The strengths and weaknesses of capitalism

On this EXTRA episode, Jason Grumet, founder and president of the Bipartisan Policy Center; Michael Farren, fellow at the Mercatus Center; and Richard Levick, f...

Is capitalism on its way out? Is socialism going to completely overtake American life and reshape the economy? Probably not just yet. But to fully understand people’s sticking points with capitalism, and what the country can do to ensure people get their fair share, looking at the ways our current economic system puts profit for the few over the health of the many is incredibly important. To understand both capitalism’s best and worst qualities, we spoke with Jason Grumet, founder and president of the Bipartisan Policy Center; Michael Farren, fellow at the Mercatus Center; and Richard Levick, founder and CEO of LEVICK.

ABERMAN: When people are talking about capitalism, what are they actually talking about these days?

GRUMET: Jonathan, I think the key question is the imagination of this country, which has always been about this aspiration to do better. Do better than your parents, do good for your kids, and capitalism is working fantastically for some of us. Working great for me. This is an incredibly wealthy country. If you took the total population of the country and divided up all the wealth, every single citizen would get sixty thousand dollars a year.

Incredible wealth, but half the country doesn’t think it could get its hands on 400 dollars in a month without having to sell a possession. They’re one step away from having their entire economics unravel, and this amount of economic insecurity is terrifying, and it’s getting people really angry. And I think that is what’s really causing us to question whether capitalism is, in fact, providing the opportunity for everybody that was supposed to be the story of this country.

ABERMAN: So, a lot of people talk about capitalism in your view, or talk them out from a standpoint of outcomes, and concern about bad outcomes, right?

GRUMET: Of course. How many people do you know who sit down every morning and think, gee, how’s our economic system working in theory? People wonder: what the heck’s happening to me? Can I send my kids to school, right? Income has been effectively flat for the last generation. Cost of in-state tuition has gone up by a factor of three. That means a lot of people no longer really have access to the basic premise of this country, and yeah, they’re upset about it.

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ABERMAN: So they’re upset about it. Which talks about the social context, but let’s let’s take it back for a moment. What is actually capitalism? How does it differ from socialism, communism, and other things? Michael, I know you’ve spent a lot of time thinking about this at the Mercatus Center. What’s capitalism mean to you, and as you do your research?

FARREN: So the basis of capitalism is free enterprise. It’s producers being able to focus on pleasing consumers and individuals being able to pursue their own happiness in whichever way they can figure out how to do that. The issue is that socialism, as a definition, anyway, is something that involves centralized control, rather than spread out control among people. And the thing that you could look at is, the benefits of capitalism is that it actually is focused on pleasing people, and the people are in power, rather than in a socialism type of situation.

You end up with some centralized authority trying to determine what people want. Like in the Soviet Union, trying to figure out what kind of shoe should we make, rather than letting consumers figure out what kind of shoe they should make. But the issue probably is that what people consider socialism today is more along the lines of a strong government welfare state that is a social safety net protecting people. That’s why people think that capitalist economies like Sweden, Denmark, and Norway are socialist, whereas they’re actually market economies with a strong welfare state.

ABERMAN: So Richard, you’ve built LEVICK. You’ve been an entrepreneur for your entire career. From your perspective, what is capitalism?

LEVICK: Well I think right now, capitalism is more challenged from an entrepreneurial point of view than I’ve certainly seen in the lifetime of this firm, or my professional experience over the last 40 years. No, we’ve never seen a point in time where we’ve had unemployment as low as we have now, around three and a half percent. And yet, insecurity so high. And I think there’s a sense, not so much about the moment, but what does it mean for the future? What is artificial intelligence going to do in robotics? What does it mean in terms of trade, and how it’s going to impact the prices, of all places, at Wal-Mart, where you know, if I’ve got a staggered income over the last generation, or two the prices of Wal-Mart are really significant to me?

So we don’t see that irrational exuberance that we talked about just 20 years ago, in terms of people having great confidence that the market was going to constantly go up and up. And what that means for companies, and what that means for the companies that service them, is that there’s less desire for long term retainers. It’s more episodic, and that makes it more challenging for everyone in the food chain.

ABERMAN: As we think about this, clearly we’re in a situation right now where people are unhappy or happy with the outcomes of a system that rewards on a profit basis for solving need. I mean I think when you cut through it, capitalism, unlike other systems it’s a harsh system, at its most basic form. It’s harsh and rewarding, but it’s based upon, are you providing something that people provide economic value to you in return? It’s the ultimate arbiter, but it’s also incredibly harsh, or can be harsh. When you think about this, and you talk about this with people. Do you think there’s a particular American expectation for what capitalism looks like, that’s different from say, Swedish capitalism, or Japanese capitalism, or Chinese capitalism?

LEVICK: You know, I know your two experts have so much to add to this, but I do want to say Jason, you raised such a powerful point here, I think in the opening comments, and that is, if capitalism has meant anything to us over the last century, it’s that our kids would do better than us, and that’s no longer happening at least half the time. And so, to the extent you’re right, Jason, we do not talk about the theory of capitalism and economics over our cornflakes, but we do feel confident, or did feel confident, that our kids were going to do better than us.

GRUMET: Just picking up on what Richard was saying, the fundamental premise of capitalism is merit. Competition, winners and losers. People who work hard, play by the rules can get ahead. And I think what we are seeing now is this question of whether that’s still true. Is there kind of a minimum entry fee to be able to get into that merit based system? And I think we are at least starting to question whether the deck is stacked in ways that make it really improbable for some people to have access to that conversation. Social mobility, that was the imagination.

FARREN: Great point, Jason. And that is essentially what a lot of my own research focuses on, that the special interests, especially corporate interests, in society, leverage government authority to their own ends, rather than to focus on serving customers. So in essence, what we have is not necessarily a capitalism problem, it’s a political problem, wherein government authority gets twisted to the ends of particular special interests.

ABERMAN: It seems to me that this issue of capitalism and of outcomes, this is not a new thing. I could trace it back to the founding of the country. Michael, I know you spent a lot of time researching this, so I’ll turn to you first. Give me some historical perspective. This doesn’t sound like this is a new issue for us.

FARREN: Absolutely not. So the idea of an excess of entangling of economic interests and government interests, and a sort of regulatory privilege or tax privileges or subsidies from the government for private industry, has a long history. There were actually multiple states that defaulted on their debt in the mid 1800s, after over-subsidizing a lot of railroad and canal projects in the early 1800s. That led to a bunch of clauses in state constitutions.

They’re essentially anti-gift clauses that prohibit the state from being able to offer special subsidies pertaining to particular firms or industries. That held for a while, but then obviously the Robber Baron era, and the federal government didn’t go too well in the late 1800s, and then in the mid 1930s, during the depths of the Great Depression, states started offering relocation subsidies for manufacturing firms, trying to draw firms to the Deep South. And then the North responded. And essentially, it just accelerated to where we have what we have today, which is about 45 billion to maybe 70 billion wasted every year on economic development subsidies.

GRUMET: The issue about the kind of cyclical reality of this, I think, is really important. And I’m going to out you, Jonathan, during the break you were quoting Tocqueville, which doesn’t happen a lot on radio. Given the opportunity of once a decade, you know, the thing that Tocqueville said about America was that we had this capacity for what he called repairable mistakes, which basically means there’s ballast in our democracy. When things get too far out of whack somehow, the country figures that out and it pulls us back towards the middle.

I think that’s the moment we’re at now. You know, you hear a lot of people talking about inclusive capitalism, or stakeholder capitalism, this idea that we, in the early 80s, shifted the system away from imagining the corporate responsibility to its community, and really thought about it as its responsibility fundamentally to maximizing kind of short term shareholder interest. And that that’s when things started to change. And if you look big picture, you know, at the math, from 1945 to 1981, the earnings of the bottom 90 percent of the country increased by almost 80 percent, and the top 1 percent increased by about 30 percent. Right, so you saw actual accelerated wealth growth at the bottom of the pyramid. Between 1981 to 2014, the bottom 90 percent income fell by 3 percent, and the earnings of the top 1 percent increased by almost 180 percent.

So something happened. Right there was this moment from basically World War 2 to about Reagan where everybody was doing better. You know, the base was broadening, and strengthening. And that changed about 40 years ago. And I think it’s a moment now where our democratic system is going to have to figure out: what can we do without taking away that engine of entrepreneurship that makes the country what it is? How can we sustain that spark, but make sure that actually more people have access to it?

ABERMAN: When we were on the break, and I talked with you about Tocqueville, you know, there’s a Frenchman who was an aristocrat. He comes to America in 1826 to learn about the prison system, and ultimately determines that what makes this country really interesting and democratic is the opportunity we all have. He saw from the beginning there was a particular intertwining of capitalism and opportunity with Americans, as he described it. Richard, you are a big believer that we have to be aware of the fabric of society. How do you see this play out?

LEVICK: You know, when we look at the founding of this country, it’s really founded on three precepts. One, obviously, democracy. Two, capitalism, and three, theology, or the absence thereof, and it’s the intertwining of course, of the First Amendment, both the protection of belief and religion, but also non-belief. But if you look at all three of the systems right now, democracy, capitalism, and religion, all of them are under attack for one reason or another, or our faith in them. No pun intended, or perhaps it is, that they are being limited, being risked. And you have all those throughout history, whether it was Grover Cleveland in the 1880s, or Teddy Roosevelt in the early 1900s, or Churchill in the 1940s, capitalism has always been questioned about its imbalance, but we’re now at a point where I think people are getting angry.

We’re seeing a level of discourse that, as a communicator, and it’s not just companies, but you know I spent time in 70-75 different countries running around the world. We’re seeing here, I think, the city on the hill, we’re seeing a greater level of anger and discourse, separation, that we probably haven’t seen, not since the ‘68 to ‘72 period during the Vietnam War, but 1856 to 1864, where you really saw the country start to pull apart.

ABERMAN: And this is what frankly drove me to want to get together with you in the studio today, because how I see this playing out is, people, their anger runs to absolutism. Socialism, it becomes a buzzword for, I’m not happy with this. Or, true free markets, and these terms get thrown around. Or religion, very absolutist, but fundamentally, America’s never been an absolutist country when it comes to solving this problem.

GRUMET: And just to note, there’s a lot of conversation about socialism. But don’t forget the rush towards nativism and authoritarianism. If you look at what’s happening around the globe, my concern is less that we’re actually going to become socialist nations then we’re going to start to see that social unrest rip the fabric of these democracies apart. And you know, look what’s happening in Poland, what’s happening in Hungary. Look what’s happening here in the U.S.. We are starting to identify our problem not as our economic system, but as the other, whatever that other is. And that’s a pretty dangerous phenomenon.

FARREN: Absolutely, and that’s dangerous not just to communities and societies, but also to capitalism itself. To bring this around. So over the last 40 years, the amount of amazing poverty, of the deepest poverty in the world, where you’re surviving on less than two dollars a day, accounted for inflation costs and cost of living, has dropped from over 50 percent of the world population to under 10 percent of the world population in just 40 years. And the reason for that primarily, has been because of greater trade. Ever since World War 2, trade opened up between nations that allowed for a lot more people around the world to lift themselves up out of poverty.

China didn’t start lifting itself out of endemic poverty until the economic reforms of the 1970s. There’s a great NPR story that you can listen to, it’s called The Secret Document that Transformed China, and was essentially a group of villagers agreeing to, rather than farm communally, to separate their land and farm individually. The fact that you actually earned the payoff from your work led them to work harder. They produced so much more in the course of a year that they weren’t able to keep their secret pact a secret. And they were worried they were going to be executed, but instead, it worked so well, the Chinese government actually shifted its entire plans, because a lot of liberal reformers had come in at that point. And that led to amazing economic growth in China, following that. So the problem now is again, like you said, faith in capitalism.

LEVICK: And the march to authoritarianism that both of you were touching on, if we look at the robber barons of today: Facebook in particular, Google, Amazon, first, what are they truly producing? When you compare them to a century ago, with the robber barons of steel, and bridges, and railroads, and oil, that created all sorts of opportunities for us. I’m not sure what Facebook is truly creating, but it certainly has created a platform for disruption of democracy, for uncensored access and encouragement of views that are now, certainly we’re seeing, commonplace in a way that we haven’t seen since the 1930s.

ABERMAN: Americans clearly are driven by fairness. There’s a particular brand of expectation. How do we make sense of this, and keep the country moving forward, because just people screaming at each other, because that ultimately will get us nowhere, except more people screaming at each other?

GRUMET: Well Jonathan, and I guess you know, this is where democracy has to actually step up a little bit. So yes, a number of us mentioned earlier that the system is getting strained, and either we find some ballast in the middle, or one of two things are gonna happen. We’re going to either see the kind of yellow vest social unrest, or, you know, the more radical progressive Elizabeth Warren agenda is going to step in with a really blunt instrument.

And I think the Bipartisan Policy Center, we think there are a number of things that could happen right now, even in this semi functional Congress, we think of it as kind of as an opportunity agenda. Initiatives like paid family leave. Now, it seems we’re the only Western democracy that makes people choose between their babies and their paychecks. A remarkable number of folks are going back to work after five or six days of having a kid. And we’ve actually seen women’s labor participation actually start to drop for the first time in a generation. The opportunity to figure out how to save for retirement. The notion of working at Kodak for 40 years just isn’t there anymore.

If you’re an Uber driver, and you’re doing work on you know someone’s tech system on the side, you have no access to a retirement account. There’s bipartisan legislation right now, moving forward, that would start to address that. I think something that really matters, we haven’t talked about the millennials that much, is student debt. This kind of crushing debt burden that is actually diminishing people’s opportunity to have families, start to buy homes. There’s good legislation moving forward. Senator Alexander and Senator Murray, who’ve always worked really well together, are trying to address this question of: how do we make sure that if you’re going to school, you’re going to be able to come out with academic credentials that actually allow you to start to pay off your debt? And if you’re a university that continues to graduate people with unmarketable degrees, you know, where’s your skin in the game?

And I think you know, we started out talking about this question, does capitalism have kind of a messaging issue? A lot of that I think is animated by this recent poll, which shows that about 50 percent of voting adults under 40 aren’t so sure whether capitalism or socialism is a better bet. And that’s not because they’re irrational, or you know, reading philosophical theory. Millennials are about 10 years behind where the baby boomers are. If you actually look at the household wealth of a millennial, it’s about half of that of a baby boomer in the 1980s.

ABERMAN: It seems to me though that we’re not asking the right question: do you want American capitalism? Michael, this is right in your research. Isn’t this about not just elevating from the bottom, isn’t it also about holding those at the top accountable for not digging themselves more money out of the public trough?

FARREN: Absolutely. The underlying issue is who writes the rules. Do people with special government access and influence get a chance to write rules that are more in their favor than others? This is a problem that we’ve had throughout the history of the U.S., both in terms of economics as well as social issues. We’ve gotten much better in social issues. We still have a long way to go, but we have moved forward, and I think it’s part of that idea of the ballast of democracy that Jason was talking about.

Well, we need to get better in regard to economics, who writes the rules. My friend Chris Krugman wrote a Wall Street Journal article a couple of years ago, I think referencing the same poll that Jason just referenced, the title of the article is Millennials Versus Mutant Capitalism. And about less than half of millennials said they favored capitalism, and about a third said they favored socialism. And what Chris’s point was that we need to essentially illustrate the fact that our economy is not purely capitalistic, that the negative aspects, that the fact that special interest groups with more influence get to write the rules, or influence the rules, is part of the problem, not part of capitalism itself.

One of the policy agenda items that I’ve been working on is something that has a lot of bipartisan support. A number of Democratic state legislators have proposed this in their own states. That is, an interstate compact, to avoid the kind of economic development subsidies that were given to HQ2, and Foxconn, and dozens of other massive corporations. that essentially are getting taxpayer dollars for doing something that they would have been doing anyway.

ABERMAN: Richard. we’ve been together now for about 25 minutes. You’re the messaging guy. If you were going to try to give father economy some advice, how would you advise that we describe capitalism in a way that will make Americans continue to buy into it?

LEVICK: Well I’m not so sure that I’m worthy of giving father economy advice. You know, I’d say a few things. First of all, in terms of the definition of capitalist: we’re all capitalist on the way up, but we’re socialist on the way down. And we’re very concerned about just how rocky the bottom is. Two, I think that we are in an age of scarcity mentality, Stephen Covey would discuss, as opposed to abundance mentality. We are all about getting ours, and I think that’s why we have this race.

Whether it’s for companies looking for better taxes or other handouts, in terms of moving into districts, or it’s our own employment, where we’re feeling scarcity at a time when we really shouldn’t. And that tells us where we’re going. And I think three, for companies, we’ve moved a long way since Milton Friedman in 1970, which is the purpose of a corporation is profit. Period. It’s the shareholder and the customer. We now are in an age where corporations are defined by far more than their profits. You know, having been in the war room at AIG ten years ago, and experienced one of the members of our team being punched in the face because he forgot to take the AIG badge off when he walked on the streets of New York. Some of your listeners are saying that doesn’t make it very unusual, because it was after all New York.

But I think, you know, people got very, very angry. What is the purpose of a corporation now? And I think it’s much harder for boards, and they have to realize now, whatever is going to happen next, we have to use our peacetime wisely. Who are our third party allies? What is our corporate social responsibility? What is our green approach? How do we have a communications out there that, when people are angry, they’re going to see us as a good guy as opposed to as a bad guy?

ABERMAN: My overall conclusion, gentlemen, is that really, what people are driven by, whether they are free market or they’re concerned about outcomes, whatever, is ultimately it’s fairness.

GRUMET: Absolutely. That’s a core human drive. And it’s even present, they’ve shown in biology studies in primates. And if you give one monkey a grape, and another monkey a banana, one of them is going to be mad.

FARREN: I’m not throwing away my shot, right. I mean, that’s the premise.

ABERMAN: That’s right. And I really enjoyed having the three of you in the studio today. This was a great conversation.

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