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Key Words: Hedge-fund billionaire Ray Dalio says capitalism needs urgent reform

Capitalism is no longer working for most Americans, according to one hedge-fund billionaire. Read More...

Capitalism is no longer working for most Americans, according to one hedge-fund billionaire, who says the expanding wealth gap dividing the haves and have-nots is creating a volatile environment with disturbing parallels to the economic and social upheaval of the 1930s.

Ray Dalio, founder of Bridgewater Associates LP, the world’s biggest hedge fund, says capitalism has developed into a system that is promoting an ever-wider wealth gap that puts the very existence of the United States at risk. In a two-part series published on LinkedIn, the noted investor argues that capitalism is now in need of reform — and offered ways to accomplish it:

‘I have also seen capitalism evolve in a way that it is not working well for the majority of Americans because it’s producing self-reinforcing spirals up for the haves and down for the have-nots. This is creating widening income/wealth/opportunity gaps that pose existential threats to the United States because these gaps are bringing about damaging domestic and international conflicts and weakening America’s condition.’

Ray Dalio, Bridgewater Associates

Dalio says he was fortunate to grow up in a middle-class family, to be educated at a good public school and to be able to enter a job market that offered him equal opportunity — at the time when most people believed equal education and equal opportunity were fair and productive.

The investor says he became a capitalist at 12 when he earned his first wages by delivering newspapers, mowing lawns and caddying, and invested them in the stock market while it was hot in the 1960s.

That experience led Dalio, 69, to become a global macro investor, a career he has pursued for nearly a half-century and one that has shaped his understanding of economics and markets. Dalio believes capitalism is the most effective allocator of resources that raise living standards, arguing that communist systems fail because they do not recognize the need for people to be rewarded properly in order to motivate them to work.

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Today, however, the system has produced little or no real income growth for most people for decades, according to the Dalio essay on LinkedIn. Prime-age workers in the bottom 60% have had no real (inflation-adjusted) income growth since 1980, and the percentage of children who grow up to earn more than their parents has fallen to 50% from 90% in 1970.

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The wealth gap is at its widest point since the late 1930s, with the top 1% owning more than the bottom 90% combined, “which,” Dalio notes, “is the same sort of wealth gap that existed during the 1935-40 period (a period that brought in an era of great internal and external conflicts for most countries).”

Most people in the bottom 60% “are poor,” he writes. About 40% of all Americans would struggle to raise $400 in the event of an emergency, he says, citing a recent Federal Reserve study. The childhood poverty rate stands at 17.5% and has not shown meaningful improvement in decades. That, in turn, leads to poor academic achievement, low productivity and low incomes.

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“The income/education/wealth/opportunity gap reinforces the income/education/wealth/opportunity gap,” Dalio writes, citing statistics showing that richer communities have better funded public schools, with better teachers, equipment and materials. Poverty hurts the family unit, too, leading to divorces and separations that exacerbate hardships for children raised in poverty. Bad child care and bad education can lead to badly behaved adults, creating higher crime rates and higher levels of incarceration.

The wealth gap is weakening the U.S. because it is undermining the country’s strength relative to global competitors, according to Dalio. It is also creating dangerous social and political divisions that threaten cohesion — and capitalism itself.

“Disparity in wealth, especially when accompanied by disparity in values, leads to increasing conflict, and, in the government, that manifests itself in the form of populism of the left and populism of the right and often in revolutions of one sort or another,” Dalio writes. “For that reason, I am worried what the next economic downturn will be like, especially as central banks have limited ability to reverse it and we have so much political polarity and populism.”

Capitalists don’t know how to divide the economic pie, while socialists don’t know how to grow it, he writes, “yet we are now at a juncture in which either a) people of different ideological inclinations will work together to skillfully re-engineer the system so that the pie is both divided and grown well or b) we will have great conflict and some form of revolution that will hurt most everyone and will shrink the pie.”

Taking action

Who’s to blame for this predicament? Dalio says it’s not “evil rich people” or “lazy poor people” — it’s capitalism itself.

“Capitalism is now working in a way in which people and companies find it profitable to have policies and make technologies that lessen their people costs, which lessens a large percentage of the population’s share of society’s resources,” Dalio writes. “Those companies and people who are richer have greater buying power, which motivates those who seek profit to shift their resources to produce what the haves want relative to what the have-nots want, which includes fundamentally required things like good care and education for the have-not children.”

Giving people greater shares of national wealth, alleviating financial insecurity, and providing better opportunities for education and advancement, is key to Dalio’s proposed solutions to narrow the wealth gap.

Change must come from the top, he writes. “You will not effect change unless you affect the people who have their hands on the levers of power so that they move them to change things the way you want them to change,” Dalio notes. “So there need to be powerful forces from the top of the country that proclaim the income/wealth/opportunity gap to be a national emergency and take on the responsibility for re-engineering the system so that it works better.”

Dalio implores national leaders to make policies that improve people’s lives. Changes in personal and corporate taxation, borrowing, and philanthropy, are imperative and would be instrumental, he explains. His ideas include:

Create private-public partnerships to invest in socially and economically productive projects that offer a solid, measurable return on investment; tax pollution and other causes of poor health, for which society pays a price; raise more money from top-earners and distribute the proceeds to the middle- and bottom-earners, making sure to still encourage productivity and innovation; establish minimum standards of healthcare and education for all, and put “money and credit into the hands of those who have a higher propensity to spend from those who have a higher propensity to save and from those who need it less to those who need it more.”

The consequences of political inaction and continued infighting could be grave, Dalio warns. ”We are at the sort of critical juncture,” he writes, “in which the biggest issue will be how we deal with each other rather than any other constraints.”

Dalio senses danger in the defining national elections taking place over the next two years in the U.S., the U.K., Italy, Spain, France, Germany, and the European Parliament. He adds: “There are enough resources to go around to deal with the risky issues and produce much more equal opportunity plus improved productivity that will grow the pie. My big worry is that the sides will be intransigent in their positions so that capitalism will either a) be abandoned or b) not be reformed because those on the right will fight for keeping it as it is and those on the left will fight against it.”

If capitalism is caught in a political tug-of-war, its power and influence will decline and so will the pillars of economic and political freedom it supports, Dalio cautions. The way forward, he adds, is for “sensible and skilled” people from both sides to come together in a bipartisan effort to reform capitalism, “so it works well for the majority of the people.”

Related: Ray Dalio: Rising debt, income inequality and political polarization are a recipe for a nasty downturn

See also: As Ray Dalio weighs in on Ocasio-Cortez’s 70% tax proposal, here’s what some critics got wrong about it

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