Elizabeth Warren

Elizabeth Warren Wants to Fight About Regulation Instead of Spending. That's Clever—and Dangerous.

Her corporate governance proposal hides the vast cost of her plans.



Elizabeth Warren has become a progressive icon over the last decade. She was the intellectual force behind the creation of the Consumer Financial Protection Bureau, and she was a prominent early voice pushing to move the Democratic Party in a more leftward direction. Although she does not claim the socialist label for herself, she is in many ways the forerunner of the resurgent democratic socialist movement and its champions, from Bernie Sanders to Alexandria Ocasio-Cortez.

But precisely because she has been so successful at pushing her party and its voter base to the left, she now faces political competition. In response, Warren is carving out a unique niche for herself: While her competitors are increasingly focused on dramatically increasing federal spending with ideas like Medicare for All and free public college tuition, Warren is focused on corporate regulation and oversight.

It's a savvy move from one of the left's most effective political strategists. It also has the potential to be far more dangerous and disruptive than conventional tax-and-spend progressivism.

Over the last two weeks, Warren has rolled out a pair of legislative proposals designed to change the way corporate governance is regulated. This week's entry was an anti-corruption plan that would impose restrictions on how soon government officials can become lobbyists after leaving office and would require the IRS to release presidential candidates' tax returns. Some of its provisions are worthwhile; some aren't. Much of it is targeted at President Trump.

The more significant of the two is the Accountable Capitalism Act, which would radically overhaul corporate governance at large companies.

Currently, corporate charters are granted at the state level, but Warren's plan would force corporations with more than $1 billion in annual revenue to obtain a federal charter from a new Office of United States Corporations within the Department of Commerce. Those companies would be subject to a variety of rules, including a mandate that at least 40 percent of the board of directors be elected by employees, an instruction to consider all "stakeholders" (not just shareholders) when making business decisions, and a requirement that 75 percent of both shareholders and board members approve of any political activity.

In a Wall Street Journal op-ed announcing the plan, Warren wrote that since 1985, shareholders "extracted almost $7 trillion" from U.S. companies. "That's trillions of dollars in profits that might otherwise have been reinvested in the workers who helped produce them." The clear implication is that corporate profits and shareholder returns represent a pot of money that can be tapped for redistribution without raising taxes or increasing government spending. Media accounts of Warren's plan have been even more explicit about this. A write-up in Fast Company, for example, said that "the Accountable Capitalism Act could precipitate the shift of trillions of dollars in wealth from the top 10% to the struggling middle and lower classes, without requiring any federal spending."

Although Warren has not explicitly framed her proposal in opposition to spending-heavy agenda of Sanders and Ocasio-Cortez, it's impossible to avoid the contrast. The essential components of the democratic socialist agenda—single-payer health care, free tuition at public colleges, a jobs guarantee—would add tens of trillions of dollars to the federal budget, even according to accounting from neutral and left-leaning sources. Warren's proposal, from a strictly budgetary perspective, would be free.

As a political strategy, it's a clever attempt to solve a problem that has consistently bedeviled the left. Socialists like Ocasio-Cortez have struggled when asked how they would pay for their plans. Even in blue states nominally receptive to much larger government, the cost of progressive policy ideas has tended to be politically and economically prohibitive. But this allows Warren to sidestep talk of massive tax hikes, and it lets her criticize Republicans for increasing the deficit, as she did in a recent CNBC interview, without sparking charges of hypocrisy. In essence, Warren can claim that she has found a pot of free money.

But of course it's not free—not even close—even if the price tag won't show up in a Congressional Budget Office score.

Warren's plan would almost certainly come with a byzantine set of rules and compliance requirements, all of which would impose a significant cost on some of America's most productive companies. It might not represent a direct transfer of wealth away from owners of capital, but it would certainly transfer a substantial measure of control to non-owners—and to the federal government. Investors would be less likely to invest if they couldn't be assured control of the returns.

Some defenders of Warren's plan have pointed to European countries with codetermination—a form of employee participation in corporate governance that resembles Warren's proposal—to suggest her plan won't seriously damage the U.S. economy. Yet as Samuel Hammond argues in National Review, Germany's mandated codetermination system has failed to create the sort of large, innovative companies that thrive in the United States. Germany, he notes, has "failed to become a dominant player in tech, producing just five billion-dollar technology companies in the last decade. Instead, Europe's largest economy is dominated by old behemoths such as Volkswagen and an abundance of specialized, thoroughly unscalable 'small and medium' firms known as Mittelstand." Research suggests that Germany's system of codetermination has inhibited its securities market, undermining shareholder ownership. It's an economic system that is unfriendly to innovators and investors.

Europe's experience doesn't make the case for Warren's plan; it demonstrates the risks. She has not found a treasure trove of free money. She has found a way to hide the vast cost of her plans. Rather than taxing anyone directly, her plan would extract from the economy as a whole, curbing its growth at a cost to everyone who works or saves, which is to say, nearly everyone.

So far, Warren has sidestepped discussions about whether she will run for president in 2020, saying she is focusing on getting reelected to the Senate in 2018. But her latest round of proposals certainly seem intended to position her for a potential 2020 run. And that means differentiating herself from other left-leaning Democrats. A recent Buzzfeed profile quotes Warren describing what she believes is the difference between herself and Bernie Sanders: "He's a socialist, and I believe in markets."

Politically, it's a smart contrast to draw in a country where the essential idea of market-driven capitalism remains relatively popular. But it's disingenuous. For all its flaws, Sanders-style socialism is at least transparent. He believes in accomplishing his political goals directly through the federal government. Warren, on the other hand, would use the government to force corporations to do it for her, making the cost opaque in the process. Yes, she believes in markets—but only when people like her control them.