“One of the lessons of the global economic transformation of the past 20 years is that when incentives change, cultures can change, too.”1
CHRYSTIA FREELAND,
Financial Times, January 29, 2010
“What is required is nothing less than a shift in the culture of … capitalism.”2
RICHARD LAMBERT,
Chancellor, University of Warwick
Is Apple the future?
I begin this chapter with a cry from the heart by the generations coming up. Written by Alexandra Petri in February 2013, it is their future envisaged by Apple and guaranteed by Reaganomics and pay-to-play:
“Millennials are grotesquely underemployed. We waded bravely into the workforce waving extremely expensive sheets of paper that turned out to be almost meaningless. Nearly half of college graduates have jobs that don’t require four-year degrees. And those are the ones who are working.”3
Apple is touted as perhaps America’s finest firm, an innovative giant, highly productive and profitable. Its business model involves transferring the fruits of R&D, venture capital, and innovation nurtured in American labs abroad where Asian production utilizes a cheap, flexible, docile, and disposable workforce. Offshoring virtually everything in the value chain from R&D to production with barely 6 percent of its workforce in America, it is also an unusually disloyal American multinational. Moreover, like most multinationals, much of its profit is channeled through overseas cutouts to be hidden in tax havens, its tax burden shifted onto families and purely domestic US enterprises.
That is the business model of the firm synonymous with the very best of American capitalism in the Reagan decline. Apple behaves like some sort of global citizen, refusing to nurture broadly based American family prosperity. Permitted by voters to commoditize employees, its officials cynically blame America for the firm’s decision to abandon the nation that nurtured its creation and creator and enabled its success.
Along with other firms, Apple exploits the nearly unique assets of the American economy, but displays little concern for the impact of its business model on US society. Apple’s behavior—multiplied thousands of times—is a major reason why American wages are stagnating, opportunity shrinking, and income disparities widening in contrast to the family capitalism countries. The plight of millenials and their parents is not a temporary condition. Looking ahead, the Apple business model promises more stagnation and more family economic distress. The US business community is offshoring too many high-productivity jobs, exporting the source of traditional US growth. That compounds the drain on productivity from short-termism. And that’s why economists such as Robert Gordon, Jeremy Grantham, and experts at the Congressional Budget Office in 2012 downgraded your future.4 Recall that Gordon concluded that American productivity growth in the future will average a bare 1 percent:
“Future growth in real GDP per capita will be slower than in any extended period since the late nineteenth century, and growth in real consumption per capita for the bottom 99 percent of the income distribution will be even slower than that.”5
The antigrowth aspects of Reaganomics have caused an enduring downshift in the potential growth rate of America. With growth slowing and the gains from growth certain to continue being redistributed upward, most families and their children will be hard-pressed to avoid further economic deterioration. Of course, forecasts can be wrong; in the era of the floppy disc, Bill Gates argued that “640 kilobytes ought to be enough for anyone.”6
Not this time. Most Americans hope for the best, but reality keeps pressing in. And that reality is the global labor overhang and a Washington that chooses not to ameliorate the impact of globalization. Wages in China and elsewhere are rising, but they will remain small fractions of US wages because of glutted global labor markets. Recall how the chairman of Gallup, Jim Clifton, explained the reality of the overhang, featuring some 3 billion jobseekers worldwide:
“There are currently only 1.2 billion full-time, formal jobs in the world. This is a potentially devastating global shortfall of about 1.8 billion good jobs….”7
In America, that reality is Apple and firms such as Dr. Pepper Snapple. As a result, men and women today find new employment mostly in the service sector, dominated by lower-wage enterprises such as Walmart, Apple, or McDonalds. Those are good jobs only in comparison to being unemployed: weak hourly pay, limited career potential, unpleasant and tiring working conditions, and too many are part-time. And it isn’t much better in more upscale service jobs, as journalist Ben Austen explained in Harper’s magazine a few years ago:
“Even in service-sector jobs at businesses on Fortune’s ‘100 Best Companies to Work For’ list, such as nonunion Whole Foods or Starbucks, employees are paid just above minimum wage and benefits are repeatedly downgraded, all in the service of a business model that relies on young workers quitting in a short time.”8
It is certainly true that improving minimum wages, more education, and stronger unions can raise individual wages. But these conventional remedies flounder on the sharp reefs of extreme offshoring and that labor compensation for most Americans has become structurally decoupled from productivity. Increasing reliance on robots threatens to further decouple wages from rising productivity. There is no path to reverse the Reagan decline without drawing on the lesson offered by Australia and the other family capitalism countries in structurally modulating offshoring while linking wages broadly to national productivity performance.
Reversing the decline requires fundamental reforms in the way firms are governed, the way gains from growth are received, the way management interacts with employees, and the way domestic content is nurtured. Are these reforms likely under Reaganomics?
Adam Smith wouldn’t think so. Recall his warning about governments comprised of merchants? To frame the answer, I first return to Joseph Stiglitz. Reprising Aristotle and also Acemoglu and Robinson, here is how Stiglitz in his book, The Price of Inequality, explains what I believe is the most accurate perspective on the origin of the Reagan decline:
“When one interest group holds too much power, it succeeds in getting policies that benefit itself, rather than policies that would benefit society as a whole.”9
Only a relative handful of Americans have benefitted from the credit bubbles, deregulation, and other Reaganomic policies and outcomes since 1980, garnering most of the gains from growth. Side effects of those policies wiped out an entire generation of toil and savings for virtually all American families. And those policies promise a future that is equally bleak.
Do not be deluded that the Stiglitz description of America today is rare or an anomaly soon to be reversed. As economists Daron Acemoglu and James Robinson make clear in their book, Why Nations Fail, the Reagan decline featuring an upward income redistribution is the template throughout economic history. For many thousands of years, mankind has continually labored under an extractive economic model that narrowly benefits the few.
With a rare few exceptions, economic elites such as Aristotle’s oligarchs, Roman equestrians, medieval kings, Ottoman Sultans, and southern plantation owners, have always dominated the less fortunate, extracting through slavery, feudalism, or tenant farming whatever surplus those souls managed to produce. Economies stagnated because such elites are Luddites, stymieing the creative destruction process because change threatens their positions. The first exception was the era of the Roman Republic from around 510 BCE until the time of Julius Caesar in 49 BCE; slavery was widespread, but property rights somewhat broadly evolved and at least plebeian “Roman political institutions had pluralistic elements,” concluded Acemoglu and Robinson. Importantly, this weak grip by elites allowed economic opportunity to flourish, enabling New Men to challenge vested interest, opening the door to innovation and entrepreneurship that evolved to be the vast Roman Empire.
The second exception flared momentarily in the thirteenth century in Venice, until it was extinguished beginning in 1286 when “Political and economic institutions became more extractive,” ending broad-based prosperity.10 The third exception was the medieval textile regions of northern Italy, Germany, Holland, and Lancaster, as explained by historians Charles Foster and Eric Jones in The Fabric of Society and How it Creates Wealth. Entrepreneurship broadly flourished, but the gains came to be concentrated in a few families, their Luddite instincts ending the saga. The fourth exception is the historically quite recent prosperity and economic equality that evolved from the industrial and political revolutions of the seventeenth and eighteenth centuries. The Glorious Revolution, the defeat of the Spanish Armada, and other historically unique conditions enabled strivers in England and later Europe and America to serendipitously thwart the luddite instincts of elites. Inclusive, pluralistic economic and political institutions evolved that facilitated rising and broadly spreading prosperity.*
But as Acemoglu and Robinson make clear, these tiny few examples of a serendipitous happenstance are not destiny. The examples of Republican Rome, thirteenth-century Venice, Europe’s medieval textile centers, and Britain’s industrial and political revolution are no guarantee of future prosperity: “Moves toward inclusive institutions, as our account of Venice shows, can be reversed…. It is neither automatic nor easy.”11 Within the framework of this long sweep of history, the Reagan decline is readily categorized as merely another iteration of this traditional pattern. The annual redistribution of gains from growth upward over the span of this decline differs from the usual pattern throughout economic history only in detail and of course, in its gargantuan magnitude.
It differs in another far more important fashion, however, which is why this book was written. The decline was created in American voting booths and can be reversed in those same voting booths.
For only the third time in American history in 2012, a winning President melded the politics of hope and change with economic resentment. It’s tempting to conclude that Americans are therefore receptive to returning economic sovereignty to families. The millenials are certainly supportive. And polling data suggest public dismay at widening income disparities. A Pew Research Center survey in January 2012 found a 40 percent jump since 2009 in respondents who believe that a conflict now exists between rich and poor Americans. Two-thirds of respondents believed that. Indeed, more respondents believed that income differences are a source of conflict (66 percent) than believe the nation is divided instead by immigrants versus native born (62 percent) or on questions of race (38 percent).12
These polling results, coupled with financial crises and weak economic recovery, have led some to conclude that reform is inevitable. Here is Financial Times journalist Francesco Guerrera writing during the depths of the stock market decline in March 2009 about corporate governance reforms:
“Long-held tenets of corporate faith—the pursuit of shareholder value, the use of stock options to motivate employees, and a light regulator touch allied with board oversight of management—are being blamed for the turmoil and look likely to be overhauled…. As a result, the composition of boards is likely to change dramatically.”13
Mutual fund manager John P. Hussman is similarly optimistic:
“Economies that generate high profits, weak wage gains, and low capital accumulation are like old-style monopolies that … fail to produce long-term prosperity or growth. No economy in the history of the world has tolerated that sort of situation for long….”14
Not so fast.
Reform is unlikely, thwarted by nineteenth-century economic Darwinians comprising a majority of the Roberts Supreme Court. They endorse a Washington firmly in legislative gridlock resulting from judicially indulged gerrymandering and pay-to-play. Washington will continue treating American families like deer in the headlights of globalization.
Recent world history offers clear lessons about how families fare when elites capture government. America has now come to resemble those nations, according to Simon Johnson, former chief economist at the International Monetary Fund (IMF), and nowhere more evident than in finance. Despite the regulatory collapse of recent decades, even reform of Wall Street is proving to be a bridge too far, an alarming tell for the future. “A whole generation of policy makers has been mesmerized by Wall Street,” explained Johnson, unwilling to regulate with prudence because of pecuniary politics. Drawing on his experience, Johnson identifies disturbing similarities between lagging developing nations and gridlocked Washington:
“The finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises…. But there is a deeper and more disturbing similarity: elite business interests—financiers, in the case of the US—played a central role in creating the crisis … [and] are now using their influence to prevent precisely the sorts of reforms that are needed…. The financial industry has not always enjoyed such favored treatment. But for the past 25 years or so, finance has boomed, becoming ever more powerful. The boom began with the Reagan years, and it only gained strength with the self-regulation policies of the Clinton and George W. Bush administrations.”15
The similarities between mismanaged nations and America in 2013 are unsettling: weak productivity growth, stagnant wages, Red Queens, deteriorating economic mobility, and widening income disparity. Johnson’s analogy is extended by statistics suggesting the United States also has come to resemble a mismanaged nation on social indices, as described by Australian journalist Leon Gettler, drawing on research by epidemiologists Kate Pickett and Richard Wilkinson, authors of The Spirit Level:
“The US has the worst health and social problems in such areas as numeracy and literacy, infant mortality, homicides, imprisonment, teenage pregnancies, lack of trust, obesity, mental illness including drug and alcohol addiction, and social mobility.”16
Voters can end gridlock by reasserting their economic self-interest at the polls, weighing carefully the consequences of policies expected from the leaders they elect. But history has not been kind to such hopes. Certainly, the Reagan decline provides evidence for behavioral economists such as Dan Ariely, who argue that millions don’t vote in their economic interest.17 It may be that too many have poor information. For one thing, Americans have a fundamental misimpression of how wealth is distributed today as a consequence of Reaganomics. Surveys by Michael Norton and Ariely found that respondents believe the top 20 percent own less than 60 percent of American wealth, when their actual share is close to 90 percent.18
Reform hinges on new rules from Washington. Yet, despite the 2012 election outcome, many voters remain distrustful of government, the lingering effects of decades of demonization. This attitude is reinforced by the rather pervasive cognitive dissonance of Americans regarding the sizable role played by government in their lives, documented in research by economist Suzanne Mettler of Cornell University. She found that 44 percent of Social Security recipients, 43 percent of those receiving unemployment benefits, and 40 percent of both Medicare and GI Bill beneficiaries say they “have not used a government program.”19
Even so, American voters are not fools and realize they are economically downtrodden. So why have a majority of Americans voted repeatedly for political leaders who reject Adam Smith’s concept practiced in the family capitalism countries, where the ultimate purpose of an economy is the prosperity of families and not firms?
There are at least two complementary explanations: betrayal by economic elites and small ball policy options offered voters.
Reestablishment since 1980 of the traditional historic extractive economic system described by Acemoglu and Robinson had an important political element. Political scientists such as Larry Bartels writing in Unequal Democracy have concluded that electoral choices and economic consequences are rendered opaque for many voters buffeted by extravagant half-truths.20 And “half-truths” is a kind interpretation of the unprecedented intensity of outright fabrications by the wealthy conservative fringe, such as swift-boaters in 2004 or birthers in 2012, tarring Presidential candidates. Democrats agree, of course, arguing that pecuniary politics enables plutocrats to obfuscate economic options, large donations empowering their hired politicians to exploit social and value issues to bamboozle voters. You may disagree, but some conservatives do agree, including David Brooks, who wrote of this charade and Machiavellian manipulation in January 2012:
“The Republican Party is the party of the white working class. They overwhelmingly favor Republicans…. The Republicans harvest their votes but have done a poor job responding to their needs. The leading lights of the party … have a more individualistic and even Randian worldview than most members of the working class.”21
Moreover, voter myopia and inattention appears to enable Republican Party officials to tend subsequently to the concerns of donors rather than constituents. Economist Nancy Folbre cites Tea Party supporters as an example. While polling results confirmed that 53 percent of members supported higher taxes and spending cuts to shrink deficits during the 2011 budget battles, Tea Party Republicans in Congress ignored them. Folbre explains:
“Their views … are not primarily shaped by the views of their constituents…. Its elected representatives quickly began relying on Political Action Committees and major contributions from Wall Street firms…. Many Tea Party members may be unaware of the extent to which wealthy political conservatives like the Koch brothers have controlled their efforts and shaped legislative priorities.”22
Such donors have taken the measure of Republicans, insisting the Party’s careerists fiercely support the present distribution of gains from growth by gridlocking Washington. And that Party has naturally responded by subordinating every other legislative issue to that donor imperative.
Economists explain the success of this relatively small donor class through the lenses provided by Mancur Olson’s 1982 classic, The Rise and Decline of Nations. Olson explained that the popular will in the United States is routinely thwarted by the focused efforts of a concentrated minority with more at stake.23 Groups like the pharmaceutical industry, hedge fund managers, the extremely wealthy, or sugar farmers that have an intense stake in public policy tend to prevail even when massively outnumbered by opponents, each of whom has a far less intense stake in the outcome. Billionaire businessman David Koch or the Red Queens have much more to lose than you have to gain from environmental or banking regulations, and their donations reflect that calculus. That is the essence of regulatory capture empowered by pay-to-play.
Another explanation why folks don’t vote in their self-interest is that they’re offered limited choices at the polls.
Scholars argue persuasively that Democratic Party officials knowingly play small ball. Drawing on research prior to 2012, law professor Joan C. Williams at the University of California, Berkeley has suggested, for example, that the Democratic Party only reluctantly raises middle-class concerns. That is because opponents have succeeded in portraying its efforts on health-care expansion and improving public education as invidious redistribution aiding only impoverished households and teacher unions. Williams argues that “Republicans have made working-class resentment a powerful weapon for achieving the policy goals of the business elite.” The consequence has been quite odd electoral battles featuring the “have-a-littles fighting the have-nots.”24 That changed in 2012.
The 2012 campaign by President Obama featured a full-throated defense of the New Deal legacy of government activism, but the prescriptions were underwhelming. Probably from limited familiarity, proven options drawn from family capitalism countries were ignored.
The small-ball reality of Democratic Party options and loyalty of Republican Party politicians to its donor class eager for gridlock have left American firms free to pursue international wage arbitrage and offshore valuable jobs. Reversing these trends with the only proven means of remediation—Australian-style wage policies, German codeterminism, work councils, and de facto domestic content—will be a herculean task for voters. Americans are ambivalent about enterprises, rightly distrustful of their priorities and morality in the wake of the financial sector crisis and their offshoring of jobs. Yet the business community is connected to families by golden handcuffs, because enterprises are the device contrived in capitalism to create wealth. Even so, as we have learned, the terms of that complex relationship are not preordained, and history teaches they can be shaped by rules cast by voters.
Renewal requires leadership. America’s greatest President, Abraham Lincoln, understood the unique opportunity offered by leadership; the potential to mobilize public opinion by appealing to the better angels in each of us. Later, Franklin D. Roosevelt seized the opportunity to lead, channeling American frustration with economic outcomes to begin assembling family capitalism. And a number of courageous leaders abroad subsequently challenged entrenched economic interests as well, in order to broaden prosperity. Japan, South Korea, and Taiwan instituted dramatic and contentious economic reforms in the 1950s to allow independent action by elected leaders in the face of oligarchs and landed aristocracies interested in maintaining the status quo.25
The barriers hindering reform today are no less formidable than in 1933, and remediation must be at least as fundamental in scope as the grand bargain crafted between families and the business community then. The concepts of a minimum wage, Social Security, and bank deposit insurance that Roosevelt championed were as unfamiliar to the Americans of his day as codeterminism and the Australian wage mechanism are today.
Three years ago, the economist Ross Garnaut, Vice Chancellor’s Fellow at Melbourne University, explained the vital role that leadership plays in mobilizing public opinion to support family economic sovereignty. And his perspective is equally applicable to Americans pondering reforms to duplicate Australia’s success:
“The vested interests have large advantages, but they don’t hold all the cards. The big card in the hand of the public interest is the community’s capacity and tendency to respond to leadership…. The independent centre cannot exist unless there are academic and other centres of policy analysis, media, and mass communications that are funded independently of interest groups. Public institutions can play a role in expanding the independent centre…. On the latter, the Australian Productivity Commission and its role in the analysis of the effects of protection is an outstanding example…. The outcome of the struggle between the national interest and special interests determines the prosperity, and in the end the security and longevity of the national community. The prospects for policies in the national interest and for stable outcomes once adopted are shaped by the quality and strength of leadership. Good outcomes are unlikely without effective, strong, and clear-headed leadership, drawing support from an informed electorate.”26
The family capitalism countries have demonstrated that steps to reassert family economic sovereignty are not on the path to serfdom. On the contrary, they put America on a path that began with the Glorious Revolution and the American Revolution, one lit by John Locke and Adam Smith, and trod by Thomas Jefferson, James Madison, and FDR.
Aside from the need for leadership and the adoption of a reform agenda built around the urgency to recouple wages with productivity, there are four specific lessons the family capitalism countries offer for those Americans pondering the journey.
First, the arguments marshaled in this book evidence that rising middle-class prosperity is incompatible with shareholder or managerial capitalism; their goals are simply different. Reaganomics has slowed growth and rendered the American family something of a free-fire zone, as David Brooks acknowledges, even as he offers no remedies:
“The social fabric is fraying. Human capital is being squandered. Society is segmenting. The labor markets are ill. Wages are lagging. Inequality is increasing. The nation is over-consuming and under-innovating…. Not all of these challenges can be addressed by the spontaneous healing powers of the market.”27
Second, in reasserting family economic sovereignty, the United States doesn’t face a trade-off between income equality and economic efficiency. The weight of evidence we have reviewed proves false the notion that policies rebalancing the gains from growth will reduce efficiency or economic growth. Indeed, the reverse even seems to be the case. Northern Europe has benefited from the superior efficiencies of stakeholder capitalism and codeterminism, while avoiding the growth penalties imposed by short-termism and other elements of Reaganomics. It also has proven false the notion that widening income disparities are an ineluctable consequence of maximizing economic efficiency.
Third, the economic viability of American enterprise is not jeopardized by paying high wages, adopting a long time horizon, or cutting CEO compensation. As noted earlier, wages are only a small component of overall enterprise costs, between 10 and 20 percent in manufacturing, for example, a figure swamped by gyrations in the macroeconomy or other costs, such as debt service or energy. Moreover, American firms have long operated around the world under a wide variety of capitalist models based on disparate rules, including those insisting on high wages. These foreign rules vary a great deal, but American corporations adjust and prosper under each; that’s what corporations are designed to do, after all. Indeed, the best American firms, such as Ford, invest hundreds of millions of Euros and employ many thousands of Europeans at $10, $20, or even $30 more per hour than they pay Americans at home. They will do the same thing at home, promoting middle-class prosperity, when voters demand it.
Fourth, stakeholder capitalism is sustainable for the long term. The prowess of the family capitalism countries in recent decades amidst globalization is the most compelling evidence conceivable of the model’s potency. Its sustainability rests on stakeholder capitalism’s superiority in driving productivity, the magic elixir powering a virtuous circle of greater investment and rising wages.
Productivity growth in both the United States and Australia has been lackluster compared to northern Europe, and both nations should seize the competitive advantages from codeterminism. Unlike America, Australia does have a national wage mechanism. But upgrading that Australian foundation to include codeterminism will be hindered by many of the same barriers confronting American reformers. While Australia balances its budgets, tightly regulates banks, and avoids recession, it has begun exhibiting unprecedented signs of American-style government gridlock fueled by its own version of pay-to-play politics. Reminiscent of collaborative governance in golden age Washington, Australia enjoyed a bipartisan bloom of government in the 1980s and early 1990s. While opposing Medicare, opposition leaders collaborated on many other initiatives with the Labor Party government. Today the nation enjoys a sturdy foundation of alert voters and unions, public institutions, watchful media and scholars, and a vigilant public sector. Yet that foundation is threatened by Rupert Murdock’s success in morphing domestic conservatives into US-style uncompromising politicians. That has created dangerous new dynamics challenging Australian voters because, as Garnaut explains, “Special interests have powerful incentives to obscure the real effects of various interventions…. The special interests are favored by ignorance and the fog of politics.”28
The ability of mining interests, in particular, to derail inspired efforts to mimic Norway’s sovereign wealth fund highlights the need to end pay-to-play in Australia. Here is a frank assessment of that nation’s contemporary political environment by Sydney Morning Herald reporter Tim Colbatch, writing in mid-2012:
“Conservative leader Tony Abbott’s war against everything has made good government in Australia almost impossible…. Whatever it [the Labor party] proposes, he opposes.”29