A Corporate Welfare Economy

James Angresano

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317277590
• Edition: 1
• Topic: Business
• Subtopic: Government & Business
• Index: Business

Although political rhetoric and public perception continue to assume that the United States is the very definition of a free market economy, a different system entirely has in actuality come to prominence over the past half century.

This Corporate Welfare Economy (CWE) has come about as government come increasingly under the influence of corporate interests and lobbyists, with supposedly equalising factors such as regulation skewed in order to suit the interests of the privileged while an overwhelming majority of US citizens have experienced a decline in their standard of living.

James Angresano examines the characteristics of this mode of capitalism, both from the theoretical point of view but also with key reference to the different sectors of the economy – trade, manufacturing, industry and defense among them.

1 The Corporate Welfare Economy

DOI: 10.4324/9781315640631-2

Today, wealthy individuals and well-organized business and financial groups exercise their power by means of costly public relations, advertising, and lobbying activities. By “investing” in the promotion of their interests … [they] have largely captured the major political parties in most democratic countries as well as the news media that communicate political events and debates to the public.

(Van den Berg, 2014)

Introduction

The term “free market economy” (FME) is often used to describe the US economy by the typical news media, particularly if a corporate executive, consultant or orthodox economist is being interviewed. This constant repetition has led most Americans to believe that an FME exists and that the major threat to the continuation of such an economy is government intervention. This chapter begins by briefly explaining the main characteristics of an FME. Thereafter it will be argued that in reality the US economy has evolved into something quite different – a corporate welfare economy (CWE) – the characteristics of which then will be explained.

The Free Market Economy

The philosophy that became the basis for an FME was conceived in the United Kingdom during the late eighteenth century. Adam Smith and other political economy philosophers forcefully advocated an economy that would substantially increase personal economic freedoms, remove regulations of trade, markets, and prices, while maintaining social and economic order through the interaction of unregulated demand and supply forces within markets. This new philosophy was a reaction to the existing economy controlled by a small elite class who established that closely regulated commercial activity. These rules, and maintenance of traditional land tenure rights, contributed to the low standards of living and little opportunity for upward social mobility being experienced by an overwhelming majority of the eighteenth century British population. In the proposed FME the specific functions of the government would be reduced to three: protecting private property rights, maintaining a system of justice, and building and maintaining those public works and institutions private investors would not be interested in either building or maintaining. It was expected that government spending would be a small percentage of total spending.¹ Proponents of the FME believed that as they envisaged an FME it would promote economic growth and job creation sufficient to achieve full employment, and that subsequently rising wage rates eventually would greatly reduce poverty rates.

This economic philosophy, like that of all other social philosophies posited, is based upon certain assumptions and theories made up by its original proponents. The assumptions infuse the functions economic agents were expected to perform, those agents’ behavioral traits, the interplay of morals and economic behavior, and contributions that the anticipated economic activity would make to economic growth and poverty reduction (Davidson, 2012). A basic assumption of Smith was his firm belief that “no society can be happy, of which the far greater number of the members are poor and miserable” (Jensen, 1976, p. 261). Smith’s ultimate goal was to alleviate the prevailing poverty of his day. He believed entrepreneurs to be the primary economic actors whose profit making and reinvestment activities would boost economic growth, job creation, and wage rates which would result in the realization of that goal. Thus entrepreneurs were assumed to be the fundamental agents responsible for promoting growth and prosperity in the FME. These agents, it was assumed, would own private business firms, pursue the potentially profitable opportunities they recognized by organizing systems of production and distribution in the most efficient manner, and continually reinvest in new innovations from profits their firms earned as they sought more profits – creating employment opportunities and rising wages in the process.

A fundamental assumption was that a high percentage of those profits would be reinvested. One basis for this assumption was the further assumption that entrepreneurs, in their pursuit of riches, had a “natural” motive to save and invest, for the purpose of accumulating physical capital that would serve the purpose of generating more profits. It was further assumed that entrepreneurs believed that their pursuit of riches would bring them happiness. However, Smith argued that the “instinct” to pursue riches so as to satisfy the entrepreneurs’ desire for satisfaction was deceptive, since the increasing appetite of the entrepreneur to achieve riches was, he believed, insatiable. Consequently, it was assumed entrepreneurs would continue to reinvest their profits in the pursuit of even greater riches. It was believed that entrepreneurs also were stimulated to reinvest their profits – and thereby initiate a process of economic growth, job creation, and higher wage rates for their laborers – because they would derive some pleasure from the improved well-being of the poor. All of the assumptions considered, Smith and most of the other nineteenth century Classical political economy philosophers believed that in an FME unregulated market mechanisms would cause the entrepreneurs’ pursuit of self-interest to serve simultaneously as an “unconscious but effective servant of the economic welfare of the entire society” (Taylor, 1960, p. 2).

The philosophers also made assumptions about the moral underpinning of entrepreneurs’ behavior. They assumed that as good Calvinists who adhered to the Protestant Ethic, entrepreneurs were morally bound to reinvest their profits to generate more means of production. This assumption followed from Smith’s belief that people would make moral decisions in a free society that would have “favorable consequences for social order and harmony and thus for universal human welfare and happiness” (Taylor, 1960, p. 48). Therefore Classical economic philosophers assumed that entrepreneurs would use their faculties and power of reason to behave in “morally reasonable” ways in the pursuit of their “natural” desires, that is to always act “in the way that would fit in as appropriate parts of an orderly system of ‘natural’ social processes, on the whole conducive to the highest attainable collective welfare of all mankind” (Taylor, 1960, p. 48).

These assumptions were manifested in the actions of the quintessential American entrepreneur, Andrew Carnegie. He believed that the accumulation of wealth by the few can lead to a “reign of harmony and reconciliation of the rich and the poor as long as the wealthy use their riches as a matter of duty in the ways best calculated to produce the most beneficial results of the community” (Fusfeld, 2002, p. 81). In his own words, Carnegie argued that “[t]he laws of accumulation will be left free; the laws of distribution free. Individualism will continue, but the millionaire will be but a trustee for the poor; entrusted for a season with a great part of the increased wealth of the community, but administering it for the community far better than it could or would have done for itself” (Fusfeld, 2002, p. 81). Carnegie’s point was that administering the wealth they had accumulated required successful entrepreneurs to engage in civic patrimony through reinvestment of that wealth back into local communities or the national economy. Carnegie himself lived by this principle.² When he sold the Carnegie Company (that later became U.S. Steel) in 1900 for $480 million, his personal share of the proceeds was $300 million. For the remaining 19 years of his life, however, “[h]e never saw them [these funds], and he never touched them; he gave them away. In giving them away he found peace” (Livesay, 1975, p. 188). The $300 million Carnegie chose to give society included the purchase or establishment of 3000 libraries and 4100 church organs. In addition, he established institutions such as the Carnegie Trust for the Universities of Scotland, Carnegie Hall in New York, Carnegie Institutes in Pittsburgh and Washington DC, the Carnegie School of Technology, the Carnegie Foundation, and the Peace Palace at The Hague in the Netherlands (Livesay, 1975, p. 188).

Faith that entrepreneurs would spearhead progress in an FME has been reiterated throughout the twentieth century. Perhaps the best argument was put forth by economic historian and philosopher Joseph Schumpeter. He argued that the FME was superior to other types of economies because it would benefit the lower income members of the society more than wealthier members in terms of the relative shares of national income each group would receive. He defended this belief by noting that between 1870 and the late 1920s in the United States “measured in real terms, relative shares have substantially changed in favor of the lower income groups” (Schumpeter, 1962, p. 67). An essential assumption of Schumpeter’s was that successful entrepreneurs would choose to reinvest a large portion of the profits they earned. Some of these investments would initiate a “process of creative destruction” “that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one” (Schumpeter, 1962, p. 83). This process featured the introduction of new goods, services, and systems of production or distribution. This process would contribute favorably to the greater social good because “by virtue of its mechanism [it] progressively raises the standard of life of the masses” (Schumpeter, 1962, p 68). This was due to there being more goods and services produced that sold for lower and lower prices. Many of these goods were purchased by members of lower income groups whose wages had been increasing, thereby raising their standard of living.

Both orthodox and heterodox analysts of the post-1980 US economy continue to agree that entrepreneurship is a vital ingredient for stimulating economic growth and employment opportunities. They emphasize that investment initiated by entrepreneurs operating within an environment unhindered by government regulations drives economic growth and job creation that will boost wage levels, and that poverty reduction should occur in the process. Further, they agree that high rates of job creation, wage level increases, and poverty reduction each will be dependent upon the extent that profits entrepreneurs earned are devoted primarily to reinvestment rather than to their own personal consumption or to giving up their American passports to avoid being taxed on income they have deposited in foreign banks to avoid having to pay their share of US income taxes (Badal, 2010). It is estimated that US companies have stashed over $2 trillion overseas to avoid taxes – a stockpiling of profits that would have served most Americans better had they been reinvested in the United States (Rubin, 2015). Further, it is noteworthy that the rate at which these wealthy Americans willingly have relinquished their US citizenship has increased dramatically, rising from about 500 in 1998 to over 3400 in 2014 (Griffiths, 2014). This is triple the number of Americans who renounced their citizenship in 2010 and represents a manifestation of a declining sense of civic duty.

Despite agreeing about the crucial place of entrepreneurship in an economy, there is not agreement as to what type of economy exists in the United States today. Some ideologues and conservative economists cling to the myth that a form of an FME still exists. However, there is considerable evidence that such claims are myopic and misguided at best, and blatantly hypocritical at worst. Although widely publicized deregulation reforms were introduced after 1980 ostensibly to reestablish the United States as an FME, less well known is that a wide range of redistribution measures favorable to upper income earners and large corporations continue to be introduced that have more than offset the effects of deregulations that began to be introduced during the Reagan administration. The net effect of this dual process on the average American’s standard of living is not unlike the net effect ensuing from substantial increases in US beef production when concurrently pink slime was being added to chopped beef sold to American consumers.

The extent to which the US economy no longer resembles a free market economy has stimulated analysts to describe it in other terms. Nobel Prize winner Joseph Stiglitz, in reference to the 2008 bailout of the finance industry, used the term “ersatz capitalism.” He argued that government policies were an inferior and artificial substitute for traditional government economic policies because they guaranteed losses to those investors whose decisions were reckless and quite damaging to the goods and services, labor, and money markets (Stiglitz, 2009 B). Since this type of economy involves income transfers to specific wealthy individual and corporate interests, others have described it as “crony capitalism” epitomized by the close nexus between Wall Street investment banks and elected and appointed US government officials based in Washington DC (Chapter 3 explains the nexus in detail).

An insightful and powerful analysis of US government policies as they support the interests of a very small, wealthier percentage of Americans at the expense of poorer Americans and poorer citizens in other countries led author Naomi Klein to describe the US economy as an example of “corporatism.” Such an economy

erases the boundaries between Big Government and Big Business. … Its main characteristics are huge transfers of public wealth to private hands, often accompanied by exploding debt, an ever-widening chasm between the dazzling rich and the disposable poor and an aggressive nationalism that justifies bottomless spending on security. For those inside the bubble of extreme wealth created by such an arrangement, there can be no more profitable way to organize a society.

(Klein, 2007, p. 18)

A large portion of those outside the bubble have experienced declining living standards. This fact encouraged another observer to describe the US economy as an example of a “Banana Republic” (Johnson, 2009). Such a description formerly was reserved for Central American countries ruled by dictators that were permissive of American multinational corporations. One example concerns the United Fruit Corporation’s activities in Guatemala. With the Guatemalan government’s (and alleged CIA) complicity, the firm was instrumental in preventing land reform legislation from being introduced. Meanwhile, it was able to acquire ownership and control over large tracts of valuable land on which bananas were raised and “then operated plantations on its own terms, free of such annoyances as taxes or labor regulations” (Kinzer, 2006, p. 130). One outcome was more highly skewed distributions of income and wealth as well as an even higher incidence of poverty throughout that country – conditions not unlike those in the United States as of 2015.

Analysts Simon Johnson, James Kwak, and Edward Fulbrook have focused on how changes in the relative distribution of economic power in favor of a small percentage of Americans have affected the political structure, especially the election and appointment of agency officials throughout Washington DC.³ Johnson and Kwak’s emphasis is on the emergence of an economy dominated by an “oligarchy.” This oligarchy is spearheaded by top officials at major Wall Street investment banks that successfully have translated their vast economic power into substantial political power. According to these analysts, “[t]he Wall Street banks are the new American oligarchy – a group that gains political power because of its economic power, and then uses that political power for its own benefit” (Johnson and Kwak, 2011, p. 6).

Fulbrook describes the new political structure as a “plutonomy” characterized by (1) a less democratic election process in terms of the influential power held by wealthiest Americans, and (2) a creative range of methods introduced by elected officials that serve to effectively redistribute income and wealth in an upward direction (Fulbrook, 2012, p. 147). Not coincidentally, during the rise of this new type of economy and plutonomy the incomes of the upper 1% of Americans have increased phenomenally. For example, this group’s average real incomes (n...