American capitalism needs to be reformed before it’s too late. It’s the sentiment of many these days, and it’s one that billionaire investor and hedge fund manager Ray Dalio expressed on a recent episode of 60 Minutes. Dalio pointed to growing income inequality and declining social mobility as a national emergency—one that could even lead to “revolution” if left unchecked. While Dalio’s sentiments may appear to echo those of many democratic socialists, he’s hardly one of them.
Dalio loves capitalism. Through it, he has become very wealthy and famous as the founder of the investment firm Bridgewater Associates. He understands, too, that as an economic system, capitalism has led to greater opportunity and technological advancement than anything that preceded it. But Dalio feels that capitalism has become a danger to itself.
He points to a relationship between income inequality and political unrest, arguing that such inequality spawns populism on both sides of the political spectrum. Income inequality is to progressives what immigration is to conservatives. In a sprawling LinkedIn post, Dalio outlined a five-point plan for righting the ship and reversing the trend toward greater inequality. His ideas, however, run directly counter to his goals.
Income inequality is to progressives what immigration is to conservatives: problems that aren’t really problems any longer but are just now beginning to trouble people.
Just like illegal border crossings have significantly dropped since their peak in the Clinton and early Bush administrations, so has income inequality stabilized since its uptick in the 1980s and 1990s. According to some measures, inequality has even decreased in recent years. But the outcry over inequality has grown louder, likely because, when they feel like they are getting by, people don’t care so much that some people have more than they do—or that immigrants are stealing their jobs. More on that later.
Dalio’s first and most emphatic point is that solutions to income inequality need to come “from the top,” an observation he bases on his personal experiences. Dalio is taking the wrong lessons from his career as a hedge fund manager. Asking why the federal government shouldn’t come up with solutions when we have 50 states is like asking a hedge fund manager why they shouldn’t invest in only a single asset.
The hedge fund manager would laugh at the suggestion. No matter how confident they were that a single asset would perform well, it would be nothing short of malpractice for him to invest in that asset alone. The risk would just be too great.
A solution “from the top” would jeopardize this process, putting all of our bets on a strategy that may very well fail.
A similar principle is at play when it comes to the states, which former President Bill Clinton once wisely referred to as “laboratories for democracy.” Dalio is not the first person to notice the problems in, say, the primary education system. Many state and local governments have long been aware of the problems Dalio notices and have been experimenting with changes in how public schools are funded, charter schools, and voucher programs.
Successful strategies are adopted by other states, while failed ones are discarded. A solution “from the top” would jeopardize this process, putting all of our bets on a strategy that may very well fail. Dalio, too, calls for the creation of a bipartisan commission of people from diverse backgrounds to come up with solutions to income inequality. But again, a superior system already exists in the states. Why come up with a risky centralized solution when the states can be allowed to experiment?
The Need for Clear Metrics
Dalio also calls for holding the people in power accountable through the creation of “clear metrics.” These, he hopes, will aid in judging the success of solutions to income inequality. Unfortunately, the term “clear metrics” is something of an oxymoron. As Jerry Muller most recently argued in The Tyranny of Metrics, metrics used for administrative purposes are often anything but clear.
Even when there’s no intent to use data in service of a certain political goal, it’s difficult to determine whether a certain metric is reflective of performance or circumstances beyond a person’s control. Similarly, the use of metrics could cause those in power to play to those metrics rather than focus on actually doing a good job. As Muller notes, there are well-documented cases of doctors avoiding treating patients with poor prognoses out of fear that it will hurt the metrics used to score their performance.
In the end, Dalio is right. American capitalism does need saving, but not from itself.
Lastly, Dalio calls for more public-private cooperation in determining how the government spends its money. In other words, he thinks the solution to income inequality involves giving the top quartile of the population more of a say in governing. While business executives might have a better grasp of the effects of a proposed policy than an everyday citizen, many are also more than willing to manipulate policy to suit their own interests. Giving the private sector more of a say in governing would lead to more corruption and inequality, not less.
So what can be done to prevent the populism Dalio fears? Again, most people don’t care so much about the haves and the have-nots when they feel like they’re getting by. Reform the healthcare system to curtail rising premiums and exorbitant drug prices, get rid of restrictive zoning laws that drive up housing costs, eliminate tariffs that make everyday goods more expensive, don’t trap children in failing school districts, and get rid of regulations that harm small businesses. These changes are small, but they add up and will have a far better impact on society than simply moving money around. In the end, Dalio is right. American capitalism does need saving, but not from itself.