Unless one or both of the two major parties in the United States shift away from the established centers of political and economic power, the new countervailing power could emerge in the form of a new party that unites the disaffected, anti-establishment elements of both major parties and gives the 90 percent of Americans who have been losing ground their own political voice. This will require, as I have emphasized, eschewing the tired and increasingly irrelevant choice between the “free market” and “government,” and focusing instead on the myriad ways the market has been organized to benefit large corporations, Wall Street, and a small and increasingly wealthy minority at the top and on how to make it work instead for the vast majority. The explicit aim of this new party would be to save capitalism by enabling most Americans to benefit from its success.
There appears to be increasing interest in such a third party. In a Gallup poll conducted in September 2014, only 35 percent of Americans believed the two major parties adequately represented them, and 58 percent of Americans thought that the Democratic and Republican parties do such a poor job representing the American people that a third major party is needed. This is one of the highest percentages Gallup found since it first raised the question of a third party a decade before. The prior high point in expressed desire for a third party occurred in October 2013, during the partial federal government shutdown. Interestingly, 46 percent of self-described Republicans as well as 47 percent of self-described Democrats feel a third party is needed.
The professed desire for a third party does not mean one will emerge to become a dominant force in American politics, however. The American political system discourages the formation of strong third parties because the two that predominate at any given time have enormous advantages, not the least of which is the lack of proportional representation. Winners of races for the Senate and House and of state Electoral College races for the presidency represent the entire constituencies. As a result, when third parties have appeared, they usually have done little more than siphon off votes from the dominant party closest to them in ideology or voter preference.
In addition, the two dominant parties have been sufficiently adaptable and gingerly opportunistic enough to take advantage of the electorate’s changing views. In the 1932 presidential election, for example, the Democratic Party reinvented itself to create a new coalition of urban ethnic voters, blue-collar unionized workers, white southerners, western voters, Catholics, and Jews, to give Franklin D. Roosevelt a landslide victory and the incipient New Deal a strong electoral foundation. Democrats grew from holding 37.7 percent of the seats in the House of Representatives in 1929 to 72 percent in 1933, and from 40.6 percent of the seats in the Senate to 61.5 percent.
Further evidence of the adaptability of the two dominant parties can be found in the sixteen years commencing with the presidential election of 1896, when Democratic candidate William Jennings Bryan attempted to mobilize western farmers, southerners, and eastern laborers against big business and finance in a putative crusade of working people against the rich, while Republican William McKinley maintained a winning conservative coalition of businessmen, skilled factory workers, and professionals. By the election of 1904, President Theodore Roosevelt and other Republican leaders felt it necessary to respond to deepening public concerns about abuses of economic power by the giant trusts and reoriented the party to include laborers, urban immigrants, and progressive reformers, and they advanced the reforms I have previously mentioned. In the campaign of 1912, Roosevelt sought the presidency under the banner of the Progressive Party, whose platform called for “dissolving the unholy alliance between corrupt business and corrupt politics” through stricter limits on and disclosures of political campaign contributions and the registration of lobbyists; social insurance for the elderly, the unemployed, and the disabled; women’s suffrage and a minimum wage for women workers; an eight-hour workday; a federal securities commission; and compensation for workers who were injured on the job. Although rejected by the electorate, who chose Democrat Woodrow Wilson instead, Theodore Roosevelt’s Progressive Party platform found its way into the New Deal of his Democratic fifth cousin.
In these instances, one or both of the two major parties adapted to the shifting views and needs of the times. A viable third party is likely to emerge only if both the Democratic and Republican parties are so dependent on big business and Wall Street that neither is able to respond to the emerging views and needs of the vast majority at this juncture in history. Whether it comes about through adaptation by one of the current dominant parties or the emergence of a new third party is less important than that countervailing power be re-established in America.
No one should expect this to occur smoothly or easily. The moneyed interests have too much at stake in the prevailing distribution of income, wealth, and political power to passively allow countervailing power to re-emerge. While they would be wise to support it for all the reasons I have enumerated above—mostly, they will do better with a smaller share of a faster-growing economy whose participants enjoy more of the gains and will be more secure in an inclusive society whose citizens feel they are being heard—they will nonetheless resist. The status quo is too comfortable, and the prospect of countervailing power too risky and unpredictable. Yet its re-emergence is inevitable. We cannot continue in the direction we are now headed.
What would the new countervailing power seek to accomplish? As a first step, it would reform the nation’s system of campaign finance in order to get big money out of politics. That would require that the Supreme Court’s decisions in Citizens United and McCutcheon be reversed—either because one justice who had been in the majority sees the folly of his ways and joins with a new majority to reverse it judicially (that happened in the 1930s, when Justice Owen Roberts switched allegiance from his four anti–New Deal colleagues on the court to the four pro–New Dealers), or a new president fills vacancies on the court that thereby create a majority to reverse it, or, far less likely, because the new countervailing power summons enough political force to amend the Constitution to declare that Congress may regulate campaign spending.
Getting big money out of politics would also require full disclosure of the sources of all political expenditures. In addition, it would necessitate public financing of general elections, probably by means of a system in which public funds matched donations from small donors. And it would ban gerrymandered districts that suppress the votes of minorities, as well as voting restrictions imposing disproportionate burdens on minorities.
A closely related set of reforms would reduce or eliminate revolving doors between government service and Wall Street, large corporations, and lobbying firms. At the least, all elected and appointed government officials would be prohibited, for a minimum of five years from the end of their government service, from accepting any form of employment with any corporation, trade association, lobbying firm, or other for-profit organization that they oversaw, monitored, regulated, or had any other official relation with while in government.
Finally, expert witnesses, academics, and inhabitants of think tanks would be required to disclose any and all sources of outside funding for testimony, books, papers, or studies that are put in the public domain. That way, if an “expert” funded by Koch Industries asserts that humans have no part in climate change, for example, or a professor funded by the National Retail Federation finds that raising the minimum wage leads to less employment, the public would have a means of evaluating the neutrality of such claims.
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Ending Upward Pre-distributions
Countervailing power would also seek to end the upward pre-distributions currently embedded in market rules, such as those we have examined. The lengths of patent and copyright protection would be shortened, for example, and pay-for-delay agreements banned, as they are in most other advanced economies. Patents could not be extended by means of small or cosmetic changes in products or processes, and pharmaceutical companies would be prohibited from advertising their
prescription brands, as had been the rule in the United States until Big Pharma insisted otherwise.
Antitrust would be returned to its original purpose, not only achieving market efficiency and maximizing consumer welfare but also reducing the political influence of large aggregates of economic power. Antitrust law would be used to bust up cable monopolies, prevent oligopolies such as now exist in the provision of credit cards, contain the size of giant hospital chains, and limit the market power of large high-tech companies over networks and standard platforms. No firm would be allowed to hold a patent to the key genetic traits of our food chain. Insurers would no longer be exempt from antitrust laws, so they could not fix prices, allocate markets, or collude over terms. At the same time, the size of Wall Street’s giant banks would be limited so that none could hold more than 5 percent of the nation’s banking assets, have any role in the pricing of commodities, or play a dominant role in initial public offerings of stock. The Glass-Steagall Act would be resurrected, so that investment banking’s wagers on stocks and derivatives would be separated from commercial banking’s more staid and secure lending of commercial deposits, as they were between 1933 and 1999.
Meanwhile, contract laws and regulations would prohibit corporations from binding their employees, contractors, or franchisees to forced arbitration. No franchisor could terminate the contract of a franchisee for minor violations in order to resell the franchise at a higher price to new owners. Fraud would be defined to prohibit all forms of insider trading, including any use by corporations and their CEOs of corporate buybacks to pump up share prices and cash in on stock options and awards, as had been the rule before 1991. Corporations would also have to disclose to shareholders the timing and extent of their buybacks, as was the case before 1982. Also prohibited would be all stock trades based on information unavailable to the general public. High-frequency trading firms would be required to share their methodologies and technologies with all other traders. Moreover, shareholders would have the right to force an entire corporate board to stand for re-election if a quarter or more of a company’s shareholders and stakeholders vote against a CEO pay plan two years in a row (the current rule in Australia). Bankruptcy law would give labor agreements a higher priority than agreements with other creditors. Bankruptcy would allow individuals with unmanageable student debt or mortgage debt on their first homes to reorganize those debts, thereby giving them more bargaining leverage with lenders.
The minimum wage would be raised to half the median wage and thereafter adjusted for inflation. Workers in low-wage industries such as retail chains, fast-food chains, hotels, and hospitals would be able to form a union by a majority up-or-down vote, thereby giving them more bargaining leverage in contract negotiations over their wages and benefits. A more evenhanded approach to international trade agreements would seek to protect not only American corporations’ intellectual property and the financial assets of American banks but also the jobs of American workers that might be imperiled. For example, the United States would require that all trading partners to such agreements establish minimum wages equal to half their median wages in order that the gains from trade be widely shared in those countries, thereby generating new customers for American exports and arguably more political stability overall. Meanwhile, a portion of the gains from trade at home would finance a world-class re-employment system including wage insurance, so that job losers who took new jobs paying less than their former jobs would receive 90 percent of the difference for two years and income support of 90 percent of their former wages if they seek to upgrade or change skills in full-time educational programs.
Enforcement resources would be adequate to fully implement all laws and rules; fines and penalties would be sufficiently high to deter corporate or financial law breaking; and private rights of action and class actions would be fully available to supplement government enforcement.
Finally, although not strictly a part of the market mechanism but an important aspect of the prevailing system of upward pre-redistribution, educational resources would no longer be allocated as they are currently. Children in poorer school districts would no longer receive less per-pupil funding than children in wealthier school districts. Given that the nation has segregated by income into different cities and townships, schools would no longer depend on local property taxes as major sources of revenue.
In these and other ways, the new countervailing power would end upward pre-distributions currently baked into market rules. But this modest agenda would only be a start. The centrifugal forces of globalization and technological change require bolder steps if prosperity is to be more widely shared.
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Reinventing the Corporation
In addition to ending upward pre-distribution inside the market, countervailing power would also seek a fairer pre-distribution inside the market, thereby making taxes and transfer payments less necessary. Achieving this would entail reinventing the central organization of modern capitalism—the large corporation.
For the last thirty years, as I have noted, almost all incentives operating on the corporation have resulted in lower pay for average workers and higher pay for CEOs and other top executives. The question is how those incentives can be reversed.
One possibility would be to make corporate tax rates depend on the ratio of CEO pay to the pay of the median worker in the firm. Corporations with low ratios would pay a lower corporate tax rate, and vice versa. A bill introduced in the California legislature in 2014 offers an example. Under it, if a CEO earns 100 times as much as the median worker in the company, the company’s tax rate drops from the 8.8 percent corporate tax rate now applied to all firms in California to 8 percent. If the CEO makes 25 times the pay of the typical worker, the tax rate drops to 7 percent. On the other hand, if the CEO earns 200 times that of the typical employee, the tax rate rises to 9.5 percent; 400 times, to 13 percent.
The California Chamber of Commerce has dubbed the bill a “job killer,” but the reality is the opposite. CEOs do not create jobs. Their customers create jobs by buying more of what their companies have to sell, giving the companies cause to expand and hire. So pushing companies to put less money into the hands of their CEOs and more into the hands of their average employees creates more purchasing power among people who will buy, and therefore more jobs. The other argument against the bill is the supposed complexity of the computation it requires. But the Dodd-Frank Act already requires companies to publish the ratios of CEO pay to the pay of the company’s median worker (at this writing, the Securities and Exchange Commission has not yet issued rules implementing this provision of the law). So the California bill would not force companies to do anything more than they will have to do under federal law. And the tax brackets in the bill are wide enough to make the computation easy. California’s proposal is not perfect, but it offers a promising direction. That the largest state in America is seriously considering it tells you something about how top-heavy American business has become, and why—even without countervailing power—political support is growing to do something serious about it.
A variation on this idea, proposed by William Galston of the Brookings Institution, would lower taxes on employers who give their workers wage increases commensurate with the nation’s annual productivity growth, while raising taxes on employers who do not. This proposal would go some way to reconnecting worker income to the nation’s overall economic gains. One objection might be that companies can game the system by subcontracting low-paying jobs to another company. Both proposals control for this. Under the California proposal, corporations that begin subcontracting more of their low-paying jobs would have to pay a higher tax; under the Galston proposal, employers would be barred from misclassifying employees as independent contractors or outsourcing low-wage work that previously had been done inside the corporation.
Another proposed change would give workers more direct ownership of the corporation by providing additional tax incentives for employee stock ownership and profit sharin
g, or the formation of employee-owned cooperatives. The idea is hardly new. It dates back to the early years of the Republic, when legislation provided tax credits to owners of fishing trawlers who established “a written, profit-sharing contract with all the sailors covering the entire catch.”
All such proposals raise a more basic question, which suggests even more fundamental reform: Why should shareholders take prominence over employees? As I have noted, corporations are nothing more than collections of contracts and property rights. They are not “owned” by shareholders the way ordinary goods are owned. It is common for the individual shareholders of large companies to be blissfully unaware of which specific companies they own, or for how long, because their ownership is through pension funds or mutual funds that tend to move quickly into and out of shares of stock, seeking quick speculative gains. If nothing else, high-frequency trading illustrates the irrelevance of stock ownership to effective corporate governance. Shareholder “ownership” is therefore a legal fiction. So is the idea that CEOs and other corporate executives have a fiduciary duty to maximize the value of corporations’ shares of stock. Corporate charters, issued by states, require no such thing. While shareholders select a corporation’s directors, the directors are under no legal obligation to put their interests above all others. Indeed, as we’ve seen, the idea that the sole purpose of a corporation is to maximize shareholder value is relatively new, dating back only to the 1980s. The dominant view in the first decades after World War II was that corporations had responsibilities to all of their stakeholders.
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