It should be clear to any serious student of economics that socialism doesn't work. Of course every society and economic system has intelligent and energetic people who rise to the top of industry, commerce and politics. But the opportunities in a socialist system to do so are very limited. For the vast majority the lack of incentives for extra effort stifles creativity, innovation, productivity and work ethic, inevitably resulting in economic stagnation. Unfortunately, a moribund economy is typically accompanied by political oppression as government assumes the allocation and rationing of scarce resources, and many politicians seem to like it that way.
But it is also becoming apparent that capitalism has its shortcomings as well in a modern technology and service oriented economy. The pursuit of wealth in a wide-open marketplace has regrettably led to unhealthy levels of income inequality with vast chasms between the haves and the have nots. Capitalism's success in generating new technology and operating efficiencies has created rising structural unemployment as this technology replaces labor in the production and distribution process. The problem is that capitalism has been too successful. It has allowed Americans to reach a far higher standard of living with fewer people involved in making it happen.
Consequently, like it or not, we will have to maintain a safety net far into the future for the unlucky among us cast adrift by capitalism's success. Certainly the support systems must be designed to encourage work, not sustain welfare. How to structure that safety net to provide adequate support while discouraging permanent unemployment and encouraging the displaced to actively seek meaningful work is another issue altogether, and a subject for another day.
In addition to structural unemployment, another consequence of capitalism is that the prospect of the enormous rewards it offers has encouraged business executives, particularly those in the financial industry, to incur extraordinary risks that result in catastrophic economic and financial disasters when the high risk activities inevitably implode. The problem is not that we need to mandate more regulations and create more federal oversight agencies to restrain our free market system. We already have in place rules, laws and regulatory authorities designed to maintain a fair and healthy business environment. The problem is that the regulatory authorities have not done their jobs of enforcing the rules and regulations. Wall Street could not have engaged in the mindless creation of excessive debt leverage in the financial system if the regulators had been paying attention and not allowed those they were supposed to regulate do anything they want.
What can be done to restore our system of capitalism to its intended purpose of prudently generating economic growth for the benefit of all members of society rather than just those at the top of the wealth pyramid? The most obvious first step would be for the regulatory agencies that already exist to enforce their regulations rather than maintain their incestuous relationships with those they regulate. Another would be to ensure that those making imprudent high risk bets with borrowed money suffer the consequences of their reckless activities instead of bailing them out with taxpayer money. But there are more.
One partial solution that would deter excessive risk taking and diminish the enormous wealth gap between the haves and the have nots would be to impose higher taxes on the super-incomes. The standard argument goes that raising taxes on the rich is against the principles of capitalism and free markets, taking away the incentives to invest, innovate and generate economic growth. Personally, I don't believe that is true if the higher tax rates are implemented starting with incomes of over one million dollars a year.
Conservatives, of which I am one when it comes to economic issues, rightfully argue that the top percentiles of income earners already pay the majority of taxes in the United States and therefore are already over-taxed. Furthermore, taxing the rich at higher rates would do very little to help reduce our outrageous budget deficit. That may be true, but it is irrelevant. To me this is more of a social issue to defuse the unhealthy polarization that exists in America than it is a balancing the budget issue, although it certainly wouldn't hurt that goal either. After all, the superwealthy are the only people in America that have excess income. Who else can afford to pay higher taxes?
Also implicit in the argument that taxes should not be raised on super-incomes is the assertion that they have earned this money by adding value to the economy and society by creating jobs and producing goods and services that consumers want. Some of them certainly do. But many of them don't. Top management arguments that they have to pay top dollar to acquire or maintain executive 'talent' is a bunch of crap, and they know it. It is just a convenient excuse to ratchet up their own pay. After all, these are the same geniuses that bring us financial meltdowns and corporate disasters, i.e., the Enron's, Worldcom's, AIG's, Countrywide Financial's and Fannie Mae's. It is not that tough to make money in a strong economic expansion. But when the economy and markets weaken, many of those geniuses are fired to bring in the next genius at even higher pay. It doesn't take exceptional 'talent' to play that game.
Lots of people on Wall Street and the corner offices of law firms get mega-rich through activities that not only do not add value but are destructive to our economy and society. Trading leveraged derivatives of high risk debt of barely solvent borrowers that implode at the slightest hint of economic slowdown does not benefit anyone but the traders. Fraudulent product liability, malpractice, workmen's comp and personal injury lawsuits sap the life out of private enterprise, causing businesses to close and jobs to be lost. Hucksters selling useless garbage and worthless investments over the phone or through internet scams swindle the public out of billions of dollars. These people should be punished, not rewarded. Raising taxes on the country's parasites may not end their damaging pursuits, but limiting their reward may impart some justice.
Maybe we should ask ourselves what the underlying objectives of capitalism truly are. Is the goal of capitalism to build wealth any way possible, even if it becomes concentrated in the hands of the few at the expense of the many? Or is it to generate wealth that benefits all by stimulating growth in the aggregate standard of living? I would argue the answer to that question is to reward those who add value to the economy by working to create and produce goods and services that cultivate sustainable economic growth. If that is the purpose, then why should those playing high risk financial games with borrowed money, games that are peripheral to the production of goods and services, be rewarded with outrageous pay packages when the game is hot and be bailed out by the rest of us when the crap finally hits the fan. They do not add value, they destroy it for everyone but themselves.
One way to prevent the lucrative for a few but calamitous for many speculative, hazardous and totally unnecessary securities transactions is to tax them heavily, and tax the money that is borrowed to speculate in them. Credit default swaps and other creative securities encourage reckless and irresponsible risk taking that serves no useful purpose other than to make big financial players superwealthy before they collapse and cause untold misery to the general public that pays the price. Tax them heavily and the players may decide they are not worth it.
I would also argue that the road to wealth in a capitalist economy should be based more on investing in the common stock of business enterprises than outrageous cash compensation packages awarded for short term performance. Bonuses should be paid in stock, not cash, to give employees more incentive to continue to work hard in improving the company's value over the long term. In fact, CEO's who are awarded the seven and eight figure pay packages are actually incentivized to maximize short term performance at the expense of the longer term, a course of action that is usually destructive to the future of the company, its employees and shareholders. Those types of compensation packages need to be restructured.
In addition to tax increases on the super income earners and high risk, superfluous financial transactions, there is much more that can be done to restructure the tax system that would benefit our capitalist system. Reducing or even eliminating corporate taxes would allow American companies to be more competitive in global markets and allow more money to flow through to investors to spend or re-invest. Simplifying individual taxes with fewer tax rates and the elimination of all preferences (deductions, credits, loopholes), including the home mortgage deduction, would increase fairness for all taxpayers and improve compliance. It would also encourage productive and efficient capital allocation throughout the economy by allowing free markets and competition to stimulate consumer spending rather than using government tax based policies to funnel money to politically favored economic activities and social programs.
Out of control government spending and massive budget deficits are critical issues America faces that must be addressed. But a potentially bigger one is the vast disparity between those at the top of the economic pyramid and those at the base. I have never seen any proof that compensation packages for top corporate executives of 250 or more times the lowest paid employee encourages or is responsible for any company's superiority in creating innovation, efficiency or productivity. There is no proof that pay packages of only 50x would reduce those measures of performance. Creativity and outstanding individual contributions would still be rewarded, and could be enhanced with awards of stock to increase an employees incentive to help the company grow, encourage team effort and produce personal satisfaction.
There is certainly nothing wrong with a goal of creating personal wealth. That is still the American dream, and America is still the best place on earth to find the opportunities to succeed. But gaining wealth should be earned by adding value to society. Working hard to get an education and creating products or providing services that people want and need should be rewarded. Those opportunities and rewards still exist and many prosperous and worthy people take advantage of them. The entrepreneurial, innovative and diligent will always endeavor to implement their ideas and succeed at their chosen vocation, regardless of whether that last dollar is taxed at a higher marginal rate.
An enlightened management team that significantly narrows the gap between the highest and lowest paid employees might find that such a policy would improve morale, generate loyalty and create a more cohesive, cooperative environment that would enhance corporate objectives. Why would any CEO or top executive want to make 250 times more than their co-workers for any reason other than to selfishly satisfy their ego. If some of them think its just all about the money, then maybe they do not really have the company's interests at heart.
One good definition of Capitalism is an economic system based on private ownership of the means of production and distribution of goods and services, characterized by a free competitive market and motivation of profit. That works best when everyone is working together for the benefit of the company. Perhaps a leveling of the gap between compensation at the top and the bottom, enhanced with awards of company stock for the most productive, would create such a stimulating environment. The best sports teams are usually those where the players all like and support each other, and help each other maximize their strengths and minimize their weaknesses. They all know who the stars are and the stars know they need their teammates. Why would it be any different in a corporate environment.
The problems America faces have moved beyond minor adjustments to current policies. It is time to consider major changes to our capitalist economic structure. We cannot just sit on our butts and ignore the math, nor ignore the warning signs and blindly drive down the road to ruin. There has to be more to our capitalist society than greed and egomania. Government leaders who reward the reckless and irrational while punishing the prudent destroy the fundamental fabric of a free society. Taxes can be raised on the ultra high incomes without extinguishing the obvious benefits of capitalism and free enterprise. Incentives to innovate and produce can be maintained while narrowing the income disparities that are growing ever wider.
The haves cannot ignore the have nots forever. Sooner or later, unless these disparities are addressed, we may end up like the rebellious revolutionaries in other parts of the world that are tired of putting up with the avarice and self-indulgence of the rich and powerful. If we really want this great country to continue to endure with freedom and justice for all, then perhaps we all need to show a little less self-interest and a lot more compassion for our fellow citizens.
