Can Democrats Save Capitalism?

(Bloomberg Opinion) -- With the Democrats having retaken the House of Representatives, and with socialists gaining more clout within the Democratic Party, the U.S. is awakening to the reality of a reinvigorated left. Long decades of increasing inequality have taken some of the shine off of capitalism, and the disappointment wrought by the Great Recession seems to have been a catalyst for a socialist resurgence.

But a big question looms in the background: What kind of new system does the left want?

There are two basic alternatives, which can be broadly labeled as social democracy and corporatism. In the first, the government is responsible for providing a social safety net — things like basic health care and social security — through taxation and spending. In the second system, the private sector is expected to provide most people with sufficient income and benefits. The role of the government is to ensure that it does so, either through specific laws (a minimum wage, for example) or more general policies (support for stronger unions, say) that encourage businesses to keep both employment and wages high.

These two systems aren’t mutually exclusive. In fact the U.S. government offers Medicare, Medicaid and other health insurance services, while also providing tax credits to help companies pay for their workers’ health care. Minimum-wage policies coexist with the Earned Income Tax Credit, which provides extra income out of tax revenue.

But it would be a mistake to pretend there’s no tension between these two systems. Many government benefits are means-tested: As a person’s earned income rises, the welfare state pulls back. This can make it hard to support both approaches at the same time — remember when Senator Bernie Sanders excoriated Amazon for paying its workers so little that they qualified for government benefits? As Ryan Cooper has pointed out, the whole purpose of the social-democratic welfare state is to make citizens less reliant on corporations.

A second source of tension is taxation. If corporations are going to be responsible for the well-being of much of the populace, they are going to have to make enough revenue to be able to sustain both high employment levels and high wages. But this often requires that corporate taxes stay low, to help a country’s businesses compete internationally — which then makes it harder to fund the welfare state.

So while the left doesn’t have to pick one approach, it will have to decide which to emphasize. One potentially unattractive feature of the corporate welfare state is that it privileges people who work or have family that does. The elderly, disabled or those living far from centers of commerce and industry can end up disadvantaged through no fault of their own. A government system, in contrast, provides for people based on citizenship, not work — who they are, not what they do.

Ultimately, it may come down to politics. A generous welfare state has always been politically very hard to implement in the U.S. Though its fiscal system has become more redistributive over the years, the U.S. still doesn’t spend nearly as much of its gross domestic product through the government as most countries in Europe do:

Can Democrats Save Capitalism?

The reason is not clear. The U.S.’s size and geographic diversity may play a role, and its ethnic diversity may make voters more wary of paying taxes that might go to support citizens from other ethnic groups. American culture may also emphasize work ethic more, as illustrated by the fact that Americans work relatively long hours compared to other rich countries. (Though of course the causation may run the other way; Americans might work more because they have to, given the country’s smaller welfare state.)

Whatever the reason, a France-style welfare state in the U.S. seems unlikely anytime soon. That leaves corporatism as the obvious alternative. This approach is more consonant with American history — policies like minimum wage and employer-based health care have always been more popular in the U.S.

That may be why rhetoric on the left is shifting. Although universal health care is still a central goal, there seems to be less talk about the beauty of Nordic social democracies and more about the need for U.S. corporations to do their part. Sanders has recently focused on pressing specific companies like Amazon and Walmart to raise wages, while Elizabeth Warren has introduced a plan for German-style co-determination. The Fight for 15 campaign to raise minimum wages has inspired many, while support for unions is growing. Meanwhile, enthusiasm for the ultimate government-based solution — a universal basic income — appears to have tapered off.

This may be for the best. The corporatist approach may not be the fairest, but it will probably be more conducive to national wealth. In order for companies to provide for their workers, they need to generate sufficient revenue. A corporatist system thus aligns the interests of workers, management and government. Though this can lead to cronyism, it also gives leaders on the left a fundamental reason to help U.S. companies develop new products and compete in global markets. That means avoiding onerous taxes or regulation. It could also mean more government support for corporate innovation and exports.

Ultimately, a more equitable corporate system may be the thing that saves capitalism — both from its own excesses and its most ardent enemies.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

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