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Hedge Fund Billionaire Says American Capitalism is Broken

7 November 2018; Ray Dalio, Founder, Co-Chief Investment Officer & Co-Chairman, Bridgewater Associates on the Forum Stage during day two of Web Summit 2018 at the Altice Arena in Lisbon, Portugal. Photo by Harry Murphy/Web Summit via Sportsfile
7 November 2018; Ray Dalio, Founder, Co-Chief Investment Officer & Co-Chairman, Bridgewater Associates on the Forum Stage during day two of Web Summit 2018 at the Altice Arena in Lisbon, Portugal. Photo by Harry Murphy/Web Summit via Sportsfile

Dalio challenges left and right-leaning populists, saying that “capitalists don’t know how to divide the pie well and socialists don’t know how to grow it.”

The billionaire head of Bridgewater Associates, the world’s largest hedge fund firm, has stirred controversy after publishing a 7,500-word essay on LinkedIn, titled, “Why and How Capitalism Needs to Be Reformed.”

Mr. Dalio said he believes the American Dream is lost, and that despite the U.S.’ growing economic prosperity, the country has failed to redistribute opportunity. Dalio said that if he were president, he would declare inequality a national emergency.

CBS News notes that Bridgewater, which manages $160 billion, has analysts more focused on historical patterns than short-term gyrations of the market. Mr. Dalio said his historical perspective informs his fears regarding inequality:

“If you look at history if you have– a group of people who have very different economic conditions — and you have an economic downturn, you have conflict. In the ’30s, for example, you had four major countries that were democracies, that chose not to be democracies because they wanted leadership to bring order to the conflict. I’m not saying we’re going to go there. I’m saying that right now – it’s a huge issue it’s unfair and, at the same time, it’s unproductive, and at the same time it’s– threatens to split us.”

In his essay, Dalio wrote the most alarming statistics showing the un-sustainability of American capitalism regard the condition of children:

“The childhood poverty rate in the U.S. is now 17.5% and has not meaningfully improved for decades.[xi] In the U.S. in 2017, around 17% of children lived in food-insecure homes where at least one family member was unable to acquire adequate food due to insufficient money or other resources.[xii] Unicef reports that the U.S. is worse than average in the percent of children living in a food-insecure household (with the U.S. faring worse than Poland, Greece, and Chile).[xiii]
One of the solutions Dalio proposes is increasing taxes on the wealthy. He said the concept of cutting taxes on the wealthy to increase productivity “doesn’t make any sense to him at all.”

Dalio believes the unequal treatment of children has long-term consequences, as weak support in childhood leads to poor academic achievement, which leads to low productivity in adults. Dalio points to statistics showing American children in the bottom 15% for standardized testing of all developed countries, and their connection to shortages in teaching staff between advantaged and disadvantaged schools.

Dalio challenges left and right-leaning populists, saying that “capitalists don’t know how to divide the pie well and socialists don’t know how to grow it.” He expressed his support for unions and higher taxation on the wealthy, but he thinks Rep. Alexandria Ocasio-Cortez’s 70% marginal tax rate on top earners may not be the best solution. “We’re in agreement on the problem that’s behind that suggestion. We have to make capitalism work for the majority of Americans. I don’t know that we’re in agreement on the mechanics,” Dalio told CNBC about Ocasio-Cortez’ proposal.

Dalio’s efforts to “bring balance” to the right and left have been met with criticism from both camps.

Are Low-Income Families Better Off Today Than Decades Ago?

On the right, American Enterprise Institute fellow James Pethokoukis challenges Dalio’s basic thesis. Dalio corroborates the common point that over the last few decades, wages have remained basically flat when adjusted for inflation for the majority of the American population since the 1980’s. Pethokoukis cites the work of economist Bruce Sacerdote, who argues that factoring in the declining costs of goods changes the economic narrative.

Sacerdote argues, “if you spend time working with high school students, you notice that even in low-income areas, many of the students have cellphones and have access to cable TV and internet services at home.”

Sacerdote’s research shows low-income Americans own more cars than decades ago, and posits that low and middle-class families have enjoyed “meaningful growth in consumption… despite a prolonged period of increasing income inequality… and a decreasing share of national income accruing to labor.”

According to Pethokoukis,”if those numbers seem too abstract, there’s the simple reality that lower income folks are living better today than decades ago.”

Critics of this position would argue that while consumer goods have become cheaper, rising costs of basic needs like housing, health care, and education have worsened the conditions of many Americans. A 2016 Brookings Institution analysis on household spending over the last 30 years found low and middle-income households spending a greater share of their income on basic needs, with low-income households spending 40 percent of their budget on housing – a 5.5 percent increase since 1984.

College tuition has more than doubled since the 1980s, and America has a 1.5 trillion student loan debt bubble. Healthcare and housing have become more expensive, and life expectancy has been declining for years in an unprecedented trend.

‘We’re All Passengers in a Billionaire Hijacking’

Dalio also faces critics on the left, such as Anand Giridharadas, an editor for Time and the author of “Winners Take All.” In January Giridharadas told Business Insider that “we’re all passengers in a billionaire hijacking” of the United States, and he said the attention given to Dalio’s proposal illustrates a bigger problem: excessive reliance on elites.

Dalio’s proposed solutions are heavily based in private-public partnerships, where wealthy individuals and corporations would work with the government to tackle societal issues. Dalio recently announced a $100 million donation to Connecticut’s public schools, which Giridhadas used as a case study to make his argument:

“It is fine to donate money to Connecticut. But Dalio’s personal preferences should have zero influence on how the money is spent. This is the problem with the public-private-partnership model he venerates: It puts some rich guy and the State of Connecticut on an equal footing to negotiate a plan to enhance the general welfare. Why? You wouldn’t ask an arsonist to lead the firefighting brigade, and you shouldn’t ask those who have benefited most from a rigged system, and who have the most to lose from genuine reform, to lead the reformation of the system.”

Giridhadas said he would be open to dialogue with Dalio, but the Bridgewater manager would have to meet him on equal footing, and recognize the outsized power his wealth gives him to shape the public narrative. Both are in agreement that if major reforms are not made to American capitalism, serious violence and revolt could occur.

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Peter Castagno

Peter Castagno is a freelance writer with a Master’s degree in International Conflict Resolution. He has traveled throughout the Middle East and Latin America to gain firsthand insight in some of the world’s most troubled areas, and he plans on publishing his first book in 2019.

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