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Wednesday, October 28, 2020

It's Time to End Slash-and-Burn Capitalism - Harvard Business Review

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The conversation about stakeholder capitalism is heartening evidence that the business community recognizes that capitalism has gone seriously off track. The obvious criticism is that, while CEOs are well-placed to pursue profits, they are ill-suited to weigh and balance the needs of the environment and many different stakeholders, as has been cogently argued in The New York Times. And so far, the follow-through on the embrace of stakeholder capitalism has been decidedly mixed.

What’s needed is not to make CEOs into central planners but to evolve toward sustainable capitalism — and away from the slash-and-burn capitalism of recent decades. In their pursuit of quarterly profits and high salaries, there has emerged since the 1980s a dysfunctional version of capitalism that does to the economy what clearcutting does to forests — destroys the conditions necessary for long-term success by focusing excessively on short-term profits.

We don’t need to reinvent capitalism. We just need to practice it. That means that corporations that embrace market mechanisms and decry government intervention in the good times should not change the rules when times turn tough. Privatizing profits while socializing risks isn’t capitalism: It’s rigged roulette. Equally important, practicing capitalism does not mean insisting on special treatment from government that benefits shareholders at the expense of other stakeholders. And it means treating government as the vital partner to business, one that supports the physical and social infrastructure, and the political stability, that make business possible.

The pattern of privatizing profits while socializing risk goes back to the 2008 recession, and has continued in the current crisis: in the U.S., the Pandemic Unemployment Assistance covers independent contractors, but American companies pay into the tax that finances unemployment insurance only for workers classified as employees. So, in effect, companies that rely on gig workers have shifted the cost of those workers’ unemployment insurance onto taxpayers. So have traditional companies that pay so little that their workers qualify for Medicaid and other programs, shifting their health insurance costs onto the U.S. taxpayer; in fact, there’s a company that provides a service used throughout the U.S. to help corporate employees shift over from company benefits to government programs. But the airlines are the best example. During the flush times, airlines happily pocketed the profits on the grounds that they are private. But when travel tanked during the pandemic, suddenly airlines insisted on huge bailouts on the grounds that saving them entails a public good. As we saw in 2008, this creates moral hazards that undermine the incentive structures that make capitalism work.

Starving Government

Sustainable capitalism requires paying a fair share in taxes, but slash-and-burn capitalism aims to do exactly the opposite. In the process, it has severely hobbled government’s ability to deliver basic services. As the pandemic has shown so dramatically, the instinctive assumption that businesses thrive better when taxes are as low as possible is factually incorrect. “Starving the beast” led to the gutting of public health departments, which during the pandemic has had devastating effects for the economy and the businesses that operate within it. Even if the administration had wanted to take the kinds of effective steps that have worked so well in countries that have reopened, we did not have the public health infrastructure to do so.

Digging deeper, slash-and-burn capitalism has undermined trust in government. That trust has been plummeting for decades, often fueled by business-financed campaigns against “over-regulation” and government programs. Only 17% of Americans say they trust government most or all of the time, among the lowest levels in the past half-century. The social contract to adhere to basic public health measures has collapsed, former CDC Director Dr. Richard Besser has pointed out. As elected officials and public health leaders respond to the pandemic, they have to contend with public indifference at best and death threats at worst: Dr. Anthony Fauci now has round-the-clock protection. The cumulative effects of distrust in, and defunding of, government have led us unable to launch an effective response to the pandemic. The U.S. has the highest death count in the world, the worst death rate among major countries, and an economy unable to reopen effectively.

This is not an isolated example. The anti-tax movement has led to an evisceration of property taxes in California and elsewhere. One result is that California public schools went from the first to the worst — and now schools in California and elsewhere don’t have the funds to make distance learning effective or to reopen in a way that’s safe. Schools are part of the basic infrastructure needed to get Americans to work. Massive public disinvestment also affects literal infrastructure: Our collapsing bridges make it literally impossible for workers to show up. Distrust of government also means we lack the care infrastructure that enables workers to show up for work, most notably paid family leave and childcare. As a result, some companies offered frontline workers $100 per shift to cover child care at the start of the pandemic, and paid leave is now financed through private employers rather than, as in virtually every other industrialized country, through the government. Is this really better for business?

Profit and Pay

Globalized supply chains are yet another example of slash-and-burn capitalism that looks different today than it did six months ago. Prominent members of both parties now recognize that globalized supply chains have created an economy that is hyper profitable but not resilient, to quote U.S. Senator Marco Rubio’s insightful analysis. The U.S.’s reliance on China for medical supplies from PPE to pharmaceuticals highlights again the vulnerability of an economy hyper focused on short-term profits without a thought to sustaining economic stability not just through thick, but also through thin.

But the single most important example of slash-and-burn capitalism concerns wages. The current business philosophy that wages are just another cost to be cut is relatively recent. In 1914, Henry Ford — Henry Ford! — doubled wages because he recognized that workers need enough money to create demand, and he wanted his workers to be able to afford his cars. Half a century later, Kodak’s annual report listed the generous wages and benefits it paid its staff as proud accomplishments in its report to shareholders. That’s such a contrast to large, rich companies today that classify a third or more of their workforces as contractors even though they often work full time, sometimes for years.

The unspoken core belief of contemporary capitalism reflects an old adage: to make the rich work harder, pay them more; to make the poor work harder, pay them less. That’s the logic behind the fact that executive salaries have ballooned from 20 times to over 300 times the average employee’s wage in recent decades, while wages for the formerly middle class have barely budged. Shareholder capitalism is really managerial-capture capitalism, as is evidenced by the company after company where CEOs’ compensation has skyrocketed during the pandemic. No wonder the 1% keeps getting richer: it’s not hard to win at rigged roulette.

Slash-and-burn capitalism’s obsession with controlling labor costs has led to a sharp diminution in the sharing of productivity gains with the workforce that created them. During the decades after World War II, wages used to rise when productivity did; if that trend had continued, wages would be twice what they are today. As a result, only half of Americans born in 1980 will do better than their parents; virtually all Americans used to. The resulting pain and fury at the loss of the American dream has fueled economic populism. Many Trump voters are from the fragile or formerly middle class, deeply rooted in communities that are being left behind: voters in counties suffering economic distress trended for Trump. “We’re voting with our middle finger,” said one.

The result is a dysfunctional economic populism that’s bad for business. It’s not just the trade wars, whose cost has been born chiefly by American consumers and businesses. The economic fury driving far-right populism is leading to the kind of political instability American business has rarely had to worry about. We have a president openly talking about not leaving office if he loses, and white supremacists just thwarted in a plan to kidnap the governor of Michigan.

It’s time to replace slash-and-burn capitalism with sustainable capitalism that provides the economic and political infrastructure needed to support a healthy economy. Policy proposals are important, but first things first: let’s stop letting ideology distort our discussions of government and the market. The right is starry eyed about the market but coldly realistic about the limitations of government. The left is starry eyed about government but coldly realistic about the limitations of the market. As Churchill once said about democracy, it’s the worst possible system except for all the others. Both the market and the government are deeply flawed tools. But they are all we have. Let’s start a conversation about how to use them to restore the American dream of a stable government, a thriving economy, and a healthy middle class.

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October 28, 2020 at 07:30PM
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It's Time to End Slash-and-Burn Capitalism - Harvard Business Review
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