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Supercapitalism, by Robert Reich
Finally, I will come to some conclusions you may find surprising -- among them, why the move toward improved corporate governance makes companies less likely to be socially responsible. Why the promise of corporate democracy is illusory. Why the corporate income tax should be abolished. Why companies should not be held criminally liable. And why shareholders should be protected from having their money used by corporations for political purposes without their consent.
That's from Robert Reich's Supercapitalism. I'm coming late to this party, but mostly I liked the book. It's full of fresh thinking and most of all it is excellent on just how much invisible hand mechanisms shape an economy. It has the best explanation (and partial defense) of high CEO pay I've seen, namely supply and demand. If you think it is exploitation of shareholders, take a look at how much private equity pays its CEOs. And as the above quotation indicates, Reich is willing to rethink just about all the old left-wing shibboleths (what a biased word) about corporations. He separates the analysis from the moral narrative, so when you disagree with him, that point is an isolated one and it does not infect everything he says.
Reich recommends that we strengthen atrophied democratic constraints on capitalist outcomes; in his view special interest politics are just another form of capitalism and special interests are crushing voter influence. "Bryan Caplan, telephone!"
By the way, make sure you read this piece on the futility of campaign finance reform, which counts as one of the most overrated ideas.
Here is Greg Mankiw on the book. Here is another take on the book.
Posted by Tyler Cowen on November 6, 2007 at 04:31 AM in Books | Permalink
Comments
Interesting.
Posted by: sa at Nov 6, 2007 6:58:57 AM
I always thought of Reich as sort of a knee-jerk lefty, but I guess I was wrong. His ideas are indeed refreshing.
Posted by: Ned at Nov 6, 2007 9:33:30 AM
I thought the same, because he was. Perhaps he has seen now how corporations
add more value to the poor and developing societies than any other entity
on this planet. Kudos to him for his awakening.
Posted by: Thomas at Nov 6, 2007 10:56:30 AM
Regarding the quote above Why the corporate income tax should be abolished here is a supportive link entitled: Why progressives should support reducing corporate tax rates. The author is a left of center economist out of Canada. He also provides a couple of links at the bottom of his post which also argue against corporate taxation.
By the way, as a matter of pure speculation I give Paul Krugman (oh the irony) the credit for awakening in Reich some economic sense to go with his economic leftist bias. Krugman bashed several pundits in his book Peddling Prosperity, and I think to Reich's credit he said to himself "hmmmmm, maybe I should actually read up on some of this stuff before I open my mouth", and it seems he did.
Now if only someone could force both parties in Congress to get some economics education....
Posted by: happyjuggler0 at Nov 6, 2007 11:18:07 AM
sorry about the italics
Posted by: happyjuggler0 at Nov 6, 2007 11:19:28 AM
Well, the Economist's article sure demonstrates how far that magazine has fallen. Finance reform is impossible, but 'limiting the scope' of government involvement in the market is an easier solution? Even ignoring the unlikelihood of this claim on its face, it assumes a fallacy: that there can be a null government interference in the market. There are always going to be laws regulating IP, externalities in business interaction, labor, shareholder relations, etc. That will only grow more true as energy policy becomes more important.
I'm not sure if a consitutional change would be required or not, but I have never thought that corporations ought to have the kind of rights that individuals do. Free speech, in my opinion, should not apply to corporations. I don't think you'll ever be able to eliminate corporate influence in politics, but I think to dismiss offhand the possibility of reducing it is folly.
Posted by: mpowell at Nov 6, 2007 12:06:13 PM
From the Economist:
"The problem with supercapitalism, apparently, is that when the government has massive power to interfere in markets, firms will compete to use the government to get a leg up on the competition."
Seems dead on to me.
"but 'limiting the scope' of government ... assumes a fallacy: that there can be a null government interference in the market."
'limiting the scope' could be lowering it from >20% gdp to only 10%. No fallacy there. Actually, it sound quite nice.
Kudos to Reich on eliminating the corporate tax, the most distorting and wasteful tax we have out there.
Posted by: Tom at Nov 6, 2007 12:31:19 PM
There is no defense, or argument for that matter, for the extremely high rate of pay wages for CEOs. CEOs are paid 411 times more that their average working employees.* This wage inequality is a serious issue and has served to promote the rising numbers of impoverished in the United States.
Big corporations in the United States, especially mega mergers and transnational companies, are not beneficial to those in poverty. In fact, they are a large contributing factor to the declining state of the impoverished.
Money is unequally distributed among the wealthy and powerful. Large corporations typically do not use their funds to aid those in poverty. For example, Wal-Mart a multi-billion dollar company, donates an extremely low percentage of their enormous profits to the poor. In addition, the company does not offer beneficial health coverage and benefits to their employees.
Overall, the United States' corporations are showing the characteristics of monopolies that benefit only those accustomed to a lifestyle of power and wealth. All the while, the poor suffer.
* Statistic obtained from the text: Social Problems, Tenth Edition, by D. Stanley Eitzen and Maxine Baca Zinn
Posted by: Ballard5969 at Nov 6, 2007 1:32:25 PM
Ballard5969-
"There is no defense, or argument for that matter, for the extremely high rate of pay wages for CEOs. CEOs are paid 411 times more that their average working employees."
Don't get out much, or even read this blog frequently, do you?
This woman is an ignoramus.
What is so magical about any ratio of "average worker" to CEO pay? This is not the law of gravity.
Posted by: Rich Berger at Nov 6, 2007 1:53:34 PM
So long as we give corporations effective personhood (or even super-personhood), there's no way one can ethically justify not taxing their income.
Posted by: M1EK at Nov 6, 2007 4:53:45 PM
Tyler,
The Cato campaign finance piece is deeply unpersuasive, and I can only hope it represents a poorly-chosen extract rather than a good overview of the "argument" provided by the book as a whole.
I mean, really, "They call it 'reform' but that presupposes it makes things better" - surely there are better versions of the "money is speech" case you could have pointed to - because were I a donor to the Cato institute I'd ask for my speech back after reading that.
Posted by: Paul at Nov 6, 2007 6:19:19 PM
Didn't read the book but this was the most confused speech I've ever seen:
http://www.fora.tv/2007/09/10/Robert_Reich_on_Supercapitalism
Posted by: Unit at Nov 6, 2007 9:00:12 PM
M1EK,
What if you tax the shareholders' incomes from the corporation?
For example: you and I have a closely held corporation (100 shares, 50 each), You and Me, Inc. You and Me sold $5,678 worth of ice cream last year. The ice cream cost the corporation $4,678 to sell (ice cream, rent for the ice cream truck, etc.). Profit = $1,000. The corporation takes that $1,000, distributes $400 to each of us, and $200 stays in You and Me, Inc.'s bank account--just enough for the deposit and first week's rent for the ice cream truck next year.
We each get taxed 25% on our earnings, so we each pocket $300, uncle sam takes $200.
Where's the moral dilemma?
Further, what changes if we scale up from You and Me, Inc. to XOM?
Serious question.
Posted by: Anon E. Mouse at Nov 6, 2007 11:18:04 PM
Agreed that essay on campaign finance reform is extremely unpersuasive. There is no shortage of political argument on the web, and never will be. You can put whatever videos you like online for free. Why should anyone be concerned about restrictions on intrusive advertisements like political TV commercials, direct mailing, or phone calls? If there were some way to have a do-not-call list for all unsolicited political commercials, most people would probably sign up.
Posted by: Brian Slesinsky at Nov 7, 2007 1:49:42 AM
Limited liability has to be worth something to the shareholders. In that context, it seems quite reasonable to effectively tax income derived from corporate earnings at a higher rate than income derived from the earnings of a proprietorship.
Posted by: Cyrus at Nov 7, 2007 7:55:08 AM
Limited liability has to be worth something to the shareholders. In that context, it seems quite reasonable to effectively tax income derived from corporate earnings at a higher rate than income derived from the earnings of a proprietorship.
Posted by: Cyrus at Nov 7, 2007 7:55:32 AM
Limited liability has to be worth something to the shareholders. In that context, it seems quite reasonable to effectively tax income derived from corporate earnings at a higher rate than income derived from the earnings of a proprietorship.
Posted by: Cyrus at Nov 7, 2007 7:56:08 AM
I believe that Paul and Brian did not read the article or spend much time considering John Samples' arguments. He went into rather excruciating detail about the expectations of those drafting the legislation and the actual results. As far as Brian's question of "why anyone should be concerned" - that shows a lack of imagination on Brian's part and a failure to become even slightly acquainted with opposing views.
Posted by: Rich Berger at Nov 7, 2007 10:36:04 AM
On the contrary Rich, the extract Tyler linked to contained only a dog whistle version of the "campaign finance reforms is incumbent protection reform" argument. You could see it was there in the background, but he certainly didn't go to the effort to actually make it.
Representative sample:
"We have reason to doubt that senators truly believed that the law addressed corruption: “Both Democratic and Republican members rejected any suggestion that the bill was required to address actually corrupt conduct, because they agreed that they were not responsible for any"
If you're nodding along vigorously to arguments of that quality then it's because you already agree with the case you think he's going to make. That's fine, but it doesn't warrant a link to a lengthy piece hinting that, were you to read his book, your prejudices would likely be reaffirmed.
You have to go a lot further than "campaign finance reform must be in the interests of a majority of sitting politicians" before on-balance rejecting it - it may solve a collective action problem for instance, or the alleged loss to democratic pluralism (certainly a key feature of modern US politics)may be outweighed by resource savings or reductions in inefficient subsidies.
The appropriately named Mr Samples doesn't get around to make that, or any, case, which is why I felt he (and, unusually, Tyler) wasted my time.
Posted by: Paul at Nov 7, 2007 5:32:48 PM
Tyler Cowen suggests that the extremely high salaries paid by private equity to executuves of their portfolio companies is proof that executives of public companies are not overpaid. however, private equity salaries are themselves a function of public company salaries, that is in order lure executives from public companies private equity is forced to overpay them even more than public companies.
Posted by: christopher Murphy at Nov 8, 2007 10:41:55 PM
If you think it is exploitation of shareholders, take a look at how much private equity pays its CEOs.
Where is this data available?
I am curious not only as to aggregate compensation but also as to the nature of incentives, the tenure and severance arrangements for unsuccessful PE CEO's, and the degree of monitoring their performance gets from those who set their pay. Would a PE CEO who performed like Nardelli or O'Neal walk away with the kind of money those guys got?
Once all that is known, and a real comparison made, we can consider Christopher Murphy's point, and related ones.
Posted by: Bernard Yomtov at Nov 9, 2007 8:08:17 AM
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