Capitalism isn't broken
And it doesn't need fixing
If American capitalism is broken, as many Democrats contend, Wall Street seems not to have noticed. Stocks just set the record for longest-ever bull market, a whopping 3,453 days and counting.
Of course, there's more to the strong economy than just the advancing stock market and rising corporate profits. GDP growth is above 4 percent, while unemployment is below 4 percent. Rising wages and hours worked have helped create what Brian Cornell, boss of retailer Target, calls "a very strong consumer environment, perhaps the strongest I've seen in my career." Indeed, "strong" is also the Fed's word of choice these days when describing many aspects of the U.S. economy, from household spending to job growth.
But Sen. Elizabeth Warren, the Massachusetts Democrat, is unimpressed. She complains businesses don't invest enough and workers don't earn enough — and haven't for decades because executives worry too much about the short-term interests of their shareholders. Her recently introduced "Accountable Capitalism Act," likely a key part of her policy agenda in a potential 2020 presidential run, would help fix those supposed problems by making American companies more like their German counterparts. The bill would force large corporations to let workers elect 40 percent of board members, require three-fourths of board members to approve corporate political activity, and bar top executives from selling or receiving shares within three years of a company stock buyback.
In Germany, such a system of management and workers cooperating in decision-making is called "codetermination." Workers must occupy half the board seats of companies with 2,000 or more employees — one-third for smaller firms — giving employees big influence over how businesses are run. And it seems to work for Germany. Some studies suggest the approach positively affects labor productivity, firm efficiency, market value, and income inequality.
So now Germany is the economy of choice for progressives. Maybe tomorrow it will be someplace else. Democratic politicians looking for novel ideas to burnish their reputation as thinkers always seem to be embracing other nations' economic models. In the past progressives have touted Scandinavia and its egalitarian social democracies. During a 2016 presidential debate, for instance, Bernie Sanders said America "should look to countries like Denmark, like Sweden and Norway, and learn from what they have accomplished for their working people."
But as Hillary Clinton retorted, "We are not Denmark." And we are not Germany, either. It takes a special sort of arrogance — perhaps only ambitious presidential candidates can muster it — to breezily suggest government should suddenly try to mimic another nation's economic model with little thought of potential costs or awareness of key differences. Might radically altering the rules under which American corporations operate have negative unintended consequences? Has Warren even considered the possibility?
For instance: Europe overall seems to have a problem generating high-growth technology companies. (This is perhaps one reason the European Union is so eager to regulate ours.) It doesn't have any big platform companies like Google and Facebook, and has managed to create just a dozen or so "unicorns" vs. nearly 100 for the U.S., according to The Wall Street Journal. Germany isn't home to any of the most innovative companies in the world, per Forbes and Fast Company. The U.S., on the other hand, is home to more than half in both their annual lists. Why do progressives ignore the possibility that following the German economic model or that of any European nation might result in fewer American firms pushing the technological frontier? After all, it's these firms that are doing just what Warren and other leftists say responsible companies should do. They are providing good jobs and investing for the long-term.
Nor does the left acknowledge that European-style capitalism might only be possible because it benefits from American-style entrepreneurial capitalism. As economists Daron Acemoglu, James A. Robinson, and Thierry Verdier argue in a 2012 paper:
We cannot all be like the Scandinavians, because Scandinavian capitalism depends in part on the knowledge spillovers created by the more cutthroat American capitalism. … Some countries will opt for a type of cutthroat capitalism that generates greater inequality and more innovation and will become the technology leaders, while others will free-ride on the cutthroat incentives of the leaders and choose a more cuddly form of capitalism. [National Bureau of Economic Research]
The continued success of American capitalism is a hard one for critics like Warren to honestly deal with. They've been complaining about bad corporate behavior for years. Yet American companies remain the world's most innovative and profitable. In a Wall Street Journal op-ed about her bill, Warren warns that American companies are "setting themselves up to fail." Maybe she should worry more about Germany's.