Thursday

Can Capitalists Save Capitalism?

by
The New York Times

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 people.

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 capitalism itself.

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 White House.

Photo

The share of total income going to labor. The gray bars indicate recessions. Credit whitehouse.gov, from a speech by Jason Furman

“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 suggested.

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 labor market.”

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 employees.”
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 fight unionization.

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 statement,
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 stagnating wages.

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 low/middle-class incomes.”
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 graduates, 57-41.

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.

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