Capitalism has a branding problem. It’s the best economic system humans have ever devised, yet a lot of people who live in capitalist systems want to replace it with something else.
The next-best alternative seems to be socialism, which has never succeeded anywhere yet seems to be the unknown outsider Americans are willing to take a chance on. Approval ratings for socialism have grown to 43% in Gallup polling, the highest level in surveys that date to 2010. Capitalism does better, at 55% approval, but its reputation is fading—and this shouldn’t even be close.
The problem with capitalism isn’t the system itself. The problem is the way we manage it. There are many forms of capitalism, depending on what societies want from it. The Nordic nations use capitalism to provide widespread social benefits, and they’re willing to pay high taxes to enjoy those benefits. American capitalism is flintier. As an individualist nation from birth, we’re more willing to let people fend for themselves. But we have amended laissez-faire capitalism many times, and can do it again.
Here are 5 ways to reform capitalism so that it brings prosperity to more people and ends the fever dream that socialism is somehow better:
1. Protect the golden goose. The American capitalist system generates phenomenal amounts of wealth. More wealth is good. Less wealth is bad. We have a distribution problem, because too much wealth goes to too few people. But that doesn’t mean we should create less wealth by, for example, letting the government run businesses best left to the private sector. We want the strongest possible growth and maximum wealth!
Here’s how the US economy performs compared with other countries some people might think do better. This is total economic output per person:
Small, homogeneous nations such as Singapore and Norway are wealthier than the United States. But no large country is. Any proposal that would degrade the overall performance of the US economy should be a non-starter.
[It’s time to revise the American Dream]
2. Tackle health-care costs. We spend way too much on health care without getting materially better outcomes. Here’s health care spending in the United States, compared with other countries:
This is a longstanding and complicated problem, but the essential conflict is between a for-profit health care sector and the need to better regulate costs and pricing. MIT economist Jon Gruber has many ideas on how to reduce total health care spending, such as cutting overhead and doing more preventive care to cut down on costly emergency room visits. There are many other studies on how to rein in runaway spending.
The United States is basically the only advanced economy that doesn’t have universal health care, with basic medical services available to every citizen. That’s a travesty. Universal coverage would include preventive services for everybody, catching problems early and stopping some of them from becoming chronic or deadly.
Universal coverage does not mean “Medicare for all,” as Bernie Sanders would prefer. Putting all health care under government control would be so disruptive that it’s not feasible. Plus, the employer-sponsored health care system that covers about 160 million Americans works reasonably well. We should leave that more or less alone while getting everybody covered. The Affordable Care Act addressed part of the coverage problem and could be expanded to address the rest. The best possible outcome is a piecemeal system that improves on what we have now, not some bumper-sticker panacea.
[I placed a bet on falling oil prices]
3. Get taxes in line with spending. The United States is a low-tax nation, with an overall tax burden far below levels in most other advanced economies. Here’s the total tax burden, including federal, state and local taxes, by country:
We shouldn’t raise taxes just to raise them. But we’ve already got an obvious problem because the federal government spends about $2 trillion more per year than it takes in. The $40 trillion national debt has now gotten too large, and it’s time to reduce annual deficits as a percentage of GDP. It would be reasonable to raise taxes to finance better health care coverage, as well. But as a country, we’re obdurate about taxes and always want them to be as low as possible.
Wealth taxes, favored by Bernie Sanders and other liberals, are unproven, hard to administer, and possibly illegal. Raising the income tax is a far more reliable way to generate more revenue. We’ve had much higher taxes on the wealthy before, with no obvious harm to the economy. That’s the obvious starting point.
[Believe it or not, the economy is strong]
Raising business taxes is trickier, because it can depress growth, which we shouldn’t do. There are many ideas for gradually raising taxes in ways that don’t upset the economy. We may eventually have to enact a value-added tax, or VAT, similar to a national sales tax, which most advanced nations have.
4. Improve the lot of workers. There’s been a long-term decline in the share of national income going to workers, while the share going to owners has been rising.
This is also a complex problem with no silver-bullet answers. But it’s not unique to the United States, and the biggest cause is probably the onslaught of digital technology, which concentrates wealth among innovators while making some skills obsolete faster than ever.
[Why soaring rates aren’t a problem—yet]
The rise of artificial intelligence presents a good opportunity to give workers a larger share of the assets that generate wealth. That could be more employee ownership of profitable firms, better support programs for displaced workers, higher taxes on capital gains, better worker training linked to the best opportunities, and other types of worker protection programs. Again, there’s plenty of research on possible improvements.
5. Make politicians more accountable. It’s probably no coincidence that worker power has declined at the same time wealthy Americans and corporations can give unlimited amounts of money to political campaigns and basically call the shots. Good-government groups want new limits on campaign donations, stronger ethics laws throughout the government, and other reforms. More open primaries, allowing independents to vote in either the Democratic or Republican contest, could also produce more moderate general-election candidates who aren’t beholden to party orthodoxy and the usual big donors.
If you think this is all hopeless, ask yourself, where is it better? France has some of the world’s most generous social benefits, but it lacks the money to pay for them and is now facing a debt crisis worse than we have here. Singapore has a model economy built on soft authoritarianism and strict rules for public behavior that would never fly here. The Nordic nations prioritize social cohesion in a way bumptious Americans never have.
Yet Americans intensely wary of government overreach have modified capitalism many times by imposing income taxes, establishing a wide array of safety-net programs, breaking up monopolies, and incentivizing activities we feel are important. It’s time for another reboot of American capitalism, and that will be better than any alternative.
Enjoy a cartoon.
You can order this cartoon👆 and play cartoon-themed puzzles and word games at CartoonStock.com.
Merely raising taxes and/or reodering the share of gains to reward labor versus capital will not fix this. That is the paradox which it appears that Democrats may have embraced. It is a canard.
That said, we have more than ample "wealth" as a nation to solve this. Your essay makes excellent proof of that.
The bigger problem is that the U.S is extremely wasteful of our resources. We also do not plan very well. It can even be argued that the politicians and media have been the only beneficiaries of this model of bickering and cleavage.
If we were to work together at the Federal level to incentivize long term investment in a national policy that resembles Germany or dare I say it, China, we'd be much better off. More emphasis on STEM education, less on "social influencer" sports and entertainment, with a tax code that put value on savings and investment.
P.S. A healthier workforce is a net positive for efficiency. So, universal coverage in combination with the above can pay for itself almost from the jump.
What this really takes is "cooperation." For the last 50 years, the U.S sucks at it. Please note as the Janis Joplin song notes: "Freedom is just another word for nothing left to lose." Not well postiioned!
Excellent starting point. Agree on essentially all your points and with most of what @annapolis73 has said. This is an extremely important post. I can think of a few other issues we need to address in our country (low civic awareness & engagement; folks not bothering to check facts before voting and then saying 18 months later that that's not what they voted for; it's like being on a long flight and opting for a literal crap sandwich with broken glass in it bc they don't like chicken Kiev, the only other option on the menu), but those have less to do with fixing capitalism.
Capitalism should stay but move farther away from the "unfettered" end of the spectrum to somewhere reasonable so that we get the desired outcomes of less oligarchic behavior (the super-rich influencing elections and then gov't [executive & legislative] decisions on regulation, incentives, taxation, anti-trust enforcement, etc), less income/wealth disparity (addressing the general affordability crisis faced by a large portion of our population), adequate and more cost-effective healthcare coverage for all, etc.
While corporate taxation need not be raised back to pre-2017 levels, the favorable tax treatment of 'long-term' capital gains (as currently defined) has to stop, with one exception: when a company issues *new* shares (IPO or later), then an investor holding those new shares (bought directly from the company or its agent) for at least 3 years (ideally 5 years; definitely not just 1 year like now) should benefit from a lower tax rate on gains from a sale. All other capital gains should be taxed like ordinary income. The idea behind lower rates for LTCG was that investors would be incentivized to invest in companies for the long term and help the companies get off the ground and build businesses. An investor selling already-issued 'old' shares of an existing company has ZERO impact on the finances of that company -- it's simply a matter of shares changing hands within the investment community. Thus such LTCG should be treated as ordinary income. This would personally hurt me bc of our holdings in taxable brokerage accounts, but it's the right thing to do.
Re: the cartoon... as a foreign student here 40 years ago, the joke was that "Don't Walk" means you're allowed to run across (at your own risk ofc!).