Poor reading of American capitalism

Those who advocate taxing the rich to give to the poor often must endure wearied explanations of why such redistribution is a pointless policy. While the rich are indeed rich, there are supposedly too few of them to tax on a scale that would help the poor.

Rarely does one hear about the opposite process—the upward redistribution, whereby a few cents taken from everyone make a few individuals very rich indeed. Yet that is precisely what monopolists and rent seekers do, by overcharging consumers, underpaying taxes, and funding politicians who will protect the process of extraction from the many to benefit the few. Worse, the 2020 US election all but ensures that this “trickle-up” dynamic will continue.

The stock market’s buoyancy during the covid-19 pandemic has been the subject of much wonder. Obviously, with interest rates near zero, investors have few other places to find a positive return; and it is perfectly understandable that the market would celebrate good news like Pfizer’s announcement that its vaccine candidate may be more than 90% effective.

The problem, of course, is that the stock market does not account for all future national income; it is concerned solely with the part that goes to profits. At any level of national income, the stock market will do better when profits rise or, by the same token, when the share accruing to labour falls. Since the 1970s, the share of wages in US national income has been shrinking. And since the onset of the pandemic, large tech firms have been doing exceptionally well, while many smaller firms have suffered or closed. Tellingly, on a day when vaccine euphoria drove up the Dow Jones Industrial Average by nearly 3%, the tech-heavy NASDAQ actually fell by 1.5%.

This perverse dynamic makes sense when one considers how the pandemic has accelerated the long-term shift in national income away from labour and towards capital. Not only are workers’ jobs vanishing and becoming less secure, but small businesses are increasingly losing out to large businesses that employ few workers relative to their revenue. These developments in turn lift the market, which rewards those who have stock portfolios and defined-contribution pensions, while workers in retail, hospitality, and entertainment are left out in the cold.

If the Democratic Party had won a strong majority in the Senate in addition to winning the White House and holding on to the House of Representatives, there might have been a chance to reverse these trends through legislative action. The US health-care system’s plundering of American households might have been checked by the introduction of a public option for health insurance, even if more radical alternatives (like “Medicare for All”) remained out of reach. It might have been possible to replace or supplement employer-based health care—which is financed by what is effectively a poll tax on workers— with a system funded through general tax revenue.

Moreover, had the Democrats performed better, it would have been possible to pursue meaningful antitrust action against the Big Tech firms. There would have been at least some chance of passing climate legislation. And the long march of anti-union laws might have been slowed or even reversed. But now, the few congressional Republicans who were willing to congratulate Biden on his victory, and even some centrist Democrats, will oppose “socialist” measures such as the Green New Deal or health-care reform.

Moreover, the courts will continue to advance the pro-business agenda.

Economists bear a good deal of responsibility for this. In the first half of the twentieth century, the failure of capitalism in the Great Depression allowed for the triumph of Keynesianism, with its role for the state. But that was soon followed by a counter-revolution that began with Friedrich von Hayek just before World War II, and culminated with Milton Friedman and his colleagues arguing —correctly enough—that the state, too, has problems. While George Stigler taught us about regulatory capture, James Buchanan showed that politicians cannot always be expected to act in the public interest, and Ronald Coase demonstrated that externalities can be ameliorated without resorting to state action.

Less convincingly, Friedman insisted that inequality is not a problem, and argued against efficient taxation—whether through pay-as-you-go collection, the inheritance tax, or closing down tax havens. The jurist Richard Posner, meanwhile, played a key role in bringing these ideas to the judiciary. Arguing that justice requires society to maximize its total wealth, he advocated favouring producers over consumers, and the wealthy over the needy. Inequality came to be seen not only as unproblematic, but as the hallmark of a just society.

This conception of justice would be recognized as preposterous were it not so regularly applied by US courts. After reaping the spoiled harvest of these ideas for so long, it is time to reconsider—not by rejecting all of the insights of the post-Keynesian counter-revolution, but by building on and beyond them.

Returning to a more innovative and competitive form of capitalism requires that we reverse the demonization of the state. We currently have a system in which the few prosper at the expense of the many. For two-thirds of Americans without a bachelor’s degree, life expectancy is falling, not least because pharmaceutical companies have been given a license (by paying off Congress) to addict and kill people for profit. Some of the world’s largest— and previously admired—corporations routinely avoid paying taxes, reneging on their obligations to the social, economic, and state institutions that nurtured them, and without which they could not exist.

President Donald Trump’s departure will diminish the crony capitalism and plundering of the public purse by his family and friends. But it will not fix a broken system. American capitalism’s potential to foster innovation and well-being remains unlimited, but currently its flaws are literally draining the life from many Americans. The rent seekers are, and will likely remain, far too powerful for the country’s good.

Angus Deaton is Professor Emeritus of Economics and International Affairs at the Princeton School of Public and International Affairs