Accountable Capitalism and Progressive Prosperity

Posted in: Tax and Economics

In a column published here on Verdict last week, I explained how Senator Elizabeth Warren, who is supposedly the bane of capitalists everywhere, in fact understands that modern capitalist economies can be much better than they are for the people who work and live in them.

Warren certainly targets the bad acts of particular capitalists, but she does so in order to prevent them from continuing to pervert the economy for their own selfish ends. She “gets” capitalism and admires what it could be, rather than adopting the defeatist conservative view that the many faults of our system are inevitable and unfixable—a view that, not coincidentally, rationalizes the extreme wealth that conservatives are busy hoarding for themselves.

I did not know while I was writing that column that Senator Warren was only moments away from making a major policy announcement. Indeed, shortly afterwards she proposed the Accountable Capitalism Act, a draft of a law that would put part of her positive vision for capitalism into practice. Unsurprisingly, the people who have rigged the current economic system for their own benefit are, shall we say, more than a bit dismayed.

It is important to understand what Warren’s bill would, and what it would not, change about the economy. It is also instructive to look at a few of the nonsensical responses by the self-appointed spokesmen for unbridled capitalism.

Warren provides a roadmap toward a future of competitive markets that help all of the people instead of only a few. Before explaining how her vision would work, it is necessary to explain why her approach is not an attack on capitalism itself, as her detractors would have us believe. Her proposal would, in fact, make capitalism work better.

The Setting of Rules and the Results of People and Businesses Competing Under Those Rules

The starting point of the analysis in my Verdict column last week (along with a companion column on the Dorf on Law blog) was that the laws that governments pass make possible the economic transactions that people can engage in. Without a government that protects against theft, enforces contracts, and so on, there can be no economy, or at least nothing beyond warlord-style enforcement of rudimentary transactions.

That the government must set rules, however, does not tell us which set of rules it must enact. If people want to save money, for example, how can they be sure that the people to whom they lend it—or, in what amounts to the same thing, the banks or investment funds into which they deposit it—will not steal it or charge hidden fees that are the equivalent of theft? For that matter, where does money even come from, and what determines its value?

There are no easy answers to those questions, even though conservatives like to talk about “deregulation” as if there is a “no rules” baseline that liberals’ regulations have destroyed. But what, for example, is the right number of years that copyright protection should exist? What is the natural baseline against which we measure, say, the difference between fraudulent deception and salesmanship? Every government, whether or not it thinks of its country as capitalist, answers such questions explicitly or implicitly at all times.

Once the rules are set, everyone asks what they can and cannot do under the law, which means that they can enter into transactions with some sense of what the other side will do in return (hopefully voluntarily, but sometimes only after being forced to do so by legal authorities). The more cynical actors ask, “What can I get away with?” And although that sounds antisocial, the laws that create and regulate the economic system are there precisely to answer that question.

But when some people start to figure out angles of the existing laws that allow them to enrich themselves—for example, payday lenders who discover that they can lie with impunity to their poor clients, or for-profit “universities” that induce their suckers students to buy useless degrees with borrowed money—those bad actors begin to feel entitled to their ill-gotten gains. You can’t regulate me, they say, because regulation is bad and free markets are good.

The reality is, however, that there was nothing about the original rules that was ordained by God, and other than a reasonable concern for reliance interests and transition rules, there is nothing that should prevent a government from changing the rules in an effort to improve economic outcomes in whatever way that the people want those rules to change.

Life under the new set of rules is no more nor less capitalism than it was under the old rules. People figure out the rules, decide what they can and cannot do and what others are likely to do, and they then compete in the markets that will operate under a new set of rules.

The people who will not do as well under the new rules as they did under the old will always complain, of course, but that does not mean that the new rules are anti-capitalist. It just means that some people who were making a lot of money under one set of rules have been told to do something different, because the rules were too one-sided.

The Progressive Critique of Conservative Capitalism

There is, of course, a body of economic and philosophical theory that holds that changing the rules of capitalism is a fool’s game. The Marxist critique of capitalism was based on the idea that allowing private entities to own the means of production would inevitably lead to exploitation, which meant that the government was only enabling harm when it enforced the rules of private property in the economy.

This is hardly the place to rehash the critiques of Marxism, of course, but the salient point here is that Warren represents a continuation of a reformist view of capitalism that presumes that the system can be improved without even coming close to creating a Maoist collective. As good fortune would have it, changing a relatively small number of rules would work wonders in improving people’s lives, now and in the future.

Do people’s lives need improving? Just in the past two weeks, I have noted newspaper articles that have documented various ways in which the economy is failing to deliver for people. For example, inequality has become so extreme that, according to an article in The Washington Post summarizing a report from the National Low Income Housing Coalition, there are no longer any places in America where a minimum-wage worker can afford to live in a two-bedroom apartment.

Yet conservatives refuse even to discuss increasing minimum wages, and the self-described “pure” conservatives even insist that minimum wage laws are an unnatural abomination that prevents markets from working as God intended them to work. As quasi-religious doctrine, people can believe what they want to believe; but as reality-based analysis, minimum wages are no different from rules that create corporations and shield their owners from liability. There is nothing about corporate personhood that is ordained by heaven, nor is the “market wage” somehow normatively correct.

Meanwhile, at the top end of the heap, corporate leaders’ pay packages are setting records, with average annual pay of top executives at America’s largest companies averaging $18.9 million in 2017. Even if Senator Warren and others were to succeed in increasing the minimum wage to $15 per hour, it would take a full-time worker more than 600 years to earn that much money.

But do the companies that those CEOs run provide a good product at a good price? It turns out that another set of rules—antitrust laws—have been changed in the US in recent decades such that even supposedly socialistic Europe now has more competitive markets than we have. Everything from airplane tickets to internet access to credit card fees to personal computing devices are much less expensive in Europe than they are here.

We also know that the Trump administration is busily allowing American companies to spew more pollution into the air and waters, while young people (who will have to deal with the consequences of that environmental degradation) are being left with more debt and fewer opportunities to build long-term economic prosperity.

It is no wonder that there is a generational divide in attitudes about controlling the excesses of capitalism—though it should be said that even Trump’s cult includes large numbers of older people who also believe that capitalism does not work for them. The difference is that Trump’s supporters have decided to stand by a person who is making life worse for everyone, including themselves.

In any event, leaders like Warren look at the current situation and say that we do not need to abandon the good things about our current system of mixed capitalism, because we can adjust various rules like labor laws, consumer and environmental protections, and so on to change the outcomes in competitive capitalist markets.

The Accountable Capitalism Act and Its Modest Aims

Having spent years championing minimum wage increases, creating the Consumer Financial Protection Bureau, and so on, Senator Warren has now decided to try to improve corporate governance. Her proposal, aptly named the Accountable Capitalism Act, is summarized well in both The Post and The Guardian, so I will not go into detail here. The broad picture is what matters.

Warren’s idea is that the existing mix of laws that allow corporations to exist—after all, corporations are the consummate “legal fiction”—have become exposed as being far too skewed toward benefiting a tiny slice of the population. She could have tried to micro-manage the problem by specifying a whole new set of corporate laws, but instead she proposed the creation of a new agency that would grant corporate charters based on broad goals.

The law would require only the largest corporations, those with one billion dollars or more in sales per year, to hold federal charters. Those charters would specify that such companies would have to take into account the interests of all stakeholders (workers, communities, and so on), rather than only those of shareholders, as under current corporate law.

What are the conservative objections to such a law? The Guardian quoted one corporate CEO as saying that “[t]he private market will reward those that take care of their stakeholders.” But Warren, of course, only acted after decades of failure by those private marketeers—and again, the current set of markets is no more “private” than any other.

Even worse, former Republican presidential candidate Steve Forbes blurted out: “What she’s talking about is freezing the economy as it is, keeping things as they are. That’s just not going to work.” That is simply bizarre, because if anything, one would think that the conservative objection would be that Warren’s proposal would change the economy too much, not freeze it in place. Apparently, Forbes simply spouted anti-Warren nonsense rather than bothering to think about the question even for a moment.

More seriously, however, one could imagine two conservative arguments in response to Warren’s proposal—neither of which makes sense, but which are at least one step better than the two quoted in The Guardian.

First, Republicans like to complain about Americans’ supposed litigiousness, so they might object to the provision allowing stakeholders to sue companies for failing to live up to their charters. That argument fails, however, because existing corporate laws allow for shareholder suits and so on—with the problem being that current laws overwhelmingly favor management and insiders over smaller shareholders. The larger point, however, is that it makes no sense to say, “But there will be lawsuits,” in an environment where thousands of lawyers already make a comfortable living by navigating the existing corporate rules.

Second, one might say that having a federal agency set up the rules of corporate charters is proof that Warren wants to engage in central planning. As I noted in my Verdict column last week, even reasonable conservatives like Jennifer Rubin of The Post insinuate that progressives “seek to centralize economic decision-making in the federal government.” Warren wants to put corporate charters in the hands of a federal agency? That’s central planning! So she’s really a Marxist after all!

But that, too, is nonsense. There is no central planning going on when a government agency is set up to create the rules of the game. Corporations would still be able to do whatever they wanted within the new rules, just as they do now under a different set of rules. Centralized planning evokes Stalinist five-year plans, with government apparatchiks actually running companies. This is nothing like that.

By comparison, the US in the nineteenth century had banks that were chartered by state governments. After a series of financial crises that would make even the Great Depression look mild by comparison, Congress created “national banks” that were chartered and operated under federal rules.

Was that “central planning”? Hardly. No one would say that US banks are currently being managed by the federal government, even though they are undeniably operating under federal and state laws. Warren’s proposal similarly changes the laws and therefore the incentives, but she leaves capitalism intact.

In short, Warren’s proposed Accountable Capitalism Act is another in a series of important proposals to make the economy work for everyone. She (and the people who support proposals like hers) wish capitalism well and want to make it work better.

As Warren put it in a recent interview: “I am a capitalist. I love what markets can do, I love what functioning economies can do. They are what make us rich, they are what create opportunity. But only fair markets, markets with rules.”

Progressives want better rules, rather than the current pro-insider rules that have done so much damage. Staying with the current set of disastrous rules is no longer acceptable.

Posted in: Tax and Economics

Tags: Economics, Legal