Thursday, March 13, 2008

Towards a superdemocracy?

Market forces are not a substitute for democratic process, nor are they equivalent. Market forces are exceptional for meeting the needs of consumers and investors, but are terribly deficient when it comes to meeting or addressing the civic needs of citizens.

That is the most important message that one takes from reading Supercapitalism: The Transformation of Business, Democracy and Everyday Life by Robert B. Reich. In this book, Reich explains how run-away global capitalism has overtaken and consumed democracy, leaving little space left for the citizen to express her or his self.

From that description alone, plenty of critics would be willing to label Reich a communist (a sad reflection on how narrow and bankrupt the national discourse is becoming.) But he is not. What he is is someone who believes that capitalism should be used to serve democratic ends, not vice versa. When democracy is used to serve capitalistic ends (as is happening now) environmental degredation, job insecurity, income inequality, and politicians subservient to corporate money is the result.

Reich argues if we expect market forces alone to determine the behavior of corporations, then we should not expect anything less than bottom line profit driven behavior from them. Although many corporate critics lament their behavior, Reich points out persuasively that those same critics as consumers and investors are part of the system that rewards those corporations for such behavior and punishes them for doing otherwise. This highlights the difference between consumer/investor values and citizen values. The only job of a corporation, says Reich, is to work within legal limits to maximize profit for its investors. It is the job of citizens to work through democratic institutions to create that legal framework.

Democracy means more than a process of free and fair elections. Democracy, in my view, is a system for accomplishing what can only be achieved by citizens joining together with other citizens - to determine the rules of the game whose outcomes express the common good. The rules of course can effect how fast the economy grows: At the extreme, a rule that divided the pie into equal slices would squelch personal incentives to save, invest, and innovate. Another rule might do more to spur economic growth. Demcoracy is supposed to enable us to make such tradeoffs, or help to achieve both growth and equity or any other goals we share in common.
But it isn't doing that anymore. The decline of progressive income taxes, trade union bargaining, good public education, the social safety net, and politicians responsive to citizens needs; an inability to confront public problems such as global warming and millions lacking health insurance are all indicative of the erosion of democratic means.

The reason for this, Reich suggests, is that new technologies born in the 70s led to the rise of global supercapitalism. This happened as a result of techonologies developed by the government during the Cold War leading to innovations that broke down the stable – almost oligarchic – system of capitalism that had existed previously from about 1945 - 75. The previous system had been dominated by a few large companies that played such a central role in the economy that it was vital that they kept production running smoothly, which led them to negotiate with government and workers for equitable benefits to society; this stability translated into a narrow range of consumer/investor choice.

The innovations of the Cold War allowed for increased competition for customers and investors, leading to more choice and better deals. With the new innovations smaller companies lobbied for deregulation so that they could take advantage of the innovations, find niche markets, and offer more consumer choice than had existed during the previous era. But with the intensified competition companies could no longer afford to negotiate to protect the common good. Increased competition led to increased desire to influence politics for any possible advantage over rivals, with increased lobbying in turn leading to increased competition among politicians for money.

The public is of two minds about supercapitalism: it wants corporations to be stewards of society but also low prices for quality products.

As consumers and investors we want the great deals. As citizens we don’t like many of the social consequesnces that flow from them. The system of democratic capitalism in the Not Quite Golden Age struck a very different balance. Then, as consumers and investors we didn’t do nearly as well; as citizens we fared better.
With the democratic capitliasm of before we had institutions (such as regulatory agencies, strong unions, and biggest business setting stable mass production values) - John Kenneth Galbraith’s “countervailing powers” - of small interest groups across the nation offering democratic flexibility and coordination. We have no such countervailing forces to today’s supercapitalism. While this system is very responsive to our consumer/investor needs, it does little to address our civic needs.

According to Reich, we've made a sort of Faustian bargain as a society. We get great deals and spectacular technology, but our values as citizens lack an outlet.

Our desires as consumers and investors usually win out because our values as citizens have virtually no effective means of expression … this is the real crisis of democracy in the age of supercapitalism.
Reich also argues that the rise in CEO salary is a function of supercapitalism, with the CEO taking on an economic function similar to that of celebrities and athletes who take home large percentages of the revenue they help generate. The disparity in income between CEO and worker is indicative of the way that supercapitalism has created a large concentration of wealth at the top of our society. The previous democratic capitalism had seen the most equal distribution of wealth in American history.

Although Reich feels that this disparity in wealth is dangerous for democracy, he suggests that we as a society have created the market forces that led to the inequality and as such should not scapegoat the super-rich.

As citizens, we may feel that inquality on this scale cannot possibly be good for a democracy. It undermines solidarity and mutually on which responsibilities of citzenship depend. It creates a new aristocracy whose privileges perpetuate themselves over generations. It breeds cynicism among the rest of us. But the super-rich are not at fault. By and large, the market is generating these outlandish results. And the market is being driven by us as consumers and investors. That does not make it right, however.
Reich also believes supercapitalism is now spreading across borders and eroding democratic instiutions in other nations. Despite many citizens being alarmed at the results of supercapitalism at home and abroad, our behavior as consumers and investors continues to promote the system. Reich asks (and answers):

If most people are of two minds about supercapitalism, why does the consumer-investor side almost always win out? The answer is that markets have become hugely efficient at responding to individual desires for better deals, but are quite bad at responding to goals we would like to achieve together.
For example, our consumer/investor demands are aggregated by large companies like Wal-Mart which have the ability to drive down costs for consumers across multiple business models, but there is hardly any comparable entity that aggregate the values of citizens.

Some might suggest that the answer to is to purchase our conscience, but Reich details that this is a very poor substitute for voting our conscience: "The only way for the citizens in us to trump the consumers and investors in us is through laws and regulations that make our purchases and investments a social choice as well as a personal one."

In other words, we can decide as individuals and a society what kind of increased costs/investor return reductions we’re willing to tolerate to trade off for the promotion civic values, environmental regulations, worker protections, the prohibition of contributing to human rights abuses, etc.

But the debate that would be necessary for us as a society to to make those decisions is not happening.

And that's largely because our elected officials now represent the corporate money they depend on to stay in office. With run-away bipartisan lobbying, even debates that seem to be about public interest aren’t. Scratch the surface and what we really have is one corporate interest going after another one; the extent to which the "public interest" is being served by one private interest is relative to the other private interest. Reich gives numerous examples, but to spotlight one, take the debate over offshore drilling. Successfull opposition didn’t really come from environmental groups like you might expect - it came from coastal tourist industries.

Another consequence of the overflowing of corporate money in Washington D.C. is the deleterious effect on the public of understanding of any give issue lobbying has; meaning that the public is less likely to recieve impartial information about an issue, making it less capable of coming to the sort informed decision that is the basis of a functioning democratic society.

The corporate takeover of politics also affects how the public understands the issues of the day. Part of the task of lobbying is to provide evidence for the greater wisdom of your point of view, which often requires the work of economists, policy analysts, and other data gatherers and numbers crunchers, as well as wordsmiths able to make almost any decision sound reasonable. Legislators need to be able to justify their decisions – if not to the broad public directly, at least to a skeptical media sensitive to outright payoffs. Regulators must convince judges they have not acted arbitrarily. Because every side in these contests needs to make the best possible case, large amounts of money are made available to engage experts to provide arguments they may know to be only half-truths or, on occasion, outright deceptions. The result is a broader form of corruption – the corruption of knowledge.
This has seen the rise of corporate paid "expert" driven debate. But when very large sums of money are involved, "[s]cruples, like other marketable commodities, can be purchased if the price is right.” “Academics and professors end up selling their integrity. The m.o. of such "debates" is that a common fact is challenged by having some “expert” testify against the established fact claiming (or, rather, manufacturing) doubt over it and thus justification for not taking public action on an issue.

This corruption of knowledge is even now extending into univertiy research. What's more:

Even when the government pays for neutral expertise, it doesn’t necessarily get it. A major academic study released in 2006, finding antidepressants to be safe and effective for pregnant women, was financed by the Food and Drug Administration. But according to the Wall Street Journal, most of it thirteen authors, among them prominent professors, were serving at the same time as paid consultants to corporations that manufactured antidepressants. This is not to suggest that these professors – or, for that matter, any experts – understand themselves to be taking bribes that compromise their professional integrity. But human beingas are remarkably adept at rationalizing comfortable arrangements. Money induces a generous frame of mind, willing to overlook evidence that might trouble an expert whose judgement is not clouded by a consulting contract.
This dominance of “expert” policy making “in effect, leads the public to assume the only issues of importance are those that bear on the welfare of consumers and investors, rather than on the well-being of society or the planet as a whole.” The same message dominates almost all public debate: “Public policies are to be judged by a utilitarian calculus of whether they improve the efficiency of the economy. They are presumed to be wise if consumer-investor benefits exceed consumer-investor costs; unwise, if the opposite holds true.”

What’s missing is the consideration of the social costs. Will inequality increase? Job insecurity? What are the global ramifications? How will it effect human rights and the environment? Etc.

“Corporate social responsibility” as an answer is meaningless, argues Reich. Corporations are created to generate profit for investors, that’s their purpose. Citizens must determine what values corporations are to adhere to through laws and regulations. Asking a corporation to act responsibily is to ask it something it is not capable of: responsibility is a function of human conscience but corporations are a legal enitity, not people.

Reich details how companies that have remained socially virtuous are punished by consumers and investors, making it difficult for them to stay competitive. See the case of Levi-Strauss, a company which quit using production in China after Tianeman Square, but when consumers quit buying their higher costing jeans the desicion was reversed in 1998. Again, when market forces are expected to substitute for democratic ones, our consumer-investor side wins out.

In the past, muckrakers like Nader, Tarbell, and Sinclair’s weren't so much attempting to pressure a particular company to cease some behavior, rather than making an effort raise the public's awareness of an issue in order to galvanize public action in order to make it illegal for any company to engage in such behavior. There efforts were “not substitutes for political action but preconditions for it.”

Leaving “social responsibility” to the market is futile because it is unaccountable to citizen values. Plus, focusing on single companies such as Wal-Mart obscures vital debate. Instead of focusing on Wal-Mart’s low employee wages or the lack of employee insurance and what not we should debate the minumum wage and health insurance; if a company is following the rules then social pressure alone is going to be futile ultimately, says Reich.

Health insurance was provided to workers in the first place because it’s a form of payment that avoids taxation.

Even though employer-provided health care has diminished since [the previous era of democratic capitalism], in 2006 it still constituted the biggest tax break in the whole federal tax system. According to recent estimates, if health care benefits were considered taxable income, employees would be paying $126 billion a year more in income taxes than they do now. In other words, employer-provided health care is a backdoor $126 billion-a-year government health insurance system that’s already up and running.
This system, however, doesn’t help those who need it most (people who lose their jobs) and distorts the labor market by creating job stagnation (out of fear of losing health insurance if one switches jobs.) Employers try to avoid health insurance cost by hiring low risk workers and trying to defer insurance to spouses; people earning a lower salary get less insurance but need more. Wal-Mart could be pressured into providing health coverage but the pattern across America wouldn’t change significantly which is why having democratic discourse over the issue is important. In effect, we have a 126 billion “backdoor government health insurance system” that benefits mainly upper-income citizens.

Reich recommends decoupling health insurance from employment, then using the 126 billion dollars of taxable income as a downpayment on a universal system of progressive insurance.

But we can’t even begin this conversation as long as the focus is on pushing Wal-Mart to give its employees better health insurance coverage, and as long as this effort occurs outside of and apart from the democratic process. By making it into a moral mission against Wal-Mart, advocates divert attention from what should be a national debate about public policy into a battle over the brand image of a single big company.
Reich summarizes

Democracy and capitalism have been turned upside down. As we have seen, capitalism has invaded democracy. Legislation is enacted with public rationales that bear little or no relation to the real motive of the corporations and their lobbyists who pushed for them and the legislators who voted for them. Regulations, subsidies, taxes, and tax breaks are justified as being in the “public interest” but are most often the products of fierce lobbying by businesses or industries seeking competitive advantage over one another. The broader public is not involved. Citizen voices are drowned out. The public rationales mask what’s really going on – which companies and industries gain and which lose.

At the same time, a kind of faux democracy has invaded capitalism. Politicians and advocates praise companies for acting “responsibly” or condemn them for not doing so. Yet the praise and blame are disconnected from any laws and rules defining responsible behavior. The message that companies are moral beings with social responsibilities diverts public attention from the task of establishing such laws and rules in the first place. It also suggests companies are the moral equivalent to citizens who posess rights, including the right to be represented in a democracy. The praise or blame is soon forgotten, and barely effects the behavior of consumers and investors. Meanwhile, the real democratic process is left to companies and industries seeking competitive advantage.
Reich does not make the following point, but I would add that although it is the proper role of democracy to aggregate our citizen values and respond accordingly to the consequences of supercapitalism (“widening inquality as most gains from economic growth go to the very top, reduced job security, instability of or loss of community, environmental degredation, violations of human rights abroad, and a plethora of products and services pandering to our basest desires”) we now have a political atmosphere where anyone who proposes such action is labeled a communist.

To restore the balance between capitalism and democracy Reich offers some possible solutions:

- Effect into law something limiting the amount of money corporations can flow into politics. Companies might be interested in such legislation in order to avoid an escalating arms race of lobbying expense; but those who profit from the existing system will remain the largest impediment.

- The only way to stop companies from giving consumers good deals at the expense of high social costs is to make them illegal.

- Corporations are not people: “Corporations should have no more legal rights to free speech, due process, or political representation in a democracy than do any other pieces of paper on which contracts are written.”

- Do away with the corporate income tax because it is inefficient and inequitable.

Reich believes that abolishing the corporate income tax would improve capital markets because the system as is in inefficient in that it "creates an incentive for companies to overrely on debt financing relative to shareholder equity, and to retain earnings rather than distribute them as dividends." Instead, the dividends should be distributed back to shareholders because "decisions by millions of shareholders about how and when to reinvest these funds are likely to be, as a whole, wiser than decisions made by a relatively small number of corporate executives. "

The tax is inequitable in that lower income investors are often taxed at a corporate rate higher than what they pay on the rest of their income while higher incomer investors are taxed at a corporate rate lower that what they pay on their other income.

Reich follows with more suggestions:

- Corporate income should be treated as the personal income of shareholders and taxed like any other personal income.

- Citizens should be skeptical of “social responsibility” from corporations and from politicians scolding companies for not doing something or for doing something unless its illegal or required by law; and the same skepticism should apply to interests targeting particular companies for public criticism.

- Corporations can’t commit crimes. Executives working for corporations commit crimes. Corporations can be held civically liable for actions, though.

- “The goal of governmentt policy should be to make Americans more competitive, not to make American companies more competitive.” Penalizing a company for sending jobs abroad or being foreign based is silly. Government should subsidize R & D if the company is going to be in America and train American workers, regardless.

- Corporations should have no right to sue or challenge laws and regulations; only citizens do. Investors, consumers, employees have the right already to go to court as individuals or in class action suits – corporations should not litigate on their behalf. Furthermore, many corporations have shareholders that aren’t even US citizens, which means giving corporation court rights gives non US citizens the right to challenge US laws. For example, California’s autoemission standards were sued by automaker companies, 7 of which had a majority of foreign shareholders.

- Shareholders shouldn’t be made to contribute to political activity they don’t approve of. Instead, give them special dividends or extra shares “representing their pro rata share of that expenditure” resulting from some particular polical lobbying or activity. “Another way to redress the imbalance would be to allow taxpayers a tax credit of up to, say, $1000 a year, which we could send to any organization that used the money to lobby on behalf of our citizen values – groups seeking, for instance, a higher minium wage, a cleaner environment, or limits of videos and music featuring lurid sex and violence. The group would have to be nonprofit, but the choice of group and goal would be up to each of us. The point would be to give the citizen in us a louder voice in our democracy.”

Reich concludes:

The purpose of capitalism is to get great deals for consumers and investors. The purpose of democracy is to accomplish ends we cannot achieve as individuals. The border between the two is bereadhed when companies appear to take on social responsiblies or when they utilize politics to advance or maintain their compettive standing.

We are all consumers and most of us are investors, and in those roles we try to get the best deals we possibly can. That is how we participate in a market economy and enjoy the benefits of supercapitalism. But those private benfits often come with social consts. We are also citizens who have a right and a responsibilty to participate in a democracy. We should have it in our power to [include]* those social costs, thereby making the true price of the goods and services we purchase as low as possible. Yet we can accomplish this larger feat only if we take our responsibilities as citizens seriously, and protect our democracy. The first step, which is often the hardest, is to get our thinking straight.
Hopefully, more works like Supercapitalism can help spark the missing public debate that may right the ship of state and put us on course towards an era of superdemocracy to couple with the existing supercapitalism.

See here to listen to the author discuss his book and to read an excerpt of the first chapter.

*I can't tell what I have scribbled in my notes and don't have a copy of the book with me any longer. I'm guessing what the word is until I can check the book and insert the corret word.

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