Key Takeaways:
American capitalism is malfunctioning, and the fix requires confronting a $200 billion corporate welfare system and decades of market concentration.
American capitalism has drifted into cronyism, with corporate welfare costing nearly $200 billion a year and market concentration suppressing competition across most sectors, Gerard Baker argues in the Wall Street Journal.
"Instead of free-market economics modulated by necessary and limited government intervention, we have an economy overly dominated by big companies, exercising and augmenting their power in ways not always consistent with the competitive principles that maximize efficiency," Baker, editor at large of the Wall Street Journal, wrote.
Baker's column, published Aug. 18, responds to reader feedback on his earlier assessment of American capitalism. He cites overwhelming economic evidence that much of the U.S. economy has become far more concentrated in the 21st century, with a smaller number of firms commanding higher markups, profits and costs to consumers. Direct subsidies, tax breaks and tax credits that make up corporate welfare total an estimated $200 billion annually, with the economic benefit of removing them potentially greater.
The stakes extend beyond market efficiency. Baker argues these distortions are the main reason for rising public dissatisfaction with the economy, and that the populist revolt that produced Donald Trump's 2016 election was a missed opportunity to reorient the system toward the interests of the people over economic elites. The Republican Party "talked a good game while doing little to redress the balance," he wrote.
Baker proposes a multi-pronged approach: reinvigorating free markets through heightened competition, simplifying the tax code to eliminate corporate welfare, and scrutinizing anticompetitive activity through merger review and targeted antitrust enforcement. He acknowledges the blunt instrument of antitrust policy carries risks, including potential harm to consumers.
The Citizens United v. Federal Election Commission ruling (2010) complicates reform, Baker notes, because corporations have a First Amendment right to seek to influence politics. He calls for more transparency around the nexus between campaign money and policy, and for deeper political reforms to the primary system, where House members must please both a small minority of base voters and corporate paymasters.
The reform agenda also extends to the tax code. Baker argues there is an overwhelming case for simplifying the tax system as a whole to create incentives for investment and cutting through rules that privilege companies big enough to deploy the best-paid accountants. The measures that make up corporate welfare — subsidies, tax breaks and tax credits — should be eliminated, he wrote.
Baker argues that achieving reform will be difficult while politicians maintain a comfortable codependence with big business. Incumbents' ever-growing need to raise money to fend off challengers encourages cronyism. He notes that under Citizens United, corporations have a First Amendment right to seek to influence politics, but more transparency could help: formal executive and legislative efforts to scrutinize and publicize the nexus between campaign money and policy wouldn't be difficult.
He also warns against a dirigiste response, insisting that allowing capitalism to flourish means giving it more space by shrinking government. Rising taxation and spending are steadily stifling private enterprise, he argues, and the economy won't recover its dynamism until entitlements and welfare spending are scaled back to a sustainable level. He adds the constraints of ever-growing public debt and a central bank wedded to backstopping every episode of financial excess.
Baker concludes that American capitalism has proved itself the most dynamic in the world, generating faster growth than most other nations, but its particular genius has been its ability to adapt and reform as circumstances demand. "They're demanding now," he wrote.
This article is for informational purposes only and does not constitute investment advice.
