Elizabeth Warren may claim to be “capitalist to my bones,” but beneath those high cheekbones there’s more socialism in her blood than American Indian DNA. Preceding this week’s first round of Democratic presidential debates, Sen. Warren is gaining on Sens. Joe Biden and Bernie Sanders in the polls and when she takes the stage she must prove her bona fides to a radicalized party base.
To do so she has turned to the birthplace of Marx, where companies are governed by the concept of Mitbestimmung, “co-determination” laws that require firms to serve interests beyond those of their owners. Under Warren’s “Accountable Capitalism Act,” unveiled last year, firms “with more than $1 billion in annual revenue must obtain a federal charter from a newly formed Office of United States Corporations at the Department of Commerce. The new federal charter obligates company directors to consider the interests of all corporate stakeholders – including employees, customers, shareholders, and the communities in which the company operates,” rather than the shareholders alone.
That’s not all Warren’s new Washington agency would be up to. By prohibiting such businesses’ political spending without 75% of their directors and shareholders approving, Warren would deliver something of a new holy grail for the left: repeal of the Supreme Court’s 2010 Citizens United ruling affirming First Amendment protections for campaign contributions.
The Harvard law prof turned Massachusetts senator says federal meddling in business decision-making is as American as apple pie, claiming “in the 1980s, corporations adopted the belief that their only legitimate and legal purpose was ‘maximizing shareholder value’ … This shift is a root cause of many of America’s fundamental economic problems.”
You remember those good old days for the economy, before Ronald Reagan succeeded Jimmy Carter.
“That has redirected trillions of dollars that might have otherwise gone to workers or long-term investments, with predictable results,” Warren says. “Since the advent of shareholder value maximization, worker productivity has risen steadily but real wages for the median worker have been basically flat and the share of national income that goes to workers has dropped markedly.”
The American Enterprise Institute’s Jim Pethokoukis, critiquing Warren’s plan last week, pointed out that actually, “real median wages grew by a quarter over the past three decades — using the Fed-favored PCE [personal consumption expenditures] price deflator — and by a third for the bottom 20% of workers.” Meanwhile, per capita GDP has been and continues to be 10% lower in Germany than in the U.S.
‘Fundamentally Subversive’ To a Free Society
The Reagan prosperity exposed the stupidity of capitalists feeling guilty about being capitalists, a point driven home over a decade earlier by Milton Friedman, who warned that the social responsibility ideology would “extend the scope of the political mechanism to every human activity” and “does not differ in philosophy from the most explicitly collectivist doctrine … I have called it a ‘fundamentally subversive doctrine’ in a free society, and have said that in such a society, ‘there is one and only one social responsibility of business … increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.’”
By “political mechanism” Friedman was referring to politicians exerting control of some kind or other over the decisions of private businesses. Such controls manifest themselves in many ways, of course. An example as amusing as it is infamous was Japan’s Ministry of International Trade and Industry (MITI) in the 1960s actively trying to prevent Honda from getting into the automobile industry.
But perhaps some plucky member of the audience in Miami Wednesday night will ask Warren why, if co-determination is such a neat idea, German companies themselves are increasingly seeking to escape it?
Writing in Business Law magazine in 2016, mergers and acquisitions attorney Lutz Englisch and employment law and union negotiation expert Mark Zimmer, both in the Munich offices of the international law firm of Gibson Dunn, noted that “the number of German companies regulated by the Co-determination Act dropped from roughly 770 in 2002 to 635 in 2015. German companies have been evading the Act by adopting other legal forms,” including “founding a company under English law but domiciling it in Germany. These entities have become more and more visible in Germany.”
Moreover, if Warren’s claims are true that there are “trillions of dollars that might have otherwise gone to workers or long-term investments,” why don’t the boards of companies themselves see it? There is nothing in U.S. law preventing large businesses from putting workers on their boards. But Cato Institute economist Ryan Bourne points out “the main impact of co-determination laws: they can prevent CEOs from making difficult, unpopular decisions for the company’s long-term benefit, while creating a new interest group resistant to reallocating capital to its most productive uses.”
Bourne cites the former Yugoslavia’s experience: “Worker representatives pushed for maximum pay, rather than new projects. When investment did take place, it tended to be to grow existing companies, rather than in new, more productive ventures.”
Samuel Hammond of the Niskanen Center warns that Warren’s Mitbestimmung “fails as a model for creating new, fast-growing companies.” He recounts: “When Steve Jobs took over Apple in 1996, for instance, he famously forced the resignation of most of its board of directors, installing close friends who would be loyal to his vision. He then proceeded to lay off 3,000 workers and shuttered a number of the company’s biggest boondoggles. This earned him a reputation for ruthlessness, but it also set Apple on the path to become America’s first trillion-dollar company. It’s simply impossible to imagine Jobs’ unilateral vision succeeding in an environment of constant stakeholder management and worker negotiation.”
Government Is Already Making It Hard For Firms
Town Hall’s Carl Horowitz also cautions: “By treating bigness as an offense, the measure would discourage capital formation. All corporations, even ‘giant’ ones, begin tiny. By subjecting the largest ones to intrusive regulation, the proposed legislation would discourage the fastest-growing (i.e., successful) companies from becoming industry leaders. Innovation and productivity throughout their respective industries would be held back.”
Horowitz points out that large companies “pay employees better … 54% more than small firms paid their equivalent employees. Moreover, they offered 2.5 times more paid leave and health insurance benefits, and 3.9 times more retirement benefits. To corral major corporations in effect is to corral their employees, whether or not they are shareholders.”
Considering his many flip-flops on an array of issues, Mitt Romney may not have made the best president, but the Bain Capital private equity business he managed fixed many companies, and as a consequence saved and produced an inestimable number of jobs. The whole reason public firms subject themselves to that complex, wrenching process is because government is already making it so difficult for them to operate.
“Consider the trend in recent years of private companies’ delaying, or even reversing, the decision to go public,” Hammond writes. “With bigger pools of capital come additional compliance burdens and a degree of backseat-driving by shareholders and the broader public that can drive a CEO insane. Co-determination laws, to the extent that they simply add bureaucracy for public and private companies alike, could diminish whatever competitive edge remains to staying private.” In other words, Warren would leave troubled businesses with no way left to save themselves.
Warren might also be asked why Germany’s practice of her concept didn’t prevent the Volkswagen scandal, in which senior executives installed software in more than 11 million vehicles to prevent the detection of emissions violations, ultimately leading to a stock collapse and $30 billion in fines and buybacks. University of Illinois law professor Nicola Faith Sharpe noted in the Michigan Business & Entrepreneurial Law Review that despite co-determination laws, “German corporate boards are susceptible to the same shortcomings as American boards. The ideal of co-determination is easily subsumed by greed and wealth maximization when proper process is not prioritized.”
Save capitalism? Quite the contrary, which is why hard-left commentator Lambert Strether swoons that “Sanders’ policies — provision of services like Medicare For All or free college — make him a social democrat; but Warren’s act — empowering workers, albeit partially, to allocate capital through co-determination as directors — place [sic] her on the road to democratic socialism, if that be defined as democratic control of the means of production.”
Capitalists will supposedly sell Marxists the rope with which they will hang them, but Warren is selling a rope that for decades has squeezed employers and workers alike wherever it’s been worn.
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