Saving Capitalism From a Painful Demise

Below is my new article in the Winter 2015 issue of the Wharton Magazine. Thanks to editor Matt Brodsky for allowing me to reprint it here!

Retailers Need Consumers

American business leaders rallied around Franklin Delano Roosevelt in 1932 during his candidacy for the presidency, after which he immediately embarked on the most progressive legislative agenda in U.S. history to tackle the Great Depression. From today’s vantage point, it may seem surprising that titans of industry, executives from General Electric to Standard Oil to IBM, not only contributed to Roosevelt’s campaign but helped author many of his famous New Deal reforms. To the men who ran these companies, it was a simple matter of fiduciary responsibility — to current shareholders and to future ones — that they should ensure a more equitable distribution of prosperity, lest their own wealth be dashed to bits on the jagged rocks of a shrinking economy.

Today, we face a similar predicament. The great challenge of business in our time is reversing the destabilizing threat of inequality. While at first this may seem anathema to our profit-maximizing mission, distribution of income lies at the very heart of sustainable capitalism.

For this reason, today’s titans of industry have stepped forward to protest the growing distance between them and the rest of the country. Warren Buffett, Lloyd Blankfein, Stanley Druckenmiller, Bill Gross — legends whose lives and words are studied and idolized at the Wharton School — have all gone public with the wise advice that we steer away from those jagged rocks.

They are not alone in their concern. According to a recent analysis by the Center for American Progress, 68 of the top 100 retailers cite the flat or falling wages of the average American household as a risk to their business — a number that has doubled in the past eight years. A recent poll of small businesses similarly found a strong majority of them in favor of raising the minimum wage.

These business leaders sense an essential truth about our capitalism: Workers are consumers. They spend what they earn — or what they borrow. While the latter may work for awhile, it has limits — and calamitous risks. The only sure way to grow the economy in the long run is to grow consumer spending — and that means growing worker incomes.

In recent decades, workers’ incomes have not grown much, on average. Since the beginning of the Great Recession, the average household has lost 8 percent of its income, after adjusting for inflation. All the growth — and then some — has gone to the richest 10 percent of Americans. And most of that growth — 95 percent of total growth, to be precise — has gone to the richest 1 percent. And most of that growth has gone to the richest 0.1 percent. And so on.

Unsurprisingly, economic growth has been slower since the advent of this new trend. From 1950 to 1980, real GDP grew 3.8 percent per year, versus only 2.7 percent from 1980 to 2010. On the rare occasions when it has approached its previous faster rate, it was fueled by unsustainable borrowing. This is no coincidence. Recent work by economists Özlem Onaran and Giorgos Galanis has shown that most developed countries experience lower growth when the share of their income going to wages (as opposed to profits) declines. In the United States, for example, every 10 percent decline in the wage share causes the economy to shrink by 9.2 percent. In fact, that has been the experience of the global economy as well.

High wages are what economists refer to as a “positive externality.” They generate “spillover effects” that benefit the people who don’t pay for them. When workers receive high wages, they invest more in health and education, increasing their productivity and reducing the costs we all pay for a sicker, less-informed population. They motivate firms to invest in advanced technologies to reduce labor costs, making them more innovative and globally competitive. Workers who receive high wages are less likely to go out on strike, vote against free trade and immigration, protest in the streets, shirk on the job and commit crimes. That’s why, in an analysis of 19 developed nations from 1960 to 2004, economists Robert Vergeer and Alfred Kleinknect found that higher wage growth consistently led to higher productivity growth.

In other words, low wages may be good for one firm, but high wages are better for all firms. Yet many businesses would like to raise wages, but they fear losing ground to their competitors.

The only solution is collective action.

Economists have a collective action for precisely this sort of “coordination failure”: taxing the negative externality and subsidizing the positive. It is time that we recognize inequality for the negative externality that it is, slowing our productivity growth, roiling our markets with volatility, gridlocking our political system, and starving our economy of willing and able consumers. Inequality is a risk to our businesses, and it ought to be treated as such.

We should therefore see taxes not as penalties but as investments in a better, more equitable, more sustainable system. We should strive to prevent a “race to the bottom” in workers’ incomes; if we don’t, the day will come when no one will be left to pay the profits our shareholders demand. Business schools should teach courses about this issue, and business leaders should address it in their boardrooms. It is not merely a political issue. It is very clearly the business of Business.

Joseph Kennedy thought so when he went to work for President Roosevelt. As one of the nation’s most notorious stock manipulators, Kennedy might have been the last person we’d expect to join Roosevelt’s crew, but when Roosevelt named Kennedy as the first chairman of the Securities and Exchange Commission, he saw it as an opportunity to save the market from itself.

“We of the SEC do not regard ourselves as coroners sitting on the corpse of financial enterprise,” said Kennedy in a radio address to the nation. “On the contrary, we think of ourselves as the means of bringing new life into the body of the security business.”

As Wharton graduates, let us think of ourselves in the same manner, and act accordingly.

My New Book Has Been Published! Just in Time for the Holidays…

Letter to the One PercentAvailable in hardcover from Lulu Press, Inc:

Support independent publishing: Buy this book on Lulu.

Available in e-book format from Lulu Press, Inc:

Support independent publishing: Buy this e-book on Lulu.

Available in Kindle format at Amazon.com:

Buy from Amazon.com!

 What It’s All About…

Letter to the One Percent is exactly what it sounds like: a letter to the richest one percent of American households. It is a call to action, a plea for compassion, and a manifesto for the future. It tells the story of their extraordinary success — and how the other 99 percent of Americans missed out. It explains how this divergence caused household income to stagnate, forced millions of Americans into poverty, and triggered the worst financial crisis since the Great Depression. It appeals to the better angels of their nature to bear a higher burden — by paying higher taxes, empowering labor, and cracking down on white-collar crime — in order to reverse the damage done in the past three decades.

No other writer has dared to speak these truths directly to power. Every other mainstream book preaches to the choir. Only Letter to the One Percent is brave enough to challenge the rich to do what the country needs them to do. It is not an attack. It is not class warfare. On the contrary: It is a challenge to end the class war that the One Percent has been winning and the 99 Percent has been losing.

No other political subject is as timely as this one. No other economic trend is as pivotal. From the financial crisis in 2008, to Occupy Wall Street in 2010, to the presidential election in 2012, the divergence between the One Percent and the 99 Percent has been the most talked-about issue in American current events. And yet, no one has synthesized the causes and consequences of it in a succinct, yet comprehensive, book. No one has translated the protests and the politics into the simple pocketbook impact that it has had on the average American household. This is the biggest story of our time, and Letter to the One Percent is the first book to tell it fully, accurately, and unflinchingly.

Advance Praise for Letter to the One Percent

“In just 85 pages, the brilliant young economist Anthony W. Orlando analyzes the events of the past thirty-five years and thoroughly explores the rise of the One Percent at the expense of the rest of us. It is truly a manifesto for the 99 Percent and should be read by every one of us.”

— Reese Schonfeld, founding President and CEO of CNN

Letter to the One Percent is an excellent primer and refresher course on macroeconomics. It helped me understand why the U.S. is experiencing the current economic state of affairs. It is also a compassionate call to action. At first, one may not agree with the basic thesis, but it makes complete sense. I am now a believer and highly recommend this read.”

— Mark Itkin, Co-Head of Worldwide Television at William Morris Endeavor

“Anthony W. Orlando has written a short dossier and critique of America’s descent into a very troubled and vulnerable society. He presents it in the original form of a letter chastising the One Percent for these policy failures and urging them to get hold of themselves and opt for decency and long-run survival. But he also provides a small storehouse of ammunition for the 99 Percent to use in their self-defense.”

— Edward S. Herman, Professor Emeritus of Finance at the Wharton School of the University of Pennsylvania, bestselling co-author of Manufacturing Consent: The Political Economy of the Mass Media

“Anthony W. Orlando has the unique ability to translate complex economic phenomena into everyday, nuts-and-bolts language. He speaks for a brave new generation with a voice that deserves to be heard.”

— Susan M. Wachter, Professor of Real Estate and Finance at the Wharton School of the University of Pennsylvania, former Assistant Secretary of the U.S. Department of Housing and Urban Development

“…this well-researched, carefully cited book is a valuable resource for understanding how the country got in such a perilous position and what can be done about it. Using a clear, authoritative writing style,…Orlando…manages to present an impressive number of facts without overwhelming readers. In particular, the statistics he presents are startling, even for those who closely follow the state of the economy.”

— Kirkus Reviews

A Lesson in Power, Courtesy of the Bangladesh Garment Industry

The bodies have been placed in coffins. The mourners have draped themselves in black.

It was one of the deadliest industrial accidents in history. Over 100 people died in that clothing factory.

It made headline news all across the world. Surely you’ve read about it by now.

When they tried to escape, the factory workers found the doors locked. It was standard practice at the sweatshop. The managers didn’t want the workers to take unauthorized breaks.

So they burned alive.

Louis Waldman happened to be nearby when the fire started. He followed the sound of pandemonium until he reached the blazing factory. He told the New York Times what he saw: “Horrified and helpless, the crowds — I among them — looked up at the burning building, saw girl after girl appear at the reddened windows, pause for a terrified moment, and then leap to the pavement below, to land as mangled, bloody pulp. This went on for what seemed a ghastly eternity. Occasionally a girl who had hesitated too long was licked by pursuing flames and, screaming with clothing and hair ablaze, plunged like a living torch to the street.”

You probably think I’m talking about the garment factory in Bangladesh, where 112 people died last weekend. But I’m not.

I’m talking about the Triangle Shirtwaist Factory in Greenwich Village, New York.

The date was March 25, 1911. One hundred forty-six people died that day.

New York City wouldn’t experience another disaster of that magnitude for another ninety years. That date would be September 11, 2001.

It’s hard to believe that such an atrocity happened right here in our own backyard. We’ve become so accustomed to workplace regulations and civil negotiations that we’ve forgotten what factory life was like before the Great Depression.

Back then, labor unions were even rarer than they are today. Most strikes ended at the barrel of a gun. The company would call the governor, and the state militia would send soldiers to force the strikers back to work. It wouldn’t be uncommon for them to kill and imprison dozens who stood in their way.

The history of our great nation is littered with epic labor battles. Hundreds, maybe thousands, of Americans died defending their right to negotiate as one union rather than as helpless individuals.

It doesn’t take a PhD in economics to see that an individual worker doesn’t stand a chance of a fair negotiation with a $237 billion corporation like Wal-Mart, especially when unemployment is high. The corporation has so many applicants to choose from. It has all the power.

It’s that kind of power that allowed the Triangle Shirtwaist Factory to lock the doors and trap its workers.

That sort of thing doesn’t happen in America anymore, but it’s not because corporations had a change of heart. It’s because the Great Depression motivated Congress to stand behind workers who wish to form labor unions. It’s because the federal government stopped sending soldiers and started sending election supervisors. It’s because they investigated factory conditions and created laws to prevent the loss of innocent life.

This is what our government does. It’s what sets us apart from the destitute places of the world, where good, hard-working people have no protection from the warlords and factory bosses.

In the depths of the Great Depression, Americans watched the Congressional investigation of Wall Street with horror, as the wretched abuses of unregulated banks came to light. The great columnist Walter Lippmann summed up the national mood when he wrote, “No set of men, however honorable they may be, and however good their traditions, can be trusted with so much private power.”

Something to remember when the One Percent refuses to pay the taxes they paid in the booming 1990s, or when they blame the demise of the Twinkie on unions who took pay cuts while executive compensation was soaring.

The 99 Percent isn’t asking for a lot. An hourly wage that doesn’t leave their family in poverty would be nice. A guarantee that Social Security and Medicare will still be there when it’s their turn to retire. Maybe a few public schools that aren’t crumbling to the ground.

You know, the things that separate us from the Bangladesh’s of the world.

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This op-ed was published in today’s South Florida Sun-Sentinel.

Putting the Spotlight on the Covert Subsidy of Wall Street

Wall Street is back in the news.

They went away for awhile, taking a backseat to gas prices and budget proposals. They preferred it that way. They make more money when no one’s paying attention.

But when you’re too big to fail, you’re too big to hide.

First, there was the announcement that JP Morgan had lost at least $2 billion in derivatives trading. Then came the Obama campaign’s attacks on Mitt Romney’s record of cutting jobs at Bain Capital, followed by the unlikely retort by Cory Booker, the Democratic Mayor of Newark, New Jersey.

But it is not enough to ask what good Wall Street does. We must go one step further: Is Wall Street so valuable — is its output so beneficial — that we must subsidize it?

In the wake of the worst financial crisis since the Great Depression, it’s hard to make that case. But that hasn’t stopped the government from giving Wall Street a bonus on top of every dollar they earn.

They don’t call it a “bonus,” but that’s what it is. Wall Street pays a lower tax rate — 15 percent — on every investment it cashes in than it would pay if that money were taxed like ordinary income. This “capital gains tax rate” is the lowest it’s been since the Great Depression.

When George W. Bush got Congress to lower this rate from 20 percent to 15 percent in 2003, it was supposed to encourage people to save and invest more, thus increasing future economic growth.

But nothing of the sort happened.

“I have worked with investors for 60 years,” said Warren Buffet, “and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain.”

Capital gains taxes have been falling for twenty years, from 28 percent in 1987 to 15 percent in 2007, yet the saving rate has plummeted over those same years.

In fact, the years following the 2003 tax cut were part of the most dismal economic expansion in postwar history. Output growth, job creation, poverty reduction, and investment were all below average, if not all-time lows.

Clearly, low capital gains taxes did not lead to the prosperity that was promised.

This conclusion isn’t restricted to one decade. From 1950 to 2011, the capital gains tax rate has been positively correlated with economic growth, meaning higher taxes have been associated with faster growth. Even when you compare economic growth occurring several years after the tax rate changed, there’s still no significant negative relationship.

Yet this tax break persists, costing the government $100 billion every year (when combined with the loss from the same low tax rate applied to corporate dividends).

Where does this $100 billion go?

$70 billion of it goes to the richest 5 percent of households. Half of all capital gains income goes to the top 0.1 percent of households. That means that a mere 114,000 households receive a $50 billion subsidy from the government every year.

And it would be so easy to fix. Here’s how it would work…

If you’re in the bottom 20 percent, you’d pay an extra $1.

That’s right. Just one dollar.

If you’re in the next 20 percent, you’d pay $2. Seriously. Only two dollars.

If you’re in the middle 20 percent, you’d pay $6. That’s it. The average American, the precious middle class, would pay only six more dollars.

If you’re in the next 20 percent, you’d pay $30. On a six-figure salary, I think you can afford to give up thirty bucks.

And those are just the average tax increases. Of those bottom 80 percent of households, 9 in 10 would experience no tax increase whatsoever.

Cory Booker says this debate is a “distraction,” but nothing could be further from the truth — $100 billion is too big to ignore. The spotlight is back where it belongs. This time, let’s keep it there.

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This op-ed was published in yesterday’s South Florida Sun-Sentinel.