Oren Cass, founder of the MAGA-influential American Compass organization, argues that economic policy in the United States should pivot from its focus on free markets to policies that strengthen the economic power of workers, encourage domestic manufacturing, and promote long-term national resilience.
Cass envisions an American economy and society similar to that of the 1950s and early 1960s, when households were made up of the traditional nuclear family, two parents, one working and the other nurturing the children, and living in a middle-class neighborhood. Unfortunately, though Cass’s goals are laudable, his vision is infeasible.
In a recent opinion article, Cass argues that the U.S. finance industry is just a grift that extracts wealth without creating incremental value. He says modern finance increases volatility without creating real value. Moreover, he argues that the largest banks and investment firms move money around and extract profit from existing companies rather than investing and building businesses.
Cass could not be more wrong. The U.S. finance industry is a crown jewel of the economy. The finance industry is a matching and weighing machine. It takes idle capital, savings, and business profits and directs them toward productive uses, for example, loans for small businesses, mortgages for home buyers, or venture capital. The U.S. finance system is efficient. It ensures that capital flows to the most viable, highest return projects. By doing so, productive growth follows, and the broad economy prospers.
The U.S. finance system produces the global economy’s most profitable companies. The profitability gap between U.S. companies and European companies is significant and persistent. That is especially the case in key business sectors: technology, pharmaceuticals, and healthcare services more generally. Most of the world’s most profitable companies are American. The U.S. produces companies that generate hundreds of billions of dollars in profits. The largest European companies struggle to generate profits in the tens of billions. Because the U.S. finance system has a laser focus on profits and innovation, American companies are now at the forefront of the artificial intelligence revolution. The U.S. leads the world in this profoundly important new technology.
The U.S. finance system can also justly claim credit for the vibrancy of America’s venture capital markets. New business is the heart of job creation and innovation. Financial intermediaries ensure that capital flows to venture capitalists who will create new ventures, such as quantum computing or outer space ventures. It is not a coincidence that sometime this year, U.S. financial firms will bring to the public markets two of the largest public offerings in history: SpaceX and OpenAI. Moreover, at this very moment, the financial markets of the U.S. are raising hundreds of billions of dollars of new capital for America’s emerging technology leaders.
Cass is especially critical of private equity. He asserts that private equity firms are often just asset strippers. Again, he could not be more wrong. Private equity brings professional management and efficiency to underperforming businesses. Private equity often buys under-managed subsidiaries of large corporations and turns them into more focused, more profitable businesses. In the global economy, mediocrity cannot be tolerated. Nor does domestic mediocrity serve Americans.
The American finance sector is also extremely important and, frankly, necessary because it enables the federal government to borrow funds in global markets at attractive interest rates. America’s largest banks facilitate the efficient operation of the global market for U.S. Treasurys, where trillions of dollars of value are traded each day.
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Finally, without the efficiency and vastness of the domestic finance sector, America’s aging population would be unable to look forward to retiring with a comfortable and secure economic future.
Cass envisions a static America where capitalism is subordinate to subjective notions of social welfare. Fortunately, the American financial system rejects statism and embraces creative destruction, which ensures a more prosperous nation and a continually rising standard of living surpassing that of other nations.
James Rogan is a former U.S. foreign service officer who later worked in law and finance for 30 years. He writes a daily note on markets, economics, politics, and social issues.