What left and right alike get wrong about 'late' capitalism

What if American capitalism isn't broken, rigged, or in dire need of saving? It's a notion completely foreign to contemporary American politics.

That's why Democrats and Republicans often sound a lot alike these days. Elizabeth Warren wants a new "accountable capitalism" that would "balance the interests of all of their stakeholders, including employees, customers, business partners, and shareholders." Marco Rubio touts a "common-good capitalism" that would focus on "restoring a balance between the obligations and rights of the private sector and working Americans."

At the heart of both populist-flavored critiques is the idea that the modern U.S. economy is afflicted by a deep and systemic unfairness. No longer is hard work matched by commensurate reward as it was in the decades right after World War II. The early 21st century is experiencing "late capitalism" in dire need of fundamental reform.

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The economic observation that seems to obviously confirm this conclusion is the longtime and growing gap between worker productivity and worker pay. Perhaps the most frequently cited version of this supposed economic reality comes from the left-wing Economic Policy Institute, which calculates a 70 percent rise in worker productivity since 1979 versus a mere 12 percent rise in pay, all adjusted for inflation. As EPI explains the big disparity, "This means that although Americans are working more productively than ever, the fruits of their labors have primarily accrued to those at the top and to corporate profits, especially in recent years."

Big if true. Also really worrisome if true. But the evidence for such a severe disconnect between what Americans produce and what they earn is uncertain at best. Different-but-reasonable assumptions — concerning inflation, productivity, and which workers exactly are counted — shrink the gap considerably.

For instance: Harvard University economist Robert Lawrence has performed a similar analysis to EPI and also finds a chasm between productivity and pay since the 1970s. But changing just the inflation measure eliminates a third of the gap. And a new analysis by the Labor Department finds that over the past decade, the gap was quite narrow with productivity up 11 percent and pay up 8 percent. Saying pay slightly lags productivity is a far less dramatic claim than arguing the two are disconnected and thus a"big structural change," as Warren puts it, is necessary.

The capitalism worriers also fret that U.S. public companies are either so beholden to their short-term oriented shareholders or face so little competition from rivals that they're failing to invest for the future. Capitalism and markets fail again.

But there's not much persuasive evidence for this, either. A 2018 Federal Reserve study found "robust evidence that public firms invest significantly more than private firms." And look at the companies most commonly accused of being monopolistic, tech titans such as Amazon and Alphabet-Google. They're also the biggest spenders on R&D. Big Tech's advantage isn't their dominant position but rather that investors trust them to make big research bets or spend massively on new technologies such as artificial intelligence. Stian Westlake, coauthor of Capitalism Without Capital, has found "short termism" only typically exists where companies haven't demonstrated an ability to make high-risk investments pay off. And if they haven't, investors will want them to return excess cash to shareholders either through dividends or stock buybacks.

If American capitalism is broken in some way, it's in the lack of productivity growth. It hasn't done much since 2004. That's the bad news. The good news is that the weight of the evidence suggests that if productivity growth were faster, wage growth would likely be faster, too. In "Productivity and Pay: Is the link broken?" Harvard's Anna Stansbury and former Treasury Secretary Larry Summers find that if income inequality had stayed at 1973 levels, the median worker's pay would have been around 33 percent higher in 2016. But if productivity growth had been as fast over the 1973-2016 period as it was over the previous quarter century — about twice as high — median and mean compensation would have been around 41 percent higher.

There's still an important linkage between productivity and pay. And that's where policymakers should focus their attention.

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