Economic inequality is shaping up to be one of the central debates of the 2016 election: Those on the left – most notably Bernie Sanders – decry the increasing wealth and power of those at the very top of the economy, while others are left behind. Those on the right respond that this upswing in inequality, however regrettable it might be, is the natural result of free markets.
Few have looked at this issue as closely as political economist and former Labor Secretary Robert Reich. In his new book, Saving Capitalism: For the Many, Not the Few, he tackles this obsession with free markets. He argues that there is no such thing as a free market, and that the basic rules of capitalism – laws surrounding property, monopoly, contract, bankruptcy and enforcement – are really driving inequality.
You called your book Saving Capitalism. Why does capitalism need saving, and why is it worth saving?
Those are the two questions I’ve been getting on the book tour. One group of people says, “Why do you suppose it needs saving? It’s perfect.” And another group says, “Why do you want to save it? It’s so rotten.”
This reveals a fundamental misunderstanding of the global economy and also the American economy. Even democratic socialist countries like Denmark and Sweden are fundamentally capitalist in terms of how they’re organized. Even communist China is moving toward capitalism. Capitalism is going to become the universal system of economic organization. The real issue isn’t capitalism versus some other “ism.” The real issue is whether capitalism is organized for the benefit of the society as a whole or for the benefit of a small group at the top. That’s really what we ought to be debating.
In the United States, we’ve fallen into a trap of thinking that on the one side there’s a free market, and on the other side there’s government, and that’s the choice we have to make. But in fact you can’t have a free market without government setting the rules.
Your book is focused on the idea that the term “free market” is a false distraction, and a harmful one at that. Why is that?
This idea forces us to make a choice that is not the central choice at all. Our system is a market with rules that are set by administrations, agencies, legislators and judges and then continuously set and reset almost every day in thousands of ways. The real issue we need to keep our eye on is who benefits from these rules, and who is having the most influence in making them. The classical, interminable debate we’ve got ourselves into between government and the so-called free market is a distraction from this more fundamental question that we ought to be raising and that I’m trying to raise in this book.
You write about the building blocks of capitalism, with a focus on contracts, bankruptcy and property law. Why should people understand our current economic plight in terms of those rules?
Because every one of these building blocks has been altered over the last 30 years by very powerful money interests who have succeeded in changing these building blocks so that they improve the finances and enhance the profits of big companies – Wall Street and the very wealthy – but make most other people worse off.
If you look at bankruptcy, for example, someone like Donald Trump can declare bankruptcy four times and insulate himself from the downside risks of his investments. But some average working person who gets caught in a downdraft of the Great Recession and finds that her home is worth a fraction of what it was before can’t use bankruptcy to reorganize mortgage debt. You can’t use bankruptcy to reorganize your student debts. You could be 70 years old and still have student debts, and those creditors could garnish your social security check in order to pay. Bankruptcy law has been changed and modified over the years to the benefit of big creditors, banks, credit card companies and corporations, to the detriment of average working people.
The business headlines today are all about “disruptive” companies, and for a lot of economic commentators monopoly power is a thing of the past – we’re in a brand new economy. But you argue that monopoly power is central to what is currently happening.
Just look at the numbers. As recently as 10 years ago we had nine major airlines. Now we have just four. Before the crisis, the five biggest banks on Wall Street had 25 percent of America’s banking assets. Now they have 44 percent of America’s banking assets. Health insurance is consolidating into giant corporations, and as a result the purchase of health insurance is less of a choice. Look at Monsanto’s dominance with regard to seed corn. Even in tech, you see the consolidation into a few, very high-tech firms that have enormous power over networks, and they’re becoming network monopolies.
It’s easy to explain how the rich are getting away with murder, but it’s harder to explain how adjusting the rules in certain ways would help everyday working-class people see their paychecks rise. How do you see the relationship between those two things?
Well, for example, if don’t have to pay as much for prescription drugs because the system is more balanced, or if you don’t have to pay as much for Internet service because there’s more competition, your pay goes a longer way. It’s as if you got a raise in pay. Market power is a distribution of your paycheck up to these monopolistic and oligopolistic industries.
Or look at ways in which contracts between big companies and their employees or consumers now have mandatory arbitration clauses to force people to go to an arbiter picked by the company. That reduces your ability to negotiate at all, which comes out of your paycheck. If you have laws that make it very difficult for people to come together to agree to unionize, and you have states that essentially prohibit you from paying union dues, then you have less marketing leverage in terms of joining together with others. It’s ironic that as anti-trust that is becoming weaker, and you have industries that are consolidating like mad, it’s harder and harder for workers to get together and generate their own market power.
It seems like there’s some convergence with this kind of analysis. Joe Stiglitz at the Roosevelt Institute (where I work) is really big on the rules of the economy. So is Elizabeth Warren. Tony Atkinson in England just wrote a book called Inequality that focuses on market structures too. Why do you think there’s so much focus on this right now?
First of all, inequality is a bigger issue because it’s more extreme. We are in a second Gilded Age. And even people on the right are beginning to agree that it is a central feature of the modern economy.
Now the next question is, what do you do about it? I think for many years Democrats and liberals have sought to correct the market with taxes and public investments and raising the minimum wage and a lot of other government regulations. Taxes and regulations and public investments are fine, and I have argued for them in the past, and will continue to argue for them. What has been left out of the debate is the actual structure of the market itself.
We don’t recognize the relationship between political power and market structure. This has stacked the deck in favor of the people at the top and against average working people. The only response is that you’ve got to have countervailing power such as we had in the first three decades after the Second World War.
What do you think of the way the 2016 primaries are shaping up so far?
The big divide politically in the future is not going to be so much left and right, Democratic versus Republican, as it is anti-establishment versus establishment. The Republican anti-establishment candidates, the people who are perceived as being outside the ruling class are doing much better. Donald Trump, although he is a billionaire, he is a guy who is a right-wing populist. Bernie Sanders exemplifies what might be seen as a reformed populist.
There’s no question that populism is on the rise. Now that doesn’t mean we are going to see the election of a populist-type president in 2016; it may wait until 2020. But it is the biggest movement, the biggest change in American politics today. It comes directly out of, as I suggested in the book, the widespread, deeply held frustration among the public with a political-economic system that seems to be rewarding only the people at the time, and at the same time running roughshod over democracy.
But there seem to be two outsider movements. You have people like Bernie Sanders, who have a much more social democratic outlook, who think the right thing is higher taxes, more services, etc. Then there are the right-wing populists, who are going to want a middle-class tax cut even if it means huge tax reductions for the rich, who are going to blame immigrants for America’s woes. How do you bridge the gap between those two? They seem to exist in such fundamentally different universes.
If you step back, there are overlaps between right-wing and left-wing populists. Number one is busting up the big banks of Wall Street. Many right-wing populists want to end “too big to fail.” In fact that is what the Tea Party grew out of: the bailout of Wall Street. Many right-wing populists hate the Transpacific Trade Agreement, they despise corporate welfare, they’re against handouts to corporations, they talk incessantly about “crony capitalism.”
Listen to what the rhetoric of what the right-wing populists is, and some of it sounds remarkably like the rhetoric of the left-wing populists. The difference, of course, is that the right-wing populism comes with the scapegoating of immigrants and Muslims and the poor. It comes with, sometimes, a lot of homophobia and xenophobia, and it has no real respect for democracy.
How should people view the Obama years? On the one hand there’s a massive expansion of health care, more progressive taxes and a long economic crisis, but one nowhere near as bad as Europe’s. But the 1 percent’s hold on the economy still stands, and we see stagnating or falling wages.
I think the truth is that Obama accomplished some important things. He was up against a recalcitrant Republican Congress for most of the time. He also had several economic advisors who had very close ties to Wall Street, and did not want to rock the boat too much. I think Obama is an incrementalist. He was trying to do some very good things, and the biggest thing he did and will be remembered for is the Affordable Care Act. But what is the Affordable Care Act? It’s a long way from Medicare for All, from single-payer, or even a Medicare for All option, which would be a step in the right direction.
His incrementalist instincts, his unwillingness to fight and be a populist, was completely understandable, because he might have got nothing done if he had taken that stand. But I think he’ll be remembered historically as the last gasp of liberalism, as opposed to populism.
You served in the Clinton White House, and it’s interesting to see that legacy being debated right now, especially with Hillary as the frontrunner. Bill Clinton has recently made statements on how he did a lot of things wrong on financial reform and mass incarceration. On the other hand, a lot of people point to those years as a time when wages really went up, and there was a strong economy. What has surprised you the most about the way the historical memory of the Clinton years is being brought up now?
I think the history of the Clinton years is fairly clear. Bill Clinton did some good things, and we worked with him. I think I’m rightfully proud of what was accomplished. I think it was a very strong recovery from a moderate recession, with 22 million new jobs. But it was a recovery. It was a strong and long recovery, helped by Alan Greenspan keeping interest rates low at the Fed. In historic terms, Alan Greenspan was willing to drop interest rates below what was then considered to be safe, given the assumptions about the rate of unemployment you could achieve and not have accelerating inflation. So the stars were lined up correctly. I think the Family Medical Leave Act, and the raising of the minimum wage and several other achievements were important.
But in the end, his administration was what we might have considered to be, in a slightly different era, a liberal Republican administration. The structure of the economy didn’t change all that much. The underlying trends toward widening inequality were still there. And Bill Clinton’s getting rid of welfare altogether, or substituting a five-year maximum on welfare, proved to be very cruel to many Americans who in their lifetimes will need more than five years. In fact, we had a deep recession that caused many people to lose everything, and there wasn’t a safety net for them. And his deregulation of Wall Street was clearly wrongheaded. Not only repealing the Glass-Steagall act, but failing to regulate derivatives when Brooksley Born and others at the Commodity Futures Trading Commission wanted to do so in the late Nineties.
In the Nineties, you wrote a lot about the way the economy was going to change, most notably in a book called The Work of Nations. People look around today and they worry about robots taking jobs. Others look at stagnant growth for college-educated workers and low productivity and think maybe the economy as a whole is broken. What role do you think technology is playing in our stagnation right now?
It’s certainly part of the story, and has been for years. In 1991, when I wrote Work of Nations, I was convinced that the whole story of inequality was globalization and technological change, and that education was a big part of the answer.
Well, I think I was partly right, but I was also partly wrong. There is a very big factor, and that is politics. The entire market has been tilted in the upward direction, toward the very wealth. And education is not, obviously, adequate. College graduates are now on a downward escalator with regard to their median earnings. 48 percent of recent college graduates are doing work that doesn’t require a college degree.
Technology is part of this problem. But as I say in my book, that doesn’t mean there are many things we can do, as a nation, as a society, as an economy to make sure that we take advantage of technological change, and it doesn’t cause more and more of the population to get poorer and poorer. There’s nothing inevitable about the market. Market forces are not beyond human control. Human beings determine what the market’s going to look like.