Yesterday, Bridgewater Associates founder and author Ray Dalio published the first part of a lengthy treatise warning that American must take radical steps to reform its capitalist economic system, or risk provoking a violent revolution.
And on Friday, after Dalio and his wife announced a $100 million donation to help finance struggling public school systems in their home state of Connecticut, the billionaire philanthropist published Part II of his essay “Why and How Capitalism Needs to Be Reformed”.
Having already explained what the problems are and why they must be addressed immediately, in Pt. II of his treatise, Dalio focuses on the steps he believes must be taken by our politicians and the business community to improve society’s “double bottom line” – that is, the social AND economic return on our public and private investments.
This pertains chiefly to investments in education, infrastructure and other areas that would help broaden economic opportunity, improve productivity and preserve access to health care and quality education for all Americans.
Once again, Dalio clarifies that he’s not advocating for socialism, the hedge fund billionaire believes capitalism is a “fundamentally sound system that needs to be reformed.” But to start, he believes Congress must appoint a bipartisan commission to focus on finding solutions for the inequality issue. These solutions should focus on improving accountability, forming public-private partnerships to boost “double bottom line” investment, and engage in a limited redistribution of resources.
1. Leadership from the top. I have a principle that you will not effect change unless you affect the people who have their hands on the levers of power so that they move them to change things the way you want them to change. So there need to be powerful forces from the top of the country that proclaim the income/wealth/opportunity gap to be a national emergency and take on the responsibility for reengineering the system so that it works better.
2. Bipartisan and skilled shapers of policy working together to redesign the system so it works better. I believe that we will do this in a bipartisan and skilled way or we will hurt each other. So I believe the leadership should create a bipartisan commission to bring together skilled people from different communities to come up with a plan to reengineer the system to simultaneously divide and increase the economic pie better. That plan will show how to raise money and spend/invest it well to produce good double bottom line returns.
3. Clear metrics that can be used to judge success and hold the people in charge accountable for achieving it. In running the things I run, I like to have clear metrics that show how those who are responsible for things are doing and have rewards and punishments that are based on how these metrics change. Having these would produce the accountability and feedback loop that are required to achieve success. To the extent possible, I’d bring that sort of accountability down to the individual level to encourage an accountability culture in which individuals are aware of whether they are net contributors or net detractors to the society, and the individuals and the society make attempts to make them net contributors.
4. Redistribution of resources that will improve both the well-beings and the productivities of the vast majority of people. As an economic engineer, naturally I think about how money might be obtained from taxes, borrowing, businesses, and philanthropy, and how it would flow to affect prices and economies. For example, I think about how a change in personal tax rates might occur and how changes in them relative to corporate tax rates would affect how money would flow, and how changes in tax rates in one location relative to another location would drive flows and outcomes in them. I also think a lot about how the money raised will be spent—e.g., how much will be spent on programs that will improve both social and economic outcomes, and how much will be redistributive. Such decisions would of course be up to the people on the bipartisan commission and the leadership to decide and are way too complicated an engineering exercise for me to opine on here. I can, however, give my big picture inclinations. Above all else, I’d want to achieve good double bottom line results. To do that I’d:
a. Create private-public partnerships (including governments, philanthropists, and companies) that would jointly vet and invest in double bottom line projects that would be judged on the basis of their social and economic performance results relative to clear metrics. That would both increase the funding for and the quality of projects because people who have to put their own money on the line would be responsible for them. (For examples, see the Appendix.)
b. Raise money in ways that both improve conditions and improve the economy’s productivity by taking into consideration the all-in costs for the society (e.g., I’d tax pollution and various causes of bad health that have sizable economic costs for the society).
c. Raise more from the top via taxes that would be engineered to not have disruptive effects on productivity and that would be earmarked to help those in the middle and the bottom primarily in ways that also improve the economy’s overall level of productivity, so that the spending on these programs is largely paid for by the cost savings and income improvements that they create. Having said that, I also believe that the society has to establish minimum standards of healthcare and education that are provided to those who are unable to take care of themselves.
5. Coordination of monetary and fiscal policies. Because money is clogged at the top and because the capacity of central banks to ease enough to reverse the next economic downturn is limited, fiscal policy will have to be more coordinated with monetary policy, which can happen while maintaining the Federal Reserve’s independence. If done well, this will both stimulate economic growth and reduce the effects that quantitative easing has on increasing the wealth gap by shifting money and credit into the hands of those who have a higher propensity to spend from those who have a higher propensity to save and from those who need it less to those who need it more.
Of course, it wouldn’t be a Dalio essay if he didn’t bring up geopolitics. As anybody who is familiar with his recent writings will know, the billionaire trader is convinced that the economic and military tensions between the US and China are reminiscent of the 1930s, when “when there were great conflicts and economic and political systems were overturned.”
In the US, these factors contributing to this unstable state of affairs include rising populism, central-bank money printing and the rise of China, which is threatening America’s status as the global military and economic hegemon.
1. The high debt levels that led to the 2008 debt crisis (and have since increased) led to…
2. Central banks printing a lot of money and buying financial assets, which pushed asset prices up and pushed interest rates down. This has benefited those with financial assets (i.e., the haves) and has left central banks with less power to stimulate the economy.
3. These factors and new technologies created very wide income/wealth/opportunity and values gaps, which are expected to increase and are leading to…
4. Increased populism of the left and populism of the right that are causing greater domestic and international conflicts at the same time as…
5. There is a rising power (China) to compete with the existing dominant world power (the United States), which will lead to competitions that will be economic, ideological, and military and will be determined by the two powers’ relative skills and technological abilities. This competition will establish what the new world order will be like via-à-vis the rest of the world.
Lest he be accused of being all talk and no action, the Dalio family’s gift to the state of Connecticut – the largest single donation in the state’s history – will go toward a public private partnership similar to what he’s advocating for in his essay, the Hartford Courant reports. Ultimately, he hopes to raise $300 million from the state, other philanthropists and businesses. In other words, this is only the beginning. Unlike his other more recent writings, this latest essay was clearly intended as a kind of capitalist manifesto.
Which begs the question: Is this just the beginning of a more socially and politically active phase in Dalio’s long-running career?