Are Capitalism and Democracy Compatible?

10/24/2016 03:18 am ET

I chanced to view a TED program that featured Yanis Varoufakis, former Finance Minister of Greece. He titled his talk “Capitalism will eat democracy - unless we speak up.” He went on to claim that the current state of our Capitalism, which is financial Capitalism, is definitely hurting our democracy.

This intrigued me because in the last two years I had researched both our Capitalist economic system and our Democratic political system and treated them as separate systems. I probably would have said, if asked, that they reinforced each other positively. Healthy Capitalism will reinforce Democracy and Healthy Democracy will reinforce Capitalism. But what I heard from Yanis is that the two systems only share negative synergy.

I had published Confronting Capitalism (AMACOM) in 2015 and Democracy in Decline (Sage) in 2016. In both cases, my aim was to identify the weaknesses and shortcomings of each system and to recommend policies that would make each system work better. My aim was not to make a case for alternative systems. I favored Capitalism, not Socialism. I favored Democracy, not Autocracy or Plutocracy.

Yet Yanis’ statement that one system was eating into the other was a flashpoint for me.

My flashpoint starts with the election system in our democracy. How do political candidates get elected in today’s democracy? It has always cost money for a person to run for political office. The candidate could draw from savings and raise more money from family and friends. Sometimes the candidate might attract the attention of a rich person who backs the candidate financially. Today’s candidates find it much more expensive than ever to run for political office. They better raise $1.6 million or decide not to run. Several Republican candidates who ran for President in 2016 had billionaire backers. Scott Walker of Wisconsin was backed by the Koch brothers, Ted Cruz had Robert Mercer, and Marco Rubio had Norman Braman, who promised to invest $10 million or more to support Rubio’s 2016 Presidential bid.

The question is: Can winning candidates be free of influence when addressing legislation that hurts their donors’ interests? We know that staying in office and getting reelected requires successful candidates to spend time in continuous fundraising. Congress members periodically have to sit in special rooms in their party’s Washington headquarters and phone donors for more money. What happened to the idea of representative democracy, namely that our elected representative are supposed to represent their voters interests, not the will of their donors.

Not only can Congressional corruption come from their donors. Corruption can also come from the lobbyist community. In 1971, there were only 175 registered lobbying firms; in 2012, there were over 13,700 registered lobbyists spending more than $3.3 billion annually in Washington, D.C. to influence legislators. General Electric alone spent $21.4 million, and Google came in second and spent $18.2 million. This doesn’t account for non-registered lobbyists bearing the names “government relations,” “public affairs,” and “corporate communications.” In addition, there are many business-funded think-tanks providing information often of a biased character.

There is a third source of corruption coming from the political party itself. Increasingly, our two political parties are expecting obedience or non-deviation from their respective platform positions. A Republican who votes for gun control or abortion is likely to be dropped from the party at the next election. Voting one’s conscience is out.

My conclusion is that Congress members who are voting on a sensitive issue will give the most weight to their donors’ interests, the second most weight to the lobbyists interests, the third most weight to their party’s interests, the fourth most weight to their voters interests, and the fifth and least weight to what is best for the country.

What this means is that the citizens are not running the country. We don’t have a direct democracy nor even a representative democracy. It is not “one citizen, one vote.” And Congress is not really running the country. The country is run by two overlapping groups, the major corporations and the super-wealthy. These two groups have taken over the country. The policies are largely determined by what is in the interests of major corporations and the super-wealthy.

This brings us back to Capitalism. Our capitalists in the past consisted of small farm owners and people running small businesses. Over time, some larger corporations were formed by entrepreneurs such as Rockefeller, Carnegie, Mellon, and others. Clearly they achieved disproportional power to influence legislation through lobbying and spending money on political candidates. But there is a difference between 175 registered lobbying firms in 1971 and 13,700 registered lobbying firms in 2012. Corporate power has grown so much stronger in recent years. Add to this the Supreme Court’s decision in the Citizens United case where corporations are given personhood and could spend more on political influence than ever before through the creation of Pacs and SuperPacs. Our elections are now swimming in money and money is determining who wins elections, not “one citizen, one vote.”

This is the meaning behind the phrase “Capitalism is eating our democracy.”

What Can we Do to Save Both Capitalism and Democracy?

Forever the optimist, I think there are a whole set of measures that would produce a healthier Capitalism and a healthier Democracy without replacing either. I think the first step is to reduce and reverse the growing disparity of income and wealth. Thomas Piketty in his monumental study Capital in the Twenty-First Century provided sufficient evidence that income and wealth disparity is growing around the world. He and others have suggested various tax policy cures, including the following:

Introduce a more progressive tax system. Instead of a single top income tax rate of 39.6%, replace it with several brackets going up to (say) a 60% tax rate on (say) annual incomes over $20 million dollars. Under President Eisenhower, we had progressive brackets, toping at a 70% tax rate, and that didn’t impede economic growth during his Presidency. This will not only bring in much needed income to turn into building new and better schools and hiring better teachers but it will also reduce the growing concentration of wealth and power.

Introduce a more progressive estate tax system. Today the estate that can be passed on to the heirs of wealthy families excludes the first $5 million given to each heir. The remainder of the estate is taxed at 55%. The case can be made to keep the $5 million exclusion but raise the tax on the remaining portion to 70%. Warren Buffet sagely observed that “a very rich person should be able to leave his kids enough to do anything but not enough to do nothing.” Use the extra tax money to fund a new program to rebuild America’s below-par infrastructure.

Raise the minimum wage of workers. Today’s minimum wage of $7.45 an hour is about 1/3 of what would constitute a livable wage for a family of four. Raise the minimum wage to $10-$15 depending on the location and the cost of living.

Tax earnings on long term capital gains and carried interest at the ordinary income level. Income coming from securities held more than one year has been taxed at 15% and this was finally raised to 23.8%. The purpose was to encourage investors to stay with chosen securities at least a year and thus reduce speculation. The problem is that most wealthy people basically put their money into securities and therefore their normal income tax is 23.8%, however much they earn. It came out during Mitt Romney’s run for president in 2012 that he had earned $13.7 million in 2011 but his tax rate was only 14.1% of his income. While workers are hard at work earning a living, wealthy people and their heirs get income without expending any current labor.

Close other tax loopholes. There are several tax loopholes, including the huge amount of tax income that is lost when American corporations such as Apple, GE, Pfizer, Merck and others keep their money in offshore tax havens and do their best to switch their reported earnings as taking place in the lowest income tax havens.

All of these call for fairly straightforward changes in our tax policies and they can be done if there is the will to do it. Some of you will agree with all of these proposals, some of you with some proposals and some with none of proposals. You may argue that each measure will hurt our economy by turning off our business leaders from working as hard as they do and that even some CEOs and celebrities and super rich people will just leave the country for another country. I doubt that most wealthy executives and celebrities who are passionate about their business or work will give up.

At least, it would be worth testing. The reason is that otherwise Capitalism will be committing suicide. When our workers don’t earn enough to support their families, when they have to take out payday loans at 10% interest, and when 40% of our workers retire not only with zero savings but even with unpaid debt, we can expect anger, protest, and possibly more crime and violence to occur.

Classic economic theory is supposed to be about achieving an efficient allocation of resources. It is hard to believe that this is happening in America with a 15% poverty rate, with college students carrying a trillion dollar interest debt, and with so many students from poor families getting an inferior public education, all the while the economy continues to build multiple mansions, private planes, and yachts for the super-rich. The mythical theory that everyone can become a millionaire will inevitably turn into more disbelief and disillusionment. We need a new economic theory of saner consumption and saner investment that respects human values, human life, and our planet.

What do you think? Join the debate. And please tell us what you think in the comments section below.

Philip Kotler is the S.C. Johnson & Son Distinguished Professor of International Marketing at the Northwestern University Kellogg School of Management in Chicago. His most recent work is “Confronting Capitalism: Real Solutions for a Troubled Economic System.”

FIXCapitalism.com is dedicated to saving Capitalism from itself. Visit us at www.fixcapitalism.com to join the debate. Follow us on Twitter and Facebook.

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