Sen. Elizabeth Warren has a new plan to “save” capitalism, though I’m not sure why exactly it’s a system in need of saving. One look at Venezuela should be an instant reminder that despite whatever flaws capitalism has, the worst of capitalism is still better than the best of socialism.
The Act would require companies that bring in over $1 billion a year in revenue to obtain a “federal charter” to continue operating. That charter would obligate corporations to permit their employees to elect 40% of the company’s board of directors. That’s the main component of the Act – though it has some other caveats too, such as requiring a 75% vote to approve any political donations.
In a Wall Street Journal column defending her proposal, Warren cited a whole host of arguments for why we needed the Act. They included rising corporate profits (which she claims is being accompanied by stagnant wages), high CEO pay, and short-term corporate thinking. It’s notable that while she’s mostly concerned with corporate earnings, her Act only affects companies with over a billion in revenue, not profits. There are thousands of companies that bring in over $1 billion annually and lose money.
We need to realign the incentives of giant corporations so they invest in their workers, not just their shareholders. My big new bill, the Accountable Capitalism Act, helps accomplish just that. https://t.co/KwTN6YPmSm
— Elizabeth Warren (@elizabethforma) August 15, 2018
Louis Woodhill of Real Clear Markets ran the numbers on the damage Warren’s plan would do to American corporations and their shareholders, and they aren’t pretty. “Senator Warren’s plan wouldn’t cost a dime. It would cost $13.5 trillion. It would also bankrupt every insurance company and pension plan in the U.S. And, while Warren’s “reform” would not completely wipe out your 401k, it would reduce the value of the common stocks in your account by 45%. If you are over 50, this could easily dash your hopes for a comfortable retirement. I estimate that the Warren plan would reduce the value of large U.S. companies by $13.5 trillion (45% of their current market cap of about $30 trillion). Ironically enough, my calculations are based upon the work of that darling of the progressives, Thomas Piketty.”
How do we know this? By comparing America to a country like Germany, which has this kind of worker involvement (and strong unionization) that Warren desires.
The calculations were derived from the “Tobin Q” ratio, which is the ratio of a company’s market value and the value of all the capital they have invested. A Tobin Q ratio higher than 100% means that a company is creating economic value, and a Tobin Q below 100% means that a company is destroying value. Since 1995, America’s Tobin Q ratio has averaged over 100%, while Germany’s Tobin Q ratio has averaged about 55%. In other words, America’s corporations are creating economic value, while Germany’s worker influenced companies are doing the equivalent of burning 45% of the euros they’ve been entrusted with.
Like most liberal proposals, Warren presents her ideas as if it would only be “the rich” paying for them. In reality, everyone pays the cost of her economic illiteracy.
