Sen. Elizabeth Warren, D-Mass., has proposed a bill known as the Accountable Capitalism Act (ACA), which essentially says that America’s largest corporations will be controlled by the federal government.
Warren claims this is necessary because those corporations have been given favorable treatment at the expense of the rest of us.
“For the past 30 years we have put the American stamp of approval on giant corporations, even as they have ignored the interests of all but a tiny slice of Americans,” Warren wrote in a recent op-ed in The Wall Street Journal.
But isn’t it true that big corporations cannot ignore the interests of Americans? If they do, Americans will put them out of business simply by refusing to buy the company’s products. Instead, the most successful corporations grew because they provided exactly the products that American’s wanted, at exactly the price Americans were willing to pay.
Warren also has said, “I am a capitalist. I love what markets can do. I love what functioning economies can do. They are what make us rich, they are what create opportunity. But only fair markets, markets with rules.”
What rules? How would Warren define fair markets? Is it fair to allow markets to freely set the price and the amount produced? Or should markets be adjusted so that prices, quantities produced and profits reflect a social goal?
It appears that Warren has noted a record profit year for corporate America in 2017, and that CEO pay jumped 18% last year. The average wage earner saw abut a 2% wage increase. She also noted that corporations received a large income tax cut this year.
While she views these things as unfair to the workers and claims there has been little benefit for the average American, the reality is much different. The large profits resulted from corporations being able to expand and offer more products to Americans.
Last year, President Donald Trump removed counterproductive and costly regulations facing American business from the Obama administration. That alone increased economic activity to a 3% rate, from the dismal 2% rate experienced during the last eight years. So corporate profits did increase as more goods and services were made available to consumers.
When corporate profits increase, the value of the CEO, who has primary responsibility for the company’s large profit, sees an increase in her value. That’s why CEO’s salaries rose.
The higher profit also leads to more investment. This comes either directly by the corporation or by the individual stockholders who get dividends or who sell their stock back, in order to invest in other more profitable corporations.
In spite of that, Warren wants to pass the ACA. The law will affect only corporations with more than $1 billion in annual revenue. In other words, America’s largest and most successful companies.
Each firm would have to acquire a federal charter, rather than the state charter they now have. This charter would require the firm to show that they were considering the interests of employees, customers and the surrounding community, and not just the stockholders, when determining their policies.
This would be disastrous for the country. No longer would large firms be able to quickly respond to changing market conditions by changing market prices and market level of output.
Instead, they would have to get some government approval every time an opportunity was presented, especially if the opportunity was outside of their normal business activities. They would have to show that any new venture improves the welfare of all stakeholders.
In order for companies to be successful when making important decisions, the corporation’s regard for the other stakeholders is always secondary to the stockholders. In any business, the primary responsibility is always to the owners. That ensures efficiency and leads to long term economic growth.
The ACA would also allow workers to elect 40% of the board of directors. This too would be a disaster. The board of directors must primarily represent the best interests of the shareholders. After all it is their money. This requirement would tend to misuse corporate funds, lead to inefficiency as well as slower economic growth.
Warren also wants to let the employees have a say in where political donations are spent. The corporations affected by the ACA would need 75% of the board to approve any political donations.
It could be tough to get stockholders to vote on every contribution and getting a 75% majority would likely be extremely difficult, especially if 40% of the board was elected by employees.
The ACA would be a disaster. It would slow economic growth, distort markets and shrink the pie for everyone. As history clearly shows, allowing market forces to work with limited government intervention always results in the most output, the lowest market prices, a distribution of income based on contribution and a higher standard of living.
Let’s give American business more freedom not less. Let’s pass laws that benefit the majority instead of trying to cure perceived social injustices. After all, isn’t that what President Barack Obama tried to do which resulted in the slowest post-recession economic growth period in history?
Dr. Michael Busler, Ph.D., is a public policy analyst and a professor of finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in finance and economics. He has written op-ed columns in major newspapers for more than 35 years.
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