Capitalisn’t: Warrenomics

Kate: Hi, I’m Kate Waldock from Georgetown University.

Luigi: And I’m Luigi Zingales at the University of Chicago.

Kate: You’re listening to Capitalisn’t, a podcast about what’s working in capitalism today.

Luigi: And most importantly, what isn’t.

We just entered 2019, which promises to be the Democratic primaries year. Probably Trump will not receive a challenge—if he does, it will be interesting—but there are plenty of people willing to run for the Democratic primaries. What we’re interested in trying to figure out is whether any of those candidates have a response to the questions that we raise in this podcast.

Speaker 3: Breaking news, the highest-profile Democrat yet officially wading into presidential waters. In just the last half-hour, Senator Elizabeth Warren announced the launch of a 2020 presidential exploratory committee.

Luigi: So, in this spirit we’re going to start discussing the economic platform of Elizabeth Warren. Elizabeth Warren is a good example, not only because she’s the first one to start campaigning, but also because she’s written a lot and made a lot of proposals trying to deal with what she thinks is wrong with capitalism.

Kate: Don’t worry, we’re not going to do this on every single episode, so it’s not like the next 20 episodes are going to be us going through the Democratic slate. But we do think that Elizabeth Warren has an established record of her economic position. It’s not getting enough attention, and she is one of the big contenders.

Luigi: I think we should start by making a distinction between her and Bernie Sanders. Bernie Sanders has not declared that he will run, but I think that there is a profound difference in the approaches of the two candidates, even if some of the solutions might be similar and they’re often clumped together.

Kate: Well, I will say that I think one of the reasons they’re clumped together is because their overarching message is similar. I think their overarching similar message is that, A, they think inequality is a huge problem, so they really don’t like billionaires. And, B, they think that the stagnation of wages, particularly middle- and lower-class wages, is a huge problem. So, you’ll see them talking a lot about how big corporations are doing too well and they have too many advantages, whereas the little guys and the smaller companies have disadvantages. So, in that sense, I think very broadly they’re similar.

Luigi: Yes, but maybe, Kate, I’m old-fashioned, but I still give importance to words. Bernie Sanders calls himself, and probably is, a socialist, while Elizabeth Warren goes out of the way to say that she is a capitalist to her bones, that she loves competition. She is not a socialist at all.

Kate: I think that Bernie Sanders uses the term socialism as a rhetorical tool. I think the reason he throws it out there is because he thinks that too many people on the left are in the center-left and there needs to be some pull over further left. And so, by taking an extreme left position, he’s kind of putting himself further in the distribution, therefore making the average move over. Maybe I’m using too many statistical terms here, but I think that he himself would acknowledge that he doesn’t actually, truly believe in socialism in the central planning sense that most real socialists would. I just think that he’s way further left than many center-left candidates.

Luigi: Again, maybe it’s because I attribute too much importance to words, but Bernie Sanders comes from a socialist background. Elizabeth Warren, when she was younger, she was a Republican, and then she was confronted with some of the distortions in the marketplace and, particularly, how low-income people get screwed in the process, and she decided to do something about it. So, I think that this different history is quite important in understanding how different their approaches are to problems.

Kate: OK. So, let’s talk about Elizabeth Warren’s economic platform.

Luigi: Number one, there is one proposal that I have to say I love, and that is the Anti-Corruption and Public Integrity Act. I think it is a very elaborate proposal that she made in the Senate to overrule the current system of revolving doors in a way that is quite aggressive, but I think very much needed. The proposal goes from banning lobbying by former members of Congress for a lifetime to restricting lobbying by other federal employees for at least two years, but most likely six years, to a tax on lobbying above half a million dollars that is designed to finance a better staff for members of Congress.

I think that one of the justifications for lobbying is that members of Congress need to be informed, and lobbying provides information, and she said, why don’t we pay more people to collect information directly? I think that’s a pretty great idea. But I want to point out—and maybe this is because I’m an academic—but I want to point out an aspect of her proposal that is not very often discussed, but I think is fantastic, that requires disclosure of research, particularly research submitted to agencies. Many, many times you have lobbyists who buy research, even by famous people, and then they submit it to agencies as independent research. But the people that submit it don’t disclose where the money comes from, and it is not peer-reviewed.

Kate: Yeah, I think that’s a good point. I think I remember looking through one of Trump’s early economic plans, and, to be fair, I think this issue got a little bit better. But early on, if you looked through his citations . . . it was all research that was published by private companies or published in journals that economists have never heard of.

Luigi: Yeah, I don’t want to be too snobbish. I’m not saying that only stuff that comes from peer-reviewed journals or prestigious institutions is valid. I value ideas on the basis of the ideas themselves. However, when you come with empirical evidence, I think that the peer-review process is definitely a very good way to do that. I don’t expect it to be passed anytime soon, but I think it is not presented just as a flag. I think Elizabeth Warren believes that this is an important thing to do and is a first step in that direction.

Kate: The people that would have to pass it would be the ones who were directly harmed by it. So, it’s for that reason that it probably will never be signed into law.

Luigi: Yeah. It’s not easy to make turkeys vote for Thanksgiving, and so it’s not easy to have Congressmen vote for the fact that they will never get a job in the industry in the future. To be honest, I think there is a legitimate concern about the quality of the people in public administration. Whether we like it or not, having a job afterward is part of the career path of many politicians, and it is the only legal way that career politicians can make some money.

So, I like the fact that she is also considering, at least in part, not for the top politicians but for the staffers, ways to increase their salaries, because otherwise, the quality of the people involved will drop tremendously. There is a huge amount of uncertainty in political life, and if you don’t have any job afterward, only the desperate will take it, and that’s not the kind of political system we want.

So, Kate, do you want to talk about the Accountable Capitalism Act that is probably the boldest proposal that Elizabeth Warren made, and the one that has generated a lot of debate?

Kate: Sure. The Accountable Capitalism Act is a bill proposed by Elizabeth Warren that concerns corporations, the corporate decision-making process, as well as corporate boards of directors. There are several parts of this bill, but the main two parts have to do with how corporations make decisions. So, what are they maximizing? And, also, this idea that workers should be able to elect at least 40 percent of the board of directors.

In the Accountable Capitalism Act, the idea is that corporate decision makers, the CEOs, shouldn’t just be maximizing shareholder value, they should also be maximizing stakeholder value, where other stakeholders include employees, members of the community where that firm is operating, as well as customers. In order to make sure that corporations are maximizing stakeholder value rather than shareholder value, Warren proposes that, because companies need charters in order to operate, that large companies should have to get this federal charter that forces them to include the interests of these stakeholders. And if they don’t do that in their decision-making processes, then they can have that federal charter revoked.

The second part is a little bit more straightforward. Just this idea that the board of directors that typically oversees the CEO, the people who sit on it, at least 40 percent of them should be elected directly by the employees of the company.

I guess it’s worth mentioning that there’s another section that concerns political expenditures as well as political donations, and the idea behind this section is that if any corporation wants to make a political expenditure, it has to get at least 75 percent approval by all of its directors as well as all of its shareholders.

Luigi: I think it’s important for our listeners to understand that she proposes that all this should start when a company is above a certain size. I think, if I remember correctly, it is a billion in sales. So, if you are mom and pop and you open your little corporation to run your plumbing business, it’s not affecting you.

Now, this is a pretty strong intervention, because it is also sanctioned by another part of the legislation that says that the federal government can revoke this charter if the company is engaged in repeated and egregious illegal conduct. I don’t know how the two reconcile, but if illegal conduct is not to act in the interest of everybody, then this amounts to a death sentence in the hands of the US federal government, and that’s pretty strong stuff.

Kate: I agree. I also think that it’s easy to say, OK, all stakeholders should be considered when corporate decisions are being made, but if you actually want to maximize the welfare of all stakeholders, that’s an almost impossible decision to make. If you think about maximizing firm value, to say that that’s the same thing as maximizing stakeholder value, I don’t think that that’s true. Maximizing firm value is maximizing the value of your debt and maximizing the value of your equity. To the extent that bondholders and lenders can’t be exploited, it’s basically the same thing as maximizing shareholder value. And, of course, companies have to operate within certain constraints, and so they have to meet the law, and they have to make sure that they’re not polluting in any illegal way. And I think that there are a lot of laws and regulations that prevent negative externalities that companies impose on society.

But then to go the additional step and say, these companies need to be maximizing stakeholder value, which includes community and customer concerns, I do think that that really complicates their decision-making process.

Luigi: Wait, Kate, you have probably been a little bit too fast for most of our listeners, because what you said is correct, but you’re sneaking in a bunch of assumptions along the way that I think are useful—

Kate: Oh, yeah, like you never do that, Luigi.

Luigi: No, I never do that . . . are useful to unpack for our listeners. So, I think it is true that if all the markets for patrons of the firms—and patrons can be debtholders, can be customers, can be employees—if all these markets are perfectly competitive, then maximizing a firm’s value or maximizing shareholder value is the same thing as maximizing the welfare of all these parts together.

However, when some of these markets are not competitive, or when there are a lot of firm-specific investments, like if the workers have made some sacrifice in the past in order to work for this firm, then the story might be different. Then we have a situation in which you can maximize one at the expense of the others. I think that where Elizabeth Warren comes from is, she’s concerned that there is not enough competition in this market, and I disagree that the right threshold is a billion dollars, because you can be a billion-dollar firm with a lot of competition in all these markets, but I do envision situations in which you don’t have that competition, and then you do have to worry.

Kate: I agree that Elizabeth Warren is concerned about not just labor, but also the environment and climate change here, but I think it’s worth pointing out that she’s also in favor of a bill called the Climate Risk Disclosure Act, in which public companies would have to say exactly how they’re affecting the environment. To the extent that we would believe that that was true, that they were being completely honest about everything that they were doing to affect the environment and climate change, then to have the environment and just people living in the world be part of a CEO’s decision-making process, that, to me, it’s a little bit redundant with the other act, the Disclosure Act, and it adds a lot to the complexity of the decision-making process. It also opens up room, as you mentioned earlier, for the government to just attack any company that they think is not complying with the act in any way.

Let’s talk about the part of the proposed act that concerns labor relations directly. So, having 40 percent of the board, at least, be elected directly by workers at the company. What do you think about that?

Luigi: First of all, for our listeners, this is not such a new idea as the previous one, because this is what has taken place in Germany since World War II for the largest corporations. In fact, in Germany, they elect 50 percent of the directors, with the only caveat that in case of a 50-50 vote, the chairman’s vote counts for two votes, and the chairman is appointed by the shareholders. So, both systems leave the majority to the shareholders, but they give representation to workers. It’s called codetermination.

The evidence in Germany is that it was neither such a sort of fix for the problems nor a disaster like their enemies seemed to represent. I don’t think that really changed a lot, and now we know that industrial relations in Germany are, if you want, less conflicted than in the United States. I don’t know whether this is due to codetermination or due to the fact that the story in Germany is different. What I want to point out is, there’s a big difference between Germany and the United States. In Germany, people tend to have one job for life. The mobility in the labor market is fairly limited, and if you enter and work for Mercedes early on in your life, you stay there for most of your life. So, as such, having representation on a company board makes more sense. When you have a labor force that changes super-fast, that representation makes less sense.

Kate: Yeah, I think codetermination deserves an episode of its own, right? We could go through the literature that’s been relatively mixed on the success of codetermination. But I think it’s an important topic, and I think, if you’re interested as listeners, let us know, and maybe we can do another episode on that in particular.

Another thing I would add to what Luigi said about the differences between labor unions and labor representation between Germany and the US is that, who pays for the unions or who pays for the representation? In Germany, the laws are such that, if you have these committees set up within the corporation to help represent you on the board, then all the offices and everything those councils need in order to function are paid for by the company. Whereas in the US, if you’re part of a labor union, then, in a number of states, that labor union has the right to take a fraction of your wages as union dues. I think that that’s a huge part of why there are differences between the German system and the US system. A lot of US workers would support more representation, but they don’t like the idea of having to be forced to sacrifice part of their income to a labor union.

On top of that, in some regions and in certain occupations, there’s only one type of labor union that you can join. For example, when I was a grad student, I was part of GSOC-UAW, where the UAW part stands for United Auto Workers. Why am I, as a finance PhD student, part of a union with a bunch of autoworkers? I don’t know what their objective is. I don’t know if they have my best interests at heart. Whereas if I knew that . . . there was just a council within my own organization that was being paid for by the organization, I would maybe feel a little bit more comfortable with that. So, I think that there are huge changes that need to take place within the United States to help reform labor rights in general, but I still agree with the spirit of this suggestion.

Luigi: Kate, I never thought of you as an auto workers’ union member. That’s a new side of your personality that I’m discovering. But the more important point, and I know, we probably need to postpone it to the next episode, but in a world of multinationals, worker representation creates a huge problem. You’re going to represent all the workers? So, you are going to have some workers from the Philippines, some workers from Cambodia, some workers from the United States, and in many of the US corporations, probably there are more workers not from the United States than from the United States. So, they should have the majority on the board.

Kate: Yeah, that’s an interesting point that I honestly hadn’t thought about. If you have different types of employees, like if you’re talking about Google, if you have high-tech employees, as well as janitors, is there a different weighting in terms of who gets more power, or is it just the raw number of people who work in each position? I think that those are all difficult issues to grapple with.

Luigi: When you bring up Google and the power that employees of Google have in shaping the corporate policies of Google, this proves the point that you don’t need to have votes to have power. Talented employees that are in short supply have a huge amount of power and can shape the direction of Google. So, in a sense—and this is what the finance literature suggests—the reason that shareholders have votes is not because they are the most powerful. In fact, they have the votes because they are the least powerful. Once they put their capital into the firm, they have no say, and they can be easily expropriated by all the other constituencies. That’s the reason why their interests need to be protected by votes. The bondholders can withdraw their money by not renewing the bonds, the workers can withdraw their labor by leaving the firm, the customers can stop buying. Maybe the only ones who don’t have a lot of power are the community at large, but we know that the local mayor does have some influence on the way companies are run. So, I think that there is a pretty strong argument to give a primacy to the shareholders in most cases.

Kate: The last thing I want to say about the Accountable Capitalism Act is that I assigned an extra-credit assignment in the class that I taught last semester, where I had all of my undergraduate students write an essay on whether or not they agreed with the Accountable Capitalism Act. I was shocked. I mean, OK, so to be fair, these are all business-school students, and so, they were learning from me about maximizing profits and things like that. But I was pretty shocked to find that 60 percent of them, roughly, did not agree with her proposal. On top of that, the ones who did agree, I think they were very thoughtful, and they said, “OK, this part I think is better than that part, but on the whole, I think that I agree with her spirit.” But the ones who were against the act were vehemently against the act. They were like, “Oh, it’s a no-brainer that we shouldn’t pass something like this. This is going to sink the country into communism.” I thought that it was interesting that the rhetoric of the people who are on either side was different.

Luigi: It is interesting, because she received a lot of criticism from the right on this proposal, and many people have talked about socialism or transforming American capitalism into socialism, because you bring some workers on the board.

Given the experience of Germany, I doubt that’s the case. But it is a little bit funny, and I picked up on an article that Richard Epstein wrote about this. He said, if you want to apply this in general, why don’t you have the dean of the business school also appointed by the janitors? That’s part of the process. What about the unions being represented also by consumers? Where do you stop this representation of our constituencies? Why, as a consumer, can I not be represented in the union that decides whether they strike, making it impossible for me to travel by train or by plane?

Kate: The third major part of Elizabeth Warren’s platform that we want to talk about is affordable housing. In particular, she has called for almost half a trillion dollars of investment to be set aside over the course of the next 10 years to go towards affordable housing for the lowest-income members of society.

Luigi: But what is interesting is how the bill is designed, because, first of all, it works on two margins. One, it has some incentives to get rid of local zoning laws that restrict the supply of houses in many neighborhoods. This is very much something that even the right side of the political spectrum will agree with, and it is fighting the so-called NIMBY, not in my backyard, that is a major cause of the increase in house prices.

In that part it shows, in my view, the capitalist side of Elizabeth Warren that is trying to work through market forces, but then the other side is that she thinks it is also important to build more houses, and she proposes half a trillion dollars over 10 years in building new houses. You wonder, where does she get the money? Actually, she is planning to get the money by increasing the federal estate tax. There was even an independent paper showing that this will be a balanced budget proposal, which means that richer people will be taxed to the point of half a trillion in 10 years.

Kate: Yeah, she says explicitly that these tax changes would only affect about 10,000 families.

Luigi: It must be that those people are really squeezed a lot, because raising half a trillion out of 10,000 people, that’s a challenge.

Kate: Yeah, absolutely.

Luigi: But one piece that I admire is that she seems to have focused on what are, in my view, the biggest problems of our time. One is the fact that wages don’t rise enough. The second is that there are problems with the cost of housing that economists have shown can have a major impact on the ability of the country to grow, and the third one is political corruption.

So, those three pieces, again, I’m not necessarily buying all the parts of all these proposals, but the fact that she has identified what I think are the right problems, and she has some interesting proposals on those problems, I think speaks very highly.

Kate: I think that something else that Elizabeth Warren should be credited for, and also part of the reason that big business doesn’t like her, is the CFPB, the Consumer Financial Protection Bureau, which was really her brainchild. I think she proposed the idea behind the bureau in 2007.

This is an agency that has gone after scams, basically. It’s gone after companies that cheated victims of 9/11 out of the money they were owed. They’ve gone after exploitative payday lending. They’ve gone after retirement scams or scams that were created just to ensnare old people. They’ve also tried to put limits on debt-to-income ratios, in essence limiting exploitation in the housing market, which is part of what contributed to the financial crisis. But, unfortunately, the CFPB has since lost a lot of its powers.

I have maybe one additional criticism. Maybe you can consider this minor, just by virtue of the fact that it has to do with my background as a bankruptcy researcher, but amongst bankruptcy academics, some of her findings have stirred up a lot of controversy, particularly some of her research related to personal bankruptcy and what causes personal bankruptcy. She’s argued that somewhere in the realm of 50 percent to 60 percent of personal bankruptcies are due to injury and health-related causes. And this has been hotly contested within the bankruptcy community. Some have even made allegations that these findings were politically motivated. In any case, at the end of the day, I prefer her as a politician than I do as an academic.

Luigi: The point here is not whether you like her or not. The point is that she has interesting proposals that speak to the current problems in capitalism. They might not be the silver bullet, and certainly we have identified a lot of her shortcomings, but they are serious proposals for real problems, and in the spirit of not trying to overrule capitalism, but trying to make it work better.

Kate: As we mentioned earlier on, though, this episode was motivated by the many similarities between Elizabeth Warren’s economic platform and the issues that we try to grapple with on this podcast. As 2019 progresses and more candidates announce—and by the way, this could include right-wing candidates as well—we want to keep the conversation going.

So, if there are any presidential candidates whose economic platforms you think deserve serious consideration on this show, let us know.