Capitalism forward

By Bill Sims Contributing columnist

By Bill Sims Contributing columnist

The great Greek biographer and philosopher Plutarch, wrote that “The imbalance between rich and poor is the oldest and most fatal ailment of all republics.” Perhaps an argument could be made that much of the social and economic tension in America today is a reflection of the increase in income and wealth disparity in our nation.

To be clear about the difference in these two factors, income inequality is a measure of how unevenly income exists in the nation, whereas wealth inequality is the uneven distribution of overall wealth or net worth. While income inequality has increased steadily in America, wealth inequality has increased dramatically.

According to a report from the federal Survey of Consumer Finances, written by the economist Edward Wolff: “The wealthiest 1 percent of American households own 40 percent of the country’s wealth, (and) from 2013, the share of wealth owned by the 1 percent shot up by nearly three percentage points. Wealth owned by the bottom 90 percent, meanwhile, fell over the same period. Today, the top 1 percent of households own more wealth than the bottom 90 percent combined. That gap, between the ultrawealthy and everyone else, has only become wider in the past several decades.”

Further, the Pew Research Center noted that “The share of American adults who live in middle-income households has decreased from 61 percent in 1971 to 51 percent in 2019.”

Make no mistake, America’s economic leadership in the world is a product of vigorous capitalism. And while China is nipping at our heels, their economic transformation is in large part a result of market-based economic policies. Somewhat ironically, economists now call the China model a socialist-market economy.

I like to think of capitalism as a powerful economic missile that travels with enormous potential energy. But it needs guidance. We learned that lesson during the gilded Industrial Age of the robber barons when huge monopolies crushed competition. We learned another lesson about controlling the missile during the Industrial Revolution, when cheap child labor was used, particularly in the textile and mining industries, to enhance profits. And the Securities and Exchange Act of 1934 galvanized efforts to control insider trading, where corporate executives made huge profits based on insider information. So there are many examples of regulations that have guided the trajectory of this powerful missile of capitalism.

Yet the growing wealth disparity that has stretched the tensions of our social fabric has the potential to create the kind of friction that can slow us down as we compete to stay ahead. So what’s to be done?

To begin with, we must accept reality. Exiting the global stage and decoupling from globalization isn’t reality. Isolationism has never worked well for this country, but stern policies like the appropriate use of tariffs should always be on the table. But our focus must be on what can be done to improve our capitalistic practices in ways that strengthen our middle class and shrink the growing income and wealth disparity that I believe will ultimately diminish our nation’s leadership at home and abroad.

By definition, profits are the priority of capitalism. That said, current captains of industry understand that there is more to the successful paradigm of modern capitalism than just profits. They realize that their corporations can’t be successful in a country with a diminishing middle class, where resulting class and cultural tensions destabilize the nation’s core.

Today, our corporate and political leaders must realize that they have to engage the needs and demands of an economy ravaged by a pandemic that has permanently obliterated many jobs, exacerbated income and wealth disparities, revised much of how we do business both in retail and health industries, and all this in the context of worsening climate conditions around the world.

Start with some fair tax reform. The Washington Post reported in October 2019 that the effective tax rate on the wealthiest families in America was for the first time lower than the effective tax rate on the bottom 50 percent, 23 percent versus 24.2 percent. Tax rates affect income but also wealth. The wealthy get wealthier generationally through inheritances but also because most of the upper classes’ unearned investments are taxed today at just 15 percent. Tax reform would help to rebuild our nation’s middle class.

Recent bank stabilization regulations have helped. Leading up to the Great Recession, banks were scarcely capitalized, and the consequence was that many had to be bailed out by taxpayers.

This powerful capitalist missile, however, can launch tremendous opportunities. The world is desperate for clean energy solutions, and such deployments mean job training and policy provisions that encourage corporate investments. The current bipartisan enthusiasm for major infrastructure projects is rife with private sector potential, potential that our market-based economy can feed on if inculcated with fair and equitable wages and hiring practices.

Our policies and practices need a smart focus on the future, and that means policy support for biotech, quantum computing, artificial intelligence, broadband, as well as the climate challenges. The Pew Research Center found that 65 percent of American adults believe the federal government isn’t doing enough to reduce the effects of climate change. Our markets need to respond, but they need policy support from federal and state governments.

Finally, let me close with (dare I say it) a socialist idea put forth by a serious capitalist, William Ackman, chief executive of Pershing Square Capital Management. It’s an idea he called “Cash at Birth So They Can Retire as Millionaires” in a Dec. 9 article for The New York Times’ DealBook newsletter. I thought it was an interesting way of saving Social Security and spreading the wealth.

In his words: “One of the principal problems with capitalism is that wage growth has not kept pace with long-term wealth creation, which has disproportionately favored the wealthy and the upper middle class, likely attributed to the higher after-tax returns generated by investment assets as compared with wage growth over the same time period.”

His answer: The government could “create Birthright Investment Funds in zero-cost equity index funds prohibited from withdrawal until retirement, compounding for 65 years at historical rates of returns (8%) annually.”

The outcome? At a cost to the government of $6,800 at birth, a retirement account of over one million dollars for each individual. That could be quite a lift for the future of capitalism in America.

Bill Sims is a Hillsboro resident, an author, and runs a small farm in Berrysville with his wife. He is a former educator, executive and foundation president.

By Bill Sims Contributing columnist Bill Sims Contributing columnist