The Future Of American Capitalism
Since its advent in northwestern Europe in the 16th and 17th Centuries, capitalism has overcome many challenges and has become the dominant economic system in the world.
Its resilience has allowed it to overcome challenges from wars, depressions and recessions to societal inequities. Worker discontent brought on the unions. Financial disparities have brought the minimum wage, etc. Whatever the challenge, tweaks and innovations have allowed capitalism to flourish.
Today, however, capitalism faces greater challenges that may affect its success in the future. They include:
- Greater societal inequalities
- Attraction of capital to a few
- Declining investment in public goods
- Global upheavals
- Global Competition
Societal Inequalities
The middle class, considered essential to a strong economy, has experienced a decline during the past 50 years. It has deteriorated from 61 percent to 52 percent. The change is due to an economy propelled by manufacturing to one run by services and consumption. This has adversely affected worker income.
American workers have had to make do with a growth of only 0.9 percent of average wages from 2000 to 2019. The push away from high wage employment toward low-wage jobs exterminated one million middle-wage American jobs. Median wages for middle-wage jobs rose only 1.1 percent between 2000 and 2019 and median wages for high-skill and low-skill workers expanded faster, at 7.3 percent and 5.3 percent respectively. Labor share of U.S. national income have lagged behind productivity growth.
Although it is true that there has been an overall gain in employment and an expansion of income-earning opportunities prior to the COVID-19 pandemic, most jobs created have been in lower wage sectors. Moreover, most of the employment increases have been caused by changes in work arrangements and part-time work, augmenting job and income vulnerability.
And, although consumers have gained from better access and lower prices for optional products, especially in electronics, appliances, and furniture, rising prices of such basic goods as housing, healthcare and education have outperformed inflation, causing a drop of 54 percent of any gains in income over the last 20 years for average U.S. households. Savings rates of households have dropped. Nearly half of people in the U.S. over the age of 15 did not save for old age last year.
Specific groups of people are suffering the brunt of the problem. Younger Americans are having a difficult time finding full-time work; spend a greater portion of their income on basic goods and services, and save less than other groups.
Although there are more jobs, individuals are getting paid less. Women still are paid only 82 cents per every dollar earned by men. In addition, a racial wealth gap has been established. In 2016, the wealth of the median white family was 10 times greater than that of the median Hispanic family and these differences persist even with college-educated individuals.
Where one lives is affected. For example, greater than two-thirds of U.S. job increases since 2007 have occurred in 25 cities and so-called dynamic hubs. Meanwhile, there has been flat or falling employment growth in rural counties where 77 million people live.
People who earn less than $40,000 are 80 percent more vulnerable to being laid off, furloughed or experience reduction in their hours or income due to COVID-19; many of them are women and people of color.
The Coronavirus Pandemic has made these disparities even worse. For example, many low-income people are in high-contact essential jobs with greater health risks, or facing temporary or permanent unemployment. A disproportionate number of them are women and people of color.
Rising inequality can add to reduced aggregate demand and inhibit educational opportunities, human capital formation, and intergenerational mobility.
Attraction Of Capital To A Few
Capitalism’s ability to direct capital growth toward promising investments affects market structure and concentration of economic power. Advances during the last 20 years have concentrated in a small subset of sectors including finance, real estate, technology, pharmaceuticals, and some business services. This has driven strong wealth accumulation to owners of physical and insubstantial assets and capital. The greater accumulation of wealth during the past 20 years is less capital- and labor-intensive than in prior decades according to research and they have been geographically concentrated resulting in inequality in income and wealth. Just 6 percent of counties in the United States account for two-thirds of GDP output. Talent, intellectual property and other intangible assets are concentrated in cities like New York, Los Angeles, and Atlanta. These cities have 40 percent higher GDP per capita than similar cities, but include higher levels of inequality.
Specific businesses have benefitted from this. Globally, the top 10 firms with more than $1 billion in revenue have 80 percent of all economic profit. Many of these businesses have large investments in intangibles, high-skill workforces, and business models assisted by digital capabilities and a high proportion of international sales.
The top-performing firms are well positioned to survive the economic crisis caused by the Coronavirus Pandemic because they have access to liquidity and more diversified markets.
Declining Investment In Public Goods
Many people are deprived due to the decline of investment in public goods including education, training, skills for human capital development, foundational research and development, and infrastructure. This decline in investment influences peoples’ equality of opportunity and participation in the economy.
Federal spending on education, infrastructure, and scientific research dropped about 2.5 percent of GDP in 1980 to less than 1.5 percent of GDP today. The share of workers receiving employer-sponsored training fell and public funding for worker training and other labor market interventions has declined. Private-sector investments in public infrastructure including in the form of public-private partnerships have fallen for the past 35 years and has declined at a faster rate after the 2008 recession. These investments are essential for a competitive, productive economy.
Assistance to individuals that has commonly come from public and private institutions has shrunk leaving people vulnerable to the forces of the economy. Employment protections are now lower and guaranteed pension levels have dropped.
Global Upheaval
The Coronavirus Pandemic has made it clear that there is a need for the public and private sectors to act on humanitarian and economic crisis. COVID-19 has shown that there is a lack of interest of business and government to tackle inherit problems.
Climate change is a problem that continues to pose a challenge to capitalism due to the potential of large disruption to markets. This has to be addressed in a coordinated effort by businesses, governments, and individuals.
The past five years have been the warmest on record and we have seen an increase in flooding, extreme weather, and wildfires worldwide. Experts are expecting that in the coming years there will be global socioeconomic impacts to humans and physical and natural capital. The effects on society as well as the most vulnerable segments of it could be catastrophic.
Global Competition
In recent years, so-called emerging economies are becoming large and competitive within the world economy. These economies are in a position to challenge the Western democracies including the United States for economic dominance. One of the biggest threats to the U.S. is China.
In 2020, more businesses based in mainland China and Hong Kong are ranked in the Fortune Global 500 list of the world’s largest public companies than in the U.S.
China has become a major player on the stage of the world economy. Its nominal GDP is now two-thirds of the United States. It produces 20 percent of global manufacturing making it the leading manufacturer in the world. Moreover, China is not a consumption market. With a population of 1.4 billion people, it has become a major consumer.
Let’s not forget that it owns nearly 4 percent of the U.S. national debt due to its large trade surplus and because it needs to maintain a large foreign exchange reserve.
Conclusion
Due to all of these issues, the capitalist economy of the United States is being challenged like never before. To continue to thrive, the U.S. economy may need to develop a combination of market and non-market based tweaks or innovations. We will have to come up with more opportunities and improved outcomes that benefit all participants. We will need to decide what aspects of market design and redesign are necessary to create a well-functioning inclusive market.
Capitalism needs to evolve to ensure that a majority of the people who participate in the economy will prosper and it will have to repair the glaring inefficiencies and inequalities that have become crystal clear due to the COVID-19 crisis.
We will have to address the inequalities caused by the accumulation of capital in the hands of a few. We need to figure out how we can assure that more players have the ability to make large, long-term investments in breakthrough industries that will lessen the inequalities and allow all of us to thrive.