We need a new economic system because the old has failed. American Capitalism has failed so many people in so many ways. We need to transform our economy to one that works for the most people possible. We need a new form of capitalism.
What is the state of American capitalism today? As Professor James Galbraith has stated American capitalism is not what we are told by politicians, media or textbooks: benign competition leads to a greater good for most people. We are far from that. The defining feature of American capitalism today is predation – where a class of people – the oligarchs – feed off the demise of people not within this class. This oligarchy, or as Professor Galbraith calls them the predatory class, has control over the government and the capital in our economic system.
There are other features of American capitalism:
1) Financial sector that is too big.
The following is from a really good article by Simon Johnson, The Quiet Coup:
From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.
That is too much concentration of wealth in one sector because with that comes great political power as shown by the various Wall Street bailout plans. According to the International Monetary Fund (IMF), the various bailout efforts by the Federal Reserve and Treasury Department will cost taxpayers $1.9 trillion. Of course the Fed and Treasury dispute those numbers.
2) Lack of Corporate Accountability
Corporations are suppose to operate in the best interest of its shareholders but not today. What we have today is “managers’ capitalism” as John Bogle calls it. Corporations are operated for the benefit of its managers and not shareholders. These managers are not held accountable either because managers are protected by securities laws and corporate governance laws or interconnecting board of directors. We see huge executive compensation packages and bonuses being paid by corporations who were not even profitable. We have executive compensation system that favors short-term gains at the expense of long-term profitability of companies.
Corporations pushing for lower costs and better profit margins by reducing labor costs. This means that corporations search the globe for foreign countries that will offer them lower labor costs at the expense of U.S. workers.
4) Destruction of the middle class
This financial crisis, which was caused by the financial oligarchy, has destroyed trillions of dollars of middle class wealth by the loss of savings (particularly retirement saving), home equity and personal income as a result of unemployment. But the demise of the middle class was happening even before this financial crisis as shown by income inequality in the U.S.
Between 1969 and 1997, the share of total household income controlled by the lowest income group has decreased from 4.1 percent to 3.6 percent, while the share to the highest income group increased from 43 percent to 49 percent, according to the Census Bureau.
In 2006, the top 5 percent of households in terms of income were making some $297,405, compared with the lowest fifth of the population, who had an average household income of $11,352, according to Census data.
A top heavy distribution like this does not favor a strong middle class and it portends the destruction of the middle class in the U.S. But this high concentration of income is a problem for other reasons as Professor Richard Levins has said:
"By the 70s, we had a very different distribution of income and wealth that, in my view, favored middle class. But by 1980, that trend has gone back the other way to where we have a very large percentage of income and wealth in the hands of barely one percent of the people… When you have that kind of wealth in very few hands, these people become politically and economically very, very powerful,"
This oligarchy or predatory class has hijacked American capitalism. American capitalism has created an illusion of economic growth and corporate profits based on debt. American capitalism has replaced good wage paying jobs with unregulated loans and more consumer debt. This house of cards has fallen. It is time to replace it – future generations are counting on us to do.
Part 2: New Capitalist Manifesto