Book Review Saving Capitalism: Keeping America Strong Pat Choate Vintage Books, 2009 Pat Choate, the

author of Dangerous Business: The Risks of Globalization for America and six other books, was the vice-presidential candidate in Texas oilman Ross Perots 1996 Reform Party bid for president of the United States. Perot had run in 1992 with Vice Admiral James Stockdale as his running mate. Observers of American politics will recall that the Perot candidacies provided an energetically idea-filled criticism of the policies favored by the two major parties. Its tone was populist in the sense that it identified with mainstream America, rejecting established elites and interests. The title of the present book tells us that Choate is by no means anti-capitalist. In common with a good many other commentators on the current scene, however, he believes that the form of capitalism practiced within the American economy in recent years has become a grotesque caricature, far different from the capitalism of the past and from what earlier proponents of a market economy have supported. Choate and the other commentators see the recent brand as a perversion formed out of a mixture of cronyism, corruption, and an free market ideological absolutism that is akin to a secular religion. When this sort of economy is blended with a political system that itself is profoundly corrupted by unprincipled self-aggrandizement and the constant exchange of favors among big money interests and politicians, the result, Choate argues, is toxic. He says the very concept of public service has changed when massive political contributions and lobbying expenditures buy access and position in Washington. The book discusses this in detail, but one of his many examples is especially telling: At one point, the chairman of the Republican National Committee was a registered agent of the Japanese auto industry, and the chairman of the Democratic National Committee was a registered foreign agent of the Japanese electronics industry. Its a system, it seems, where everyones soul is for sale. What Choate favors is a capitalism, properly regulated. Although he wants a strong financial sector, he also wants a reversal of what he sees as a long-standing U.S. policy that has favored finance over industry: The federal government in the latter part of the twentieth century put into place, step by step, a long-term national industrial policy that privileged the financial industry over all others, particularly manufacturing. He tells of the deindustrialization of the United States and the decline in manufacturing employment, and says that outsourcing has devastated Americas middle class. Leaders have seemed indifferent to the well-being of the people of the United States. The result has been an impoverishing policy in pursuit of current gratifications that has hollowed out the American economy. Choate says that beginning with the Reagan administration, our government has increasingly financed its debt by selling national assets and borrowing money from the central banks of Japan and China, the oil-exporting nations, and Caribbean banking centers. He isnt pleased as he looks back at the response that has been made to the recent financial crisis. The bailout of the past year has done little more than recapitalized the gamblers and kept our financial oligarchs in power. The money industry got more than $12 trillion in aid, while by comparison only a piddling amount went to other needs. The

priority should be reform first and bailouts second. Rather than bailouts, there should have been orderly liquidations such as was done through the Federal Deposit Insurance Corporation (FDIC) in the savings-and-loan crisis a few years ago. The book is certainly a cry of dissatisfaction but also much more. Choate spells out a number of policies he thinks desirable in the areas of taxes, innovation, infrastructure, workers needs, industrial policy, financial regulation, and trade. What he says about taxation ties directly to the points he makes about trade, industrial policy, the condition of workers, and finance. He favors a Value Added Tax (VAT), which is used by all industrial countries other than the United States and by 153 countries in all. The VAT is a consumption tax, Choate explains, that is imposed each time a sale is made, from raw materials to final sale with each participant paying the tax only on its value added. He sees it as having several advantages over the income tax, which has long been the principal source of revenue for the national government in the United States. We wont recount those advantages here, other than to note how a VAT can address several critical problems. Choate argues that nothing can repair the economy of the United States or that of the world until U.S. trade is balanced, citing the enormous trade deficits over the past several years. In this connection, it is essential to know that World Trade Organization (WTO) policy allows other nations to rebate the VAT, thereby subsidizing their exports sold in the United States, while imposing a tariff-like VAT on U.S. imports into their countries. This is a potent protectionist system a giant import tariff that has long worked against American products. Taken just by itself, it is a reason why thousands of American manufacturers are responding by moving their production to countries where they too can get the VAT advantage. This migration lends itself to the deindustrialization of the United States and to the loss of American jobs. The United States can move from the income tax to a VAT within the existing WTO framework, since the VAT is instantly compatible with WTO treaties. The VAT is an indirect tax, the rebating of which is permitted, rather than a direct tax such as the income tax, the rebating of which is prohibited as a trade subsidy. The result of this discrimination against the American system is to grant other countries a tax loophole (and, in effect, a tariff) , which came about in the aftermath of World War II when the United States was anxious to speed Europes economic recovery and that persists to this day. The U.S. federal budget deficit, Choate argues, is akin to the trade deficits in that it, too, must be overcome if there is to be economic recovery. It is crucial to state that America will be unable to surmount the current economic crisis until it again controls its debt. A Value Added Tax is relevant here: The VAT is the most powerful and efficient way ever invented to raise government revenue. It is precisely what America needs now. Increasing revenue is accompanied by other advantages: it greatly encourages savings by not taxing money saved or the interest generated; it goes far toward eliminating the massive non-compliance problem experienced under the income tax; and its regressive burden on people with low incomes can be eliminated by doing what many countries do: impose zero or low rates on food, health care, and religious and cultural services. Even though we will recount several of Choates other proposals, readers will be well served by reading the book for a more complete discussion. Because Saving

Capitalism is short at 261 pages, one might expect its content to make it dense; but this is belied by its easy readability. His chapter on Innovation provides a short course about how the U.S. patent system relates to Americas unfavorable competitive situation. Patents, he says, are at the heart of invention, but there are serious flaws in the American system. These include having given advantage to less-innovative large producers in preference to the more prolifically inventive small-entity inventors. The processing of U.S. patents is underfunded and far too slow. For these and other reasons, there is much to be improved. Choates chapter on Infrastructure calls for a national capital budget a plan to set priorities, financing, and time schedules. This is desperately needed because the United States has significantly underinvested in its domestic civil works for decades in, among other things, levees, dams, drinking and wastewater treatment, solid waste disposal, bridges and roads, airports, inland waterways, rail, schools, hazardous waste, public parks and recreation. Restoring a responsible capitalism, he says, calls for imposing strict federal supervision of all financial institutions of any form doing business in the United States. He makes several suggestions about this supervision, but there are reasons to doubt the wisdom of his admonition that the United States should first take on the task of putting its house in order and only then consider various worldwide regulatory proposals. Why? Because if global reforms arent made while the worlds attention is on the need for them, it is likely that they will fall far short of what is needed. The reality is that both the national and the global financial scenes cry out for reform simultaneously. At the world level, global financial brinksmanship, with hundreds of trillions of dollars sloshing at great speed, contains recurrent threats of world economic collapse. The dangers are so critical that a postponement of reform is highly inadvisable. We stress this importance despite knowing that global reforms will in all likelihood run into insurmountable resistance from international banks that are often larger than the governments that would seek to regulate them. Resistence may come, too, from emerging nations, such as China, that would not welcome outsiders control of their financial systems. If such resistance prevails, the world economy will continue in peril. Choate would play hard ball with the malefactors who brought about the current crisis. Criminal charges, he says, should be brought against the many who committed fraud. There were various types of fraud in the real estate mortgage market, and as mortgage loans were collateralized and sold in the world market virtually all the participants knew they were involved in a massive scheme that featured collusion by industry insiders. Choate would impose a lifetime ban on people responsible for this crisis those who would automatically qualify are the CEOs and all board members from every bank, insurance company, and investment house of that era that failed because of the corporations overexposure to subprime mortgages. He continues: Others who merit the same ban include leadership (CEOs and boards) of all the major banks that had to take federal bailout monies because of their subprime mortgage activities. This suggests a veritable revolution, justified because the ban would tell the world that market capitalism is about responsibility and that the United States is dead serious. He joins with many other authors today in saying that commercial banking should again be separated from brokerage activities. And short-term speculation should be replaced by long-term investment. One way to do this is to base executive compensation

on performance over an extended period of time rather than on quarterly gains. Others would be to impose either a transaction tax on each corporate stock trade or a tax on shortterm trades. Choates many prescriptions seem right to the point, but need to be weighed seriously against the alternatives. Given the power-alignments that exist in American politics, it is probable that some of his suggestions, especially such a thing as banning for life much of the erstwhile financial leadership of the United States, will be dropped into a black hole. But the national dialogue has many voices, and Choates is certainly an important one. The book covers so much ground that it may be asking too much to say that in various ways his analysis and proposals should be taken considerably further. Nevertheless, it is valuable to realize that the complex economic situation today calls for much more. We notice that Choates discussion of innovation and improvement of the patent system contains no hint of the role that robotization must play in the reindustrialization of the United States. Non-labor-intensive technology can compete with minimal-cost Third World labor; American workers cannot. When he directs his discussion of the condition of American workers to the need for jobs, he is trapped within what logicians call the present universe of discourse; i.e., he shares (in this connection) a common inability to think outside the box. It is odd that he doesnt quite come to a realization that in the future most people wont be able to derive their livelihood from employment. He comes close when he says rhetorically that one answer is to provide them with more education and training, and then asks, but training for what? It is understandable that almost everyone continues to think, as Choate does, in terms of what until now has been universally necessary income-through-gainfulemployment. But if non-labor-intensive technology continues to come in, as it almost certainly will (and must), most of the economic return will go to the owners of the technology. This has, of course, robust implications for all aspects of economics, politics and society. There is little pie-in-the-sky in Choates very practical analysis. But we would be remiss if we didnt comment at least briefly on his idea that bringing Mexico, its peoples lives, and its economy up to developed-world standards is a mission the United States and Canada have delayed too long. With this simple sentence, he would impose a nationbuilding undertaking both vast and quixotic. Dwight D. Murphey