Saving capitalism
The author is a professor at UC Berkeley, a prolific author and a political commentator. Not only is he well-versed in economic theory, but also a practitioner. He was a secretary of labor in Clinton administration. Real life experience and solid academic theory makes his comments, ideas fresh, interesting and worth looking into. His works show that he has strong sense of social responsibility. In his interviews, he is casual, relatable and has a weird sense of humour. Always a treat to watch or listen to.
General theme
“Free markets” (as in markets move naturally reaching equilibrium eventually, no government interventions nor manipulations required) don’t really exist. Markets depend 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.
Rules are created and enforced by government. It, therefore, can tilt playing fields toward whomever it so chooses.
Pay-for-delay agreements
Drug companies pay the makers of generic drugs to delay their cheaper versions. These so-called pay-for-delay agreements, perfectly legal, generate huge profits both for the original manufacturers and for the generics—profits that come from consumers, from health insurers, and from government agencies paying higher prices than would otherwise be the case.
Why is US health care so expensive?
The average American is unaware of this system—the patenting of drugs from nature, the renewal of patents based on insignificant changes, the aggressive marketing of prescription drugs, bans on purchases from foreign pharmacies, payments to doctors to prescribe specific drugs, and pay-for-delay—as well as the laws and administrative decisions that undergird all of it. Yet, because of this system, Americans pay more for drugs, per person, than citizens of any other nation on earth.
All those tactics that drive health care cost up are the result of government regulations. The critical question is therefore not whether government should play a role (It already swims in it). Without government, patents would not exist. The issue is how government organizes the market. So long as big drugmakers have a disproportionate say in those decisions, the rest of us pay through the nose.
Stock buybacks
Other than paying dividend, companies buy their stocks back to return profit to shareholders. The catch is that company executives know when and how much stock buybacks will happen. Stock buybacks will drive up stock prices because there’re fewer stocks in the market. Executives can then sell their stock options making more profit. Not only do stock buybacks enrich CEOs and other top executives at the expense of smaller investors who do not know about the timing or amounts of buybacks, they also drain away money the corporation might otherwise spend on research and development, long-term expansion, worker retraining, and higher wages.
The purpose of corporations
In the past it is to maintain an equitable and working balance among the claims of the various directly affected interest groups i.e. stockholders, employees, customers, and the public at large. Now, however, it is assumed that shareholders were the only legitimate owners of the corporation and that the only valid purpose of the corporation was to maximise shareholder returns. This idea is relatively new, dating back only to the 1980s before that it’s about all stakeholders.
Rational behaviour, vicious cycles and road to ruins
Each has merely behaved rationally in pursuit of his or her private interests. As their wealth has increased, so has their political power, and they have quite naturally used that power to enlarge and entrench their wealth. The meritocratic ideal (you get paid for what you are worth) with which our form of capitalism has been justified does not match the reality in which most of us live and work. The playing field is tilted toward those who have had the resources and power to tilt it in their direction. And as they gain steadily more resources and power, it tilts further. The bottom 90 percent are losing ground in large part because of upward pre-distributions embedded inside “free market” rules over which those at the top have great influence.
It’s not sustainable
if America’s distributional game continues to create a few big winners and many who consider themselves losers by comparison, the losers will try to stop the game—not out of envy but out of a deep-seated sense of unfairness and a fear of unchecked power and privilege.
There is simply no way the American economy can be sustained if the richest 10 percent continue to reap all the economic gains while the poorest 90 percent grow poorer; there is no way American democracy can be maintained if the voices of the vast majority continue to be ignored.
US democracy
Democracy had succeeded in America while failing elsewhere because it embraced a wide number of independent groups, each of which was separately a political minority. Because each of them had to form coalitions with others in order to get anything done, the overall system remained flexible and responsive. The result was neither rule by majority nor by minority but rule by a “majority of minorities. These have changed in recent times. Corporations have become so big, they wield immense financial and then political power for their benefits and they no longer need to form coalitions with others.
What to do to benefit the many not just the few-a policy gold mine
get big money out of politics. Court currently recognises corporations as persons who can make campaign contributions i.e. big corporations can buy politicians with their enormous financial power to make rules favouring themselves. Small money from ordinary people have little influence hence their voice ignored.
public financing of general elections, probably by means of a system in which public funds matched donations from small donors.
require corporations full disclosure of the sources of all political expenditures. Shine the light through secretive deal makings.
ban gerrymandered districts that suppress the votes of minorities. If the system is to benefit the many, we need more diversity not less.
reduce or eliminate revolving doors between government service and large corporations, and lobbying firms (promise of lucrative jobs after leaving rule making/enforcing agencies, conflict of interest). At the least, all elected and appointed government officials would be prohibited, for a minimum of five years from the end of their government service, from accepting any form of employment with any corporation, trade association, lobbying firm, or other for-profit organization that they oversaw, monitored, regulated, or had any other official relation with while in government.
expert witnesses, academics, and inhabitants of think tanks would be required to disclose any and all sources of outside funding for testimony, books, papers, or studies that are put in the public domain. Making sure that data, research that influence policies are truly impartial.
the lengths of patent and copyright protection would be shortened, for example, Patents could not be extended by means of small or cosmetic changes in products or processes.
pay-for-delay agreements banned, as they are in most other advanced economies.
antitrust would be returned to its original purpose, not only achieving market efficiency and maximizing consumer welfare but also reducing the political influence of large aggregates of economic power.
the size of Wall Street’s giant banks would be limited so that none could hold more than 5 percent of the nation’s banking assets, have any role in the pricing of commodities, or play a dominant role in initial public offerings of stock (giving small banks a chance to grow).
fraud would be defined to prohibit all forms of insider trading, including any use by corporations and their CEOs of corporate buybacks to pump up share prices and cash in on stock options and awards. Society would be more equitable if capital income reduced and labor income increased.
bankruptcy law would give labor agreements a higher priority than agreements with other creditors. As it stands, capital income is better protected by law than labor income. This is a part of a push to increase the share of labor income.
the minimum wage would be raised to half the median wage and thereafter adjusted for inflation. Workers in low-wage industries such as retail chains, fast-food chains, hotels, and hospitals would be able to form a union so their bargaining power increased.
make corporate tax rates depend on the ratio of CEO pay to the pay of the median worker in the firm. Corporations with low ratios would pay a lower corporate tax rate, and vice versa. This is an incentive for the company to reduce inequality so they will get lower tax rate.
Alternative corporate structure
Benefit corporation
Reich talked about a for-profit company whose articles of incorporation require it to take into account the interests of workers, the community, and the environment, as well as shareholders thereby giving directors explicit legal protection to consider the interests of all stakeholders rather than just the shareholders who elected them. Sounds like an improvement to the current corporate structure.
In his book, Mohammad Yunus, 2006 Nobel peace prize winner, took a different route i.e. a social business corporate structure. He also argued against benefit corporation structure. As a for-profit company, it will eventually face with a decision on competing interests e.g. public vs shareholder interests. How should the company make a decision when interests of different stakeholders would drive decision differently? Social business might have an edge over benefit corporation as its main goal is social good. Business financial interest is important but not as important as its main goal. So the priority is clear in this structure; decision making process is therefore more clearcut.
Company board of director
In Germany, corporate laws require “co-determination,” with a management board overseeing day-to-day operations and a supervisory board for more high-level decisions. Depending on the size of the company, up to half of the members of the supervisory board represent employees rather than shareholders. Workers on the shop floor are also represented by works councils, or Betriebsrate. This structure has made major German corporations, such as Volkswagen, far more receptive to worker rights than their counterparts in America.
Profit sharing
Providing additional tax incentives for employee stock ownership and profit sharing, or the formation of employee-owned cooperatives. This is to incentivise companies to share capital income to wider recipients.
Corporate structure for the betterment of society
The legal privileges of incorporation in America—limited liability, life in perpetuity, corporate personhood for the purpose of making contracts and the enjoyment of constitutional rights—would be available only to entities that share the gains from growth with their workers while also taking the interests of their communities and the environment into account.
This idea is interesting and useful, applying it abruptly though might be a political suicide for any aspiring politicians or government. The book Nudge by Sunstein & Thaler may offer more palatable approach. To change current corporate structure to the ones that would lead to more equitable society. It might be easier to convince to forgo not yet realised gains. Applying this concept should be done in phases, one step at a time including grandfathered clause of existing corporations.
Inheritance and equitable society
We need new market rules that cause wealth eventually to revert to the public domain rather than compound for future generations that had nothing to do with creating it, and be used instead to finance a minimum guaranteed income for all citizens
An alternative would be to provide every citizen a tiny share of all intellectual property awarded by the patent office and protected by the government. As the worth of the nation’s stock of intellectual capital grew, all citizens would reap the dividends.
Another alternative would be to give every child at birth a basic minimum endowment of stocks and bonds—a “share” in the future economy, which, as the economy grew and the value of the endowment compounded, would become a nest egg capable of producing a minimum basic income.