Supercapitalism by Robert Reich

reich_supercapitalism.jpgFew members of the Democratic intelligentsia have both the liberal credentials and the government experience comparable to that of Robert Reich. He was a member of both the Carter and Clinton administrations, serving in Clinton's cabinet as a notable progressive voice in a team of centrists. His 2004 book, Reason, which I explored in a series of posts (1, 2, 3) was a road map for liberals to regain the political high ground on morality, economics, and patriotism, and much of what he wrote has proved successful in the past two federal elections.

So when Robert Reich writes a book on the clash between capitalism and democracy, it is worth paying attention. In Supercapitalism, published last year, Reich traces the changing face of capitalism in the late twentieth century, from the stable (if stagnant) oligarchical post-war manufacturing economy to the modern slash and burn Wall Street/Walmart economy, fueled by an unquenchable thirst for low prices and high profit margins. He deems the older system democratic capitalism, the new system supercapitalism. As the names suggest, Reich believes the rise of uber-capitalism, accompanied by both tremendous economic growth and rising inequality, has severely undermined the power of the political sphere:

Democracy means more than a process of free and fair elections. Democracy, in my view, is a system for accomplishing what can only be achieved by citizens joining together with other citizens--to determine the rules of the game whose outcomes express the common good... Yet democracy is struggling to perform these basic functions. As inequality has widened, the means America once used to temper it--progressive income taxes, good public schools, trade unions that bargain for higher wages--have eroded. As the risks of sudden loss of job or income have grown, the social safety net has become less reliable. More of us lack health insurance. As a nation, we seem incapable of doing what is required of us to reduce climate change... In all these respects, democracy has been unable to take effective action, or even articulate the tradeoffs and sacrifices doing so would entail.

Capitalism has become more responsive to what we want as individual purchasers of goods, but democracy has grown less responsive to what we want together as citizens.. The last several decades have involved a shift of power away from us in our capacities as citizens and towards us as consumer and investors.

Reich describes an era he deems "The Not Quite Golden Age," in which "a unique blending of capitalism and democracy" took hold in the United States in the thirty years after World War II, combining "a hugely productive economic system with a broadly responsive and widely admired political system."The features of democratic capitalism included independent regulatory agencies that "would assure companies a steady flow of profits and customers a steady price," complicity by a few huge corporations that preferred steady, stable profits with little competition, top executives who viewed themselves as "corporate statesmen" charged with "balancing the claims of stockholders, employees, and the American public," and powerful unions that would negotiate good wages and lucrative fringe benefits like health care and pensions. The economic prosperity of the 1950s, with the rise of the middle class, growing economic equality, and vast stability, seemed to validate the system.

There was parallel action in the political sphere, in which politicians "paid careful attention to local elites--small business that comprised the local chamber of commerce, for example, and to national organizations whose members were active in local chapters, such as the American Legion, the Farm Bureau, and union branches." This responsiveness to civic society was accompanied by government empowerment of "new centers of economic power that offset the power of the giant companies," including labor unions, farm cooperatives, and retail chains; this was dubbed "countervailing power" by John Kenneth Galbraith. It did not last:

Since the late 1970s, a fundamental change has occurred in democratic capitalism in America, and that change has rippled outward to the rest of the world. Capitalism has triumphed, and not simply as an ideology. The structure of the American--and much of the world's--economy has shifted toward far more competitive markets. Power has shifted to consumers and investors.

Meanwhile, the democratic aspects of capitalism have declined. The institutions that undertook formal and informal negotiations to spread the wealth, stabilize jobs and communities, and establish equitable rules of the game--giant oligopolies, large labor unions, regulatory agencies, and legislatures responsive to local Main Streets and communities--have been eclipsed. Corporations now have little choice but to relentlessly pursue profits. Corporate statesman have vanished.

Reich argues that the change was not caused by inflation, or the oil embargo, or Reagan's tax cuts, or deregulation, or globalization, or greed, or corruption, or countless other theories, which he calls "nonsense." While some of these played a role (particularly deregulation and globalization), they fail to explain why the change occurred when it did or why it took place in Europe and Japan as well as America. Reich suggests that the "real explanation involves the way technologies have empowered consumers and investors to get better and better deals--and how these deals, in turn, have sucked relative equality and stablity, as well as other social values, out of the system." In particular, he emphasizes the lowering of barriers to entry by new, smaller businesses, the advances in container shipping dramatically dropping the costs of international transport and increased specialization in production. The resulting competition, with no price controls or limits on competition, drove prices down; consumers will always take their business wherever the price is lowest.

At roughly the same time, "savers turned into investors, and investors turned active." They were no longer content with healthy, stable interest-bearing savings accounts. Instead, they began to put money into stocks, with mutual funds and pension funds in particular wielding enormous influence:

To lure or keep these collections of shareholders, CEOs had to do everything possible to raise the value of their companies' shares. They had no choice but to focus ever more intently on creating "shareholder value."

Thus we have have a simultaneous push for lower prices and higher profits; that means everything in between gets squeezed, and the results are always pretty: rising income inequality, job instability, market volatility, and lots of uninsured. In a particularly thought-provoking chapter, Reich argues that Americans really have no one to blame but themselves for the rise of supercapitalism. As consumers and investors, we support and benefit from a system that emphasizes low prices at the store/gas pump/dealership without foregoing high returns on our IRA/401(k) investments.

Reich takes a closer look at Wal-Mart, the target of much anti-corporate venom, and claims the company is simply being responsive to the market pressures that we as consumers and investors are placing upon it. He discusses the mercenary behavior of corporate executives, and suggests they if they are not doing anything illegal, they are doing only what the drive for profits demands. Not the sort of thing one might expect from Robert Reich. That's what makes it so provocative. At the same time, Reich recognizes that the citizen in many of us is troubled by these side effects of supercapitalism. Yet the consumer-investor seems to always win. Reich explains that:

[M]arkets have become hugely efficient at responding to individual desires for better deals, but are quite bad at responding to goals we would like to achieve together. While Wal-Mart and Wall Street aggregate consumer and investor demands into formidable power blocs, the institutions that used to aggregate citizen values have declined.

This includes regulatory agencies, labor unions, and local civic associations. In their absence, individual citizens are powerless to make much difference, and are unlikely to even try knowing they will be making personal sacrifices for little social gain. Instead, Reich argues that we must enact "laws and regulations that make our purchases and investments a social choice as well as a personal one." Examples he points to include laws that promote labor organizing, a transfer tax on stock sales to slow day trading, extended unemployment insurance, fair trade treaties, a more progressive income tax, and universal health care.

Reich recognizes the difficulty such an agenda faces in an era where the democratic process has become dominated by lobbying groups. He dedicates a whole chapter to exploring the history of lobbying, demonstrating that the fast majority of Capitol Hill (as well as courtroom) battles are not consumers vs. corporations, but corporations vs. other corporations. The insurance company vs. the pharmaceutical company; the telephone company vs. the cable company, and so on. What Reich details is that corporations have recognized that Washington is just another battlefield; politics is just capitalism by other means. In an environment where every penny counts, getting a good contract, a good regulation, or a good law out of Washington can make the difference. So investing in a Washington operation is just good business.

What the confluence of money and politics has done is made the government less responsive to our interests as citizens, rather than responsive to our interests as consumers and investors, something the corporations are already doing. Nevertheless, Reich dismisses the non-legal pressures that many have sought to place upon corporations. He examines the movement for "corporate social responsibility" and concludes it is a mere diversion, allowing corporations to get morale points for taking actions that were already in their interest:

All these steps may be worthwhile but they are not undertaken because they are socially responsible. They're done to reduce costs. To credit these corporations with being "socially responsible" is to stretch the terms to mean anything a company might do to increase profits if, in doing so, it also happens to have some beneficent impact on the rest of society.

Furthermore, with the emphasis on low prices and high profits, Reich argues that supercapitalism actually prevents companies from being socially responsible, because "[c]ompetition is so intense that most corporations cannot accomplish social ends without imposing a cost on their consumers or investors--who would then seek and find better deals elsewhere." Reich goes further, and suggests that current law makes it illegal for corporate executives to be beneficent with their shareholders' money. In the aftermath of the 2005 tsunami, President Bush boasted about the generosity of American CEOs; Reich says not so fast:

The assembled CEOs had not been generous--they had not contributed their own money. They had donated their shareholders' money. Presumably they had done so in the belief that their shareholders would benefit from the public relations value such contributions added to the firms' bottom lines. Otherwise, these CEOs would have violated their fiduciary duties and risked having their shareholders switch to other companies that didn't give away their money. Shareholders do not invest in firms expecting their money will be used for charitable purposes. They invest to earn high returns.

Reich derides the growing proclivity of politicians to use "public shaming" as a tactic for fighting bad corporate behavior. He goes through a series of examples, from oil companies with record profits to Yahoo and Google's cooperation with Chinese authorities, and argues that not only is this tactice ineffective, and a ppor substitute for legislation, it is fundamentally misguided:

Corporate executives are not authorized by anyone--least of all by their consumers or investors--to balance profits against the public good. Nor do they have any expertise in making such calculations. That's why we live in a democracy, in which government is supposed to represent the public in drawing such lines.

There's a lot here to argue with, and Reich certainly offers more descriptions of what is wrong than prescriptions for how to fix it. He also wrote this book before the last year's parade of corporate failures and government buy-ins/bailouts, which further entwine the fates of our democracy and our economy. But this is provocative stuff, much of it the sort of thing a liberal would expect from the Wall Street Journal and dismiss accordingly. He dismisses many of the tactics that liberal groups have been emphasizing in recent years, and promotes some that liberals might never consider (e.g. eliminating the corporate income tax to destroy the fiction of the corporation as a person). To see it come from Reich, and to read his justifications and purposes in urging just innovations as an end to the corporate income tax, is certainly eye-opening, and enough to put the ideas on the table for discussion.