Friday, April 8, 2016

Brian Gaynor: ‘Free market’ failings fuel the Trump movement

Robert B. Reich’s book Saving Capitalism is an excellent read for those wanting a better understanding of the Donald Trump phenomenon. It also highlights why the traditional political order has been disrupted in many other countries and why New Zealand could also have a “Trump experience”.

Reich, who was Secretary of Labor in the Clinton Administration, is a strong supporter of capitalism but he believes that its rules are strongly skewed in favour of a number of elites and against the majority of ordinary citizens.

He argues that communism and fascism are no longer the major threats to capitalism but that the biggest threat is “a steady undermining of the trust modern societies need for growth and stability”.

Reich believes that when individuals consider that neither they nor their children have a fair go, they will find ways to protest against the unfairness of the capitalist system. This is a core reason behind the strong support for Trump in the US presidential primaries.

Reich identifies a number of reasons for the widespread discontent in the US, including:
  • In the 1950s a schoolteacher, baker or mechanic could earn enough to buy a house, purchase two cars and raise a family but this is no longer possible unless they are willing and able to borrow substantial sums of money.
  • CEOs of large corporations now earn more than 200 times the average worker’s income compared with 20 times 50 years ago.
  • The richest 1 per cent of Americans now receive more than 20 per cent of the country’s income compared with 9-10 per cent in the 1950s and 1960s.
  • Politicians pay more attention to the needs of large corporations, compared with individuals, because these corporations are successful lobbyists and make huge political donations.

NZ CEO remuneration

He argues that corporate and financial elites have huge political influence and have been able to dictate the way the US economy operates. These elites have actively reorganised the rules of the “free market” for their own benefit.

Reich believes that the biggest political divide is not between the Republican and Democratic Parties but between ordinary Americans and large corporations, Wall Street banks, Washington politicians and wealthy individuals who have managed to reorganise the economy to their own advantage.

Donald Trump has successfully tapped into this discontent.

Reich wrote: “While this book focuses on the United States, the centre of global capitalism, the phenomena I describe are increasingly common to capitalism as practiced elsewhere in the world, and I believe the lessons drawn from what has occurred here [USA] are as relevant to other nations.

“Although global businesses are required to play by the rules of the countries where they do business, the larger global corporations and financial institutions are exerting growing influence over the makeup of those rules wherever devised. And the growing insecurities and cumulative frustrations of average people who feel powerless in the face of economies (and market rules) that are not working for them are generating virulent nationalistic movements, sometimes harboring racist and anti-immigrant sentiments, as well as political instability in even advanced nations around the globe.”

Reich goes on to write about the need for governments to make and enforce rules, including for the “free market”.

He argues that the size of government is not unimportant but the rules under which the market functions are far more important. It is impossible to have a free market without some rules because the absence of rules will lead to a huge concentration of power and, as a consequence, discontent among a large percentage of the population.

Reich argues that “the free market is a myth that prevents us from examining these rule changes and asking whom they serve. The myth is therefore highly useful to those who do not wish such an examination to be undertaken. It is no accident that those with disproportionate influence over these rules, who are the largest beneficiaries of how the rules have been designed and adapted, are also among the most vehement supporters of the free market and the most ardent advocates of the relative superiority of the market over government. But the debate itself also serves their goal of distracting the public from the underlying realities of how the rules are generated and changed, their own power over this process, and the extent to which they gain from the results”.

He also goes on to point out how the underlying rules of the free market are hidden because intangible assets are becoming more and more important. Rules governing intellectual property are harder to see as are the dominant market power of Google, Apple and Facebook compared with the giant railways and oil trusts of over a century ago.

That is why any investigation into the commercial strategies and tax policies of these cyber giants is important.

New Zealand has a few faint signs of these issues and the discontent that has led to the strong support for Trump.

House prices are out of reach for the younger generation, unless they are willing and able to borrow huge sums of money, and student debt continues to increase. There are clear signs of monopoly and oligopoly power in business, although our corporate sector doesn’t finance political candidates to the same extent as the US corporate sector.

Fonterra, the country’s largest company, was formed through the merger of our two largest dairy companies to create a dominant market position, while Auckland International Airport, the largest listed company by market capitalisation, is an effective monopoly. There are also concentrated market positions in a number of other sectors, including supermarkets.

However, a small sample of New Zealand chief executives shows that they are more modestly remunerated than CEOs in the United States. The accompanying CEO remuneration table includes Fonterra, Auckland International Airport and New Zealand Post. The latter is the country’s largest 100 per cent state-owned enterprise, mainly because it owns 100 per cent of Kiwibank.

The average CEO salary of these three companies is 54 times greater than the average New Zealand income, compared with 45 times the national income a decade ago. This compares with a CEO/average worker’s income ratio of over 200 times in the United States.

Fonterra is the standout among this small sample as its CEO receives 93 times the national average compared with 90 times a decade ago.

The business community needs to look beyond short-term self-interest and ensure that it doesn’t allow elite groups to capture most of the economic spoils. If it doesn’t, the danger is that we could end up with a similar political situation to the one the Republican Party in the United States found itself in, facing a major loss of popular support. The Republican Party originally brought in Sarah Palin to help attract this disaffected group but the strategy backfired as her supporters and others have decided to vote for Trump.

There are a few signs of this discontent in New Zealand, with the sharp rise in popularity of New Zealand First in the latest Roy Morgan political poll and perhaps also in the flag referendum. The rejection of the proposed new flag has some similarities with the support for Trump, as voters feel they have experienced too much unwanted change and would prefer to keep some of the enduring symbols of the past.

The clear message is that the “free market” needs rules and regulations that give everyone a fair chance to participate and prosper.

Brian Gaynor is an investment analyst and the Executive Director of Milford Asset Management. 


Brian said...

Free Market Failure? Or have Free Market Disciples failed to discipline their Tiger?
Good analysis Brian,
Comment. The Trump phenomenon is due as much to the old clichés of candidates all seeming to be born of the same version, speaking the same language, with the same ideas, to a Public “brassed off” with promises that are never fulfilled. Especially so down here, when the major elected party in New Zealand succumbs daily to the blackmail of minor parties just to stay in power!
Trump whatever his “policies” and these have yet to be enunciated (if ever); has pressed the button on just what is in fact, a failure in our democratic system. Good idea initially, but it never actually comes into fruition.
Reich fails in his diatribe to take the rod to institutional bureaucracy or perhaps, at capitalistic bureaucracy (the increase in size relative to what the CEO can earn); which is exemplified by your graph and comments on the salaries of CEO’s. You could have easily included Local Bodies and other Government departments in this analysis. But then these institutions always seem to be excluded from any public disquiet as being necessary departments of State (sacred cows). Due no doubt to New Zealand being at heart a socialistic state, despite the actions by private organisation to bring God’s Own right into the World economy.
Reich’s comparisons are true, but fail to take into account that in the 1950’s the public’s expectations and financial ability to pay (such as the use of excessive borrowing from Banking being virtually impossible) the use of credit “verboten”. This method was restricted mainly by the fact that people then avoided debt, and had not been seduced by the practice of “keeping up with the Jones’s”. Also the shadow of the Great Depression of the 1929 still hung like a black shadow.
Also is there such a thing as a “Free Market”? Especially when we see the increase in agricultural subsidies both from the E.U. and the U.S.A, has the World Trade Organisation hibernated these days? If then the “Free Market is a myth, then too, are the imposed barriers such as import controls, internal market protection to local industries. A factor which it seems has escaped the notice of our politicians and the general public, concerned as they all are, with the spectre of rising unemployment.
As long as New Zealand remains true to the cult of a total leadership by a P.M., a solution derived from the Muldoon era; we need not fear an outbreak of Trumpmanship. After all we still have the All Blacks to fill our media and divert our attention.
However there is a nagging fear that in our hour of financial triumph compared with other Western Countries, our increase in domestic spending has a price to pay down the line. After all our main exporters the Agricultural sector is not only suffering from oversupply on world markets. But also, from an ever expanding internal aggression from those who demand a reduction of its animals, to satisfy a Green propensity for total safety, and our natural clean green image!
Trumpmanship.has its merits, at least it has become the most interesting election with its continual ups and down; so whatever the outcome it will be remembered mainly for its entertainment value. Which after all, in this day and age, is the real primary function of our way of life.

Unknown said...

Surely it is completely up to shareholders as to what they pay their CEO's. If they consider they get good value by paying 200 times the average salary it is their call, they are spending their own money and expect a return. If the delivered return is not up to their expectation the CEO will soon be replaced.Obviously shareholders must consider that the decisions made by the CEO is 200 times more critical to their investment's chance of success than decisions of employees in the same enterprise earning the average income.

Regulating CEO's remuneration is the start of a slippery slope to central control. Where has that ever been successful? Governments should be involved in creating a legal frame work not meddling in the running of private business as this book, which I will still read, seems to be suggesting.
A good Kiwi analogy would be a referee in a rugby game deciding that some players are not doing so well so having the odd kick or pass himself!

Anonymous said...

What about globalisation which enriches some but costs the rest of us.?

Last weeks post by Mike Butler seems to hit the nail on the head:
The conventional way of looking at the economic impact of large-scale immigration shows:

1. Real wages will fall
2. Owners of land will benefit because land underpins the New Zealand economy and the supply of land is fixed.
3. There will be an outflow of "native" labour in search of higher wages in Australia
4. The economy will be bigger, but average incomes will fall
5. Resources will flow into low value service production.

If so and you work in a low paid service job you will have lots of work but never be able to afford a house.

Trump also stood up to the media. These days we are saturated with the opinions of know it alls like Hosking and Jack Tame. They carried the power of a public shaming (remember Winston attacked by blonde Cambell Live reporter over his Sin City comments?)
Recently a survey showed that only 9% trust the media.

Anonymous said...

Real free market capitalism is the best mechanism known to man for democratizing wealth.

What Brian outlines above is today commonly known as "Crony capitalism," a bastardisatio of the free market that ensures most of the wealth stays on the top table, with a few crumbs falling off now and again for those at the lower tables.

This used to be known as Fascism. As Friedrich Hayek reminds us: "Fascism is the stage reached once Communism has proved an illusion." Fascism means Big Business in bed with Big Government for government preferment, and everyone else serfs on the Big Government/Big Business plantation.

Let's call these people "One Worlders."

The One-Worlders don’t disdain to conceal their aims when addressing the like-minded.

As a single example, at the Bilderberg Conference of June 1990, held in Baden-Baden, Germany, Rothschild descendent, David Rockefeller made a highly revealing statement:

"We are grateful to the Washington Post, the New York Times, Time Magazine, and other great publications whose directors have attended our meetings and respected their promises of discretion for almost 40 years. It would have been impossible for us to develop our plan for the world, if we had been subjected to the lights of publicity during those years.

"But the world is now more sophisticated and prepared to march towards a world government. The supra-national sovereignty of an intellectual elite and world bankers is surely preferable to the national auto-determination practiced in past centuries."

Hundreds of other such statements by various One-Worlders can be readily located if one takes the time to look.

As O’Brien, the torturer in George Orwell’s “1984”, told Winston Smith during his interrogation: “If you want an image of the future imagine a boot stamping on a human face --forever.”

Anonymous said...

Real free market capitalism is the best mechanism known to man for democratizing wealth.
Do we assume limits to growth or the infinite creativity of the human mind?

Our government currently aims to add a larger crew to the NZ ship with nothing to show except returns to the owners of land?