Katherine S. Newman is the Torrey Little Professor of Sociology and Interim Chancellor of the University of Massachusetts, Boston, and the author of “Downhill From Here: Retirement Insecurity in the Age of Inequality,” to be published in January.
The stock market has hit a record high, soaring past 26,000. Unemployment has fallen below 4 percent, to a 50-year low. All in all, an odd time to ask “Can American Capitalism Survive?”
But that is the central question posed by author Steven Pearlstein, a distinguished economics journalist, winner of the Pulitzer Prize and thoughtful critic of our times. His answer? “Yes, but . . .” or maybe “Only if . . .” followed by a blistering critique of the excessive pay of corporate executives. With their average compensation now hundreds of times that of ordinary workers, a reward for boosting short-term profits that redound to shareholders at the expense of productivity (or even the survival of some firms), the book argues that we are reaching the edge of an economic abyss.
Pearlstein’s chief complaint is not the workings of capitalism per se but the excesses of inequality that characterize the particular form it has taken in the United States. Indeed, the core question of his book is just how much inequality capitalism can really accommodate without bursting at the seams. The speed with which the truly rich have been pulling away from the rest of the country has been accelerating since roughly the mid-1970s, when an oil embargo shoved the world into a deep recession. That unfortunate moment ended a prolonged period of shared prosperity that had persisted since the end of World War II.
In its place, the United States saw rising rates of income inequality. This disparity was driven not so much by the hidden hand of the market but, as Paul Pierson and Jacob Hacker showed in “Winner-Take-All Politics,” by overt policies that favored the top 1 percent, who benefited from a variety of engineered policy changes, from sharply tilted tax reforms to government-sanctioned “shareholder capitalism” to constraints on union organizing and a frozen minimum wage. Pearlstein ties galloping inequality to this form of capitalism, in which executive compensation is linked to stock performance. Corporate captains, fearful of hostile takeovers, have been incentivized to cut workers’ wages by busting unions, and by migrating assembly lines to low-wage regions of the country and then to Mexico or China. Unholy increases in their own pay and stock portfolios have followed.
Several seemingly unrelated forms of inequality reinforced the increasing “stickiness” of social immobility. For instance, where or to whom a young man or woman was born began to dictate more and more sharply where he or she ended up. Pearlstein relies on the work of economists such as Princeton’s Alan Krueger, whose “Great Gatsby Curve” shows that those born poor are increasingly likely to be stuck at the bottom of the class structure and that those born rich remain in their elevated perches. For extra measure, Pearlstein calls upon the research of Harvard economist Raj Chetty and his Brown University colleague, John Friedman, to show that some very important institutions, including low-cost public universities, have made enormous strides in promoting intergenerational mobility. However, they are increasingly starved of resources and hence less accessible to younger generations hoping to match or exceed their parents’ income. Overall the message is that these different layers of social experience — from the highest reaches of the corporate landscape to the ordinary lives and educational pathways of American families — are shaped by an American capitalism that has completely forgotten how to dampen the impact of inequality. Instead, it is working overtime to amplify those gaps.
Why is this unsustainable? That is not entirely clear. At the end of this road are societies like Brazil or South Africa, where the wealthy barricade themselves behind walls topped with jagged glass to thwart home invasions or travel with security guards to ward off carjackings. The social costs of economic polarization will become, or perhaps have already become, intolerable. But the signs of that intolerance are not yet at the apex stage. True, teachers strikes have emerged in the reddest of red states, while unexpected progressive victories emerged in the Massachusetts and Florida Democratic primaries. For those looking for an opening to thwart Trumpian extremism, there has been some good news.
But powerful signs of popular revolt do not appear very often. Instead, we encounter extremist efforts to retract health insurance from people who are struggling, the denial of government support for the poor, continued agitation to build a wall and deport legal immigrants, and the list goes on. As Sen. Elizabeth Warren has noted frequently, the titans of capitalism who brought us the Great Recession have not been punished for that financial debacle. Taxpayer bailouts rescued them; the country declined to rescue the thousands of home owners whose equity vanished. The outrage is more muted than we might expect if capitalism were really on the brink.
Pearlstein argues that the right response to galloping inequality is a resurrection of political guardrails against monied interests and a return to robust forms of income redistribution. Under the heading “A Better Capitalism,” he argues that we must overturn Citizens United through a constitutional amendment, develop a universal basic-income policy, force firms to share their profits with employees by insisting that performance-based compensation for executives be balanced with profit-sharing schemes for workers, equalize educational opportunity, increase competition in industry through more vigorous enforcement of anti-trust law and, above all, reduce the role of shareholder value in corporate governance. These policies would, Pearlstein believes, create a new political vocabulary, one conducive to a kinder and more sustainable capitalism.
As a diagnosis of the ills of “late capitalism,” this book delivers a trenchant critique of the ravages of inequality and a passionate cry for greater balance. It is not clear to me that capitalism will fail to survive these excesses. For those at the top, this form of capitalism is just fine, and those at the bottom have so little power to right the wrongs Pearlstein chronicles that his solutions seem appealing but far from imminent. Nonetheless, we need this voice to remind us of what is at stake when seemingly anodyne legislation governing tax, pensions, and even where polls are located and how long they remain open is debated. Inside antiseptic language lie the mechanics of the inequalities Pearlstein has brought to our attention in this powerful, idealistic book.
By Steven Pearlstein
St. Martin’s. 244 pp. $27.99