Capitalism is Broken can Andrew Yang Fix it?

Andrew Yang’s insurgent presidential campaign has a message that resonates with ordinary people. That message is “American Capitalism is broken and needs to be fixed.”

In essence, Yang says what many Americans have thought for years: the U.S. economy no longer works for ordinary people. That line is not original, President Donald J. Trump (R-New York) and U.S. Senator Bernie Sanders (I-New Hampshire) have been saying “capitalism is broken” for years. 

Indeed, one of the Greatest Americans Martin Luther King Jr tried to warn us that broken capitalism was coming before his death over 50 years ago. In fact, King was fighting for a universal basic income to fix capitalism at the time of his death, Big Think reports.

The difference is that Yang, like King, wants a total overhaul of the system while Sanders and Trump want to patch up the old order. Trump, for instance, thinks an old-fashioned tariff policy can fix capitalism. Meanwhile, Sanders believes an expansion of the welfare state and increased union membership can achieve the same goal.

America’s Jobs Economy No Longer Works

In contrast, Yang is proposing a new economic order for a new economy. Yang’s real message is that the 20th Century economy is dead, so we need a replacement.

The old 20th Century order relied on jobs and employment to drive economic growth and prosperity. The theory was that capitalism can provide everybody with a good job that comes with high pay and great benefits.

The 21st Century economy is not providing those jobs; however. Americans are working but not making much money. The US Labor Force Participation Rate was 62.3% in October 2019, Trading Economics estimates. That means the average American can find a job if she or he wants one.

Jobs No Longer Pay

Yet, CareerBuilder and the Harris Poll estimate 78% of American workers were “living paycheck to paycheck” in 2017. Hence, Americans have work but no money.

Dramatically, the Urban Institute estimates 40% of American non-elderly adults admitted having trouble paying bills in 2018. Plus, 61% of American adults admit they could not cover a $400 emergency expense with cash, The Federal Reserve Estimates.*

These surveys show traditional employment is no longer providing sufficient income for many Americans. Yet , all politicians talk about is creating jobs, even though America has plenty of jobs. In fact, America’s unemployment rate was 3.6% in October 2019, the Bureau of Labor Statistics estimates.*

Business and investment; not employment, now generate most of the wealth in America. This explains income inequality because those who rely on business and investment for money are getting richer. In contrast, those who rely on employment are getting poorer.

Inequality grows in America

Consequently, the top 20% of US households held 77% of America’s household wealth in 2016, the Brookings Institution estimates. In contrast, the Brookings Institute estimate the middle class owned just 21% of household wealth in 2019. Moreover, the top 1% of the richest Americans owned 29% of the national wealth worth $25 trillion in 2016.

Low middle. and working-class incomes are the major cause of this inequality. For instance, the Real Median Personal Income in the United States in 2018 was $33,706 a year, The Federal Reserve Bank of St. Louis estimates. Hence, the average person in the richest country in history takes home $33,706 a year.

In contrast, the Brooking Institute claims every American could receive $343,000 we distributed our wealth equally. To explain, Brookings estimates each of America’s 329 million people could receive $343,000 if we divided the $113 trillion held by all US households evenly among all citizens.

The Coming Crisis

Theoretically, America has the resources to provide a middle-class income for every citizen. Yet income inequality is bad and could get far worse soon.

I think three looming crises could make income inequality far worse in America. Those crises are an aging population, the retirement crisis, and technological unemployment.

First, 20% of the US population will be over 65 in 2030, The US Census Bureau estimates. An aging population means more and more Americans cannot work, so they will make less money.

A related problem is that a large percentage of those people cannot care for themselves at some point. In most cases, a loved one will have to quit work; or cut back on work, to care for that person.

In fact, 34.2 million Americans provided unpaid care to somebody over 50 in 2015, the National Alliance for Caregiving estimates. Furthermore, 15.7 million American adults were caring for a family member with Alzheimer’s or other dementia in 2015.

Consequently, America is about to experience a big drop in economic activity because of the aging population and the retirement crisis.

The Retirement Crisis

Second, most Americans are not saving for retirement, so they will have nothing but Social Security to live on when they quit work. Frighteningly, 42% of Americans admit they are not saving for retirement, the Center for Financial Services Innovation estimates.*

Furthermore, the average monthly Social Security Old Age and Survivors Insurance benefit was $1,402.83 in September 2019, the Social Security Administration estimates. Thus, tens of millions of Americans will soon adjust to living on $1,402.83 a month.

Millions will receive far less because of the arcane way they calculate Social Security payments. For instance, my mom only gets $500 a month in Social Security because she stopped working for two decades to raise my brother and I.

As a result, 58% of Americans plan to work after they retire; and 43% of Americans plan to work after age 70, Transamerica estimates. Working longer is only a partial solution because 60% of American retirees quit work unexpectedly and involuntarily, Voya Financial estimated in 2015. Disturbingly, health problems force 16% of people into early retirement, USA Today reports.

I think the retirement crisis could lead to a drop in economic activity rivaling the Great Depression. To explain, millions of people will have less money to spend, so businesses will take in less money.

A related problem is that we finance Social Security and Medicare with taxes on wages. In fact, the government does not collect Social Security taxes on income over $132,900, an amount that rises to $137,700 in 2020.

Hence most of the income in America is exempt from Social Security taxes. As a result, Social Security’s trustees estimate the program could deplete its $2.9 trillion reserve fund in 2035, Barron’s notes.

Moreover, Social Security’s benefit payouts could exceed its income next year. Thus Social Security could run out of money when Americans need it most.

Technological Unemployment

The third crisis; technological unemployment is the most frightening because we do not know how bad it could get. However, statistics show the technological jobs apocalypse could produce Great Depression level unemployment.

To elaborate, the Brookings Institute estimates automation threatens 61% of US jobs. In detail, 25% of American jobs have high exposure to automation. Plus 36% of US jobs have medium exposure to automation.*

Hence, automation, artificial intelligence, and robots could destroy one out of four American jobs by 2030. The last time America faced that level of unemployment was at the height of the Great Depression. To clarify, the unemployment rate in 1933 was 24.9%, Market Mad House estimates.

Even if Brookings’ estimate is half wrong, we could face 12.45% unemployment soon. My guess is 12.45% unemployment will lead to widespread political unrest and violence.

McKinsey & Country is a little more optimistic. The consulting firm estimates 50% of jobs are vulnerable to automation. In 2017, McKinsey estimated automation could destroy between 3% and 14% of jobs by 2030.*

Thus, under the best-case scenario for technological jobs loss we could see massive unemployment. Worst of all, the jobs most vulnerable to technology are those held by the poorest and least educated Americans.

As a result, technology could gut the working and middle classes. For instance, Brookings estimates 91.4% of food preparation workers, 85.6% of dishwashers, and 76.9% of waitresses could lose their jobs to machines. In addition, Brookings claims; 85.6% of of bookkeepers, 70.1% of pharmacy technicians, accounting clerks, and auditing clerks, 87.6% of billing and posting clerks, 85.4% of automotive body repairers, and 78.2% of light or delivery drivers could lose their jobs to tech.

Thus, millions of Americans who think they have “good jobs” today could stand in line at the food bank, clean bedpans, or deliver pizza in 10 years. That sounds like a recipe for civil unrest and political upheaval to me and Andrew Yang.

Yang believes technological unemployment will lead to mass riots and violence, The Daily Telegraph reports.

Andrew Yang’s New Economic Order

Yang hopes to fix these looming crises with two radical economic policies.

First, Yang proposes financing government with a Value-Added Tax (VAT). Under the VAT the government taxes all commercial activities involving the production and distribution of goods and services.

For instance, the government collects the VAT when Warner Brothers produces a movie and when Netflix (NASDAQ: NFLX) streams the movie to viewers. The advantage to the VAT, is the government collects money as they make it.

With a VAT you could tax large companies like Amazon (NASDAQ: AMZN) based on their revenues rather than incomes. Thus, government gets more money. For example, Amazon reported quarterly revenues of $69.981 billion and a quarterly income of $2.134 billion on 30 September 2019.

Under a 10% VAT Amazon could pay $6.9981 billion in taxes for last quarter. Under the current 21% corporate income tax rate Amazon could pay $448.14 million for the same period.

I think Yang’s VAT proposal is smart because it could increase government revenues when demands for government services are increasingly dramatically. For instance, 10,000 Baby Boomers (Americans born between 1945 and 1964) turn 65 each day, Transamerica estimates. Yet only out of 10 of those boomers is building a nest egg large enough for retirement.

Yang’s New Social Contract

Second, Yang plans to rewrite America’s social contract by offering all Americans a guaranteed basic income. Specifically, Yang proposes giving every American over 18 a $1,000 Freedom Dividend.

The idea is to get all Americans participating in the economy by giving them some income. In addition, Yang hopes to expand the safety net to cover all Americans.

Plus, the Freedom Dividend will give all Social Security recipients a $1,000 a month or $12,000 a year raise. Hence, the Freedom Dividend will go a long way to resolving the retirement crisis.

Essentially, Yang plans to change America’s income distribution mechanism from jobs to the basic income. This change will not be as radical as you think. Currently, 68.785 million Americans; out of a population of 329 million, are receiving Social Security, the Social Security Administration estimates.

Hence, over one in five Americans already depends on the government for income. In addition, most of those recipients receive their incomes with no strings attached. Instead, most Social Security recipients receive an electronic funds transfer of cash to their bank accounts rather than submitting to bureaucratic oversight.

Thus, Yang’s Freedom Dividend extends an existing system rather than overhauls the economy. Yang is rewriting the social contract and redesigning the welfare state to deal with new realities.

Those new realities are an economy in which technology produces most wealth and a large percentage of the population is unemployed or underemployed. Under those circumstances capitalism cannot meet most Americans’ needs without drastic restructuring.

Only time will tell if Andrew Yang can fix capitalism. However, Yang’s fix is the only one built for 21st Century realities. Hence, Yang could win the debate even if loses the election.