Elizabeth Warren and Capitalism

Elizabeth Warren, who is absolutely not running for President, has proposed saving capitalism from itself. Her proposal is that once a corporation reaches an arbitrary revenue figure, it will be required to obtain a government license in order to stay in business. It will also be required to have an arbitrary number of board members from the employees, spend an arbitrary amount on reinvestment and a super majority of the board will have to agree before the corporation can engage in politics. This last part is a way to neuter the Citizen's United decision which allows corporations to engage in politics. The rest of her proposal shows just how little Warren understands about economics. Vox has a long piece explaining why the proposal is a good thing which proves that they are equally clueless about economics.

The reasoning for this proposal is an essay by Milton Friedman saying that corporations owe it to their shareholders to maximize profits. To people on the left, this means wringing every possible penny of profits, no matter how many lives are ruined in the balance. In practice, this seldom happens. Yes, plants are closed and production is moves overseas but this usually has more to do with keeping the company in business than maximizing profits. Similarly, most corporations have charitable foundations. Warren and Vox seem unaware of this.

The bigger problem is that the whole thing is based on revenue instead of profits. The left often assumes that all corporations have huge profits which are then paid out to the undeserving (meaning the share-holders who literally own the company). In reality, profits are usually a tiny percentage. Take Walmart as an example. It's at the top of Forbes's list of largest corporations. Their revenue was around $500 billion dollars. But... they only made $10 billion in profits. That's 2%. They have 3 billion shares of stock so they only pay a few dollars per share. They also only have 2.3 million employees so, even if you confiscate all of their earnings and give them to the employees, it's only going to come to $5,000/each.

But that will never happen. If the government started confiscating all profits of a corporation once it hit $1 billion in revenue then the shareholders would demand that it never hit that amount. There would be corporate inversions (buying a smaller company overseas then moving the headquarters there), splitting off subsidiaries, and whatever else it takes to avoid that. This is what we'll see if Warren's proposal becomes law, also. Corporations will find ways to avoid it.

And that overlooks the biggest problem with only looking at revenue - not all corporations make money. When I was researching this I looked at a list of corporations' income from 2017. One corporation jumped out at me - Toys R Us. They had $4 billion in revenue last year. This year they went bankrupt. That's because their expenses were greater than their revenue. Red Lobster was also on the list and they've been flirting with bankruptcy for years.

Of course, Warren knows that she can't nationalize all large businesses at this point. Her proposal is aspirational: something that will happen if she becomes President (not that she's running) and has a strong Democratic Congress. And heaven help us if that happens.