The social consequences that are considered defects of capitalism – growing inequality and corporate power – are in fact primarily the result of governments. As governments and their peoples became addicted to long periods of low interest rates, socialized risk, and the resulting misallocation of capital, governments became overly interventionist and overconfident. Due to the “paternalistic fear” of governments, a “bailout culture” grew. “A safety net was once placed under financial markets to catch the poor on the brink of starvation.” This was the result of the vows made by Alan Greenspan, an Ayn Rand-loving reader who was appointed Chairman of the Federal Reserve by Ronald Reagan.
So argues investor and Rockefeller International chairman Ruchir Sharma in his provocative book, “What Went Wrong with Capitalism?”. Government risk aversion and increasing provision of pleasure have made the country “the biggest deficit spender in the capitalist world.”
According to Sharma, the tax cuts enacted after President John F. Kennedy's assassination were an American first: a tax stimulus to stimulate an ongoing economic expansion. President Lyndon B. Johnson's innovation was a spending stimulus to accelerate an ongoing economic expansion. In 2017, President Trump “pushed the practice of continuous stimulus to new extremes by cutting taxes later in the recovery than any previous president,” and drove the budget deficit to a peacetime record.
Because of fiscal follies during the pandemic, namely “forgivable loans” (previously called grants), floods of cash (recipients including most Americans, many of whom are gainfully employed, have seen a $3.5 trillion increase in bank deposits), the government has issued more debt in 12 months than it did in the first two centuries since 1776.
Previously, the “cleansing effect” of a major recession would have weeded out weaker companies, leading to a 20% increase in bankruptcies. But the bailout culture has led to a rise in corporate bankruptcies during the pandemic. rejectionDid you know Biden bailed out the National Union Retirement System with $36 billion in 2022? On the indiscriminate “impulse to bail out,” Sharma says: “It’s a big deal.
“By the summer of 2020, the Fed was holding bonds issued by virtually every major company in every industry, even utilities owned by Berkshire Hathaway. In effect, the government was providing Warren Buffett with a one-sided financial bailout.”
In 1987, after the Black Monday stock market crash that sent ripples through the economic expansion, Greenspan declared that the Fed was “ready to serve as a source of liquidity to support the economy and the financial system.” allUsing central banks to stimulate Economic expansion Sharma says this was the first step towards the government operating in “permanent crisis mode”, prolonging the “low interest rates” era that politicians had enjoyed for nearly four decades.
Since Greenspan made that promise in 1987, “the stock market has grown from half the size of the U.S. economy to twice as large,” Mr. Sharma said, disproportionately benefiting the wealthy. But economic stability can mask a loss of vitality: The economy was in recession half the time in the late 19th century, but only one in five from 1945 to 1980 and just one in 10 since then.
But Sharma argues that debt accumulation slows business cycles. In a bailout culture, slower growth is stimulate Financial markets are anticipating a new influx of government funds that will particularly benefit the wealthy.
Sharma writes that between the 1790s and 1970, the nation “consistently ran surpluses, with only five major deficits during crises: the War of 1812, the Civil War, the Great Depression, and two world wars.” Since 1970, the nation has had large deficits in every year except four.
Conservatives' belief that tax cuts can be paid for by the pocket is similar to progressives' belief that their “investments” can be paid for by the pocket. The end result is the same: debt.
Greenspan's successor, Ben S. Bernanke, said the Fed's bond purchases were designed to lower interest rates and boost asset prices, creating a “wealth effect” — that is, as Americans felt wealthier, they would spend more. This was demand creation, not demand management, government planning, not capitalism, which distributes wealth through market forces.
Socializing risk benefits the wealthy most, but it also benefits everyone else. Total U.S. social spending, including health and pension benefits provided by private employers but mandated or subsidized by the government, accounts for about 30% of gross domestic product, giving the U.S. the second-most generous welfare state in the world after France. But what Sharma calls a “corporate culture of debt” means that everyone ends up losing.
