Meet Ray Dalio. Coming from a middle-class background, he founded Bridgewater Associates in his apartment, which is now one of the world’s largest hedge funds. He is ranked among the 100 richest people on earth.
So why the hooray? Well, Dalio has done a lot of thinking about the economic situation in our country, and come to the conclusion that,
. . . Capitalism is not working well for most Americans . . . not reforming capitalism would be an existential threat to the US
Say what, hedge fund guy?
He then writes an extremely detailed and insightful description of the problem, its causes and its solutions. While we may not agree with everything he says, it’s worth a careful read for the theories and ideas he has, especially given his view from the top of the financial world. I’ll summarize:
I. The Problems. This is actually the least-original part, though he goes into significant detail to describe the problems that we’re all familiar with: the historically large economic gap between rich and poor; the stagnation of real wage growth for those in the middle and bottom; the permanence of poverty and the decreasing likelihood that people can rise out of poverty, and how the overall situation contributes to poor schools, lack of education, increased crime and bad health outcomes.
He also correctly observes that this situation leads to a self-perpetuating downward spiral for millions. People generate income from their ability to produce something of value, which in today’s society is largely the product of skills obtained through education. Children who receive insufficient “investment” (as he terms it) during their childhoods develop into adults without the skills to to obtain incomes that lead to economic security. He also cites as contributing factors the inability of lower income parents to obtain good childcare, and the lack in some cases of sufficient parental guidance.
II. The Causes. This is where it gets interesting, because while some of his points are familiar, he goes into much more theoretical detail than simply “the greed of the rich.” His key thesis is:
The problem is that capitalists typically don’t know how to divide the pie well and socialists typically don’t know how to grow it well.
As for specifics, he describes:
(a) The pursuit of profit has focused on increasing efficiencies, which in turn has led to (i) people being replaced with technology; and (ii) jobs being moved to locations with cheaper labor. Yes, I recognize that we already know this.
(b) In its profit-seeking, the machinery of our economy has become ever more oriented to producing goods desired by the “haves,” and not producing goods desired by the “have nots.” This is because the “have nots” don’t have the money to generate a profit paying for the goods produced. The “products” our economy could produce that would do the most objective good on a societal basis, like the “production” of free or subsidized widely-available, high-quality child care, are not produced because there is no profit in doing so.
(c) Central banks have dealt with financial crises by printing money, which on a relative basis increases the prices of financial instruments such as stocks. This means that the “haves” who own things like stocks become relatively richer just by holding on to them and doing nothing as money is devalued, while the “have nots” who don’t own these assets become relatively poorer over time, contributing to a widening wealth gap.
(d) Governments are too focused on budgets rather than “return on investment.” To this point he states,
For example, not spending money on educating our children well might be good from a budget perspective, but it’s really stupid from an investment perspective.
III. The Solutions. His key thesis here is:
I believe that capitalism is a fundamentally sound system that is now not working well for the majority of people, so it must be reformed to provide many more equal opportunities and to be more productive.
He emphasizes strong leadership from the top, the necessity of bipartisanship, and the need to measure the success of the efforts in improving opportunities in the middle and bottom. Key initiatives he identifies are:
(a) Tax the rich. Yep, he went there. He adds that increased taxes on the rich should be guided by three principles: (i) don’t disrupt productivity; (ii) target help to those at the bottom and in the middle so that they improve their own productivity; and (iii) always maintain the availability of healthcare and education to those that are not able to provide it for themselves.
(b) Create public-private partnerships to jointly select and invest in projects that would be objectively judged on the basis of social and economic performance.
To put (some) of his money where his mouth is, he just announced a donation of $100 million directly to the State of Connecticut, which will be matched by $100 million of state funds and $100 million of other philanthropic donations, to operate a program focused on children in high-poverty areas of the state. The goal is to provide these children with career paths and other support in order to reduce the dropout rate and increase the number of children who are able to rise out of poverty.
(c) Make individual tax decisions based on the “all-in” cost to society, such as taxes levied directly on pollution.
(d) Re-engineer fiscal and monetary policy. This is the most complex area, but he explains the overall principle clearly: Money and credit are “clogged at the top.” Economic policies must change to move money and credit to those who have a higher need and a higher propensity to spend (i.e., for basic necessities).
In putting these suggestions into action, the main stumbling block he sees is the increased polarization between the “populists on the right” and the “populists on the left,” such that capitalism is either abandoned completely (bad) or not reformed to benefit the majority of Americans (also bad). This leaves the biggest questions of:
a) whether populists of the right or populists of the left will gain control and/or have conflicts that will adversely affect the operations of government, the economy, and international relations or b) whether sensible and skilled people from all sides can work together to reform the system so it works well for the majority of people.
From my perspective this is certainly an interesting take coming from an ultra-rich person, and I agree that the biggest issue given the current political climate is whether a plurality of Democrats and Republicans sufficient to move these ideas forward could be formed. My personal opinion is very close to his: capitalism is a good economic system as long as it is controlled in such a way as to provide basic levels of economic security to everyone, and economic opportunity for everyone. I think his proposals could do a lot of good.