What if I told you the American economic system is a farce? A giant, smelly farce built upon a crumbling structure that threatens to erupt and break apart our nation as we know it. You’d probably tell me I’m wildly immature for belittling our nation’s economy with a flatulence pun. While you might have a point about my immaturity, the core of my argument still remains legitimate. We like to think of capitalism as a slightly unruly horse, an earnest creature that will bring us in the right direction if we ensure the reins are tight. This seemingly logical analogy, however, couldn’t be farther from the truth. This image needs to be flipped on its head to realize the reality of our economic situation. The horse is unruly and the reins are tight, but it is we the people who are wearing the reins, and it is the unruly horse that is directing our course. Our steadfast devotion to the facade of capitalism’s endless growth is a delusion that threatens to tear our country apart.
Let’s start with the basics: what is capitalism? In the simplest definition that this 1,000-word column can contain, it is the private ownership of capital. Capitalist theory states that individuals are incentivized by profit to create products to sell in the market. This profit is then reinvested into production to grow the business and consequently grow the economy as a whole. It is a cycle that continues to breed prosperity as long as companies remain profitable and invest their profits into production.
We have adhered to this capitalist cycle of growth for centuries. It has created prosperity as long as profits were invested in long-term material growth, or in other words, used to improve the quality and quantity of production. But capitalism’s prosperous history has ended, and its unruly nature has now taken over the reins. The erosion of our economy can be seen in the weakness of its foundation: the middle class. The average worker has lost $5,000 per year in income since 2000. This is coupled with the fact that the cost of basic necessities has risen $10,000 in the same period, resulting in a net yearly loss of $15,000 per family. While the mainstream narrative is that we’ve recovered since the Great Recession, 95 percent of the income gains since 2009 went to the “top 1 percent.” The majority of the country has not recovered. What’s going on? The root of the problem lies in the very fuel used to drive capitalism forward: profit.
Everything works according to plan if profits are reinvested in long-term investment. This is no longer the case because we have had a dangerous reorganization of our economic system away from reinvestment of profits and toward speculation of profits in the financial industry. The financial industry doesn’t grow the economy by itself—it only facilitates the growth of other business actually engaged in material production (giving loans where needed grows the economy, speculating on the stock market does not). While a small, efficient financial industry is necessary in any capitalist economy, ours has grown to become an untamable behemoth, a profit-hungry stallion trampling middle-class families in its wake. It has steadily increased from 1.3 percent of GDP to absorb 9 percent of our economy. This large financial sector is not an efficient use of resources. The financial industry of the 19th century was more efficient than our modern financial industry at cultivating growth. We’ve switched from using the financial industry to facilitate long-term business investment to businesses facilitating the short-term, empty profits of the financial industry.
We want to believe that high corporate profits are indications of a healthy economic situation. Paradoxically, this is a symptom of a disease slowly infecting our economy. The disease’s name? Short-term profits. 92 percent of corporate profits over the past two years have been used to buy back company stock or pay out dividends to stockholders. 92 percent. This wealth does not grow the economy. Investing in one’s own stock price only gives money to stockholders and contributes to the ever-inflating economic bubble that threatens to pop and destroy our economy. Long-term growth has been thrown to the wayside as executives realize the billions to be made investing in the financial industry. This wealth does not trickle down. In fact, it sucks the life out of the company and the entire economy when there is no investment in long-term growth. Raising the stock price once a company goes public does not help anyone besides the stockholders, who are hardly representative of our nation (the “1 percent” owns 50 percent of all stocks. The bottom half of the country only owns .5 percent of stocks). Money spent buying back stocks is money that could be spent raising wages, hiring workers, or increasing production efficiency: actions that actually grow the economy as a whole.
I wish I could say there is an easy fix. I wish there was one more regulation that could limit the financial industry so that long-term growth would be prioritized. We can pass more laws, but the origin of the problem will remain: this is the natural trajectory of capitalism. Economics is all about incentives, and companies are incentivized to pursue short-term profits at the detriment of long-term growth because the people in charge of the company are not looking out for the company’s best interests. They are blinded by the prospect of short-term profits. The profit motive is the unruly horse directing our nation’s course toward self-destruction. As long as a handful of people have control over a company, they will be incentivized to make as much money as possible at the expense of the long-term health of the economy. We need a new pathway forward, in which company leadership is not restricted to a select few, but rather democratized to ensure executives are held accountable for any possible self-destructive behavior.
In this case, he who smelt it had not dealt it. The middle class is feeling the effects of the destructive behavior of the 1 percent, and we need to recognize the silent but deadly farce destroying our economy.
Featured Image by Seth Wenig / AP Photo