The Oracle: Robert Reich on saving American capitalism
Dean DiSpalatro on November 25, 2015
Academic critics of capitalism aren’t exactly in short supply. A former academic myself, I can say anecdotally there’s an annual bumper crop, and that many such critics have little or no training in economics or related practical experience. Lacking the chops to back up their missives, they’re summarily dismissed by the informed, if they’re noticed at all.
No matter where you stand on the question of capitalism’s premise and viability, one academic critic you can’t dismiss is Robert Reich, a Berkeley professor who served as Secretary of Labor to Bill Clinton and economic advisor to the Obama campaign in 2008. A familiar face of the book-chat world lately on programs such as The Daily Show and Moyers & Company, he’s spent decades ruminating and writing on his country’s fortunes and failures. His latest work, Saving Capitalism: For the Many, Not the Few, is a compelling diagnosis of a system on the brink.
Reich’s overarching argument amounts to a red alert: the structure of the United States’ political, legal, financial and economic system is rigged to promote the narrow interests of the financial elite. “The building blocks of capitalism—property, contracts… bankruptcy laws, enforcement mechanisms—are now tilted dramatically in favour of the corporations, Wall Street and the wealthy, and against average working Americans. Most people don’t see this tilt because much of it is invisible. It’s hidden within the rules of the game.”
The financial elite, says Reich, exert tremendous power over the policymakers responsible for creating the rules and regulations that dictate the character of the market and economy. “They do this continuously, over and over. I’ve been in Washington for half my adult life—when I haven’t been teaching—and I’ve been in the middle of it. The big difference between when I started in the 1970s and now is that there’s no countervailing power. It’s basically only big corporations, Wall Street and a smattering of billionaires who are influencing all of these decisions.”
He’s borrowed the term, “countervailing power,” from economist John Kenneth Galbraith. It refers to power centres representing the broader population, such as labour unions, that effectively offset the strength of society’s elite.
“We have to re-establish countervailing power in America. That was the key to widespread prosperity for 30 years after World War Two… The [current] lack of countervailing power, and the concentration of wealth and income, has generated more and more political power at the top to rig the game on behalf of the big corporations, Wall Street and the wealthiest.”
If you know what to look for, you’ll see this influence almost everywhere, suggests Reich. Corporations with “deep pockets and lots of political influence” as he puts it in Saving Capitalism, have gradually built competition-choking monopolies and oligopolies that squeeze consumers. For instance, he says, “eighty percent of Americans have no choice of Internet service provider, which explains why [they] are paying more for Internet service, and getting slower speeds than the citizens of any other advanced nation.”
Lack of competition also plagues the airline industry: “Ten years ago [the U.S.] had nine major airlines. Now we’re down to four. Most hubs have only one or two. So when people wonder why airline fares haven’t dropped even though fuel prices have dropped through the floor, the answer is, there isn’t competition.”
Another example: “Right now [there is] a massive consolidation going on of private, for-profit health insurers—they’re merging like mad.” Fewer insurers competing means higher healthcare costs.
“In all of these ways,” says Reich, “there’s a pre-distribution upward from average people to big corporations, their top executives and their major shareholders.”
The fortunes of organized labour also bear the stamp of the elite’s political power, according to Reich. “In the 1950s, over a third of all working people in America belonged to a labour union. Now, in the private sector it’s down to fewer than seven percent, which means the working class and average working people don’t have bargaining leverage of the sort that they had in the 1950s.”
The largest company in the 1950s, adds Reich, was General Motors, whose workers were paid an average of $35 in today’s dollars. “Now the largest employer is Walmart, whose employees get an average wage of a little over $9. This is not because the Walmart worker is any less productive than the GM worker… It’s because they aren’t organized—they don’t have any bargaining leverage.”
Right-to-work laws, which allow employees to bypass union membership and dues as a condition of employment, have been one of the key forces undercutting organized labour, says Reich. In his book, he explains that “the practical consequence [of these laws] was to let workers who did not pay dues get a free ride off of those who did, thereby undermining the incentive for anyone to join a union in the first place.” CEOs have chipped away at labour’s bargaining power in part by relocating, or threatening to relocate operations to right-to-work states.
The kinder, gentler Wall Street
Reich is especially unnerved by the elite’s impact on bankruptcy law. “Why is it that… big corporations can use bankruptcy to shield themselves from their debtors, including their commitments to labour unions and to their workers?… The bankruptcy code, particularly in the last 30 years, has been changed to help and insulate those with a great deal of money and power… and at the same time become unavailable to home owners and student debtors. Student debt is a huge problem now, but they have no recourse.”
And then there’s Wall Street. It was actually “rather tame” in the 1950s, 1960s and 1970s, says Reich. “Banking was boring. And regulations put into place in the 1930s to make sure banking was boring were still very much in place. But then Wall Street began to assert its political clout to get rid of those regulations.”
Especially significant, he says, was the repeal of the Glass-Steagall Act in 1999, allowing commercial and investment banking to be combined. Dodd-Frank, the law enacted to rein in the financial sector post-2008, “is being whittled back” by Wall Street.
Reich notes the power of Wall Street and major corporations on Capitol Hill is mostly a non-partisan affair. Major financial interests play both sides of the campaign financing game so from their point of view, it matters little whether Democrats or Republicans get elected.
If Reich is correct, the United States is in quite a pickle. On one hand, the solution to the excessive power of the elite must come from the political sphere. “We don’t have any choice, because politics and political decisions shape and define the market.” On the other, policymakers in Washington are almost completely under the sway of the financial elite.
Where’s the way out?
Reich says the current situation in the United States has two key precedents: the Great Depression, and the turn of the 20th century, when the robber barons of the “Gilded Age” held sway. “It’s the same pattern. If we had this conversation in 1900, and you asked me, ‘How do you correct this politically [given that] the wealthy have control over democracy and the economy?’ I would have said, ‘It has to be corrected. It’s not sustainable.’”
In Europe and elsewhere, such conditions have been the breeding ground of murderous ideologues. But if history is any guide, says Reich, the United States will once again skirt the scourge of totalitarianism. “Unlike other nations and societies, where economic stresses, poverty, middle-class stagnation [and] enormous wealth at the top have led to revolutions—I mean communism or fascism—the United States, Canada, Britain and a few other nations have avoided these kinds of traumatic and often disastrous revolutions by reforming capitalism from within.”
Reich says he can’t say what form the countervailing power will come in, “but I can tell you that historically, [it’s] always been the pattern [that] when American capitalism goes off the rails, as it has in recent years, there’s a political movement to get it back on track.”
This may give small comfort to those worried that the United States may not be so lucky the third time around. But Reich isn’t in the business of offering guarantees, because there are none—a message readers of this magazine are inured to. “You’re not going to get any insurance. I mean, there just is none. All I can do is provide the historic trend and explain why the current trend is unsustainable.”
Signs of what could become meaningful countervailing power have already bubbled up to the surface. “Why is it that Bernie Sanders is surging? Why is Donald Trump also surging?…They’re very different people and they represent very different ideas, and I hesitate to put them in the same sentence…” But he considers them both fuelled by an upsurge of disgust towards the ruling class, “the insiders, both political and economic. The only thing they have in common is that they are outsiders taking on the political establishment, the ruling class.”
Trump represents the Tea Party wing of the Republican Party, while Sanders represents the Occupy element of the Democratic Party, says Reich. The 2008 bailout of Wall Street was a defining, combustive moment for both, fueling an overwhelming “sense that the whole economy has turned into a kind of corrupted form of crony capitalism.”
It isn’t just these groups that are getting fired up. Most Americans know “they have not seen any increase in their wages in 30 years… and yet the people at the top are doing better than ever. So, I think average Americans are coming around to believing that the system is rigged.”
For now, at least, the opposition appears too fractured to mount an effective charge. “To the extent that it’s possible to gain some unity among the anti-establishment forces, we’ll begin to see countervailing power.”
Copyright 2015 Rogers Publishing Ltd. This article first appeared in the Winter 2015 edition of Corporate Risk Canada magazine