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Introductionto the Paperback Edition
For former Colorado governor and Democratic presidential candidate John Hickenlooper, it should have been a soft pitch at the letters, one easily knocked out of the park. Appearing on MSNBC’s highly rated Morning Joe program, the successful brew-pub-owner-turned-politician was asked if he considered himself a “proud capitalist.” But rather than embrace his—and his country’s—entrepreneurial roots, Hickenlooper dissembled, desperate to avoid offending the growing army of liberal party activists for whom capitalism has suddenly become a dirty word. Shocked by the candidate’s nonresponse, host Joe Scarborough invited him a second time to affirm his capitalist leanings, and then a third, and twice more the candidate demurred. His candidacy never quite recovered.
When a moderate, pro-business Democrat running to be president of the United States refuses to endorse capitalism, you know something fundamental has changed. For all his rhetorical bumbling, what Hickenlooper had come to understand is that the economic system and business culture that had made the United States the world’s richest and most powerful country was now viewed by a growing number of Americans as ruthless, unfair and morally corrupting.
This disenchantment has already energized an army of camp followers for avowedly socialist politicians like Bernie Sanders of Vermont and Alexandria Ocasio-Cortez, the influential new congresswoman from Brooklyn, who tells anyone who listens that capitalism is irredeemable and unsustainable, and whose top adviser famously declared every billionaire to be a “policy failure.” Almost overnight, ideas such as wealth taxes, guaranteed jobs, national health insurance and debt-free college have moved from the fringes of the policy debate to the red-hot center. More Democrats and Democratic-leaning voters now have a positive view of socialism (57 percent) than capitalism (47 percent). Among younger voters, the gap is even wider.1
And it is not just politicians who have noticed the change in the zeitgeist. So have captains of business and finance, who have begun to worry publicly that unless something is done to reform capitalism and make it work for more Americans, more radical fixes will be thrust upon them.
For several years, for example, Larry Fink, the chief executive of BlackRock, which manages and invests more of the world’s savings than any company on the planet, has written to the chief executives of all the country’s large public companies to warn them to demonstrate that their companies serve a larger social purpose than enriching shareholders and executives. Ray Dalio, the billionaire founder of the world’s largest hedge fund, recently penned a two-part manifesto warning of “revolution” unless American capitalism is reengineered to do as good a job at dividing the economic pie as it now does growing it. And in his 2019 letter to shareholders, Jamie Dimon, the chief executive of JPMorgan Chase, the country’s largest bank, felt the need to come to the defense of capitalism while acknowledging that “the social needs of far too many of our citizens are not being met.”
Amid all this angst, it’s easy to forget that it was only 25 years ago that the world was celebrating the triumph of American capitalism. After a long cold war, communism had been vanquished and discredited, with China, Russia and Eastern Europe seemingly rushing to embrace the market system. American capitalism had widened its economic lead over European-style socialism while the once-unstoppable export machine, Japan Inc., had finally hit a wall. Developing countries such as India, Brazil and Russia were moving to embrace the “Washington consensus” of privatization, deregulation and free trade. Around the world, this embrace of market capitalism would lift more than a billion people from poverty.
In recent years, however, confidence in the superiority of the American system has been badly eroded. A global financial crisis that started in Asia and spread to Russia and Latin America shattered the Washington consensus. Americans have lived through the bursting of two financial bubbles, struggled through two serious recessions and toiled through several decades in which almost all of the benefits of economic growth have been captured by the richest 10 percent of households. A series of accounting and financial scandals, a massive government bailout of the banking system, the inexorable rise in pay for corporate executives, bankers and hedge fund managers—all of these have generated widespread resentment and cynicism. While some have prospered, many others have been left behind.
Part of this disquiet has to do with the market system’s inability to continue delivering a steadily rising standard of living to the average household, as it had for the previous half century. In the 15-year period from 1953 to 1968, the inflation-adjusted income of the median American family increased by 54 percent. In the 15-year period from 2001 to 2016, the increase was just 4 percent. No wonder that just 37 percent of Americans now believe they will do better financially than their parents, the driving idea behind the American Dream.2
But another part of our disquiet reflects a nagging suspicion that our economic system has run off the moral rails, offending our sense of fairness, eroding our sense of community, poisoning our politics and rewarding values that easily degenerate into greed and indifference. The qualities that once made America great—the optimism, the commitment to equality, the delicate balance between public and private, the sense that we’re all in this together—no longer apply.
It has got to the point that we are no longer surprised when employees of a major bank sign up millions of customers for credit cards and insurance they didn’t want or even know about, just to make their monthly numbers.
We are reluctantly reconciled to a system that lavishes $800 million in compensation a year—that’s $250,000 an hour—on the head of a private equity firm simply for being clever about buying and selling companies with other people’s money.
We are now barely shocked when a company tells longtime workers that their jobs are being sent overseas and that they will get a modest severance—but only if they train the foreign workers who will be taking their jobs.
We are both outraged and resigned when yet another corporation renounces its American citizenship just to avoid paying its fair share of taxes to the government that educates its workers, protects its property and builds the infrastructure by which it gets its products to market.
While we may have become desensitized to these individual stories, however, collectively they color the way we think about American capitalism. In less than a generation, what was once considered the optimal system for organizing economic activity is now widely viewed, at home and abroad, as having betrayed its ideals and its purpose and forfeited its moral legitimacy. We seek a new, more moral capitalism.
* * *
To understand how we got to this point, we have to travel back to the mid-1970s. After decades of dominating U.S. and foreign markets, many of America’s biggest and most successful corporations had become complacent and lost their competitive edge. They were less efficient, less innovative and less willing to take risk. Excessive government regulation had raised costs and sapped the dynamism of sectors such as transportation, communication, finance and energy, with government officials dictating which companies could compete, what services they could provide, what prices they could charge and what profits they could earn. Overzealous antitrust enforcement had prevented mergers among rivals that would have allowed them to achieve economies of scale. Unions had pushed wages and benefits to unsustainable levels, driving up prices and draining companies of the capital needed for investment and modernization. Loose interest-rate policy at the Federal Reserve and overspending by Congress had triggered double-digit inflation.
All that was happening at a time when European and Japanese exporters were beginning to make inroads into the American market. It began with shoes, clothing and toys, then spread to autos, steel, consumer electronics, computers and semiconductors, cameras, household appliances, chemicals and machine tools. Initially, the appeal of these foreign products was that they were cheaper, but before long these foreign firms began to offer better quality and styling as well. By the time American firms woke up to the competitive challenge, many were already playing catch-up. In a few industries, it was already too late.
With their costs rising and their market share declining, the large blue-chip companies that had dominated America’s postwar economy suddenly found their profits badly squeezed—and their share prices falling. Although few remember it today, the Dow Jones index, reflecting the share prices of the 30 largest industrial companies, essentially ran in place for the ten years between 1972 and 1982, resulting in a lost decade for investors. Indeed, it was worse than that. When adjusted for inflation, the Dow lost half its value over that period.
By the mid-1980s, serious people were wondering if the days of American economic hegemony were quickly coming to an end. When Japan’s Mitsubishi conglomerate purchased Rockefeller Center from the descendants of America’s most celebrated business mogul in 1989, it seemed to many as if the American Century had come to a premature and inglorious end.
“The central task of the next quarter century is to regain American competitiveness,” declared MIT economist Lester Thurow in a widely read jeremiad, The Zero-Sum Solution. Blue-ribbon panels were commissioned, studies were published, hearings held. In the corridors of government, at think tanks and business schools, on the covers of magazines, there was a sense of urgency about America’s industrial decline and a determination to do something about it. And do something they did.
With support both from Republicans and from a new generation of centrist Democrats, federal and state governments deregulated whole swaths of the economy, unleashing a burst of competition from upstart, low-cost rivals in airlines, trucking, freight rail, telephony, financial services and energy. Government spending was cut, along with taxes. Antitrust regulators declared that big was no longer bad, unleashing a flood of mergers and acquisitions. New trade treaties were negotiated that lowered tariffs while opening overseas markets for American products.
Across the manufacturing sector, inefficient plants were shuttered, production was reengineered, employees laid off and work shifted to non-union shops down South or overseas. Companies that once employed their own security guards, ran their own cafeterias, operated their own computer systems and delivered products with their own fleet of trucks outsourced those “non-core” functions to cheaper, non-unionized specialty firms. Over-indebted companies used the bankruptcy courts to wash their hands of pension and retiree health-care obligations and force lenders to accept less than they were owed. Japanese management gurus were brought in to lower costs, improve quality and create new corporate cultures.
Meanwhile, in the fast-growing technology sector, established giants selling mainframes and tape drives suddenly found themselves out-innovated and out-maneuvered by entrepreneurial startups peddling minicomputers, disc drives and personal computers that were smaller, cheaper, easier to use and surprisingly powerful.
The transformation was messy, painful, contentious and often unfair, generating large numbers of winners and losers—exactly what the economist Joseph Schumpeter had in mind when he identified “creative destruction” as the essential characteristic of capitalism. Along the way, the old social contract between companies and their workers—and more broadly between business and society—was tossed aside. No longer could workers expect pensions, full-paid health insurance, job security or even a Christmas bonus from their employers. And no longer would business leaders feel the responsibility, or even the freedom, to put the long-term interests of their country or their communities ahead of the short-term interests of their shareholders.3 Chief executives found it useful to cultivate an aura of ruthlessness, winning sobriquets such as “Neutron Jack” and “Chainsaw Al.”
And it worked. By the mid-1990s, the hemorrhaging stopped and corporate America was again enjoying robust growth in sales, profits and stock prices. Chief executives and Wall Street dealmakers were lionized on magazine covers and on the front pages of newspapers, their dalliances chronicled in the gossip columns, their soaring pay packages a source of both fascination and controversy. Students at the best universities flocked to business schools, and from there to high-powered jobs on Wall Street or at management consulting firms. Individual investors began piling into the stock market through new tax-exempt retirement accounts and a dazzling array of new mutual funds.4 For the first time, business books with titles like In Search of Excellence, Reengineering the Corporation and Competing for the Future regularly made it onto the bestseller lists.
America—and American capitalism—was back, stronger and more globally competitive than ever.
Copyright © 2018, 2020 by Steven Pearlstein