Senator Warren's Plan for a Command Economy
- Senator Elizabeth Warren has introduced legislation that would fundamentally change the federal government’s relationship with private enterprise.
- The proposal would create a powerful new bureaucracy, the Office of United States Corporations, and require all large businesses to serve the “general public benefit” as decided by Washington.
- By effectively commandeering thousands of corporations, Senator Warren’s bill would be a major step toward a government-run economy.
On August 15, Senator Elizabeth Warren introduced legislation that would impede the dynamism of the American economy by effectively requiring private companies to act as government agents. It would give a new Washington bureaucracy power to dictate the activities of businesses by reducing the authority of owners and executives to run their businesses to create jobs, serve their customers, and grow the economy. The bill would fundamentally change the federal government’s relationship with private enterprises by altering their very purposes.
The success of a business is built on voluntary and mutually beneficial cooperation among employers, employees, customers, and shareholders. If any one of these parties no longer believes that they are getting a good deal, they are free to move to better opportunities. Companies either adjust to the market or go out of business. The dynamism of the American economy is evident: only 60 of the Fortune 500 companies in 1955 were still on the list in 2017. This kind of evolution allows our economy to grow and forces companies to innovate.
A NEW FEDERAL BUREAUCRACY
Senator Warren’s legislation, the Orwellian-sounding Accountable Capitalism Act, would create a new federal bureaucracy: the Office of United States Corporations. A corporation with more than $1 billion in gross revenue in a year – an arbitrary threshold – would have to apply to this office for a corporate charter and become a “United States corporation.” According to S&P Capital IQ, there were around 1,800 U.S. companies over this limit in 2017, making up $16 trillion in aggregate revenue.
Senator Warren’s proposal would impose broad mandates on the charters of United States corporations. The charters must direct the corporation to act in a “manner that seeks to create a general public benefit,” which is defined as a “material positive impact on society resulting from the business and operations of a United States corporation, when taken as a whole.” The corporation would be required to balance the interests its shareholders with the interests of its employees and its suppliers’ employees, the interests of its customers, “community and societal factors,” and “the local and global environment.”
Shareholders would be authorized to sue for violations of the corporate charter. The director of Office of United States Corporations, a presidential appointee, would be granted expansive power to revoke or rescind corporations’ charters, including upon the petition of a state attorney general.
The legislation would require at least 40 percent of a United States corporation’s directors to be elected by the employees. It would also set new limits on executive compensation and political spending.
CREATING A COMMAND ECONOMY
Corporations in the United States generally are chartered by states. Although some federal laws, such as the Sarbanes-Oxley Act, affect the responsibilities of a corporation’s officers and directors, these responsibilities are mainly dictated by state statutes. Senator Warren’s proposal would nationalize much of corporate law, in contravention of decades of learned experience.
In general, the American legal approach directs corporate officers and directors to act in the best interests of the corporation and its shareholders. Directors are given fairly wide latitude to make decisions about what is best for the business. Some states specifically allow officers and directors to consider other stakeholders, and Justice Samuel Alito has noted that “modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so.” While nothing prevents corporations from taking other considerations into account, nothing requires them to do so. This is a foundational principle of our capitalist system. This approach has allowed businesses to grow, transform, take risks, and react to the changing economy and consumer tastes. Senator Warren’s proposal would replace this principle with government decision-making.
A number of states give corporations the choice of incorporating as “benefit corporations,” which requires them to consider factors other than shareholder value in making corporate decisions. Again, this form of incorporation is just an option. Although some economists have suggested that a focus on public benefits “may impose costs to a firm in the form of forgone investment opportunities that in the long run is manifested in the loss of shareholder wealth,” with a benefit corporation law that is optional, the company can decide what is best for itself, and potential owners can decide whether to invest.
Senator Warren’s legislation effectively commandeers corporations to attain governmental ends. It would prevent large corporations from focusing on their best interests and force them to do what Washington says is best. It would limit their ability to make difficult decisions to stay competitive in the marketplace, and it would give judges, bureaucrats, and politicians broad powers to enforce vague “public benefit” standards on the entities our economy relies on to innovate, create jobs, and bring new products to market.
How Does A Liberal Dream Look in Real Life?
Teasing out the real-world effects of Senator Warren’s proposal is like asking CBO to score Das Kapital. The bill is so far removed from the American capitalist system and contains so many uncertainties that predicting what it would do is extremely difficult. What is practically certain is that a radical departure from American capitalism would come with serious consequences, intended and unintended.
By severely distorting markets, the proposal would threaten jobs and hurt American workers. In general, investment seeks the highest risk-adjusted return. By forcing American companies to attempt to achieve vague “general public benefits,” Senator Warren’s proposal would very likely reduce the profit of corporations subject to the law. By turning corporations into quasi-governmental creatures, subject to the whims of bureaucrats and politicians, it would likely increase the risk of investing in them. So by reducing returns and increasing risk, the law would almost definitely reduce investment in these corporations. Capital will flow to other assets that may not be as naturally productive.
When capital exits a company, the company cannot grow and may shrink, reducing jobs. On a broader scale, the overall size of the economy is reduced and so is tax revenue. Businesses may go abroad to avoid becoming a United States corporation. They may be dissuaded from growing, since success would be punished by becoming a vassal of the federal government. Resources that could be used for innovation and hiring will be used for keeping bureaucrats and politicians happy.
George Mason economics professor Donald Boudreaux has predicted, “Sen. Warren’s planned confiscation of owners’ equity would turn what is now a Niagara of job-creating and prosperity-enhancing investment funds into a mere puddle, as stagnant as it is puny.” Upon passage of the bill, we “would then bid adieu to American prosperity.”
Over the course of American history, there have been different opinions on the proper role of the government, the social safety net, and the correct reach of regulations. But there has been widespread agreement that the free market beats government-run enterprise in creating prosperity and ensuring individual freedom. Although Democrats may be, in the words of the New Republic, “souring on capitalism,” experience should show that a command economy works to the detriment of citizens. By requiring companies to act essentially as agents of the government and changing their very purposes, Senator Warren’s legislation would set us on that path.
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