What Went Wrong with Capitalism (And Other Stories)

Recent articles shed light on important trends in today's America.

One of the things I do is highlight trends that aren’t always visible or frequently discussed, but are affecting our world. Some recent articles around a so-called “new centrism,” the problems with today’s capitalism, and the non-profit industrial complex in cities each shed light on important facets of today’s America.

The New Centrism

David Leonhardt at the New York Times argues that a new centrism is rising.

During the Covid pandemic, Democrats and Republicans in Congress came together to pass emergency responses. Under President Biden, bipartisan majorities have passed major laws on infrastructure and semiconductor chips, as well as laws on veterans’ health, gun violence, the Postal Service, the aviation system, same-sex marriage, anti-Asian hate crimes and the electoral process. On trade, the Biden administration has kept some of the Trump administration’s signature policies and even expanded them.

The trend has continued over the past month, first with the passage of a bipartisan bill to aid Ukraine and other allies and to force a sale of TikTok by its Chinese owner. After the bill’s passage, far-right House Republicans tried to oust Speaker Mike Johnson because he did not block it — and House Democrats voted to save Johnson’s job. There is no precedent for House members of one party to rescue a speaker from the other. Last week, the House advanced another bipartisan bill, on disaster relief, using a rare procedural technique to get around party-line votes.

This flurry of bipartisanship may be surprising, but it is not an accident. It has depended on the emergence of a new form of American centrism.

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The new centrism is a response to these developments. It is a recognition that neoliberalism failed to deliver. The notion that the old approach would bring prosperity, as Jake Sullivan, Biden’s national security adviser, has said, “was a promise made but not kept.” In its place has risen a new worldview. Call it neopopulism.

What I think this phenomenon really shows is the power of the “uniparty.” The establishment factions of both the Democrats and Republicans can work together, both are at odds with large and loud movements on their flanks, and both would like to vanquish those movements in order to go back to business as usual.

Some of this seems to be “populist” in some respects. But one could argue that’s an illusion. On China, there has been a bi-partisan shift. This is one of the major legacies of the Trump administration. But rather than a response to populist concern about, say, the impact of offshoring on regular people’s jobs, this is more a reflection of how American businesses realize they’ve reached “peak China” in terms of the amount of money they can make there, and now recognize that the Chinese government is squeezing them out. There are also some concerns around the impact of excessive dependency on China for our military industrial base.

What we aren’t seeing is these folks questioning outsourcing of white collar jobs to places like India or the Philippines, or against manufacturing outsourcing in general. It’s similar with Tik Tok. The abuses of US tech companies, which are arguably as severe, have been ignored. Congress remains in the pockets of their lobbyists.

These people are taking actions based on their own concerns, not populist ones.

But there is something to this idea of a new elite realignment.

In my article on the future of conservative fusionism, I noted that the establishment conservative world is deeply hostile to the Trumpism that’s devouring the party, and doesn’t particularly like either social or cultural conservatism either. They have a plausible home on the center-left.

If - and this is a huge if - the establishment left is able to rein in the far left activists that have been so damaging, it’s easy to imagine these establishment conservatives migrating to what I called the non-woke, neoliberal, technocratic left. They share much of the same worldview.

This would represent a new centrism of sorts, but I think of it more as a realignment.

I also think this non-woke, neoliberal, technocratic left - as represented by people like Matthew Yglesias - is the most likely source of substantive policy ideas for addressing some of the core issues facing our country. There simply aren’t enough people with serious policy chops on the right to engage on many of these issues at a detailed level.

The populist right has been more focused on political and philosophical questions like post-liberalism, the “regime,” nationalism, etc. and much less so on actually implementable policy solutions. How do we bring down health care costs? How do we modernize our energy system? How do we address income inequality and poor social mobility? These aren’t questions with trivial answers.

I don’t say this as someone who hopes for this outcome, but merely as a statement of what seems likely. I see the center-left as the most likely source of these policy ideas, just as it was with health care reform (Obamacare). Whether these work is another matter.

What Went Wrong with Capitalism

The Financial Times ran a lengthy excerpt from a new book by Ruchir Sharma called What Went Wrong with Capitalism. This is not a typical left wing screed against neoliberalism, but rather a critique of how too much government intervention in the economy has created many of the problems we are experiencing.

One does not need to agree with all of Sharma’s conclusions, but the things he highlights are real. Most of them have already been discussed elsewhere by others.

Ronald Reagan Didn’t Shrink the Government

Sharma notes that government’s spending and scope has been increasingly almost continually for an extended period of time, with the real shift being in how it was paid for: by ballooning debt.

When Joe Biden won in 2020, op-eds in newspapers around the world hailed his presidency as a death knell for “the era of small government”, which they dated to the “neoliberal” rebellion against the welfare state launched by Reagan and Margaret…Just one problem: the era of small government never happened. Government has been expanding for nearly a century in virtually all measurable respects, as a spender, borrower and regulator; the one brief retreat, under Bill Clinton, proves the trend. In the US, government spending has risen eight-fold since 1930 from under 4 per cent to 24 per cent of GDP — and 36 per cent including state and local spending. What changed under Reagan was that as spending rose, tax collections remained steady, so government started paying for its own expansion by borrowing. Deficits went from rare to routine and as a result public debt has quadrupled in the US to more than 120 per cent of GDP today.  

Welfare Spending Has Been Going Up, Not Down

Since 1980, welfare spending has risen in most of the developed economies tracked by the OECD — and has risen faster than the average in the US. Even liberals who favour more welfare spending don’t dispute this trend. Matthew Desmond, the scholar of American poverty, has written that he expected to find that US spending on the poor had grown “stingier over time”, because that is the standard story, but found instead that “the opposite is true”.   

Regulations Are Increasing Too

The tale about shrinking government was based on talk not data. High-profile tax cuts were counterbalanced even under Reagan with lower-profile rises, so tax collections have remained steady as a share of GDP since the 1950s. Campaigns of “deregulation” ended up rewriting old rules at greater length but with “deregulatory intent” — creating a thicket of loopholes that favour the biggest banks with the most lawyers. During the past three decades, the bureaucracy eliminated a total of just 20 rules, while adding new ones at an almost metronomic pace of about 3,000 a year, under both parties. 

Governing Has Been Absorbing Risk for the Rich - And Everybody Else, Too

Much has been made of how the US government increasingly bails big business or billionaires out of a jam whenever they get into trouble. We saw that with with housing crash recession. And it continues to be on display in ways big and small, such as the bailout of Silicon Valley Bank’s well-heeled customers by providing insurance far in excess of what was originally promised.

Sharma compares this metastasization of bailouts for financial pain to the rise in opioid prescriptions for physical pain.

With good reason, progressives deride this new version of capitalism as “socialism for the very rich”, but governments were doling out relief for the poor and middle class too. More than socialism for the rich, this is “socialised risk”, a campaign to inoculate an entire society against economic downturns. Although still widely criticised as the land of “raw” Reaganite capitalism, America is displacing Europe as the society least tolerant of financial distress for anyone, up to and including the super-rich.  

Something has been changing in the culture. Just as the American “revolution in pain management”, which insisted on treating even moderate injuries with powerful opiates, was hooking the nation on OxyContin, its approach to economic pain management was addicting the system to a drip feed of government support.

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The pre-Depression instinct to “liquidate” weak companies in a crisis gave way to the opposite excess: “liquefy, liquefy, liquefy”. Why not rescue everyone, all the time, when governments can borrow for free? 

The Financialization of the Country Comes from Cheap or Free Government Money

Although some financial sector deregulation did open new opportunities for big investors, the spring from which their capital flowed was governments and central banks. Including equity and debt, the size of financial markets grew from slightly larger than the global economy in 1980 to almost four times larger today. This worldwide boom fed the illusion that markets were running free and wild as governments retreated, when in fact the driving force behind the runaway “financialisation” of capitalism was easy money flowing from the government.

Productivity Growth Has Been Slowing

Behind the slowing recoveries was the central mystery of modern capitalism: a collapse in the rate of growth in productivity, or output per worker. By the outset of the pandemic, it had fallen by more than half since the 1960s. And a growing body of evidence points the finger of blame at a business environment thick with government regulation and debt, in which mega-companies thrive and more corporate deadwood survives each crisis.

Declining Anti-Trust Enforcement and Corporate Consolidation Has Turned More Industries into Oligopolies

Although mega-companies in the tech industry get all the attention, three of every four US industries have ossified into oligopolies, dominated by three or four names. Worse, these oligopolies are more and more often the “bad kind”, prospering by lobbying regulators and killing off competitors, not by innovating. 

There’s Growing Income Inequality and Far Less Upward Economic Mobility Than People Think

Throughout, income inequality has been widening, but since 2000 this trend is no longer explained mainly by the rise of chief executives, making multiples more than their own employees. It flows from the rise of superstar companies such as Google, where all employees are making more than all their peers at weaker companies.     

Immobility is stifling the American dream. Other than the British, Americans are the people least likely to earn much more than their parents. Amid the record pandemic bailouts, the leading US tycoons saw their fortunes grow by tens of billions within 12 months. But if every entrenched billionaire is a “policy failure”, as the slogan says, the essential mistake is too much state support, not too little.  

Again, all of these trends are ones that I’ve seen written about before, and in which I’ve seen mainstream economists making arguments. But they have a different effect when you put them all together in one place.

If you can get through the paywall, I highly encourage reading the whole thing.

The Non-Profit Industrial Complex

The new issue of American Affairs has an article by Jonathan Ireland on “The Nonprofit-Industrial Complex” in America’s cities. My one friend calls this the “NGOctopus.”

He gives a few examples of the toxic nature of some of these NGOs. He talks about the Tenants and Owners Development Corporation (TODCO) in San Francisco, a non-profit that in theory develops and manages affordable housing. However, they are a horrible landlord, no longer actually development property, and today lobby against new affordable housing developments in the city in order to protect their own units and extract cash.

It turned out that instead of spending money on housing development and tenant support, TODCO boosted executive pay and funneled millions into lobbying. As TODCO’s spending on its tenants declined by 17 percentage points, executive pay quadrupled. Meanwhile, TODCO’s president, John Elberling, launched the Yerba Buena Neighborhood Consortium, a political lobbying organization. Between 2012 and 2020, TODCO’s direct lobbying of legislative bodies increased 95 times, from $5,000 to $470,000. The Yerba Buena Neighborhood Consortium spent another $1.35 million on ballot referenda between 2016 and 2021, and within the small pond of municipal politics, that much money, if strategically deployed, can buy a shocking amount of influence.

Here’s where the story gets strange. Although TODCO’s nonprofit status is predicated on helping poor people afford housing, TODCO lobbies incessantly to prevent the construction of affordable units in some of San Francisco’s most expensive neighborhoods. In 2018, TODCO sued to prevent the construction of a mixed-use building on the grounds that it would cast “new shadows” on a community garden; TODCO then agreed to drop this lawsuit after the building’s developer paid them $98,000, raising questions as to whether TODCO was merely using San Francisco’s byzantine permitting process to extract a bribe from another developer. In another case, TODCO lobbied to block a 495-unit housing development that would have included over a hundred affordable units. In other words, an affordable housing nonprofit has repeatedly sued other developers to prevent the construction of the same affordable units that it is supposed to be working to provide.

And then, in July of 2020, the strangest of TODCO’s fiascos took place. That year, TODCO prevented the construction of over one thousand new apartments, including 350 affordable units, so it could run a “racial equity study,” which it then never bothered to conduct. San Francisco Supervisor Dean Preston—a TODCO political ally—convinced the land use committee to put off the development for six months, during which time TODCO would supposedly analyze the development’s impact on minority residents in the neighborhood.

By August 2022, TODCO had not even begun the study that was supposed to have been completed eighteen months earlier.

There are plenty of non-profit follies in Seattle, too:

This is a surprisingly common occurrence in Seattle. In 2022, the city gave $260,000 dollars to a registered sex offender who was operating under a fake name and credentials to mentor at-risk young people. In 2020, they gave a $3 million no-bid contract—one of the largest grants in city history—to a nonprofit called Freedom Project to run a “racial equity study.” Freedom Project’s executive director at the time was David Heppard who was convicted as a teenager for taking part in the gang rape of a pregnant seventeen-year-old. Freedom Project’s finance director, Quddafi Howell, once shot up a man’s house as an intimidation tactic to prevent him from snitching on Howell’s drug dealing.

Believe it or not, the $3 million Seattle handed over to a bunch of convicted felons was somehow mismanaged. A local political blog called Seattle City Council Insight looked into the paperwork behind this contract and discovered that hundreds of thousands of dollars were handed out to subcontractors for minimal work and the project’s lead was paid $300 per hour while publicly claiming to be a volunteer.

In another case, a homelessness nonprofit called share (the Seattle Housing and Resource Effort) turned out to employ an unlicensed accountant at the same time they were handling millions of dollars in government funds. Share claimed that they were the victim in this case, as they were unknowingly defrauded by a man who held himself out as a legitimate accountant. Fair enough. Share, however, might have noticed that their accountant was unlicensed were it not for the fact that Share’s treasurer, the man presumably responsible for handling all their money, was Lantz Rowland, an unqualified homeless man who lived in a tent. This nonprofit had total annual revenue of approximately a million dollars in 2016, which included grants from King County and the City of Seattle, and the people responsible for handling that money were an illegal accountant and a sixty-year-old homeless tent dweller with no discernible qualifications.

Ireland then makes the provocative argument that in these supposedly left-wing cities, the non-profit sector essentially represents the privatization of government, to the detriment of the public and public services.

Once you start digging into the evidence, you find that the places where “progressives” wield the most power are some of the least socialist governments in the country. In 2022, San Francisco spent $5.8 billion on private contracts, over 40 percent of all city government spending, while the entire budget of Houston, a city 2.5 times as large, was only $5.7 billion. It is a strange form of socialism that runs more than two-fifths of its government through private contractors, instead of using publicly owned developers and social housing.

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Portland, Oregon, meanwhile, has been suffering from a serious trash crisis for the past several years, due both to the city’s soaring homeless population and the government’s refusal to enforce antidumping laws. Portland’s response to the festering trash piles now blighting a once-beautiful city has not been to dramatically increase the government’s capacity to pick up and process garbage; instead, Portland, in conjunction with the state of Oregon, has paid millions of dollars to nonprofits to deal with the trash problem.

As Portland outsourced trash collection to private nonprofit organi­zations, the ability of the government to collect trash has been gutted by budget cuts and a lack of resources.

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This is the state of affairs in almost every city where “progressives” have a large impact on local politics. Progressives claim to support government spending programs, but also have an anarchistic, anti-governmental attitude that can be seen in their support for policies like police abolition in 2020. Although progressives want the government to fund public programs, their opposition to centralized state power means they often don’t want the government to run the programs being funded.

The cities progressives control therefore tend to underfund core government agencies in favor of “community-based organizations,” by which they mean NGOs and nonprofits. Once the government can no longer meet its responsibilities, progressive cities outsource those ser­vices to nonprofit organizations, effectively privatizing the government.

Click over to read the whole thing.

I’ve long been a critic of the excessive number of non-profits in American cities, which greatly complicate doing anything sensible, or often anything at all. In a 2017 piece I called for a “non-profit die off”.

When I look around older cities, I frequently see that they’ve got a veritable armada of non-profits. Rarely do I see these making a huge difference in the trajectory of the city.

The usual complaint about too many non-profits is that they aren’t coordinated, and so often overlap or don’t work well together on whatever cause it is they are trying to advance.

This actually doesn’t bother me. The temptation to try to create a single uber-structure for everything is always there, but distributed systems have their own virtues. And where there are legitimate problems, the organizations generally come up with a solution. An example is the various “clearing house” organizations that charitable orgs use to prevent double-dipping.

The bigger problem is that all these non-profits are basically sand in the gears that make it harder to get anything done. While the Lapides talks about innovation, from what I’ve seen non-profits seem to be among the biggest advocates for the status quo.

Try to do anything in a city and you’ll be told to meet with all these “stakeholders”, a large percentage of whom are non-profit leaders who claim to speak in the name of some constituency or cause but too often represent their own personal fief.

I think most big American cities would be better off if around half of their non-profits went away.