Evan Soltas
Jan 21, 2012

Death of the Salesmen?

On right and left, rising mistrust of capitalism

Giles and Adam
Is this beginning to scare anyone yet? From both the ostensibly conservative right--Newt Gingrich and Rick Perry--and the left, I see an increasing chorus of populist anti-capitalism.

Now Jon Stewart's point about private equity's "carried interest" exemption is well taken, and the case that the capital gains tax should be level with the top marginal income tax rate indeed makes economic sense. (Of course, one would want to tax only real, i.e. inflation-adjusted, capital gains, and one should also strip the income tax code of all deductions and reduce rates in a revenue-neutral and proportional manner.)

But I think he and his guest, New York Times columnist Joe Nocera, were off-base when they said that Bain Capital represented a capitalism which had "metastasized" into evil, and that the Right was exaggerating when they deemed any attack on private equity or Wall Street an affront against the capitalist system. The truth is, this aspect of their critique, although perhaps more nuanced, suffers from essentially the same flaws as Gingrich's rants against "rich people figuring out clever legal ways to loot a company" and Rick Perry's demonization of "vulture capitalists."

Stewart, Nocera, Gingrich, and Perry all ignore the fact that the only way to achieve sustainable per capita income growth, regardless of the economic system, is through productivity gains. Now there are ways to ensure that this income growth translates into true and not overly unequal gains in terms of quality of life--progressive taxation, a social safety net, state support for education, R&D, and other public goods--but productivity gains are essential. They, however, induce a clear long-run--short-run tradeoff: when workers  are more productive, you need fewer workers for that task. The result is structural unemployment as resources (labor and capital) are reallocated to more productive uses. Again, we can institute "market-legitimizing" institutions to ease the short-run pain, such as unemployment insurance or retraining. But the idea that we can somehow grow in the long run without the sort of economic dynamism that implies economic dislocation--that is a fallacy.

Private equity, as Wall Street Journal columnist Daniel Henninger argues, is one of the major engines of this process of "creative destruction," remaking companies to maximize profit. I don't doubt this means layoffs, restructuring, and occasional failure--but what mistake I see as increasingly common is a distrust of this process, one which is so central to capitalism itself. There are ways to fault Wall Street, and Stewart's argument against inequality is fair game, but I saw a shortsighted, anti-capitalist dislike of "creative destruction" come through in his critique of Bain Capital.

And then you have those who are unapologetically anti-capitalist, like Onion columnist Representative Dennis Kucinich, whose recent proposed legislation of a "Reasonable Profits Board" would be laughable if it didn't scare me about the rise of populism.

The Democrats, worried about higher gas prices, want to set up a board that would apply a "windfall profit tax" as high as 100 percent on the sale of oil and gas, according to their legislation. The bill provides no specific guidance for how the board would determine what constitutes a reasonable profit. 
The bill effectively empowers three federal appointees to set whatever level of profit they deem "reasonable" and confiscate the rest for green pet projects like a subsidy for fuel efficient cars and mass transit systems. If the company overshoots the profit cap, the Feds can take 50, 75, or even 100 cents from every marginal dollar of "unreasonable" profit. I can't even begin to contemplate how bad of an idea this is.