Connecticut needs a new, more inclusive, form of capitalism
Recently there has been much discussion about the need for municipal and state workers to face the new reality of current budgetary constraints. As a Hartford taxpayer, I recognize that current labor agreements are not sustainable, and a failure to restructure health and pension benefits could lead to bankruptcy and an even harsher reality. But in fairness, I also feel there is a need for a more honest and holistic discussion of this new economic reality.
The Economist magazine recently highlighted that business profits are at record high levels. Meanwhile, the labor share of income has dropped from 65 percent to 56 percent , and would have been even more extreme if not for the increased income of the top 1 percent of workers.
Sadly, political candidates have preferred to play off the economic insecurities faced by the other 99 percent with a focus on the emotional hot buttons of globalization and immigration. While these do contribute to constraining wage income, the real challenge faced today is technology. A study conducted by McKinsey & Company suggested that 45 percent of activities individuals are paid to perform could be automated with currently available technology (including 20 percent of what CEOs do!) This represents an additional $2 trillion of labor income that could be transferred to capital.
The financial challenges faced by state and local governments in Connectict today are further aggravated by a crumbling infrastructure that undermines the competitiveness of businesses and imposes high social costs, particularly on the most needy. The current political climate clouds any meaningful discussion with slogans of intrusive government regulations, burdensome taxes and bureaucratic inefficiency.
The solution is to cut taxes, streamline regulations, and provide subsidies to attract business investment. The new reality is that business spending on lobbying has doubled over the period 1997 to 2013 as many industry sectors — health care, insurance, credit cards, telecoms, and pharmaceuticals — consolidated and created a rule book that favored incumbents.
The new reality is that business has not invested in the public infrastructure that underpins their current record profits. Free cash flow is so high that companies were sitting on $800 billion after capital investment. Too often this excess capital is simply used to buy back shares to prop up earnings per share metrics used to justify incentive compensation.
Labor does need to agree to come back to the table to restructure agreements that are simply too expensive in this new reality. But business also needs to come to the table to restructure the social contract for their license to operate. And politicians need to focus less on campaign slogans and more on the hard work and difficult choices of governing.
Further concentration of the wealth, whether in corporate accounts or payouts to shareholders is not in the best interest of business, consumers or politicians. Extreme wealth concentration will depress economic demand and private investment, limiting future growth needed to help balance budgets and threatening social cohesion.
Infrastructure investment has been shown to create local jobs, reduce environment impacts, and contribute to long- term economic vitality. Connecticut needs infrastructure investment. Studies have indicated potential returns on investment for various infrastructure projects of 8 to 14 percent.
Connecticut has an aging population of rather well off retirees looking for places to park their retirement savings. It may be unrealistic to ask politicians tied to two- year election cycles to make decisions having 25- to 50-year impacts, but other countries are partnering with pension funds that specialize in the financing and management of infrastructure projects.
Technology will advance, and capitalism will drive further efficiencies that suggest the new reality will not generate sufficient labor income to fund livable wages. But a more inclusive form of capitalism that promotes capital investment in critical infrastructure systems — communications, transportation, energy, and education — can generate sufficient wealth for sustainable livelihoods. The new reality can be ugly and divisive, or it can be an innovative and inclusive approach to building a better Connecticut.
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