Robert Reich Explains Why Capitalism Is Broken and the Importance of Bernie Sanders

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Capitalism needs to be rescued.

That's what Robert Reich, former secretary of labor under President Bill Clinton and an influential public policy professor at the University of California, Berkeley, argues in his latest book, Saving Capitalism: For the Many, Not the Few.

In an era in which soaring inequality and dysfunctional government are eating away at the public's faith in America's major economic and political institutions, Reich is bent on a reboot. While the popular conversation on how to confront social inequity in liberal circles tends to center around taxation and the social safety net, Reich urges citizens and policymakers to think more deeply about the way wealth and power is distributed in society by the very way that markets are structured.

As Reich points out, after World War II, the United States experienced the largest economic boom in modern history, in which the typical worker saw their wages double and a large middle class took root in American society.

They key insight he drives home is that the emergence of the middle class wasn't just a matter of effective "redistribution" in the form of more progressive taxation, or a greater public interest in eradicating poverty through welfare programs. The success of the postwar American economy can also be attributed to "predistribution," or the way that wealth flows to different classes within the market.

Mic chatted with Reich on the phone to discuss his new book, and to discuss his take on how all this relates to a presidential race dominated by political outsiders like Sen. Bernie Sanders (I-Vt.) and Donald Trump, a phenomenon he predicted in his book.

Mic: You've studied and worked to address the greatest excesses of capitalism for much of your career. Some argue that we should be laying the groundwork to evolve beyond capitalism, rather than try to rescue it. Why do you think capitalism should be saved?

Author Robert Reich  Svetlana Cvetko

Robert Reich: I don't think we should get caught up in "isms." The real question is: Can we organize our political economic system so that it benefits the many rather than the few? Between 1945 and 1980, we created the largest middle class the world has ever seen, with more and more opportunities for the poor to ascend into it. But since then, we've moved in the opposite direction.

Every major economy in the world, including Denmark, Norway, Sweden and even China are capitalist. But we are the one major capitalist country whose economic benefits are going almost exclusively to a small group at the top. This isn't sustainable, either economically or politically.

In my book, I also talk about the 1830s, the Progressive Era between 1901 and 1916 and the New Deal in the 1930s. These are all periods in which we had political shifts that were large enough to put capitalism back on track, so that it was working for the majority rather than a tiny minority. That's been the pattern in the United States, and I have every reason to believe we'll do it again. 

Reich during his time as labor secretary  Marcy Nighswander/AP

Mic: One of the most compelling parts of your book is the way you talk about the myth of the free market, and how it distorts the political conversation. What does it really mean when people in the business or banking world call for a free market or defend the private sector against new government rules?

RR: I have no idea what they mean. I think they've bought into an ideology that has no coherent meaning at all. 

It's not possible to have a market without rules, and those rules govern everything, from the very meaning of property and contract to the processes by which people pay their debts, renegotiate their debts, the degree of market power that can be exercised by companies or groups of companies and the enforcement of the entire system.

Unfortunately, we've bought into this completely absurd notion that we have a choice between a free market and government. That ideological debate has kept us from examining exactly what we ought to be discussing: how to make the system work for the vast majority, instead of a very, very few people at the top. 

Even introductory courses in economics and other fields have bought into this ideological nonsense. We talk about government "intervention" into the economy. We speak of government "regulating or not regulating" the economy, we talk about "market imperfections." These ideas have no meaning when you understand that it's impossible to have a market without rules that emanate from government. And the central question is who influences the making of these rules.

We've seen the results. The bailout of Wall Street was government intervention at its most explicit and at a humongous scale. The choice was not and has never been a free market in finance or government-run finance. It's always been a question of how government is going to structure the financial system. Once we got rid of the post-1929 organization, we then set ourselves up for a new organization called Too Big to Fail.

Mic: In the book you write that the liberal focus on taxes or redistribution to the poor are in some ways beside the point. What are the most important things that need to happen in order to make the economy fair in the future?

RR: The redistributions that anyone is arguing for pale in comparison to the upward predistribution from the poor and the middle class to the wealthy. This transfer happens because of monopolistic practices, market power, extended copyrights and patents and bankruptcy rules that make it easy for wealthy businessmen to evade their debts and protect their fortunes, but make it almost impossible for homeowners caught in a downdraft to reorganize their mortgage debt or for graduates to reorganize their student debt.

The only way we can begin to tackle all of these upward predistributions and create a market that works for all of us, rather than a few, is to change our politics and create — as we have had in various times in our history — centers of countervailing power, to balance our economy and democracy. 

I can't tell you right now what those centers will be. I have spent the last year talking to everyone from small farmers who are organizing against big factory farms and monopolistic food processors, to small business-owners and regional bankers who are organizing against giant retailers, Amazon and Wall Street banks, to people engaged in the Fight for 15, the campaign for a $15 minimum wage.

All of these groups are organizing in the same direction in terms of countervailing power. When I wrote the book, I hadn't anticipated Bernie Sanders or even Donald Trump, but I do predict in the book that the biggest division in the future politically will be between antiestablishment and establishment forces, not between Democrats and Republicans or liberals and conservatives. And that's already beginning to play out.  

Mic: On the Democratic side of the aisle, you could say Hillary Clinton represents the establishment, and Sanders has become the antiestablishment candidate. Do you have a preference for one, and what do you make of this dynamic?

RR: Well, my preference is irrelevant. Because I [support] Common Cause, which is a nonpartisan citizens' movement to get big money out of politics, I can't express a preference. But I do think the Sanders phenomenon is important.

Coming from a different direction of populism, a more authoritarian populist tradition, Donald Trump is also using the frustration and anger that get that many people feel and channeling it both against the establishment and also against scapegoats, such as immigrants and Muslims. That's the difference between reform populism and authoritarian populism. Reform populism aims to strengthen democracy. Authoritarian populism aims to strengthen strongmen who claim to be able to change the system sheerly by dint of their personal power while scapegoating minorities.

I'm not sure it will play out by 2016. But the trends and forces are unmistakeable. In 2008, partly in response to the bailout of Wall Street, the tea party movement began, as did the Occupy movement. The Occupy movement should be credited with putting inequality on the public agenda, front and center. Although it was not as much of a political movement, as an economic and cultural statement it still had a great deal of significance.

But, more importantly, both the tea party movement and the Occupy movement have morphed into several antiestablishment candidacies. The force of this upsurge cannot and should not be underestimated. The establishment may still be victorious in 2016, but it needs to be aware that its days are numbered.

Robert Reich speaking to Occupy San Francisco in 2011  Jeff Chiu/AP

Mic: Clinton has called for more regulation of Wall Street, oversight of shadow banks and additional fees. Sanders has gone further, calling for big banks to be broken up and the Glass-Steagall Act to be revived. Who do you think has the right idea in that policy domain?

RR: As I've written about in several columns and essays, we need to break up the big banks, and also resurrect the Glass-Steagall Act. Doing one without the other won't avoid a Too Big to Fail catastrophe. 

The big banks are much bigger today than they were even in 2007. The five biggest banks on Wall Street now hold or control 44% of the nation's banking assets. In 1990, just by way of comparison, the five biggest banks had 10% of the nation's banking assets. In the year 2000, they had 25%.

The Dodd-Frank Act has had little or no effect on the size of these leviathans. As they get larger, they gain even more political power. As they gain economic and political power, it becomes much harder to do anything about them. That's why we invented antitrust laws in the 1890s. 

So, I think Sanders is correct about breaking them up. I think it's also important to resurrect Glass-Steagall, which was a 1930s-era law to keep investment and commercial banking separate. Dodd-Frank is not succeeding. The so-called Volcker rule inside Dodd-Frank is far too weak and has too many loopholes.

Mic: Vox's Matt Yglesias wrote a popular piece recently throwing cold water on the general sense that the left is ascendant in America, pointing to the Republican dominance in Congress and state legislatures, and the likelihood that their power will grow even stronger. He wrote, "Democrats are currently engaged in a slightly bizarre bidding war between Hillary Clinton and Bernie Sanders to see whether Congress in 2017 will reject a legislative agenda that is either somewhat to the left of Obama's or drastically to its left." Put another way, how do progressives hoping to reshape capitalism grapple with the reality of extreme polarization right now? 

RR: As I suggested, the polarization is less extreme than you might imagine, particularly if you see the great divide as establishment versus antiestablishment.

As I've gone around the country and talked to many people who describe themselves as conservative Republicans or even tea partiers, they agree with me on busting up the big banks, on getting rid of corporate welfare, on getting big money out of politics, on ending crony capitalism, on stopping the Trans-Pacific Partnership, and so on.

Once you get past labels, Republican or Democrat, and really see this through the lens of establishment versus antiestablishment, populism vs. status quo, you see that a movement is building to change and reclaim our democracy and also our economy.

Now I disagree with the tea partiers and self-described conservative Republicans on many issues. That's not the point. The point is that we have a large and growing overlap that has to do with the structure of our economy and democracy. And if we only think in terms of the current political dynamic, we're missing the bigger story. 

Change will come about through organization and mobilization. If Bernie Sanders succeeds, that success itself will be the result of a substantial change in the mobilization and organization of American politics. He could not succeed without that change. And that change will have an impact on the Republican Party, as well.