The contrast between two books on economic reform that I have just finished reading is striking. The first, addressing the “captured” economy as it stands at present, offers hope in a return to a more liberal and less corrupt capitalism. The second, focusing on a program of reform advanced by leaders of the Socialist Party in the 1960s—a Freedom Budget—offers a much more profound hope of changing not merely the American economy but even the ways we relate to one another as human beings. I believe we can learn from both books and should adopt policies that draw on both approaches.
Seeking to reduce the extent to which our economy has been captured by the financial sector is a first step toward the reform of the American economy—a first step toward making that economy serve the common good instead of the 1%. Ultimately, our sights should be set on the realization of the full promise of American democracy. This will require winning the support of the American people for the strategy behind the Freedom Budget.
In The Captured Economy
, two economists, Brink Lindsey and Steven Teles (one a libertarian and the other a liberal), work together to clarify some of the ways in which the government putting its thumb on the scales to favor the rich has contributed both to increasing inequality and to slow economic growth: “This favoritism obviously exacerbates inequality, but its side effect is to reduce the competition and dynamism upon which economic growth depends. Accordingly, we now have the opportunity to kill two birds with one stone. If we can scale back regressive redistribution [basically governmental policies that amount to Robin Hood in reverse], we can enjoy more growth and a more equal society.” As an example of a change in the rules of the game benefitting the rich and harming the economy, Lindsey and Teles note that one of the consequences of the change in the tax code since Eisenhower has been to incentivize companies to bid competitively for CEO and administrative talent—to increase their salaries far beyond those of the ordinary worker (and far beyond any value added that they could actually provide). This is, in my opinion, one reason why we should restore Eisenhower era tax rates and tax income from capital gains at the same rate as income earned by work.
The data Lindsey and Teles present on the excessive growth of the financial sector is dramatic. Between 1980 and 2006, the financial sector’s share of GDP rose from 4.9 percent to 8.3 percent. By 2004, the top 25 hedge fund managers earned more than all the CEOs of the S&P 500 combined. Financial executives and professionals constitute 14 percent of the top 1 percent of earners and 18 percent of the top 0.1 percent. Beyond inadequacies in governmental regulation and oversight, the financial sector has grown as governmental bailouts have artificially reduced the risks of excessive leverage. If the government had bailed out Main Street as well as Wall Street, the damage would have been less severe, but there would still have been distortions that worked to the advantage of those relying excessively on short term debt. This is particularly true as compensation practices in the financial sector involve return on equity as a major factor in determining executive compensation, providing executives with a personal incentive to lever as much as possible. As Lindsey and Teles argue:
“In short, financial firms’ extreme reliance on debt makes them a house of cards that any stiff breeze can topple…. But there is no necessary reason why loans, by banks or anybody else, have to be funded by short-term liabilities. Institutions funded purely by equity, or funded by equity to a considerably greater extent than banks are today, are perfectly capable of making loans…. A bank with much more equity financing than is the norm today, say equal to 30 percent of assets, would still face liquidity risk as its short-term liquid liabilities would usually far exceed its liquid assets. Yet its insolvency risk would be much lower than that of a typical bank today because its relatively large equity cushion would allow it to weather a sizeable downturn in the value of its assets.” This is a direction in which American policy should move. It will mean shrinking the size of the financial sector, which will be painful for those within it, but this will benefit the real economy by making crashes like the Great Recession less likely and by moving people into more productive careers.
In their history, A Freedom Budget for All Americans
, Paul Le Blanc and Michael Yates, tell the story of the great civil rights leader A. Philip Randolph’s call for a national commitment to abolish poverty in America within ten years with specific investments in public education, in housing, in health care, and in job creation—guaranteeing a job for everyone who wanted work through a budget designed by Leon Keyserling, who had been the chairman of Harry Truman’s Council of Economic Advisors.
A. Philip Randolph, Martin Luther King, Jr., Bayard Rustin, Max Shachtman, Michael Harrington, and Tom Kahn—all of them but King leaders of the Socialist Party—were the moving forces behind the strategy behind the Freedom Budget. Le Blanc and Yates summarize that strategy as follows:
“The Jim Crow system, politically vulnerable as it was, and standing in clear violation of the intentions of the Fourteenth and Fifteenth Amendments to the U.S. Constitution, was the obvious first target for a movement dedicated to the elimination of racism in the United States. The nonviolent but unrelenting assault on one of the pillars of institutional racism, in an extended campaign employing moral, religious, and democratic rhetoric so central to the culture and history of the United States, would be able to mobilize considerable popular support.”
“This strategy would intensify the personal racism of some individuals, bringing it out into the open and consequently making it easier to address and deal with than if it remained submerged. For others, all of this would cause them to examine and move away from aspects of their own personal racism, and in many cases to commit themselves to the popular struggle to overcome the racism that had been so central to American society for so many years.”
“The consciousness and momentum of this crusade against the Jim Crow system could stand as a preliminary stage for confronting the other aspects of institutional racism, which would require a more fundamental social and economic transformation.”
“This transformation could only be realized effectively by attacking racism’s underlying economic roots, which in turn could only be done effectively by developing a broader program for economic justice: decent jobs, housing, education, and health care for all, as a matter of right. Though such a program would be initiated by blacks, it would be powerfully relevant to a majority of whites. The resulting interracial coalition for economic justice would have the dual function of eliminating the roots of institutional racism and creating an atmosphere of idealism and common struggle that would help to further push back various forms of individual racism. If there was abundance and a decent life for every person, then the fearful competition for scarce resources, an essential breeding ground and one of the material bases of racism, would be eliminated, and this would strengthen the sense of interracial solidarity generated through the shared struggle for a better life for all people.”
That was the strategy behind the Freedom Budget in the 1960s and it remains the strategy behind calls for a Freedom Budget for the 21st century; calls the Democratic Party must embrace.
In the late 1970s, I had the great good fortune—as a political activist in high school with the Social Democrats, USA—to get to know both Bayard Rustin, the group’s national chairman, and Tom Kahn, another amazing orator who was particularly influential with the organization’s youth group. The vision of social democracy, or democratic socialism, that they offered has shaped my life. My first book was described in Foreign Affairs
in 2005 as the work of “A passionate pro-labor Social Democrat.” As Tom Kahn once suggested, in conveying Max Shachtman’s view, it’s all about realizing the promise of democracy:
“Freedom and democracy—they were not abstractions; they were real and could therefore be destroyed. Communist totalitarianism was not merely a political force, an ideological aberration that could be smashed in debate; it was a monstrous physical force. Democracy was not merely the icing on the socialist cake. It was the cake—or there was no socialism worth fighting for. And if socialism was worth fighting for here, it was worth fighting for everywhere: socialism was nothing if it was not profoundly internationalist.”
This faith in the universal promise of social democracy remains, together with my religious faith, at the foundation of my view of the world and my reasons for running for Congress in the Illinois 5th District. For those who are interested, I addressed what I see as the connection between religion and politics in a speech on “America and the Kingdom” that I gave to the 144-year-old Chicago Literary Club in October 2017 that is available here: http://www.schwartzbergforcongress.com/news-letters/