A group of many of the nation’s top CEOs released a statement last month arguing that maximizing shareholders’ profits can no longer be the primary goal of America’s corporations. To some Americans, the message may come as a surprise; over the last several decades, shareholder primacy theory has fundamentally remade significant parts of our economy, shifting precedence from business development to enlarging short-term financial returns for stakeholders. The group, led by JPMorgan Chase CEO Jamie Dimon, stressed the importance of capital investment, supporting local communities, and generating long-term value.
This is a start. American economic policy today suffers from an inability to identify a common good and set priorities required to realize it. The outcome is an active aimlessness, in which problems are often articulated without the intent or possibility of solving them. Absent the direction provided by priorities, we have no way to evaluate how the country is doing to begin with, nor can we identify related problems in a coherent way.
The present drift should be alarming to political conservatives, for it was against a politics that pulled in all directions in the late 1970s that modern conservatism first gained political power. An ineffectual liberalism then pursued the conflicting goals of raising union pay and increasing government welfare, but raising taxes and regulations on businesses for environmental and progressive causes; reducing reliance on high-price foreign oil but retreating from American power abroad and refusing to drill for oil at home. The outcome of pursuing all of these goals at once was crippling inflation, preventing the achievement of any.
Conservatives like Ronald Reagan saw the incoherence of these goals when the liberalism of that time could not. Reagan noted in his first inaugural address that he was not elected to merely “preside over dissolution,” but to “reawaken the industrial giant” and remind the country of “our capacity to perform great deeds.” The Reagan legacy as we know it today set national priorities of making the American economy productive again and using American economic power to crush the Soviet Union. These priorities made the competing interests and ideologies that plagued the 1970s subordinate to national goals. Conservatism cut through tired debates to the core issues of American life, and was rewarded for it.
Ineffectual liberalism then has become incoherent neoliberalism today. The agenda pursued in recent years by President Obama and still proposed by policy elites of both parties is to import cheap labor and maintain standards of living through welfare income supports. It promotes financial services and digital technology as the core of the American economy, but allows our more productive manufacturing sector to evaporate away. It promotes an ever-increasing choice of social lifestyles, but refuses to make family formation — the foundation for our country’s continued existence — the basis for social policy. They want open borders but high domestic wages, and sustainable local economies without traditional families. It cannot achieve priorities because it does not actually set any to begin with.
Inverting the inflation of the 1970s, the outcome of this incoherence has been the deflation of the real economy. It has drained economic resources away from the lives of regular people and concentrated them elsewhere, often in speculative and unproductive elite trends and fashions. The problem Reagan’s men at the counter face today is not that their staples are too expensive, but that there is no local counter to be at in the first place, and the men have no family to buy for. The paradox of choice without prosperity is the heir to Jimmy Carter’s malaise.
Where ineffectual liberalism pursued contrasting priorities, incoherent neoliberalism fails to set public priorities at all. To demonstrate what an American politics that sets priorities should be, over the last six months I have released three documents arguing for a policy framework based on the dignity of work, strong families, and thriving communities.
In The Atlantic, I wrote about how my parents’ experience in the United States as immigrants during a time of widely-shared prosperity can help us understand a fundamental policy commitment to the availability of productive work. In a report titled Made in China 2025 and the Future of American Industry, I argued that American competitiveness in high-value goods exports should be a primary goal of economic policy because of the good jobs it supports. In another report, American Investment in the 21st Century, I document a long-term decline in capital investment by corporations and the economic reasoning of short-term value that justifies it.
I have encountered two main arguments against this work. They have, to my surprise, not been that the priorities I’ve identified are wrong, but that they shouldn’t be set as goals for the economy to perform at all. In this essay, I will explore how these arguments draw an important distinction about the terms upon which we set economic policy.
The first objection is to deny the existence of a problem in the provision of dignified work. The most common method is to use different measures of consumption to demonstrate that the purchasing power of American wages have increased over time.
As former Senator Phil Gramm and John Early write in the Wall Street Journal, if wages are measured by their ability to purchase the basket of consumer goods defined by the Commerce Department’s personal-consumption expenditures price index, then Americans “are substantially better off today than they were a half-century ago.”
This index, Gramm and Early suggest, better accounts for changes in consumer preferences for bigger homes, flatscreen televisions, and the technological advancement of goods like smartphones than other measures. But accounting for these changes requires making decisions about what satisfies consumers’ desires. Underneath the technical debate lies the reality that to measure the value of someone’s income requires judgment about what is valuable.
“Consumer preferences” are not independent criteria. After seeing her father get laid off from a manufacturing job in his hometown, does a young woman’s career in computer programming in a large city far away from home reflect genuine preference or situational response? Many measures of economic productivity might say this individual is flourishing, but does that mean it’s how she feels?
Determining what should count for improving the quality of life is a value judgment, because it is ultimately a claim about how people should live. Deferring this judgment to current statistics about consumer purchasing patterns can miss decline by important values.
Consider the life course of a hypothetical average worker of my parents’ generation. By the age of 30 he owns a home, is married, has several children, and works a job at a company and location he will remain at for the rest of his career. Compare this to a hypothetical average worker today, who at the same age is unmarried and childless, rents an apartment in a large city, and can expect considerably more job turnover, but is more highly educated.
All else held equal, a price index that perfectly accounted for the differences between these two life courses as “substitution effects” could count them as identical. As long as they can satisfy the same amount of their preferences with their income, regardless of what those preferences are, then their purchasing power is the same.
If we compare the two hypothetical workers in relation to the fixed standards of the first, however, there is significant decline. By the standard of starting a stable family life, today’s worker clearly does not have the same quality of life as the worker of my parents’ generation.
Denying a clear decline in American workers’ standard of living on the grounds of shifting consumer preferences is a circular argument. For reasons that are often outside their control, what consumer preferences currently are often diverge from what public purpose should be. It would be far better to decide what values we should promote in our economy, and measure our success by them.
The second objection is to rationalize declining business investment as inevitable. According to this argument, the American economy’s comparative advantage is in financial services and digital technology, so reduced business investment in physical assets is just a statement of fact. As former Treasury Secretary Larry Summers and Anna Stansbury write in The Washington Post, falling investment can be explained by a “shift in our economy toward sectors with lower capital intensity — largely services and digital products — which directly reduces the volume of investment needed for production.”
The shift of a mature economy into capital-light sectors produces a new normal, or what Summers has called “secular stagnation.” Companies earn more profits off of less physical investment, leaving them with free cash to distribute to shareholders, who reward these decisions as profit-maximizing and start the cycle over again. To the extent reduced investment causes problems, Summers argues, it is up to the government to solve them through spending programs, for example in healthcare and climate policy.
Like the assumption of consumer preferences as independent determinants of the quality of life, the assumption underlying this argument is that this change in investment decisions is neutral: businesses seek to maximize profits, and increasingly the best way to do that is to invest in intangible and financial assets. The implication is that falling physical investment is not so much a problem to be solved as it is an ambient setting to work with.
I reject the premise. An economy which allows the achievement of profits without investment is not neutral, but runs counter to the basic requirement of American capitalism that businesses invest their capital productively.
While financial and intangible assets may be profitable for a given business or group of businesses, they cannot be for the economy as a whole. Consider something like off-shoring. While sending jobs overseas to reduce labor costs will increase the profits of the business doing it, if every business did this then there would be no American workers with income to buy the businesses’ products in the first place.
We can think of the increasing “financialization” of corporate America in a similar way. Instead of earning profits by competing on the quality of their investments, large corporations make money off of lending to the rest of the economy. This might work for some businesses for a while, but somewhere down the line somebody has to create the value off of which everyone else is trading. The entire economy cannot earn interest off of itself.
The problem with the increase in corporate net lending today is, as Wall Street Journal columnist Joseph Sternberg wrote in review of my report, that the businesses which are supposed to be investing for production instead “distribute capital to others so that those guys can invest somewhere else.” Falling total private investment suggests that “those guys” aren’t investing the capital either.
Another reviewer points out that this insight is “not the sort of thing that one would find in mainstream economic textbooks.” Indeed, he has identified the problem.
Decline goes unobserved by the “mainstream” economic assumption that companies should simply be computers that optimize for liquid, financial return. This is short-termism. The production of valuable and enduring capital assets is fundamentally uncertain, requiring both the dynamic initiative of private entrepreneurship and long-term certainty of public priority.
Reducing physical investment may be more rational by the neutral terms of present value, but it neglects maintaining the preconditions of our prosperity. Far from a benign description of the present, “secular stagnation” is a justification of decline.
Some conservatives have recently argued that making public priorities based on a higher good is socialist. News headlines like “Rubio One-Ups Sanders And Schumer With Plan To Curb Corporate Buybacks” have understandably raised eyebrows. They have also obscured fundamental disagreement. Emergent calls for “democratic socialism” are more expressions of general frustration than they are the articulation of discrete priorities.
Consider proposals to limit stock buybacks. Senate Democratic Leader Chuck Schumer and presidential candidate Senator Bernie Sanders have proposed prohibiting stock buybacks unless corporations meet progressive standards on wages, pensions, healthcare, and other areas. Compliance with Green New Deal carbon emissions standards can’t be far off. There is little thought given to why companies are not investing their profits, so long as they can be redistributed elsewhere.
More than simply being wrong, democratic socialism is unserious because it is not productive. Progressives are incapable of recognizing the sources of prosperity like the stability of traditional families and the development of physical capital. Forcing the economy to conform to ever-changing progressive social goals is asking for a return to the inflation of the 1970s, because it tries to do everything at once without creating real value to support it all.
The inability to set economic priorities in recent years helps create demand for things like socialism, however. As businesses spend less of their capital to improve the physical economy of equipment and skilled labor, Americans may increasingly look to government to pick up the slack to create good jobs, either by command-and-control regulation or through expanding the federal welfare state.
I believe we can do better than this. Instead of merely requiring artificial compensation to the “losers” of our current economic arrangement, we should work towards an economic system that creates fewer losers in the first place. But doing so will require being clear about what “winning” means, and setting clear priorities to advance it. In America, this has long been the dignity of work, strength of families, vibrancy of communities, and unity of nation. It is within our power to build an economy that promotes these values, and I believe we must.