The Economist USA - 26.10.2019

Leaders 9

E

lizabeth warrenis remarkable. Born into a struggling fam-

ily in Oklahoma, she worked her way up to become a star law

professor at Harvard. As a single mother in the 1970s, she broke

with convention by pursuing a full-time career. In an era of rule-

by-tweet, she is an unashamed policy wonk who is now a front-

runner to be the Democratic nominee for president in 2020. Polls

suggest that, in a head-to-head contest, more Americans would

vote for her than for Donald Trump.

But as remarkable as Ms Warren’s story is the sheer scope of

her ambition to remake American capitalism. She has an admi-

rably detailed plan to transform a system she believes is corrupt

and fails ordinary people (see Briefing). Plenty of her ideas are

good. She is right to try to limit giant firms’ efforts to influence

politics and gobble up rivals. But at its heart, her plan reveals a

systematic reliance on regulation and protectionism. As it

stands, it is not the answer to America’s problems.

Ms Warren is responding to an enduring set of worries. Amer-

ica has higher inequality than any other big rich country. While

jobs are plentiful, wage growth is strangely subdued. In two-

thirds of industries big firms have become bigger, allowing them

to crank out abnormally high profits and share less of the pie

with workers. For Ms Warren this is personal. Her parents en-

dured the Dust Bowl and the Great Depression in the 1930s and

later her father’s career collapsed because of ill-

ness. As a scholar, she specialised in examining

how bankruptcy punishes those who fall on

hard times. The idea that animates her thinking

is of a precarious middle class, preyed on by big

business and betrayed by politicians feasting on

the corporate dollar in Washington, dc.

Some Republican and Wall Street critics

claim that Ms Warren is a socialist. She is not.

She does not support the public ownership of firms or political

control of the flow of credit. Instead she favours regulations that

force the private sector to pass her test of what it is to be fair.

The scope of these regulations is jaw-dropping. Banks would

be broken up, split between commercial and investment bank-

ing. Tech giants such as Facebook would be dismembered and

turned into utilities. In energy there would be a ban on shale

fracking (which, for oil markets, would be a bit like shutting

down Saudi Arabia), a phase-out of nuclear power, and targets

for renewables. Private health insurance would be mostly

banned and replaced by a state-run system. Private-equity bar-

ons would no longer be shielded by limited liability: instead they

would have to honour the debts of the firms in which they invest.

This sectoral re-regulation would complement sweeping,

economy-wide measures—a 15% social-security levy on those

earning over $250,000, a 2% annual wealth tax on those with as-

sets over $50m, a 3% tax for those worth over $1bn and a 7% extra

levy on corporate profits. Meanwhile the state would loosen

owners’ control of companies. All big firms would have to apply

for a licence from the federal government, which could be re-

voked if they repeatedly failed to consider the interests of em-

ployees, customers and communities. Workers would elect two-

fifths of board seats.

Ms Warren is no xenophobe, but she is a protectionist. New

requirements for trade deals would make them less likely. Her

government would “actively manage” the value of the dollar.

Ms Warren champions some ideas this newspaper supports.

One reason for inequality is that lucrative corners of the econ-

omy are locked up by insiders. She is right to call for a vigorous

antitrust policy, including for tech firms (see Business section),

zero-tolerance of cronyism, and an end to non-compete agree-

ments that limit workers’ ability to gain higher wages and switch

jobs. Given inflation, her plan to raise the federal minimum

wage to $15 over five years may be a reasonable way of helping

poorer workers. The rich should indeed pay more tax (see Books

& arts section), although we think the practical path is to close

loopholes, such as a perk for capital gains known as carried-

interest, and to raise inheritance taxes, not a wealth tax. And

while a carbon levy is our preferred way to fight climate change,

her plan for clean-energy targets would make a big difference.

However, if the entire Warren plan were enacted, America’s

freewheeling system would suffer a severe shock. Roughly half

the stockmarket and private-equity owned firms would be bro-

ken up, undergo heavy re-regulation or see activities abolished.

And over time Ms Warren’s agenda would entrench two dubious

philosophies about the economy that would sap its vitality.

The first is her faith in government as benign

and effective. Government is capable of doing

great good but, like any big organisation, it is

prone to incompetence, capture by powerful in-

siders and Kafkaesque indifference to the plight

of the ordinary men and women Ms Warren

most cares about. When telecoms firms and air-

line companies were heavily regulated in the

1970s, they were notorious for their stodginess

and inefficiency. Ms Warren’s signature achievement is the cre-

ation in 2011 of a body to protect consumers of financial services.

It has done good work, but has unusual powers, has at times

been heavy handed and has become a political football.

The other dubious philosophy is a vilification of business.

She underrates the dynamic power of markets to help middle-

class Americans, invisibly guiding the diverse and spontaneous

actions of people and firms, moving capital and labour from dy-

ing industries to growing ones and innovating at the expense of

lazy incumbents. Without that creative destruction, no amount

of government action can raise long-term living standards.

Primary colours

Many presidents have taken positions in the primaries that they

pivoted away from as their party’s nominee. If Ms Warren were to

make it to the Oval Office in 15 months’ time, she would be con-

strained by the courts, the states and probably the Senate. The

immense size and depth of America’s economy means that no

individual, not even the one sitting in the White House, can easi-

ly change its nature. Nonetheless Ms Warren’s government-

heavy master-plan contains much to worry about. She needs to

find more room for the innovative and dynamic private sector

that has always been at the heart of American prosperity. 7

A plan for American capitalism

The Democratic front-runner has too little time for markets or business

Leaders