We Need to Fix American Capitalism

Fifty years ago the wealth our economy created was broadly distributed throughout our society – everybody benefitted from the prosperity .  Over the last thirty years almost all of the new wealth created, $21 trillion, has gone to a very small part of our population, with the middle class and poor getting almost none of the gain.  

This wasn’t the natural result of Capitalism.  It happened because the Keepers of Capitalism allowed a second set of rules to be slipped into different parts of our economy that only benefitted a very small part of our population.  It happened because we stepped away from one of the key principles of capitalism – it works better if the playing field is level.

Most of that $21 trillion in gain is because of just three things:  Private Equity, Financial Derivatives and CEO salaries.  All are the result of second sets of rules that gave wealthier people significant economic advantages over the Middle Class.  
We know what to do:  End the second set of rules.  Go back to one set of rules for everybody.  We just have to have the willpower to do it…

Democracy for shareholders to bring down CEO salaries

Policy Change #1: Require publicly-traded companies to implement electronic shareholder voting to discuss, nominate and vote on board members; make the process much more democratic.

How it’s a Second Set of Rules: 
CEO’s of publicly traded companies effectively get to choose the board members who are their bosses and who set their compensation.  For the rest of us, we don’t get to choose our boss or who decides our salary.  

How it Fixes the Second Set of Rules: 
Currently shareholders have almost no ability to nominate possible board members for the companies in which they own shares. More importantly, they generally don't get to communicate and connect with fellow shareholders during the run-up to the meeting, to discuss the slate of board members offered or possible alternatives.  Electronic Shareholder Voting and more effective shareholder communication would change the balance of power, allowing every shareholder to have a say in who runs the company they own.  Shareholders would be able to directly pick board members and even executives.

Impact:
It will lead to significantly reduced CEO salaries. Transparency and competition will cause CEO salaries to come down substantially (because there was no economic reason for CEO salaries to go from 20 times workers’ wages to 200 times workers’ wages – it was the result of the second set of rules). It won’t happen overnight, but the ability of shareholders to communicate with each other, nominate their own board members, or board members in support of a competing CEO, will create competition at the top and this will bring down CEO salary levels.

End the shadow financial system that benefits the wealthy

Policy Change #2: End the parallel non-regulated economy that is only accessible to the wealthy. Require any private equity entity with revenue over $10 million or more that borrows money to submit to oversight by the Securities and Exchange Commission (SEC); require all unregulated banks to submit to regulation by the Office of the Comptroller of the Currency (OCC).

How it’s a Second Set of Rules: 
Middle Class investors are only allowed to invest in companies and banks that are part of the regulated economy.  Accredited investors, those with a net worth over $1 million, are able to invest in a parallel second economy, with less regulation, fewer financial control and greater potential returns on investment.  This gives Wealthy money a significant advantage over Middle Class money.

How it Fixes the Second Set of Rules: 
Private equity and non-regulated banks currently avoid the cost, transparency and risk management of government regulation, putting our economy at risk and putting middle class investors at a disadvantage.  Requiring any entity that borrows money and has revenue over $10 million annually to submit to the reporting requirements of the SEC will end private equity’s advantage over regulated companies.  Requiring any financial entity that loans more than $10 million annually to submit to regulation by the OCC will end private bank’s advantages over regulated banks.  Together, they will end the parallel economy that only benefits the wealthy.

Impact:
It will level the playing field. It will end the distortions that have allowed private equity firms to do deals and takeovers which wouldn’t have been allowed for publicly traded companies, and which regularly wind up gutting functioning, successful businesses. It will keep private banks from offering riskier, higher interest loans that make private equity transactions possible.  It will end many of the advantages that wealthy investors have over middle class investors, and over time lead to a broader distribution of economic gains.

Stop Wall Street from selling or insuring things it doesn’t own

Policy Change #3: Forbid taking out insurance on or selling things you don't own. End Credit Default Swaps and other financial derivatives.

How it’s a Second Set of Rules: 
“Credit Default Swaps” (CDS) are a form of insurance on bonds you don’t own.  Synthetic Collateralized Debt Obligations (Synthetic CDO’s) are a way of selling bonds or shares you don’t actually own or control.  Middle class investors aren’t able to take out insurance on things they don’t own, or sell things they don’t own.  Wealthy investors and private equity companies can.  

How it Fixes the Second Set of Rules: 
It would keep any person or entity from taking out insurance on things they don’t own, and keep them from selling things they don’t own.  It will force the wealthy and private equity firms to live within the same constraints as the Middle Class.

Impact: 
It will remove a form of gambling from our economic system, causing more investment to go into productive economic activities and will significantly reduce the fees earned by Wall Street.  When Wall Street invests in factories or research, it creates new value.  CDS’s and Synthetic CDO’s do not create any new economic value.  Instead, one side wins and the other side loses – they are essentially a form of gambling, done through Wall Street.  If we stop allowing wealthy investors this form of Wall Street gambling, they will have to look for other places to invest their money.  No CDS’s and Synthetic CDO’s means more investment into factories and research.  

It will also mean less revenue for Wall Street. Financial firms take a tiny fee every time something is bought or sold on Wall Street.  There are only so many people that want to sell the bonds they own, which limits the number of bonds sold and the revenue Wall Street can earn.  But if you don’t have to actually own a bond to sell it, then there is no limit to the number of bonds that can be sold, or to the fees that Wall Street can earn.  If we stop allowing the wealthy to buy and sell things that they don’t own, there will be a LOT fewer transactions, and less revenue to be made by Wall Street.  If there is less money to be made on Wall Street, then fewer smart people will go to Wall Street and more smart people will go into engineering or science or other productive activities.

The IRS checks wealthy taxpayers the way it checks middle class taxpayers

Policy Change #4: Require the IRS to confirm all income of all tax returns.

How it’s a Second Set of Rules: 
The IRS confirms literally every dollar of W2 or 1099 income that a Middle Class taxpayer receives. The IRS confirms almost NONE of the income received from the complex businesses or investments that often make up the bulk of income for wealthy taxpayers.  

How it Fixes the Second Set of Rules: 
It would require the IRS to treat wealthy taxpayers the same way it treats Middle Class taxpayers, and confirm all of their income.

Impact:
It will mean increasing the IRS’ budget by $1 billion, but this will likely generate an additional $35-$40 billion in additional tax revenue. If the wealthy know that all of their income is going to be checked, they will be more careful to properly declare and document the income they receive.

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Interested in talking with Blake or having him as a guest for your show? Email Blake at Blake@BlakeAshby.org