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What Happened to the Moral Center of American Capitalism?

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This post originally ran on Robert Reich’s website.

                                                             I

An economy depends fundamentally on public morality; some shared
standards about what sorts of activities are impermissible because they so
fundamentally violate trust that they threaten to undermine the social fabric.

It is ironic that at a time the Republican presidential
candidates and state legislators are furiously focusing on private morality –
what people do in their bedrooms, contraception, abortion, gay marriage – we
are experiencing a far more significant crisis in public morality.

We’ve witnessed over the last two decades in the United States a steady decline in the willingness of people in leading positions in the
private sector – on Wall Street and in large corporations especially – to
maintain minimum standards of public morality. They seek the highest
profits and highest compensation for themselves regardless of social consequences.

CEOs of large corporations now earn 300 times the wages of
average workers. Wall Street moguls take home hundreds of millions, or more. Both
groups have rigged the economic game to their benefit while pushing downward the
wages of average working people.

By contrast, in the first three decades after World War II
– partly because America went through that terrible war and, before that, the Great Depression – there was a sense in the business community
and on Wall Street of some degree of accountability to the nation. 

It wasn’t talked about as social responsibility, because it was
assumed to be a bedrock of how people with great economic power should behave.

CEOs did not earn more than 40 times what the typical worker
earned. Profitable firms did not lay off large numbers of workers. Consumers, workers, and the community were all considered stakeholders of almost equal entitlement. The marginal income
tax on the highest income earners in the 1950s was 91%. Even the effective
rate, after all deductions and tax credits, was still well above 50%. 

Around about the late 1970s and early 1980s, all of this changed dramatically. The change began on Wall Street. Wall Street convinced the
Reagan administration, and subsequent administrations and congresses, to repeal
regulations that were put in place after the crash of 1929 – particularly
during the Roosevelt administration – to prevent a repeat of the excesses of
the 1920s.

As a result of that move towards deregulation, we saw a steady
decline in standards – a race to the bottom – on Wall Street and then
in executive suites. In the 1980s we had junk bond scandals combined with
insider trading. In the 1990s we had the beginnings of a speculative binge
culminating in the dotcom bubble. Sad to say, under the Clinton administration
the Glass-Steagall Act – that had been part of the banking act of 1933,
separating investment banking from commercial banking – was repealed.

In 2001 and 2002 we had Enron and the corporate looting
scandals. Not only did this reveal the dark side of executive behaviour among
some of the most admired companies in America – Enron had been listed among the
nation’s most respected companies before that time – but also the complicity of
Wall Street. Wall Street traders were actively involved in the Enron travesty.
And then, of course, we had all of the excesses leading up to the crash of
2008.

                                                            II

Where has the moral center of American capitalism disappeared?
Wall Street is back to its same old tricks. Greg Smith, a vice-president of
Goldman Sachs, has accused
the firm of putting profits before clients. Almost every other Wall Street firm
is doing precisely the same thing and they’ve been doing it for years.

The Dodd-Frank bill was an attempt to rein in Wall Street, but
Wall Street lobbyists have almost eviscerated that act and have been
mercilessly attacking the regulations issued. Republicans have not even
appropriated sufficient money to enforce the shards of the act that remain.

The Glass-Steagall Act must be resurrected. There has to be a
limit on the size of big banks. The current big banks have to be broken up
using anti-trust laws, as we broke up the oil cartels in the early years of the
20th century.

We’ve got to put limits on executive pay and have a much more
progressive income tax so that people who are earning tens if not hundreds of
millions of dollars a year are paying at a rate that they paid before 1981,
which is at least 70% at the highest marginal level.  

We also need to get big money out of politics.

These changes can’t come about unless we have campaign
finance reform that provides public financing in general elections and a
constitutional amendment that reverses the grotesque decision of the Supreme
Court at the start of 2010, in a case called “Citizens United versus the
Federal Election Commission.”

None of this is possible without an upsurge in the public at
large – a movement that rescues our democracy and takes back our economy. One can’t be done without the other. Our economy and democracy are intertwined. Much
the same challenge exists in Europe and Japan and elsewhere around the world,
where systems profess to combine capitalism and democracy.

Massive inequality is incompatible with robust democracy. Today,
in the United States, the top 1% is taking home more than 20% of total income
and owns at least 38% of total wealth. The richest 400 people in America have
more wealth than the bottom 150 million Americans put together.

As we’ve already seen in this Republican primary election, a
handful of extraordinarily wealthy people can virtually control the election
result – not entirely, but have a huge impact. That’s not a democracy. As the
great American jurist and Supreme Court associate justice Louis Brandeis once
said: “We can have huge wealth in the hands of a relatively few people or we
can have a democracy. But we can’t have both.”

Robert Reich
Contributor
Robert B. Reich is Chancellor's Professor of Public Policy at the University of California at Berkeley and Senior Fellow at the Blum Center for Developing Economies. He served as Secretary of Labor in the…
Robert Reich

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