How to Fix America (Part 2: Commerce)

This is the second installment of a three-part series on how to get the country back on track. I avoid saying “making America great again” because that’s both a political trigger and blatantly wrong. Although I may rail against the country’s direction, America remains the greatest sovereign endeavor in humankind’s history.

In the last column (2nd quarter issue of The Business Journal), we scratched the surface of ways to improve our approach to education. Education may be the foundation of a successful society, but commerce is its engine.

Like many subjects, capitalism has become polarizing. The wealth gap continues to expand, and business scandals seem commonplace. Both are problems, but capitalism isn’t the cause.

As an economic system, capitalism is the most effective one conceived to date. It is the one that best fosters progress and aligns with human nature. The latter is where communism and socialism (a diluted form of communism) fail.

It’s important to segment the political aspects of communism and socialism from the economic ones. I’m no fan of either system as a political model, but all societies have elements of socialism. And those elements can be beneficial if structured and managed properly.

Moreover, the focus shouldn’t be on the capitalist model itself, but on how it has been distorted. To do that it’s helpful to divide the business community into two segments: public and private. The culprits are invariably public companies. And the biggest abuser is the collective known as Wall Street.

Wall Street likes to promote itself as providing working capital to businesses, thereby fostering growth and job creation. It can correctly cite Google and Amazon as companies that have succeeded in creating great wealth while also employing hundreds of thousands of people. However, the successes mask a multitude of distortions in the financial industry. These include massive capital misappropriation, a wildly uneven distribution of capital, and the capital destruction that results from the concoction of financial instruments designed mostly to make the rich richer.

Since the advent of the Ponzi scheme, Wall Street has perpetrated a litany of financial frauds. In my lifetime we’ve witnessed the S&L crisis, the junk bond meltdown, the dot-com debacle and the housing scandal. Honorable mentions go to Bernie Madoff and every corporate scandal from Enron to WorldCom. You might think that Wall Street shouldn’t be blamed for individual corporate scandals. I beg to differ. Every corporate scandal has its roots in and was enabled by, Wall Street.

Wall Street has morphed from a legitimate driver of investment capital to legalized gambling for the very rich. With help from Washington, it continually “restructures” the rules to facilitate its ability to generate even greater wealth for insiders. In the process, society has suffered great harm.

This may be the only view I have in common with Elizabeth Warren: Wall Street will continue its out of control behavior until we demand that our political leaders properly regulate its conduct. But don’t hold your breath. Next time you’re bored stiff, Google “former Goldman Sachs employees in government.” I’m no conspiracy theorist, but those dots connect themselves.

Notwithstanding Warren Buffet — who generates wealth the old fashioned and correct way — Wall Street has mutated from an investment community to a trading community. Stocks are bought and sold in milliseconds by black boxes based on decisions triggered by sophisticated algorithms rather than by humans. This can be considered progress and in some sense it is. I don’t espouse abolishing such business practices, just taxing the behavior.

The historical concept of “buy and hold” should be rewarded by structuring capital gains taxes to incent investing rather than trading. Taxing long and short-term gains differently is on point, but it just doesn’t go far enough. I would tax “very” short term gains at 75% or higher. You want to day trade — knock yourself out. I would also widen the tax gap on long and short term gains and consider lengthening the time required to qualify for long term status.

On the corporate side, Wall Street may have helped enable the implosion of big businesses like Enron, but it isn’t the sole culprit. Another major contributor is the rules related to corporate board structures. These rules result in a classic case of the fox guarding the chicken coop. Allowing a CEO to be the chairperson of the board assumes self-regulation is a good idea. And the C-suite often stack boards with country club cronies who, by current rules, are considered “independent” directors.

Still, the scandals with the broadest negative impact are typically orchestrated by Wall Street. The dot-com debacle was a direct byproduct of allowing Wall Street analysts chartered to inform the public on the value of public companies, to report to the very people who profited from taking these worthless companies public.

In what world does that make sense? Evidently, in the political one.

Note that none of these examples have anything to do with private companies or the vast majority of small businesses that operate ethically. Yet, Washington rarely discerns between those who actually cause the problems and those who bear the brunt of the superficial reforms enacted to convince the public that our political leaders are doing their job.

Washington is bought and paid for by Wall Street and Big Business. Capitalism isn’t the problem. Rather, it’s the distortions created by greedy, self-serving business leaders who are enabled by power-hungry and self-serving political leaders.

My final series installment will expand upon the root cause of our problems: Washington. T