The Leader of the World’s Largest Hedge Fund Says the Economic System That Made Him a Billionaire Is a Threat

Ray Dalio, billionaire and co-chairman of Bridgewater Associates, the world’s largest hedge fund, recently penned an essay warning that America faces an existential threat if capitalism isn’t reformed. Even in the overheated rhetoric of 2019, this is a bold claim from a professional capitalist.

So, what is the state of the American economy?

Wage Stagnation

After a decade of slow growth following the Great Recession, the US economy grew by about 3 percent in 2018, unemployment has declined to 3.8 percent, and wages are starting to rise. As James Pethoukis says, the economy is awesome, or at least “fairly decent.” You would expect things to be dramatically worse if capitalism were an existential threat to America.

To make his case for the economic apocalypse, Dalio makes the highly subjective argument that capitalism isn’t working well for the majority of Americans. He breaks the population into the bottom 60 percent and top 40 percent. It’s dubious that wages holding steady over time is sufficient reason to declare capitalism a threat to our existence.(Doing so conveniently produces a majority). Then, Dalio builds his case for “reform” by pointing to wage stagnation and income disparity.

Dalio explains that wages have been steady for the bottom 60 percent since 1980. Notice Dalio doesn’t argue there has been wage decline. Merely wage stagnation.

It’s dubious that wages holding steady over time is sufficient reason to declare capitalism a threat to our existence. But, comparing current wages with historic wages may not tell the whole story about the standard of living.

Prosperity and Trade-Offs

When judging whether Americans are less prosperous now than they were at some earlier time, we should factor in the technological advancements, the wider variety of goods, the improvement in modern medicine, and the development of new products, entire industries, and jobs that simply did not exist in 1980 or mid-century America. For instance, no matter how wealthy a person was in 1980, she couldn’t make an Instagram post from her smartphone of her dancing to her favorite song on her Spotify list. Those things simply didn’t exist.

Assuming wage stagnation is a real concern, what caused it? Dalio blames globalization and automation.

Global commerce, like all commerce, involves trade-offs. Globalization means that factories in the Rust Belt have faced more competition from manufacturers in Latin America or Asia. But international competition and trade have produced more diverse and less expensive consumer goods, cheaper inputs for American manufacturers, and created economic efficiency and growth. We can sympathize with the Rust Belt workers of the 1980s who lost jobs due, in part, to increased global competition. But at the national level, we would be foolish to look only to one side of the ledger and conclude that trade is bad. Veronique de Rugy, describing the 25-year history of NAFTA, has pointed out that the reality of international trade isn’t calamitous, it is boring. She wrote:

As economists know, trade—like all competition, whether domestic or international—causes particular jobs to disappear, particular companies to go out of business, and particular sectors of the economy to shrink. But over the long run trade doesn’t affect the total number of jobs or the overall rate of employment or unemployment.

So, global trade isn’t a cause for panic.

What about Dalio’s concerns about automation? To keep up with international competition, improve efficiency, and mitigate the cost of worker demands and employment regulations, manufacturers turned increasingly to automation. The rise of automation yielded an increase in American productivity, while the number of manufacturing jobs was reduced.

As a result, workers migrated to service positions. Leaving dirty, loud factories and coal mines behind, workers moved to clean, comfortable, air-conditioned offices to work in professional services or new industries like information technology, e-commerce, and software. Unless you really hate working in an office, this is no reason to sound an alarm.

Cultural Failings 

Beyond lamenting automation and global trade, Dalio points to declines in culture and parenting, as well as several governmental failings such as underperforming public schools, excessive public debt, inadequate infrastructure, and fiscal and monetary policy.

I share Dalio’s concerns about American social decline. We are confronted by real social problems, including the decline of the family and private institutions, a growing sense of alienation, the opioid crisis, and too little “Netflix and chill” that writers W. Brad Wilcox and Lyman Stone recently dubbed the “Happiness Recession.” These are real problems—but this ain’t capitalism.

Capitalism is boring. But capitalism has brought prosperity to this country and lifted people out of extreme poverty around the globe.

Despite sounding the alarm of economic apocalypse, Dalio’s policy prescriptions are pretty standard fare. He calls for centralized power, what he calls “leadership from the top.” In addition, he calls for raising taxes, redistributing income and wealth, and “public-private partnerships” (mainly in traditionally public areas such as public education and infrastructure). Despite a hysterical call to reform capitalism or face our doom, these policy prescriptions aren’t particularly innovative. More to the point, these policies wouldn’t reform capitalism itself.

Alarmist hype isn’t conducive to thoughtful deliberation about America’s real problems. Capitalism is boring. But capitalism has brought prosperity to this country and lifted people out of extreme poverty around the globe.

Calm down, Ray. Overwrought rhetoric that undermines trust in free enterprise is a threat to our prosperity.