Episode 2 - Capitalism Requires Government
Full transcript and sources below:
Welcome back to Toil, Episode 2. In the last episode I explained that we live in a country (and world, but today we’ll focus on the US) of wealth inequality - and it’s not defined by the extremely rich working hard and being brilliant while the middle class and poor are not working hard or as intelligent. It’s rather mostly a result of injustice intentionally embedded within our economic systems. Hard work, or lack of it, might be a part of the equation, sometimes, but it’s usually not and so much more is outside the control of a person who is or is not working hard. Rather, luck is the biggest force at play.
Today I will expand on my claim in the last episode that our most powerful tool to fix this reality, to fight this economic injustice, is our American Government.
WEALTH INEQUALITY & POVERTY
Before I do that though, let’s establish a few key indicators on wealth inequality and poverty in the U.S. This will be a common thread throughout all future episodes but for now I’ll share some initial data and I encourage you to memorize a few of these so you can share this information with others. I’ve included the full transcript of this episode on my website, toil4justice.org, with sources for every statistic I share.
Alright, let’s start with wealth - which includes the value of someone’s assets (their income, stocks, house if they have one) minus any debt:
In 2022, the top 1% held about as much wealth as the bottom 90% (NYT citing FRED) and relatedly the top 1% owned almost half of all stocks and mutual funds (Federal Reserve Economic Data (FRED)). Almost half the stock market is owned by just the top 1%! Does that sound like the result of a fair system?
Let’s now look at income:
In 2022, CEOs were paid 244 times as much as a typical worker. Compare that to 1965 when that ratio was 21 to 1. We’ve gone from 21 to 1 to 244 to 1. Another way to look at this, from around that same time, 1978 to 2022, compensation grew about 15% for typical workers and 1,209% for CEOs (EPI).
Now that was considering a typical worker, let’s also consider the folks paid the least in this country. About a million workers are still paid the federal minimum wage of only $7.25/hr (or even less in some cases like tipped workers) (Bureau of Labor Statistics (BLS)). This wage has both not kept pace with productivity since 1968 (Center for Economic and Policy Research (CEPR)) and is not a livable wage in any state and usually puts families below the poverty line (MIT Livable Wage Calculator). I link in the transcript to MIT’s Livable Wage Calculator which also takes into account states who have passed higher minimum wages, yet it shows there is still often a gap between minimum wages and what is livable.
Speaking of what is livable. Let’s talk about poverty:
According to 2022 data using the Official Poverty Measure, which I’ll explain, 40 million people in the US are living in poverty (US Census Bureau). 40 million out of a population of roughly 330 million. Furthermore, the “Official Poverty Measure” has not been updated since its creation in the 1960s by the Social Security Administration and only considers two things: the cost of food and the percentage of a family’s budget devoted to food (Social Security Administration Bulletin). Given that housing and transportation comprise significantly more than food out of a family’s budget - with housing at 33%, transportation at 17% and food at 13% in 2022 (BLS), this measure is a significant under-estimation of how many Americans are actually living in poverty today.
CAPITALISM REQUIRES GUARDRAILS
So how did we get here? How, in one of the most developed economies in the world, could there be so much poverty and inequality? The bottom line is that in order for capitalism to work for the good of everyone, it needs a few guardrails to protect individuals, because our capitalism is motivated by the pursuit of profit. Without effective government to ensure that this pursuit of profit is not at the expense of the people - then capitalism will violate the rights of the people. “At the expense of the people” is the key point here: capitalism is designed to pursue profit. It is not designed to consider what is best for all people. The hope is that what is best for pursuing profit will also be what is best for the consumers, the employees, the suppliers, and local communities. But if the corporations pursuing profits grow too large and amass too much power, then their pursuit of profit quickly comes at odds with what is best for everyone and individuals are no longer powerful enough to restrain the harm these massive corporations can cause.
No entity is powerful enough to do this except our government. Which is us, we the people are the government - and we, our government, has the power, if forced by us, to ensure that this pursuit of profit is AFTER all stakeholders are protected.
This capitalism defined by the pursuit of profit has a name. It’s called “shareholder capitalism”. This is a well-known term in economic and policy circles and claims that the pursuit of profit for the shareholders should be the guiding mission of corporations. It was championed by the popular economist Miton Friedman in the 1970s - and I link in the transcript to a NYT article he wrote at that time.
An alternative model, pushed by activists and policymakers to fight against this greed is called “stakeholder capitalism”. This approach considers the well-being and rights of every stakeholder impacted by a corporation. This means employees, customers, suppliers, local communities, and, yes, shareholders, too. But corporations will not just choose to switch their shareholder model in pursuit of profit to a stakeholder model on their own accord. Only the US Government can make them.
GOVERNMENT HAS FAILED TO PROVIDE SUFFICIENT GUARDRAILS
Yet, in this pursuit of profit for shareholders, big corporations have succeeded in growing so powerful and so wealthy BECAUSE our government has failed in three major ways to restrain them. I’ll share examples of economic injustice across future episodes through these three lenses.
ONE: Failing to protect. To protect the American people from corporate abuse.
TWO: Failing to enforce Antitrust Laws. I’ll explain what this means.
THREE: Failing to tax fairly.
Okay, let’s break each of these down.
FIRST: Failing to protect. Failing to protect the American people, and the oppressed globally, by failing to prevent corporations from harming all stakeholders - and our shared resources - on their road to profit for shareholders.
Consider it this way. Everything we buy has a true cost - which is currently not what we pay for it. It’s not defined only in monetary terms. The question is which stakeholder pays how much of that true cost. And the injustice in our shareholder capitalist system, absent government guardrails, lies in unfair costs being imposed on stakeholders with less power for the benefit of the shareholders - the most powerful stakeholders.
For example, take fast fashion. A shirt for the customer may cost $7, from which shareholders might earn $3-4 in profit, but that is not the true cost. It can only be that cheap, because the people who made that shirt, likely in a poorer country with even weaker regulations than the U.S. allowed stores to contract with suppliers that only pay staff in their country pennies on the dollar while they work in deplorable conditions. Furthermore, these clothing companies, or the subcontractors they hire (and try to hide behind to avoid liability), face no penalty for dumping poisonous clothing dye into nearby rivers; poisoning drinking water, devastating crucial agricultural cropland, and killing wildlife and even the local population. Water is often a natural resource that companies devour disproportionately, to the detriment of the local population, while facing no consequences. Water is a shared resource, as is forested land with trees we desperately need in our fight against climate change. Yet corporations the world over, are allowed to disproportionately consume or devastate these resources that we all share - with little or no cost to the corporation.
This is the true cost of that $7 shirt. And I can keep going, the semi-truck drivers that transport from the port to the warehouse and then to the actual store where we buy that shirt are often subject to unfair rules and predatory lease-purchase agreements that can leave them owing their employer money at the end of the week rather than getting a paycheck (Landline). On top of all of this, the entire supply chain is nearly entirely relying on fossil fuels - a cost to the planet and the global community. None of these costs are reflected in the $7 shirt that we see in the store or in the dollars per shirt that are siphoned up to the shareholders of these corporations.
If a company has to abuse someone, or pillage shared resources, to provide its product; that business model should not be legal. But if a corporation can make more profit by doing this, it will - unless forced to stop.
Now, before I move to my second point, I want to clarify something. I am not seeking to use the government to prevent people from becoming rich, even very rich. I want us to use the government to make sure that people cannot become rich by abusing others, or by polluting or unfairly consuming our shared natural resources. If a company’s business model necessitates this kind of abuse and pillage in order to be successful, in order to be profitable, that is a failed business model and should be illegal.
SECOND: Our government has failed to enforce Antitrust laws. This is how corporations have been allowed to grow so large. Antitrust laws were created to prevent monopolies and oligopolies. A monopoly or oligopoly is when one or a very small number of companies control so much of an industry that there is no longer any real competition between businesses, meaning that a company or companies has complete control over prices and the quality of a product or service. It also means they are the only buyer of goods so suppliers can’t negotiate a good price for what they’re selling to a monopoly and employees have nowhere else to go if mistreated or underpaid.
The phrase “Antitrust” basically means “anti-monopoly”. It was coined in the 19th century, with the word “trust” referring to when a group of businesses form a monopoly to dictate pricing in a particular market. Policymakers are increasingly also using the term “anti-monopoly”. Antitrust or anti-monopoly laws were passed to ensure competition in capitalism - a requirement of a free market. If there aren’t enough businesses in each sector to compete with each other, we literally don’t have capitalism; competition is a necessity of capitalism and a free market. So, when you hear politicians claim that we shouldn’t regulate corporations AT ALL because we should have a free market, they are either lying to protect their big corporate donors or they don’t understand economics. A free market requires competition, so we need the government to intervene enough to ensure that we have enough businesses to offer customers, employees, and suppliers a CHOICE: this helps ensure that corporations don’t abuse or underpay their employees, because the threat of those employees leaving, because they have somewhere else to go can be a check on a corporation’s treatment of them. The same goes for the prices and quality of service or products that they provide. It also forces firms to innovate to stay ahead of other firms.
The good news is, we actually already have antitrust laws. The first major antitrust law was passed in 1890 - the Sherman Antitrust Act in response to the massive growth of monopolies at that time, which were seen to be unfairly monopolizing their industries and colluding to increase prices. Two additional major antitrust bills were passed in 1914, the Federal Trade Commission Act which created the Federal Trade Commission, or FTC, as the government agency responsible for policing antitrust. Anytime you hear about the FTC in the news, this is referring to preventing the growth of monopolies. Third, the Clayton Act, added to, and clarified, gaps in the Sherman Act (and was made stronger with some amendments later in 1936 and 1976). All of these bills were passed in response to the growing monopoly power of their time (FTC).
The bad news is, for decades, our government has failed to enforce these antitrust laws, leading us to today where:
More than 75% of US industries have experienced an increase in concentration levels over the last two decades (Grullon, Larkin, and Michaely 2018).
For example, four companies (Tyson, JBS, Cargill, and National Beef) control more than 80% of all meat processing in the US (Reuters).
Five Airlines (Delta, American, United, Southwest, and Alaska — have subsumed 42 other airlines since 1960 (Axios). Four of these, often referred to as the Big Four: American, Delta, United, and Southwest now control over two-thirds of U.S. domestic air travel (Bureau of Transportation Statistics (BTS).
Or take Healthcare Insurance: where in at least 42 states, three or fewer health insurance companies control 80% of the market (GAO Study).
The terms BigPharma, BigAg, BigOil, BigTech, BigLaw are increasingly just part of our national lexicon and we all know what this means. It means huge corporations have too much power and control too much of the market for fairness to be a likely outcome.
When we have this much concentration within industries, customers have nowhere else to go. Employees have nowhere else to go. And companies have more power to harm stakeholders on their way to shareholder profits. In the future I will devote a full episode to antitrust and share more data and resources.
But for today let’s move to my THIRD and final example of how the government has failed to ensure economic justice: Failing to tax fairly. Similar to antitrust I will do a full episode devoted just to this topic, but will share a few key points here today as a primer.
First, massive corporations should pay a higher tax rate than individuals because they use infinitely more government resources than anyone else! Take
Infrastructure, for example - roads, bridges, air travel, water provision, trash and recycling and many more are all services provided by the government with taxpayer dollars that massive corporations use disproportionately more than individuals.
Social services for corporations’ employees - some of the most wealthy and powerful corporations (like Walmart and McDonalds (GAO study)) pay their employees so little that they qualify for medicaid and food stamps. These corporations are benefitting from taxpayer dollars enabling their underpaid employees to survive. This is basically a government subsidy provided to multi-billion dollar corporations. Speaking of:
Subsidies - presidents and congressional leaders of both parties have shelled out hundreds of billions of taxpayer dollars in subsidies to large corporations. Sometimes there may be a case for these subsidies, often there isn’t. But regardless, these subsidies have helped corporations become the multi-billion dollar monopolies that they are today.
Research and Development (R&D) - private corporations benefit from, again, hundreds of billions of taxpayer dollars poured into research and development that lead to new prescription drugs, technological advancements, and healthcare breakthroughs that bring these corporations profits.
Protectionist trade policies that help big corporations - the American government, funded by taxpayer dollars, negotiates preferential trade agreements that benefit American corporations.
And the last example I’ll share for today is intellectual property laws and enforcement - corporations benefit from the passage and enforcement of intellectual property laws that disproportionately benefit powerful corporations.
Now, if we had a stakeholder model of capitalism, a lot of these benefits would trickle down to individuals, but we don’t, we have a shareholder model - where profit does NOT trickle down. So almost all of the profits gained through this government support to corporations, stay with the shareholders. And yet despite all this taxpayer funded support to these massive corporations and the wealthy, corporations and the wealthy pay a lower tax rate than most Americans.
There are two key ways this happens:
First: the tax rate on corporate income, or profit, is lower than it is for individual americans. The maximum income tax rate for individuals is 37%, but for corporations it’s only 21% (Internal Revenue Service (IRS)). Again, I’ll break this down more in a later episode.
Second: income; a person’s salary or wages, from working is taxed at a higher rate than wealth gained from investments. Now, most, if not all in some cases, of middle class and poor Americans’ wealth comes from their income - which again is taxed at a maximum rate of 37% (IRS). In contrast, most of the wealth of rich Americans comes from their investments: their stocks and their assets that appreciate in value over time and generate returns through what are called “capital gains” and “dividends” - which are taxed at a maximum rate of only 20% (IRS). I’ll explain these rates more in a later episode, but the bottom line is - income is taxed at a higher rate than wealth. With income being how middle class and poor folks have money and wealth being how wealthy people have money. And thanks to these preferential rates for wealth over income, and the loopholes that can be found with an army of tax lawyers, billionaires manage to pay very little, and even zero taxes in some cases on their massive wealth (ProPublica). In fact, the head of the IRS, recently shared that millionaires and billionaires are evading more than $150 billion dollars a year in owed taxes (CNBC interview).
GOVERNMENT CAN BE FORCED TO ACT IN THE INTEREST OF ALL AMERICANS
As is hopefully evident by now, but rest assured I will continue striving to prove this point across all future episodes, only our government is powerful enough to enact the changes needed to bring us closer to a just economic system. Individuals or even altruistic or faith communities or organizations cannot solve these problems alone.
Think of it this way, people are falling or even being pushed into a raging river and at risk of drowning and while we absolutely need folks focused on pulling them out which faith communities and altruistic individuals and groups have shown they can sometimes do - the problem is both too big for them to pull everyone out of the river and it will never end if we don’t also work on preventing people from ending up drowning in the river in the first place. Only our government is powerful enough to fight the forces, to change the actual system, that is pushing people into the river. The good news here is that, again, WE ARE THE GOVERNMENT. We can elect better leaders and force them to better represent us.
On that point and in closing, we are in an election year. One with very high stakes. I wish we could avoid politics in discussing these issues but we can’t. Politics is how we get the government we need to solve these issues of injustice. So, as much as we may hate it, we have to pay attention - and, crucially, we have to cut through the noise, past the clickbait headlines or the social media algorithms programmed to push us toward extremes. We have to toil for truth and nuance and UNDERSTANDING POLICY.
And there is very disproportionately a candidate and party with policies that are actually trying to right the ship and get us closer to a just economic system. And that is Biden and the Democrats. They’re not perfect, and Democrats have also been part of the problem in the past - it’s hard to resist lobbying dollars and influence when you need money to win an election (sidenote: campaign finance is something else we must change to help us more easily elect better leaders and hold them to account. I’ll definitely be doing a full episode on this).
But Democrats have historically been far and above better on these issues than Republicans. And they can be even better with our increased pushing. And Biden, in particular, has tried, successfully in some cases and in vain in others due to Republicans blocking him, to shift the balance of power away from corporations and back to the American people. I’ll be sharing examples of how he’s done this throughout this election year. A large part of this equation is who our leaders surround themselves with, and Biden has surrounded himself - in the white house and across the executive branch - with experts who want to bring about justice in these systems. In contrast, when he was President, Donald Trump surrounded himself with quite a different group of folks who were focused on how to cut taxes and regulations on these massive corporations - most of them having come from running these massive corporations and who would go back to doing so after serving President Trump.
So, as you wait for episode three, I encourage you to view election news - covering candidates at all levels - through the lens of how they would engage on these three government failures: the failure to protect Americans from corporate abuse and pillage, the failure to enforce antitrust, and the failure to tax fairly. Would they seek justice on these problems or maintain the status quo, or even exacerbate the problem?
Until next time, I’m thinking of you toil for justice.