On October 6, 2022, the Truman Medal for Economic Policy was awarded to Roger W. Ferguson, Jr. The transcript of his address, “The Future of American Capitalism,” follows. Watch the recorded program on YouTube.

The Future of American Capitalism

Roger W. Ferguson, Jr.

It’s a pleasure to be in Kansas City. Indeed, I spent some time early today in the Kansas City Federal Reserve Bank building, which was, I think, the last building I got a chance to oversee before I left the system. I will say it turned out remarkably well. So, it’s a pleasure to be back.

Let me also to say, I’m very, very pleased and honored to receive this award. I’m honored on three separate reasons, so to speak. First, its award named for Harry Truman. You heard already a great deal about what he did in terms of economic policy. He was a great American politician. He was a great American statesman, and it’s a pleasure to be here in this great library that’s named in part for him, and to receive this award. I’m also very grateful to the organizing groups here that really drove this, the Truman Library Foundation, the Economic Club of Kansas City, and of course, the Black School of Business. So, I want to thank all of you as well. Because those three institutions recognize or represent the various dimensions of economic education policymaking in conversation, so it’s a pleasure to be associated with all of those institutions as well. Finally, I’m humbled beyond words to be in the company of these phenomenal leaders, Alan Greenspan, George Shultz, Paul Volcker, Alice Rivlin and Janet Yellen. I had a chance to work with almost all of them, and a chance to interact absolutely with all of them, including George Shultz. So, to be here, a recipient of this award, which they have also received, is really quite phenomenal for me. Then Alan Meltzer, John Taylor, Robert Shiller, major academic thinkers, whose work underpins so much what happens in modern macroeconomic policy in particular, an area that’s close to my heart, as well as Tom Hahn and others’ monetary policy. So, thank you all very, very much for being here.

In my talk today, I’d like to reflect on the world of these policymakers and these thinkers, these prior recipients of this prestigious award, and their peers created and asked the question, “What is the state of that world today?” To put this in context, Harry Truman, in part through the creation of the Council of Economic Advisers, which has already been mentioned, recognized that the post-World War II competition with the Soviet Union would depend crucially on the economic strength of America. The goal expressed in the act that created the council was, and I quote, “To take all measures necessary for a healthy economy.” That economic strength as all of you know, ultimately led to the fall of the Berlin Wall in 1989. The economic policy leaders who have preceded me as recipients of this medal and their contemporaries created the conditions for, and then presided over the post-Berlin Wall era in diplomatic and economic policy. In the roughly 35-year period following the November 1989, symbolic end of the Soviet Union, can best be characterized by the emergence of capitalism as the dominant mode of organizing economic activity, literally in all major parts of the globe.

As we all understand in this room, capitalism at its core involves a private ownership of most property and business enterprises, which are then operated on a for-profit basis in the interest of their owners. Capitalism accepts that private ownership is protected by the laws, and that the owners of capital invest for private gain. Additionally, adherents of the capitalist system generally believe that forces of supply and demand should determine prices, and those prices will be determined in a way that can serve the best interest of society. Generally, in a capitalist system, the forces of competition with firms created and then destroyed are thought to enhance both private welfare and importantly, overall social good. And finally, adherence of capitalism belief in the freedom of choice for all economic actors with respect to consumption, production and investment.

The role of the government in the capitalist system is to protect the rights of the private owners of capital, and maintain an orderly society that facilitates the actions of private sector economic actors. As part of maintaining an orderly society, we generally accept that government has a role in regulating the acts of private citizens and enterprises to avoid the most egregious behaviors. We will debate often how much or how little regulation is consistent with the capitalist system, of course, and the regulatory pendulum certainly tends to swing back and forth over time. We’ve also come to understand and accept that the government in a capitalist society has the authority to tax citizens to pay for the provision of services and to protect the least advantaged through redistributionist policies. As with regulation, how much the government should tax and how much redistribution it should foster through taxes and social programs is also a matter of perpetual debate, with different societies accepting differing answers.

Finally, we all agree that government must provide that class of goods known as public goods, which includes national defense, police and fire services, and also public education. Again, of course, there’s a debate on the nature and magnitude of the services that the government should provide between narrowly-defined public goods and more broadly-defined services. Here, there’s a recognition that some goods and services thought to be the purview of government might be provided by the private sector, and hence, depends on whether privatization swings back and forth. Importantly, the post-1989 world is not characterized by only one type of capitalism. In fact, one can identify six styles of capitalism that emerged in the post-Soviet era. Therefore, I described this period as one of global “capitalisms,” plural.

Clearly, here in the U.S., we continue what I would describe as regulated free market capitalism, which might also characterize the capitalism of the Thatcher era in the UK. Some have described this as liberal market capitalism. Western Europe might best be described as having strong safety net capitalism, in which the government is willing to undertake stronger redistributionist policies to avoid extremes of wealth and poverty. Japan, and perhaps other Asian economies, since World War Two, has created a unique collective capitalism, or sometimes called coordinated market capitalism, in which actors exchange information through non-market institutions, such as trade associations and cross shareholdings and the great industrial conglomerates. Elements such as lifetime employment create a cohesive economic environment. Finally, India has a mixed capitalism, in which large private enterprises flourish and coexist along with major government monopolies. What is fascinating about the post-1989 period is in both Russia and China, two major economies that had experimented with communism, the major anti-capitalist theory of the 20th century, they also both adopted reforms that led to their own types of capitalism. With regard to Russia, the system that replaced communism has been described as “crony capitalism,” in which former state-owned enterprises moved into the hands of a select few individuals with privileged access. There were attempts at reforming the Soviet system immediately after the 1989 fall of the Berlin wall that ultimately did not achieve the aim of broader distribution of state-owned assets into private hands. Finally, in China, during the era of Deng Xiaoping, starting in the early 1980s, and culminating in a series of important economic reforms at the same period in the early 1990s, China adopted something that has been called capitalism with Chinese characteristics or state-controlled capitalism. So, these then are the six constituent parts of the global capitalisms system that has dominated since roughly 1990.

What can we say has been the result of roughly 35 years of the post-1990 global capitalisms? Well, the benefits are certainly well recognized. During the global capitalism of our era, literally hundreds of millions of individuals have risen from abject poverty to enjoy a roughly middle-class lifestyle. Until recently, life expectancies were rising inexorably, in almost all societies, with the notable exception of Russia. The global capitalisms that prevailed in the past 35 years have fueled the technological revolution, embodied in major improvements in communication, health, et cetera, just as earlier versions of capitalism fueled the Industrial Revolution and the Green Revolution. We have seen the rise of major global companies such as Apple, Microsoft and Google that are literally only a few decades old, but have transformed the way that we, and literally, billions of people around the world live. But at the same time, critics point to major failures. Most notably, late 20th century capitalisms have contributed to a significant gap between the richest and poorest in terms of both income and wealth. The gap is particularly stark here in the United States, but it’s darker in other countries as well, where the poorest individuals have seen no real income growth by some measures since 1980, and the most highly compensated cohort have seen their income grow by around 6% per year. Wealth inequality is even starker both here and in other economies.

Many economists and other observers point to climate change and the loss of biodiversity as potentially another side effect of the modern economic system that has prevailed for many decades, pointing in particular to an absence of the right price for carbon. Others, such as Anne Case and Sir Angus Deaton, in their book, Deaths of Despair and the Future of Capitalism, argue that capitalism in its current form, is literally destroying the lives of many working-class people. A typical quote from that book, and I’m not endorsing this, I’m simply quoting it, “Over the past two decades, deaths of despair from suicide, drug overdose and alcoholism have risen dramatically, and now claims hundreds of thousands of American lives each year.” So perhaps the single most compelling set of statistics highlighting the threat to the global capitalism for the past 35 years, comes from the work of Richard Edelman, who publishes the annual Trust Barometer. The Edelman Trust Barometer fields an online survey across 28 countries and receives more than 36,000 respondents. In the 2022 version, 52% of respondents agreed with the statement, and I quote, “Capitalism, as it exists today, does more harm than good in the world,” which is only a slight improvement over the 57% that agreed with that statement just a few years ago. An astounding 33% of respondents from the 21 democratic countries that Edelman surveyed, so these are the 21 richest democracies in the world, 31% of respondents said, “Centrally managed economies do a better job than free market economies.” So, imagine if you look around and one-third of the citizens in the U.S. or rest of Europe or Australia, thought that centrally-managed economies do a better job than free market economies. So clearly, the global capitalism system is being questioned.

Indeed, only 51% of all respondents expect their families to be better off in five years’ time, but in most advanced economies, that percentage that expected improvements range from somewhere like 15% in Japan, to 43% in Singapore. Here in the United States, only 40% of respondents to the 2022 Trust Barometer believe their families will be better off in five years’ time. This is a decline from 43% in the 2020 Barometer, 46% in the 2021 Barometer, and 50% in the 2019 Barometer. So, over time, those who believe that their next generation will be better off than we are today has been steadily declining here in the United States. In the 2020 Trust Barometer, only 18% answered the question, “The system is working for me positively,” while 48% answered the question, “The system is failing me.” So, this apparent skepticism about the benefits of capitalism is not an exclusively Western phenomenon. Notably, China, one of the major beneficiaries of the sweep of this global capitalism that prevailed after the fall of the Berlin Wall is visibly struggling with massive income and wealth inequality, and seeking to introduce what is being described there as “common prosperity.” The tenets and modalities of common prosperity appear to outsiders to be very much in flux, but the call for “Reasonably adjusting excess incomes,” and for high-income individuals to “Give back more to society,” which the Chinese Communist Party called for last year is unmistakable. Similarly, the large fines and other restrictions that have severely weakened some of China’s largest and most successful private enterprises and their very visible owners are noticeable to all.

So clearly, clearly, we are confronting a crisis in the global capitalism’s system that has prevailed in the past 35 years. I believe the question for the future is “What is the future of capitalism?” That question I believe is squarely on the table, and institutions such as those supporting this medal are, and must continue to be part of the dialogue. Most immediately and most urgently, our societies are asking if we can conquer the scourge of inflation which erodes the earnings and savings of average citizens, and it’s currently a challenge in almost all major economies, without tipping into global economic decline. A few months ago, the World Bank published its global economic prospects. The headline to the press release summarizes the outlook of the World Bank from just a few months ago, and that headline was, “Stagflation risk rises amid sharp slowdown in growth.” The World Bank now expects global growth to slump from 5.7% in 2021, to about 2.9% this year, which is significantly lower than the 4.1% that it anticipated back in January of this year. The report also notes that global inflation is expected to moderate next year, but will likely remain above inflation targets in many economies. If inflation remains elevated, the report observes, a repeat of the resolution of the 1970 stagflation episode could translate into a sharp global slowdown, along with financial crises in some emerging market and developing economies. This is clearly a very dour assessment, noticeable both in the degree of change and also the speed with which it changed. A few days ago, a UN agency, UNCTAD, warned the risk of monetary policy-induced global recession linked to what it considers “imprudent monetary policy” that would have serious consequences for developing economies. And this morning, the executive director, the managing director of the IMF, clearly signaled that they too are quite concerned about rising risks of recession globally.

So, clearly, the next few years risk putting even a larger dent into trust and confidence that the average citizen has in our economic system, and perhaps in those who lead it. As all of you know, beyond the current conjecture, capitalists, by which I mean the managers and owners of large pools of capital, business leaders, asset managers, and asset owners are not oblivious to the challenges the global capitalism system is confronting. Perhaps the public trust them to fix a system perceived to be broken. Again, according to the 2022 Edelman Trust Barometer, following a recent trust decline for government and media, business is still the only trusted institution, scoring a 61%. Business leaders themselves are leading the charge to redefine the role of business to consider more explicitly, groups that are called stakeholders, as well as shareholders. While this redefinition is sometimes described as a reversal of the mantra ascribed to Milton Friedman, that business exists only to maximize shareholder value. In fact, it was always the case that business leaders and thought leaders always recognize that other groups, in addition to shareholders, have both a financial interest and a nonfinancial interest in the performance of the corporation.

In my mind, actions by business leaders are more important than the words chosen to describe the purpose of business. Business leaders are joining together in groupings such as the Council for Inclusive Capitalism to undertake concrete and meaningful actions to achieve a more just and equitable society, while still operating with the private sector for profit motive. These leaders aspire to increase diversity in the workplace, to protect the environment, and to provide better health and well-being for all, and they have pledged to take concrete actions to achieve these worldly goals.

In my assessment, the actions of other capitalists, asset owners and asset managers also merit intention when we ask the question, “What is the future of capitalism?” We see three notable trends as these capitalists try to revive trust in the system that they have built, and for which they have benefited. First, we have the emergence of broadly defined and accepted concept of activist shareholders. This is mainly a group of long-term owners of businesses, pension funds, foundations and endowments now joined by index funds and other passive investors who recognize that they are unlikely to sell their ownership stakes in the major businesses that they own, and therefore, must engage with both the directors, who are their legal representatives, and the managers of these companies in which they are owners.

The company which I was the CEO for about 13 years, TIAA, was one of the first to recognize that it needed to engage with both directors and the corporate C-suite to influence behavior in matters such as climate change, disclosure, and board diversity. We welcomed other long-term shareholders to engage as we did with the directors and corporate leaders to improve the functioning of our portfolio companies in ways that cannot just mitigate some of the negative corporate behaviors, but turn the corporation into a more trusted and more consistent positive force in society without giving up on the profit motive. In addition to direct engagement with directors of the C-suite, owning shares in the company gives investors the right to raise concerns with other shareholders. By filing or co-filing and advisory shareholder resolutions at U.S. companies, which may obtain a place on the annual proxy, institutional investors and investment managers can appeal to other shareholders for support in pursuing their goals. And indeed, investors filed more than 750 resolutions relating to ESG issues for the 2020 proxy season. The leading issues were corporate political spending and lobbying, as well as workplace discrimination, climate change, executive pay, human rights, and board diversity. In this regard, we should note that regulators, who along with large institutional investors drive corporate disclosure regimes, are encouraging greater disclosure in the ESG area.

The SEC has proposed climate-related disclosures that would greatly increase the amount of climate-related information that companies would have to provide in registration statements and annual reports. This is the E of ESG. This proposal has garnered more than 3000 comments and we all await the final rule. Chairman Gensler from the SEC has indicated that he wants to issue rules on the S as well, asking the SEC staff to work on a proposal related to human capital disclosure. According to Gensler, this could include “a number of metrics, such as workforce turnover, skills and development training, compensation, benefits, workforce demographics, and health and safety.” The owners and managers of the assets are also leveraging their pools of capital to directly improve outcomes by adopting a more assertive stance on the use of ESG approaches to investing itself. This is the second trend that I’ve determined to. This so-called sustainable investing is an investment discipline that content considers environmental, social and corporate governance that’s ESG criteria to generate long-term competitive financial returns.

According to the US SIF foundation’s report on U.S. sustainable impact investing trends, as of year-end 2019, one out of every $3.00 under professional management in the U.S., that’s about $17 trillion, was managed in an ESG strategy. That’s a 42% increase from the $12 trillion identified just two years earlier. The latest statistics indicate that there are roughly 836 mutual funds, variable annuity, closed-in funds, and ETFs with ESG assets, and 905 private equity, venture capital, hedge funds and REITs that consider ESG criteria. Some people in this room probably are involved in financial services and are aware the fierce competition that has emerged to develop and market ESG financial products to both retail investors and institutional investors alike. Of course, we all recognize that we might need more standardization on the use of the term ESG by these various asset managers, and regulators in the U.S. and Europe are trying to tighten the rules on popular ESG investment products, proposing to establish a common benchmark on how sustainable investment products are labelled, marketed, and reported.

Additionally, as investors demand for ESG products increases across the fund industry, fund boards are facing mounting pressures to enhance their oversight of ESG products, and it’s crucial that directors have access to robust education and training programs on the latest ESG developments. A related but distinct trend is the movement toward what’s called impact investing, which is using private investments in for-profit firms that are meant to both make a profit and demonstrably improve the lives of their customers. Most often, these companies have a focus in emerging market economies, and I am privileged to serve on the Global Leadership Council for a leader in the impact investing sphere called Leapfrog Investments, whose motto is “Profit with purpose,” and whose investment strategy is to make an impact through private equity investments in high-growth, purpose-driven businesses.

More broadly, I believe that we should challenge owners of capital, even if not formally identified as ESG or impact investors, to consider if they are putting their resources to work, solving some of the major societal problems that I believe undercut the trust and confidence in capitalism. Healthcare, financial security, and lately, given the Russian aggression in Ukraine, even national defense are areas in need of pressing modernization and for which private capital and entrepreneurial skill, I believe, should be marshalled. Of course, in both ESG and impact-investing arenas, there must be accurate measurement in order to avoid accusations of so-called greenwashing, and those measurements, I believe, should be based on solid statistical evidence.

More recent efforts by business leaders and asset managements to improve capitalism, and the third trend that I’d like to focus on is leveraging markets directly to create financial products aimed at solving or mitigating the effect of social problems that have emerged as a major concern during the past three or four decades. Obviously, climate change, along with the radio topics of natural disasters and carbon emissions, is a top priority for these market developments. Catastrophe bonds, sometimes known as CAT bonds, are one of the oldest of these financial market instruments meant to erase the financial impact of natural disasters, or at least mitigate it where possible. They were created and first used in the mid-1990s in the aftermath of Hurricane Andrew. The market has expanded steadily since that time but remains relatively small at approximately $30 billion of debt outstanding. Another market again aimed at solving one of the perceived shortcomings of the global capitalism’s system is the market for carbon credits. This market has been around for roughly two decades, but it’s struggled to grow due to the lack of standardization and oversight.

Confidence in the market has been negatively impacted by concerns again of this phrase, greenwashing. However, progress is currently on the horizon through efforts of newly established organizations, such as The Integrity Council for the Voluntary Carbon Market, the ICVCM, and the Voluntary Carbon Market Integrity Initiative. The ICVCM will address integrity issues in the supply of carbon credits and how they trade, while the other organization, the VCMI, will address how those credits can be used. These markets have the potential, if they’re perceived to be of high integrity, to increase 100-fold by the year 2050, and have therefore the potential to impact our accelerating – or accelerate now transition to net zero. Now, will these efforts to fix capitalism being undertaken by the capitalist themselves prove sufficient to resolve the issues that the global capitalism system faces? We clearly do not know. But as an optimist, I note that in the past, capitalism has indeed fixed itself, with the help of government intervention, in the form of new rules and regulations that work to somewhat inhibit the freedom of the capitalists in order to make capitalism itself more sustainable.

Here, I’m thinking of the Progressive Era here in the United States that featured rules and work conditions, child labor, working hours, and many other elements of market functioning. Many think that without the set of rules and regulations promulgated at the beginning of the 20th century, capitalism might have failed due to its own excesses. Similarly, capitalism famously readied itself during and after the Great Depression thanks to creative initiatives of the Franklin Roosevelt administration with Harry Truman playing a pivotal role as a senator, and ultimately, as vice president. Harry Truman himself was the first president to unreservedly advocate national health insurance, stating in 1948 that, quote, “The greatest gap in our social security structure is the lack of adequate provision for the nation’s health.” When Medicare and Medicaid were born in 1965, Lyndon Johnson traveled to Harry Truman’s hometown of Independence, Missouri to sign the Social Security Amendments Act of ‘65, creating those two iconic programs, and doing so in the hometown of President Truman.

So, while I am optimistic that capitalism will most likely be the primary organizing principle of the global society for many, many generations to come, I’m 100% confident that the legacy of Harry Truman that we recognize tonight, the Council of Economic Advisers, will help to shape the public policy responses to concerns about the functioning of our version of capitalism. Likewise, the three organizations supporting this medal, I’m sure, will feature the thought leaders and decision makers that will be central to the conversation. For that reason, I close by saying I thank you again for bestowing on me, the 2022 Truman Medal for Economic Policy. Thank you very, very much.

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