Why and How Captialism Needs to be Reformed by Ray Dalio

tldr
finance
Published

August 23, 2019

Abstract

Ray Dalio, the founder of Bridgewater Associates, published a two-part article on April 5, 2019 titled Why and How Capitalism Needs to be Reformed. The first section is about Ray’s perspective both as an American and further as the founder and CEO (although not currently) of one of the world’s largest and most successful hedge funds. The second part of the article offers an explaination why capitalism is failing and what he thinks we should and can do about it.

This piece is already written in a succinct fashion with lots of bullet points and summaries. This TL;DR attempts to distill this distillation even further. I highly recommend reading the original article, which is available here.

TL;DR

  1. There is income/education/wealth/opportunity gap in America and it is broadening. This is a self-reinforcing, generational problem.
  2. Historically, this is a phenomenally bad sign for society. In the past, if there is an economic downturn, it has been followed by conflict.
  3. The coordination of monetary and fiscal policy, coulpled with leadership from the top, can help to shift money and credit to those who need it more and will spent it (i.e., boost the economy.)

Part I

  • There has been little or no inflation adjusted income growth for the lower 60% of American household incomes since 1980.

    • In the same time, incomes for the top 10% have doubled. Incomes for the top 1% have tripled.

  • The wealth gap is the highest since the late 1930s.

    • The top 1% of the world has more wealth than the bottom 90%.

  • American workers in the lowest earning quartile have one of the lowest probabilities of moving into a higher quartile in the entire world.

  • There is a income/education/wealth/opportunity gap that has been rampantly growing.

  • The current American system is largely failing children. Many children in the USA are poor, physically and mentally malnourished, and poorly educated.

    • Overall, American scores poorly in testing compared to the rest of the world. These scores can be correlated with poverty rates.

  • The income/education/wealth/opportunity gap reinforces itself.

    • Over 1/3 of public school funding comes from real estate tax. Wealther neighborhoods have better schools. Wealthier students have better outcomes which turn into higher productivity and earnings which come back to their neighborhood. Their neighborhood becomes even wealthier, taxes bring in more money, the schools become better, the expected outcomes of students improve.
    • The exact opposite is true for poor neighborhoods.

“To me, leaving so many children in poverty and not educating them well is the equivalent of child abuse, and it is economically stupid.”
-Ray Dalio

“These gaps weaken us economically because:
They slow our economic growth because the marginal propensity to spend of wealthy people is much less than the marginal propensity to spend of people who are short of money. They result in suboptimal talent development and lead to a large percentage of the population undertaking damaging activities rather than contributing activities.”
-Ray Dalio

This income/education/wealth/opportunity gap breeds populism on both the left and right, which is not condusive to a stable economy or political system. In the event of an economic downturn, history shows that there is an extremely high probability of conflict and revolution. Conflict and revolution are not good for growing the economic pie. But history also shows that they also fall short of their promise to redistribute the pie as well.

So in summary:
INVEST IN CHILDREN.
ALL CHILDREN.
FEED THEM.
EDUCATE THEM.
ENSURE THEY HAVE SAFE HOMES AND STABLE GUARDIANS.

Part II

How to fix capitalism in America:

  1. Leadership from the top.
  2. Bipartisan commission tasked with simultaneously dividing and increasing the economic pie.
    1. Focused on “double bottom line investments” - good social returns and good economic returns.
  3. Clear metrics that can be used to judge success and hold the people in charge accountable for achieving it.
  4. Redistribution of resources that will improve both the well-beings and the productivities of the vast majority of people.
    1. Create public-private partnerships with clear metrics to evaluate success.
    2. Tax things that create an over-all burden on the economy (e.g., pollution)
    3. Tax the top more and earmark the money specifically for the middle and bottom. The savings produced by investing in the middle and bottom will yield more over-all economic gains than the taxes taken.
      1. Establish minimum universal standards for healthcare and education.