Free, Wealthy and Fair (hallelujah)
The role of the government in making capitalism work.
BY FELIX G. ROHATYN
Sunday, November 16, 2003 12:01 a.m. EST
Over the past three decades, small government and deregulation have become the basic American political and economic credo, and the marketplace has been left to deal with major social problems and economic deficiencies. First the airlines, then the energy sector, and finally the finance industry were deregulated and the results are far from positive. Major economic weaknesses, such as our excessive reliance on foreign oil and capital as well as an accelerating loss of jobs overseas, went unattended; and gradually, the stock market, instead of real assets, became the bellwether of the economy. Paper wealth became the new standard and the concentration of wealth at the upper end of the income scale became astounding. From the 1980s through 2000, the financial profile of America was dramatically changed.
These were the years of the stock market bubble and were followed by its collapse as well as by financial scandals. They all had the same characteristics: Thousands of employees lost jobs and savings, stockholders lost capital, senior executives made fortunes, and many of those charged with protecting the interests of investors and employees failed in their duties. Speculation, encouraged by the financial media, had replaced investment--with disastrous results.
And now the New York Stock Exchange, the centerpiece of American market capitalism, turns out to have suffered from many of the faults that caused the failures in many public companies. Trust in our market system is a prerequisite both here and abroad. The importance of our capital markets is obvious; the economic growth of our economy and the financing of our foreign deficits depend on the proper functioning and the public trust in our markets. And the NYSE is its symbol.
At the same time our trade deficit has been mounting steadily and has now reached a record $500 billion annually. To service our foreign debt of $3 trillion requires an inflow from abroad of $1.5 billion daily. Our answer has been to encourage a global devaluation of the dollar; this may help our exports for some time but also has negative effects. It is obvious that deliberately devaluing the dollar is not a policy that is likely to encourage foreign investment in the U.S. Asian central banks now own almost $700 billion in Treasury bonds and have been financing our trade deficits and helping to sustain the value of the dollar. However, the 25% recent devaluation of the dollar implies an economic loss of almost $200 billion to the Asian central banks alone, a questionable incentive to maintain their American investments. We now run the risk of a possible crisis of the dollar, which would bring about large increases in U.S. interest rates, and a significant decline in the stock market. Keep in mind that foreigners own about $2 trillion or about 20% of all listed stocks in the U.S.
In addition to being big investors in our markets, foreign companies are large employers here; 4.5 million Americans work for European companies in the U.S. and many more are employed by our huge two-way trade with Europe. A breakup of the transatlantic partnership would have serious economic consequences for the U.S.; Europe and the U.S. are each other's most important trade partners and investors. No other economic relationship comes near.
Last but not least we are, slowly but surely, causing serious damage to one of our greatest assets: the credibility of our financial system. When the markets collapsed and wiped out $7 trillion of market value, they wiped out the savings of millions of Americans, triggered the recession of 2000, and brought about the bankruptcies of Enron, WorldCom and others. It brought into question the role of the key components of our system: the regulators such as the Federal Reserve, the Securities and Exchange Commission and the Financial Accounting Standards Board; the auditors; the boards of directors; the conflicts of interest of investment and commercial banks and the repeal of the Glass-Steagall Act; lawyers and their responsibilities; and, above all, the ethics of the business leadership. Now we have the unfolding scandal of the governance of the NYSE. The privileged status of self-regulation for the NYSE should be amended. We cannot risk the reduction of foreign investment in the U.S. as a result of a possible loss of confidence in the NYSE.
We now face serious lapses in the mutual fund industry. Once more, what is happening gives the lie to much of what we are trying to project as the image of American capitalism. If the NYSE is the symbol of successful capitalism for the world's investors, mutual funds are the symbol of "popular capitalism" at its best. Now, a vast number of the industry's leading players seem to be riddled with conflicts, abuses, and compensation excesses. The most vulnerable among investors are prey to these abuses.
Much of what has gone wrong is obviously due to serious ethical lapses of business leaders. In the financial services field, however, there is an additional factor involved: the dehumanizing aspect of much of the business.
Financial services used to be an extremely personal business: the making of loans, the purchase and sale of securities, the giving of financial advice, these were all activities with high levels of personal interplay, where personal character counted. Today, more and more of the financial service business involves capital markets and other trading activity. These consist of individuals, facing computer screens, buying and selling electronic signals with counter parties, whom they never see, in locations all over the world. At the end of the day the only measure of performance is the profit or loss for that day. There is no measure of quality, trust and confidence or any other non-quantitative measure of performance. Self-regulation, under these circumstances, would appear to be an illusion more than a practical objective.
I had always believed that this country's basic goals consisted of the primacy of freedom, the objective of fairness and the creation of wealth. This concept seemed to hold until the '80s, when greed overcame fairness and the creation of wealth became an individual fever that knew no limits. Our present situation calls for a rethinking of many of our economic and social assumptions, especially the notion that there is but a minor role appropriate for the government in our economy. First and foremost, the Fed should follow the example of the Bank of England and begin a slow increase in interest rates. The Fed should send a signal that we will not abandon a strong dollar policy and that it will not allow a dollar crisis to develop.
Our dependence on foreign capital and our budget deficits must be reduced by greater fiscal discipline at home including the politically painful reform of entitlements such as Social Security. Our dependence on foreign energy is both an economic and security risk to our country. Our government must become an active partner with business to reduce this dependence, encouraging energy-saving technology as well as penalizing excessive energy uses.
Overseas, a realistic perspective on trade with countries like China is required. If present trends continue unchecked, the accumulation of American assets in China could become destabilizing to our economy and society. Our problem with China may be more the result of the acceleration of China's educational levels than the value of the yuan. India will not be far behind in accelerating the loss of service jobs from America and also becoming an important creditor to the U.S. At home, a major federally funded infrastructure program is required to make up for the inability of state and local governments to play their traditional role, to improve homeland defense, and to generate badly needed jobs. The creation of a minimum of two million new private sector jobs should be our goal. It should be financed with long-term Treasury debt.
These issues require an active government working with business and with labor to find solutions. Deregulation, faith in the market and tax cuts will not, by themselves, resolve these problems.
America today is badly divided. It is divided, on the one hand, between those who see our role in the world as that of an invincible superpower, impervious to outside influences; on the other hand, there are those who believe in collective security, in the Atlantic Alliance, and in the necessary role of the U.N. We are also divided between those who believe that there is an appropriate role for government in providing a social safety net and a fair apportionment of wealth, and those who believe that ever-greater concentration of wealth among Americans is the most efficient way to create more jobs and a growing economy. These are not issues of Democrats vs. Republicans. These are very profound issues that divide Americans at this time.
I am an American and an Atlanticist who believes in the U.N. and in NATO. I am also a capitalist and believe that market capitalism is the best economic system ever invented; but it must be fair, it must be regulated, and it must be ethical. The last few years have shown that excesses can come about when finance capitalism and modern technology are abused in the service of naked greed. Only capitalists can kill capitalism but our system cannot stand much more abuse of the type we have witnessed recently, nor can it stand much more of the financial and social polarization we are seeing today.
I rejoice in the spectacular performance of our economy at this time. I hope that most of the remarkable growth and productivity can be maintained. But, even under the most optimistic assumptions, many serious economic and social problems would remain. "The business of this country is business," said Calvin Coolidge, of his time. That is even more true today. But it imposes on business and on political leaders the responsibility of remembering that the basis of our democracy is fairness. An earlier president, Theodore Roosevelt, said, "A great democracy must be progressive or it will soon cease to be great or a democracy." Teddy Roosevelt, as usual, was right on the mark. We must never forget it.
Mr. Rohatyn is a former managing director of Lazard Frères and a former U.S. ambassador to France.
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