Inequality and the future of capitalism

Given America’s enormous inequalities in income, wealth and opportunity, are we moving towards violent upheaval or a new version of capitalism?

A deep thinker on this subject is Connecticut’s own Ray Dalio, head of the hugely successful investment firm Bridgewater. He and his wife Barbara’s recent donation of $100 million (as a matching grant with another donor and the state) to improve educational equality in our state is an example of how much the Dalios’ thinking is focused on the public good.

Income inequality has been growing rapidly in the U.S. and other countries for decades now and is reaching the point where the disparity between haves and have-nots is at a boiling point. The extremely divisive politics seen both here in the U.S. and in many other countries reflect the societal pressures generated by these profound disparities.

Capitalism is great at assuring the efficient allocation of resources in a profit-making context, and its incentives for such privately efficient allocations are a key part of its enormous success in the western world. The problem is that capitalism left to its own devices is very bad at addressing externalities (those things affecting society as a whole but not individually apportionable by capitalism acting alone), whether they take the form of pollution emissions or educational failures for large segments of our population.

Dalio cites many statistics very persuasively to make his point: In America, income growth has stagnated for decades with no inflated-adjusted increase in 40 years while the wealth of the U.S.’ top 1 percent has come to exceed that of the entire bottom 90 percent taken together. Sixty percent of the U.S. population is poor, many of them children —with the Federal Reserve finding 40 percent of all Americans would have trouble raising even $400 in an emergency. America’s long-vaunted upward mobility has fallen to among the worst in the developed world: those born to parents in the bottom quartile of income have a high likelihood of staying there themselves. In standardized test scores, American children as a whole test on average in the bottom 15th percentile among those tested worldwide.

The cost of not meeting these educational and sustenance needs represents a major loss of national opportunity. From an economics standpoint, the role of our investment in education in enhancing national productivity cannot be overstated, yet in that we are failing; and food insecurity for those 17.5 percent of our children in extreme poverty compounds the problem.

From the standpoint of societal stability, the value of a quality education is immeasurably high. In our own state, 22 percent of youth are regularly missing 25 or more days of school a year; they are five times more likely to be incarcerated and 33 percent more likely to suffer from substance abuse.

These statistics are repeated nationwide and, if not rectified, present a daunting prospect for our nation. Dalio’s prescription for reversing them has multiple dimensions and amounts to a necessary reforming of capitalism. As Dalio has said, “The problem is that capitalists typically don’t know how to divide the pie well, and socialists typically don’t know how to grow it well.” The failure of the two to work together leads to the rise of populist demagogues of the right and the left who neither understand nor care about equitable division of the pie or well-managed encouragement of its growth.

In Dalio’s words, “The effective motivator and resource allocator for creating productivity [that is profit-focused capitalism]…is now producing a self-reinforcing feedback loop that widens the income/wealth/opportunity gap to the point that capitalism [itself] and the American Dream are in jeopardy … leading to harmful excess at the top and harmful deprivations at the bottom.”

His prescription is for bipartisan, skillful leadership, clear metrics of success, “public-private partnerships (including governments, philanthropists, and companies) [to] jointly invest,” and wise tax policies “earmarked to help those in the middle and bottom in ways that also improve the economy’s overall level of productivity.” He notes, for example, that “early childhood education programs…produce returns of around 10-15 percent annualized in the form of cost savings for the government when one accounts for the lifetime benefits for the students and society” and that public-private partnerships aimed at investments like this can produce enormous benefits that capitalism alone cannot confer because the “profits” from them in the form of return on investment are long-term and disbursed across large segments of our population. You can read Dalio’s thoughts in much greater detail at Dalio’s thinking is something we all really need at this point in our national life; let’s hope it gets a wide audience.