign is because my opponent, Governor Romney, his main calling card for why he thinks he should be President is his business expertise. He is not going out there touting his experience in Massachusetts. He is saying, I’m a business guy and I know how to fix it, and this is his business.
And when you’re President, as opposed to the head of a private equity firm, then your job is not simply to maximize profits. Your job is to figure out how everybody in the country has a fair shot. Your job is to think about those workers who got laid off and how are we paying for their retraining. Your job is to think about how those communities can start creating new clusters so that they can attract new businesses. Your job as President is to think about how do we set up a equitable tax system so that everybody is paying their fair share that allows us then to invest in science and technology and infrastructure, all of which are going to help us grow.
And so, if your main argument for how to grow the economy is I knew how to make a lot of money for investors, then you’re missing what this job is about. It doesn’t mean you weren’t good at private equity, but that’s not what my job is as President. My job is to take into account everybody, not just some. My job is to make sure that the country is growing not just now, but 10 years from now and 20 years from now.
So to repeat, this is not a distraction. This is what this campaign is going to be about — is what is a strategy for us to move this country forward in a way where everybody can succeed? And that means I’ve got to think about those workers in that video just as much as I’m thinking about folks who have been much more successful.
Figuring out “how everybody in this country has a fair shot,” and “move this country forward in a way where everybody can succeed”?
If that’s not all about fairness, I don’t know what is.
