Ray Dallio’s call for reforming capitalism. Let Trump and the Congress take the final hit on change.

Billionaire Ray Dallio yesterday shared his insights on why capitalism should be reformed but not abandoned.  The socialism versus capitalism argument has been highlighted over the last three years with the business media attributing the post-election surges in the market to the “Trump Effect” and politicians such as Senator Bernie Sanders, Independent of Vermont, and Alexandria Ocasio-Cortez, Democrat of New York, calling for more pro-consumer policies i.e. Green New Deal, free college education, higher taxation on the rich, etc., as a response to a growing wealth gap between the affluent and the middle and lower class.

The the COVID-19 pandemic has been ravaging the economy, specifically the two markets that get the most attention from consumers and investors: the stock market and the labor market.  Last April there was some bewilderment on the part of the average guy on the street that while the stock market saw gains, the labor market dissed workers.  Writing for MarketWatch, Mark DeCambre shared the following:

“Markets have enjoyed a solid run up April thus far, following a withering bout of selling prompted by the COVID-19 pandemic that has infected well over three million people—1 million in the U.S. alone—and claimed the lives of nearly 230,000 globally, according to data aggregated by Johns Hopkins University. Apparently, stock-market investors are betting that the viral outbreak that has devastated the jobs market, pushing the total number of Americans to around 30 million and likely driving the unemployment rate to the worst levels since the Great Depression, is likely to eventually subside.”

But as we move further into the month of May, the surge in the stock market seen last April may have raised false hopes for stock investors seeking that quick “V-shaped” recovery.  Writing for the Motley Fool, Sean Williams shared the following:

“For nearly the past three months, Wall Street and investors have dealt with some of the wildest volatility they’ve ever seen. In a span of 33 calendar days, the benchmark S&P 500 (SNPINDEX:^GSPC) lost 34% of its value. That’s the quickest descent in history from a recent high. (It’s taken an average of 11 months for the S&P 500 to lose 30% during previous bear markets.)

Furthermore, we’ve witnessed an unprecedented economic impact from the spread of the corona virus disease 2019 (COVID-19). The corona virus pandemic shut down nonessential businesses throughout most of the country and has put an estimated 33 million people out of work, based on initial jobless-claim filings over the previous seven weeks.”

That unemployment number has climbed to around 36 million with the unemployment rate for April hovering around 14.7%.

Reforming an economic system is nothing new.  The United States moved from briefly being a mercantilist state, where the emphasis was on increasing state power by maximizing exports, minimizing imports, imposing high tariffs, and accumulating a trade surplus versus today’s economic model, capitalism, where industry and trade are controlled by the private hands that own the factors of production.

Mr Dallio’s call for reform apparently stems from the fear that the barbarians are knocking at the gate and can only be put at bay with changes in economic policy that minimizes their angst. The consternation spawned by the gap between stock market performance and labor market performance may be short-lived as economic indicators may show the United States formally fell into a recession this Spring and that both markets are now swimming in the same muck.

Right now COVID-19 is America’s biggest political distraction.  The Trump administration does not appear too concerned with the gap between the performance of the labor and stock markets.  While President Donald Trump has not explicitly advocated a trickle down theory for economic growth, one could not be blamed for taking the view that he is a Reaganite given his emphasis on the stock market as a barometer for how America’s economic fortunes are compounding.

Meanwhile this is an opportune time for the Fourth Branch to make a determine whether it has the regulatory tools to steer the ship of state toward a new type of economic system that is more equitable in the eyes of labor.  I would recommend public administrators treat reformation as a laboratory experiment, identifying the endogenous and  exogenous factors upon which a number of reform proposals could be crafted and presented, while the politicians, who should be the ones taking the public hit, figure out where they want reformation to go.

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