Will Donald Trump Embrace Main Street Capitalism?

Tokyo at night. Wikimedia Commons/Creative Commons/Moyan Brenn

The elites in Washington have run out of excuses.

January-February 2017

Trump should seize the opportunity to restore growth and prosperity. The blunt truth is that the American people had a message for both Donald Trump and Hillary Clinton during the 2016 presidential contest: Stop the partisan bickering. Fix the economy to allow for higher rates of economic growth. Try different things. Cut bipartisan deals. Be bold. Unite the country behind a plan.

Trump’s approach should be as sweeping as it is obvious. He should recognize that capitalism comes in different varieties, and a return to a more equitable society of higher growth hardly means embracing European-style socialism. The key to a better economy is not to reject capitalism; it is to rediscover the Main Street roots of capitalism—and to jettison today’s desultory corporate capitalist mind-set.

Corporate capitalism is a recipe for economic gloom. Today’s corporate capitalism of top-down mismanagement and backroom deal making has smothered the American people’s innovative spirit. Even central-bank policy now favors the big, the corporate and the status quo at the expense of the small, the young, the new, the inventive and the entrepreneurial. It favors Wall Street over Main Street. Under today’s stifling corporate capitalism, Washington policymakers have an almost slavish devotion to large institutions, both public and private. They have also allowed a poisonous hyperpartisanship to make effective policymaking impossible. They have squandered the chance for an effective immigration policy that confronts the demographic challenge. They have imagined away America’s coming entitlement nightmare. As a result, average folk, apprehensive of the future, can feel in their bones that the American Dream is slipping away.

Main Street capitalism offers the opposite approach. When Main Street capitalism is working, it produces an explosion of success and failure, of reinvention, dynamism, and growth, all happening on a level playing field where the winners and losers are difficult to predict. Main Street capitalism creates a culture of start-ups. The dreamers continually come up with new, creative, commercially viable ideas that, in some cases, are transformative for the economy. This climate of dynamic reinvention and equal opportunity to achieve moves the economy to new heights. It empowers people at all levels of the income ladder.

In recent decades, the Main Street capitalist model has receded. As a result, the U.S. economy is suffering from a disease that has led to almost terminal morbidity—mediocre growth and a growing inequality. Productivity growth rates (doing more with less) have been abysmal. Innovators are starting firms at half the rate they did fifteen years ago. Existing firms are not investing in new opportunities at the same rate as in the past. Young firms are finding it much tougher to go public—and 80 percent of new job opportunities come when firms five years old or less go public. Today’s innovation itself appears to be less than transformational to the lives of average working families.

Meanwhile, America’s large corporations—the ones that haven’t moved offshore—have used the Federal Reserve’s low interest rates not to invest in America’s economic future but to buy back their own stock, creating an unprecedented mountain of corporate debt for this point in the business cycle. Even today’s leaders in high technology, Google and Facebook, now spend more on patent lawyers and lobbyists to stifle competition than they do on research and development. Is it any wonder that GDP growth rates have been subpar and inequality has expanded?

Main Street capitalism requires a change in mind-set. It entails a dynamic climate of economic mobility. In this climate, every man or woman is a potential founder of a business start-up. (Today, women are now starting firms at twice the rate of men. They are among the economy’s new secret weapons.) With Main Street capitalism, people again are not just consumers; they are also investors, business operators and, in some cases, dreamers of breathtaking innovation. For the majority of Americans who don’t start new firms, Main Street capitalism offers a new grassroots climate of more dynamic growth and more lucrative job opportunities. Trump should emphasize that the key to not only higher economic growth but greater social mobility is for America to return to a start-up culture. He should become the “start-up president.”

Innovative breakthroughs are the key to long-term prosperity. They are particularly essential to an economy bogged down with massive amounts of debt. But here’s the problem: Broad-based prosperity requires more than a handful of glitzy technological breakthroughs, such as the smart phone, coming from rarified places such as Silicon Valley. History shows that significant increases in per capita income arise from what economist Edmund Phelps calls “mass flourishing” at the grassroots level. In this process, average folk become “idea machines” in an environment where ordinary people reinvent ordinary products and services from the bottom up. For Washington policymakers, the greatest challenge is to figure out how to make the entire economy, not just Silicon Valley and the dozen or so other tech centers, the innovative economy.

POLICYMAKERS HAVE got it all wrong. America’s economic destiny is not a matter of luck. Human initiative and creativity are not irrelevant in determining economic success or failure. Attitude is everything. The health of an economy depends on behavioral elements that don’t always fit on an Excel spreadsheet or follow the confines of a predictable theory. Economies involve a complex ecosystem and are linked to psychology.