Senator Warren plans to stifle the influence of big businesses and several CEOs. The Senator is not a fan of Wall Street or corporations, especially large firms and their CEOs. Many folks agree with her. They see several CEOs collect massive bonuses even as their decisions hurt consumers and other stakeholders. To fix these problems, Senator Warren introduced bills in the Senate to establish a wealth tax on individuals, to enhance accountability for CEOs, and to set the framework to break up large tech companies.
While the status quo is unacceptable, the Senator’s proposals do not deal with central issues. Thus, if these bills pass as is, they will discourage innovation and creativity and dampen economic development.
Before discussing these proposals, let’s look at the Senator’s background. Senator Elizabeth Warren was a law professor for more than 30 years, including nearly 20 years as the Leo Gottlieb Professor of Law at Harvard Law School. She was President Obama’s advisor and a principal architect of the Consumer Financial Protection Bureau. Following the Great Recession in 2008, she chaired the congressional oversight panel of the Troubled Asset Relief Program (TARP). The Senator has been an outspoken critic of business, and a strong consumer advocate.
To be sure, we must protect consumers from abusive companies, but Senator Warren’s proposals won’t fix the targeted problems and might hinder economic growth.
Senator Warren’s Wealth Tax
Senator Warren, who does not identify as a socialist, proposes a two percent wealth tax on Americans with assets above $50 million, rising to three percent on assets more than $1 billion.
No doubt, inequality is an issue; however, we do not fix the underlying causes by taxing the wealthy. First, we must identify the systemic problems. Specifically, we should learn why there isn’t an acceptable sustained rise in lower income levels. In Warren’s proposal we narrow the income gap by taking from the wealthy, and later redistributing the amount seized to lower rungs. How does this approach solve the endemic problem? It doesn’t! Among other things, it ignores incentives to create jobs and wealth.
Taxing the wealthy doesn’t fix the problem. Admittedly, it will increase tax revenues; but governments will create more programs, hire more people, and become even more creative with wasteful spendingThen again, Warren and her husband earned $905,000 in 2018, which puts them in the top one percent of wage earners. Should they redistribute some of their incomes? Certainly not! But Senator Warren’s rhetoric might lead some folks to think she should because her income is enormous. Warren and her fellow Democrats, wittingly or unwittingly, promote identity politics, exacerbate class warfare, victimhood, and entitlement.
Senator Warren and CEOs Accountability
It’s vital Americans and Canadians identify the causes of income inequality and fix them. But whatever solutions we develop, they must stress wealth creation by all in society, not wealth redistribution. Without a doubt, redistributing wealth from the top will discourage wealth and job creation. The message that the Senator is sending to people aspiring to be the next Bill Gates, Warren Buffet, or Jeff Bezos is simple: Though you might work hard to develop businesses that create millions of jobs, expand the economy, and you plan to donate most of your wealth to charity, the government prefers to redistribute your wealth. Is this what we want to communicate to the next generation of entrepreneurs?
One of the bills Senator Warren introduced is the Corporate Executive Accountability Act , “Which holds executives of large corporations criminally responsible when their companies commit crimes, harm large numbers of Americans through civil violations, or repeatedly violate federal law.” As well, Senator Warren reintroduced the Ending Too Big to Jail Act, a comprehensive bill to hold big bank executives accountable when the banks they lead break the law. In introducing these bills, Warren said:
“Corporations don’t make decisions, people do, but for far too long, CEOs of giant corporations that break the law have been able to walk away, while consumers who are harmed are left picking up the pieces.”…
“These two bills would force executives to responsibly manage their companies, knowing that if they cheat their customers or crash the economy, they could go to jail.”
CEOs Can Be Harmful To Their Companies
I agree with Elizabeth Warren that too many CEOs cause harm to consumers and shareholders and walk away from their firms with substantial financial benefits. We must hold delinquent CEOs who break the law accountable. However, we must be careful we do not punish CEOs for well-intentioned, bad corporate decisions? That’s the role of the board of directors and shareholders! Still, I realize the interconnectedness of corporate board memberships will allow some CEOs with poor performance records to survive.
Paul Carroll and Chunka Mui in their book Billion Dollar Lessons said:
“We defined failure as writing off major investments, shuttering unprofitable lines of business, or filing for bankruptcy… The extent of failures was stunning [over 25 years]… Since 1981 (to 2006), 423 U.S companies with assets of more than $500 million filed for bankruptcy. Their combined assets at the time of their bankruptcy filing was $1.5 trillion; yes, that’s trillion with a “t”… Over those 25 years, 258 publicly traded U.S companies combined for $280 billion in write-offs.”
Carroll, Paul, and Chunka Mui, Billion Dollar Lessons: What You Can Learn from the Most Inexcusable Business Failures of the Last 25 Years, Penguin, 2010, pages 279-291
Carroll and Mui found that the problem was not negligence or poor execution. It was poor strategy. Should a CEO go to jail for a poor strategy? For incompetence? Some “negligent” acts flow from incompetence. As written, the bills won’t prevent poor strategy development, instead, it might discourage competent, well-intentioned CEOs from taking needed, measured risks, which are essential in running businesses. Existing laws will take care of dishonest CEOs and send them to jail. Nevertheless, it is crucial Democrats and Republicans find a bipartisan way to agree on a bill that addresses the fundamental issues Warren’s bills are trying to solve.
Senator Warren Wants To Break Up Large Tech Companies
Here again, the Senator has misdiagnosed the problem and provided a naive, counterproductive solution. No doubt, Facebook abused individuals’ data, but breaking up Facebook would not address the privacy issue, for instance. A $10 billion Facebook (Warren’s breakup threshold is $25 billion) company could easily misuse personal data. Size isn’t the issue. We need consumer vigilance, corporate transparency, and simple, pragmatic government oversight.
I agree with the Senator when she says,
“I want a government that makes sure everybody – even the biggest and most powerful companies in America – plays by the rules,… And I want to make sure that the next generation of great American tech companies can flourish.”
The challenge is to find the appropriate, non bureaucratic, minimum regulations’ solutions. Every company should play by the rules!
Only one CEO went to jail following the Great Recession. Should others have gone because of their poor stewardship and ill-advised decisions? CEOs of several companies abuse people’s private information and waste shareholders’ funds; this must stop! However, we delude ourselves if we believe the size of large tech companies that Warren is targeting is the problem. Indeed, because of the visibility of these large tech companies, we are better off today with them as is, than if we divided them into smaller firms.
The government must level the playing field, enforce sensible regulations, but not succumb to temptations to over-regulate companies. Facebook is trying to entice the government to regulate the industry, which effectively would help to create a more substantial entry barrier than today. Regulation as Facebook is requesting will assure Facebook’s near monopoly. Instead, the government should require Facebook and similar companies to be transparent about how they collect, use, and share private information, among other things.
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