When Robert Reich published Supercapitalism: The Transformation of Business, Democracy, and Everyday Life in 2007, the U.S. economy was growing, the financial sector was intact, and the housing bubble had just begun to leak. Although that now seems like decades ago, the former Secretary of Labor’s core argument still has a decidedly clear ring of truth; indeed, perhaps now more than ever.
There’s a paradox at the center of every capitalist democracy, Reich believes. “Capitalism has become more responsive to what we want as individual purchasers of goods, but democracy has grown less responsive to what we want together as citizens,” he wrote. In other words, our individual power as consumers and investors has expanded in manifold ways — we can get virtually anything we desire, usually quickly, cheaply, and on credit if necessary — but our ability as citizens to influence the rules of how the economy should operate (which ultimately have a profound impact on our daily lives) has eroded measurably.
Reich, currently professor of public policy at the University of California at Berkeley’s Goldman School of Public Policy, recently sat down with strategy+business to update his thoughts from Supercapitalism in light of the bailout of the banking sector, the swirling economic crisis, and the Obama administration.
S+B: Do you view the ongoing multi-hundred billion dollar bailout of the financial sector as an inevitable result of the cozy relationships that have formed between Wall Street and Washington during the rise of “supercapitalism”?
REICH: There’s no doubt that Wall Street has huge clout in Washington, not just in terms of all the campaign contributions given by the banks, but also by virtue of the personnel who move from Wall Street to Washington and back at very high levels. The other important fact is that most people in Washington, even those at relatively responsible levels of public policy, find themselves somewhat intimidated by Wall Street. Often, they don’t fully understand finance. They fear that they will be held accountable if something goes terribly wrong with financial markets, particularly if they have not done what Wall Street wants.
And because of that fear and the connections between Wall Street and Washington, there is a fundamental question involving the bailout that few people in positions of power are willing to ask: Why should taxpayers be bailing out Wall Street’s executives, shareholders, and creditors? After all, these executives, shareholders, and creditors were paid to take risks; they just made the mistake of taking the wrong ones.
S+B: And because the bailout skeptics are relatively quiet, there is a general belief that the Bush administration, through Treasury Secretary Henry Paulson, may have worsened economic conditions by not rescuing Lehman. What is your position?
REICH: I’m not sure I agree with the conventional wisdom. After all, the panic on Wall Street is mostly about Wall Street’s own investors and creditors. To be sure, they constitute a large number of people and institutions. But the mutual funds and pension funds, where most Americans’ savings are held, are really not in jeopardy. Capital markets have ceased to function because Wall Street made some colossal errors, in terms of risk management. How in the world are those errors ever going to be rectified unless Wall Street executives, creditors, and investors pay a severe penalty?
Now ask the question a slightly different way: Why should Wall Street executives, shareholders, and creditors come out any better from this taxpayer-supported bailout than they would under a typical Chapter 11 reorganization, where they would get relief from a portion of their debts and bad loans, but not all of them, and they would have to restructure compensation, management, and governance procedures? Despite the bailout — and the relatively easy course that Wall Street has enjoyed — Main Street is still suffering: People are losing their homes at a faster rate than they did before. Small businesses can’t get loans, creditworthy car buyers and others are seeing credit lines shrivel and disappear. So from the standpoint of average Americans, the bailout has had no positive effect whatsoever.