A new type of capitalism

THE CRISIS roiling Wall Street has led to calls for a new type of capitalism, presenting a real opportunity for positive and productive changes. What would market capitalism 2.0 look like? To start, it would pay more attention to fairness. It would also guarantee that full-time workers don't live in poverty. Finally, it would offer an enhanced safety net.

The benefits of the vast growth in the US economy over the last few decades have accrued to the wealthy. The drivers of that growth have not only been executives but also the American workforce, which has been more productive than ever. Nearly two years ago, Federal Reserve Board Chair Ben Bernanke noted that income inequality could threaten the nation's "dynamism," and recently at a conference on global capitalism at the Harvard Business School, former Treasury secretary Larry Summers called for action. Summers suggested that in order to sustain economic growth, we must have shared prosperity. He offered startling statistics: The top 1 percent of earners in the United States gained $600 billion annually in income while the bottom 80 percent lost that same $600 billion from 1979 to 2008. That translates into an average gain of $500,000 in annual income for each person at the top, while those at the bottom lost an average of $8,000.

It is not a surprise that the ranks of the working poor are swelling. At the same time that real wages have been decreasing for a significant proportion of American workers, costs have been rising, leaving many families without enough money to cover their basic human needs such as food, fuel, healthcare, and housing. Today, one in four working families in the United States is considered low-income.

Poverty and widening inequality are morally, economically, and politically unsustainable. Recent estimates find that poverty costs the US economy $500 billion annually or 4 percent of GDP due to loss of productivity and economic growth, increased crime, and rising health expenditures.

A new social contract is needed, guaranteeing that anyone who works full time will not be poor. We need to "make work pay." A couple of ways to do this quickly include expanding the earned income tax credit, which provides a tax refund to low-income wage earners, and assisting working families to access affordable child care. These policies would represent an investment in the workforce and in productivity.

Another element of market capitalism 2.0 would be a stronger safety net at times of both dislocation and economic crisis. At the Harvard Business School conference, Professor Michael Porter shared research showing that last year 30 million new jobs were created. At the same time, 30 million jobs were destroyed. The notion of creative destruction is essential to capitalism - as economies evolve due to the introduction of new technologies and innovations, there are both winners and losers. Porter suggested that the safety net to assist workers at times of economic dislocation is failing and that a functioning safety net is essential to market capitalism.

A critical first step is to modernize the Unemployment Insurance program, because only about one out of every three who are unemployed receive any help when they lose a job.

The failure to make fundamental changes to promote fairness, combat poverty, and provide all workers with a meaningful safety net risks setting the stage for a new era of protectionism as a backlash to the public's perception that business doesn't work for everyone. This would pose a major threat to the system of market capitalism and would limit economic growth both in the United States and globally.

It is time for business leaders to come together with government and civic leaders to devise a new set of public policies to ensure that market capitalism 2.0 gets it right. The cost of inaction will be far too high.

Andrea Silbert, former CEO of the Center for Women & Enterprise, is president of Eos Foundation.