Henry Kaufman: Statism is replacing capitalism in the U.S.

 Section: 

U.S. Capitalism Has Been Shattered

By Henry Kaufman
Financial Times, London
Thursday, June 25, 2020

https://www.ft.com/content/e7baaac4-b66e-4c87-8d77-ff5135a0f20c

American capitalism is rapidly disappearing. Its demise has been under way for some time and the economic devastation wrought by the Covid-19 pandemic is the latest blow to our political economy.

Adam Smith remains a useful guide to the hallmarks of capitalism. In 1776’s “The Wealth of Nations” he argued that humans innately strive for material progress and the best way to get there is through unfettered competition, the division of labour, and free trade.

Smith wrote that the state should play a limited role in economic affairs. For him, governments should be properly confined to national security, the rule of law — including the protection of private property — and the provision of a few public goods such as education. He also cautioned against sharp class divisions that might idle rich people and exploit workers. “No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable,” he warned. Smith hoped that whole societies could be enriched through the striving of individual members.

This kind of capitalism has been shattered.

Free trade is being dismantled as treaties are being abrogated. The free movement of labour is constrained by walls and edicts. Competition enforcement in business and finance is lagging and tardy. The anti-monopoly trustbusting that thrived under U.S. President Theodore Roosevelt is long gone. Concentration of non-financial corporations has increased sharply. Many businesses now enjoy a global reach, allowing them to post non-competitive prices.

In financial markets, concentration is even more glaring. Today a shrinking number of financial conglomerates hold a tight grip on investment management and the underwriting and trading of securities. The enormous underlying conflicts of interest are tolerated by the authorities. In truly competitive economies, those who do well should prosper while those who offer inferior goods and services should fail. Increasingly, that doesn’t happen.

Rather, capitalism is being rapidly replaced by statism — a form of political economy in which the state exercises substantial centralised control over social and economic affairs.

In the U.S., the federal government and the Federal Reserve sit atop statism. The government has a vast capacity to tax, borrow, and reallocate funds. Federal debt owed to the public currently stands at $20 trillion and much more can be borrowed. For some time to come the U.S. dollar will remain the key reserve currency, and overseas investors continue to prefer U.S. government bonds over most other securities.

In contrast, the creditworthiness of state and local governments has come under acute pressure because of the coronavirus pandemic, forcing many of them to seek federal help. States and localities will be financially beholden to the federal government, weakening their independence while strengthening the central authority. That is not what the U.S. system of federalism envisions.

Historically, the Fed has been viewed as somewhat independent from immediate political interests. But the central bank’s response to the onset of the pandemic-related recession shows that its quasi-independence is quickly evaporating, contributing to the emerging statism.

The Fed was helpfully supportive in previous crises. During the Second World War, it stabilised yields on government securities. In the 2008 financial crisis it bailed out prominent financial institutions, engaged in quantitative easing, forced large banks to accept government capital, and lowered interest rates sharply.

But the Fed’s response to the pandemic is far more open-ended. It is buying not only government bonds but also corporate bonds — including low-quality issues, mortgage obligations, municipal bonds, and exchange-traded funds. The central bank also is working with the Treasury to get loans to small and medium-sized businesses. Its balance sheet has already swollen by an astonishing $3 trillion to more than $7 trillion since the start of this year. And financial markets have come to expect the Fed to intervene in response to any sharp decline in equity prices.

Before the pandemic the Fed had made considerable progress in reducing its balance sheet. But now we can expect an even more significant increase in its intervention as long as there remains no clear resolution to the pandemic, such as a mass-produced vaccine. Markets will probably remain quite skittish as well.

With the federal government and the Fed firmly joined at the hip, the transformation of capitalism into statism is gaining momentum, perhaps irreversibly. This is a great departure not only from the vision of the U.S. founders but also, I suspect, it is not the kind of economic system most Americans living today want to leave for future generations.

—–

The writer, a former senior partner of Salomon Brothers, is president of Henry Kaufman & Co.

••••

The Liberty Beacon Project is now expanding at a near exponential rate, and for this we are grateful and excited! But we must also be practical. For 7 years we have not asked for any donations, and have built this project with our own funds as we grew. We are now experiencing ever increasing growing pains due to the large number of websites and projects we represent. So we have just installed donation buttons on our websites and ask that you consider this when you visit them. Nothing is too small. We thank you for all your support and your considerations … (TLB)

••••

Comment Policy: As a privately owned web site, we reserve the right to remove comments that contain spam, advertising, vulgarity, threats of violence, racism, or personal/abusive attacks on other users. This also applies to trolling, the use of more than one alias, or just intentional mischief. Enforcement of this policy is at the discretion of this websites administrators. Repeat offenders may be blocked or permanently banned without prior warning.

••••

Disclaimer: TLB websites contain copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available to our readers under the provisions of “fair use” in an effort to advance a better understanding of political, health, economic and social issues. The material on this site is distributed without profit to those who have expressed a prior interest in receiving it for research and educational purposes. If you wish to use copyrighted material for purposes other than “fair use” you must request permission from the copyright owner.

••••

Disclaimer: The information and opinions shared are for informational purposes only including, but not limited to, text, graphics, images and other material are not intended as medical advice or instruction. Nothing mentioned is intended to be a substitute for professional medical advice, diagnosis or treatment.

Be the first to comment

Leave a Reply

Your email address will not be published.


*