The Good, the Bad and the Exaggerated in Michael Moore’s New Film, ‘Capitalism: A Love Story’

Michael Moore’s new movie, Capitalism: A Love Story, doesn’t pull any punches in its depiction of capitalism as the monster that is destroying America. Moore’s villains range from Wall Street bankers to Wal-Mart to Treasury Secretary Timothy Geithner, while capitalism’s victims include those who are losing their jobs, their houses and, in some cases, their faith in a system that is supposed to reward hard work and playing by the rules. Moore — whose other documentaries include his diatribe against General Motors in Roger & Me, his condemnation of George W. Bush and the war on terrorism in Farenheit 9/11, and his blistering attack on the American health care system in Sicko — is no less opinionated and entertaining in his latest film. Knowledge@Wharton asked Kent Smetters, a professor of insurance and risk management at Wharton who describes himself as “generally right of center,” to review Capitalism: A Love Story. An edited transcript of his comments follows.

Knowledge@Wharton: So, what did you think of the movie?

Kent Smetters: Surprisingly, there is a lot in the movie that I agree with. Moore made some very valid points about the shortcomings of capitalist society, including areas we want to tackle going forward, especially on the retail level. For example, we need new and better consumer protection laws. But Moore’s approach was very anecdotal: He used examples that, in many cases, we would all agree with. The company in Illinois that failed to pay wages it owed to its employees — I don’t know too many people who would have [supported] the company’s behavior.  

I also agree with Moore that we shouldn’t have used taxpayer money to bail out the banks. I thought that was a big mistake. But to use these anecdotes to make sweeping generalizations about capitalism as a whole is a little far-fetched.

In addition, I thought Moore was somewhat cowardly. He was making big claims about capitalism but he didn’t just come out and say, “Hey, I’m a Socialist.” He knows the “S” word is a bad word. He instead created a false dichotomy between capitalism and democracy. But there is actually a lot of evidence that capitalism leads to democracy. As people get richer over time, they want political rights…. If you look at socialist countries, they often have a few rich people at the top while the masses below remain in poverty. Castro in Cuba does well and the rest of the people are poor.

Knowledge@Wharton: Is Moore a socialist?

Moore: I’m sure he is. Socialists try to avoid that label, but I don’t see any evidence to the contrary.

Knowledge@Wharton: What was the best part of the movie?

Smetters: I thought Moore’s criticism of the bank bailout was probably the best, especially in contrast to the government not doing enough to help the average Joe on the retail side. He made that contrast nicely. I happen to agree with it.

He also had another good point in the part about companies — he uses Wal-Mart as an example — taking out death benefits on their employees. There are sometimes legitimate reasons for taking out insurance on key executives; the reasons are less legitimate when doing it on non-key employees.

But having said that, Wal-Mart is also paying an insurance premium. So the question is: Were they making a lot of money? Moore gave the sense they were by focusing only on the death benefits of people who died. But Wal-Mart is also paying insurance premiums on many people who have not died. It’s not obvious to me that Wal-Mart is actually making a lot of money once all of their premium costs are added up. Moore never showed the balance sheet. In fact, he cited some evidence from an internal company memo [stating that] death rates were too low. I think he took that memo out of context. That was just actuarial-speak to suggest, perhaps, that the company wasn’t actually making a lot of money on this particular investment strategy.

However, I still don’t think that Wal-Mart needs to take out insurance policies on non-key employees. There is not a strong insurable interest there. By analogy, Moore is correct in saying that I don’t have a right to take out a fire policy on your home. Well, you can imagine an argument being made that Wal-Mart shouldn’t take out insurance policies on their employees because it may be an incentive to make the work place less safe. So Michael Moore scores some points there, although he was very selective in the way he did it.

Knowledge@Wharton: What was the worst part?

Smetters: Basically, what I was referring to above: Moore’s [tendency] to make generalizations based on some exceptional anecdotes. I could have played the same game and said, “What do you actually believe, Mr. Moore? Look at all the socialist countries out there, and exactly what have they achieved in terms of helping the poor? Is the middle class in Europe really doing better than the middle class here?” But I realize it’s hard to make an entertaining movie that is highly theoretical.

Knowledge@Wharton Is Europe socialist?

Smetters: I guess it depends on what we mean. We tend to use the term “Socialism” somewhat loosely. We often think that communism means no reward for private effort, socialism means some reward for private work and capitalism means a lot of reward for private work. If we use that kind of loose definition for socialism, then France is socialist. It’s hard to set up a company and hard to exit there. It’s hard to engage in profitable business. But at the same time, Europe has made changes. The corporate income tax rate in European Union nations is now on average lower than in the U.S., so they are making changes here and there. But unless I was selling croissants, I’m not sure I would ever set up a company in a place like France, given how regulated it is.

Knowledge@Wharton: Is Moore part of a trend toward polarizing political discussion in America?

Smetters: Not really. But that has less to do with his rhetoric than his relevance. One of the things that I find interesting about him is that he is not taken very seriously even by a lot of my friends who are Democrats. They don’t see him as part of the voice for those left of center. They view him in much the same way as Ralph Nader — more on the fringe. So I don’t think Moore is contributing that much to the polarization of political discussion, mainly because he has only a small following, unlike some of the talk show hosts.

Knowledge@Wharton: He isn’t a Rush Limbaugh?

Smetters: Rush Limbaugh’s impact is probably an order of magnitude larger due to his audience size. Moore is at best a mini-Rush, for the other side, in terms of his draw.

Knowledge@Wharton: How would you describe yourself?

Smetters: In general, I’m right of center. At the same time, I also believe in smartly done redistribution. I’m definitely not a libertarian. I personally grew up below the poverty line in Ohio. My father was a minister and I was the youngest of five kids. I didn’t have health insurance myself until graduate school, and that was only because I went to Harvard on a scholarship and they required health insurance. My flight home to Ohio one Christmas as a PhD student was the first time I flew on a commercial plane. I know what it’s like to grow up without some of the basics. During some extreme times when meat was too expensive for my family, we ate squirrels from the yard. We made our own candles for lighting, our own soap for bathing. We heated our home with wood that we would cut and haul ourselves. We used the oil furnace once a year on Christmas morning. My father died a few years ago, but my mother still lives in the house that seven of us were raised in. It’s 1,200 square feet and had one bathroom. Its current market value is about $70,000.

But I was able to escape that poverty because of education. I would still be poor today if there weren’t government programs that allowed me to get student loans. I believe in teaching people how to fish, how to enable them to work their way up. However, I was also really lucky. I had smart and encouraging parents and siblings. But not everyone has the ability, even if you give them access to schooling, to do a good job with it. So, we should make sure that there is a basic safety net. But I don’t believe in the level of redistribution that Michael Moore would believe in — unconditional, not based on effort. I believe in second chances but not in giving people handouts.

Knowledge@Wharton: To paraphrase a famous quote, to the effect that capitalism is the worst economic system in the world, except for all the others…. What does Moore suggest instead?

Smetters: That’s the problem. He would not come out and say, “This is what I believe.” We got a hint of it [in the movie when he showed] Franklin Delano Roosevelt’s proposed Second Bill of Rights [calling for “economic security and independence,” including adequate food and employment]. I agree with many of these [rights]. But at the same time, Michael Moore’s conclusion isn’t that we need to have more regulatory reform, especially to protect consumers, which is something I think we are in great need of — or that we simply need some more redistribution, which I also agree with if done smartly. Instead, he simply generalizes that capitalism does not work altogether, which I disagree with.

In focusing too much on sweeping generalizations, he actually missed some areas, including the broker/dealer and financial planning areas, which is in need of regulatory reform. It’s a massive $110 billion a year industry that is dominated by “crooks and creeps” that take commission kickbacks on the advice they give. The UK is outlawing this model by the year 2012. Clients will pay a financial planner upfront and make it very explicit so that there is nothing sneaky — no kickbacks or commissions.

But Michael Moore was right that the mortgage area needs serious regulatory reform in order to make mortgages very transparent. There is no reason they have to be so complex. You could have a one-page summary of the key terms of any mortgage.

Still, as far as the mortgage crisis goes, again, he was very selective. He talked about the people who already owned these homes and refinanced them. They were enticed to borrow against their homes with a new type of mortgage where they paid a teaser low rate followed by a jump in rates later on. I believe a lot of people really didn’t know what they were getting into. But what he does not mention is that most of the mortgage busts are not coming from people who were refinancing homes that they already owned. They are coming from new home buyers who were also being greedy, those with incomes of $60,000 buying a $600,000 home. It wasn’t just the banks’ fault. A lot of people wanted something more than they could afford. I can criticize the banks for their lack of transparency, but the people themselves should also be criticized. Moore didn’t really provide that balanced look. 

Many of his other examples against capitalism are also easy fixes on the regulatory side — including his section on the juvenile detention center in Pennsylvania. [Two judges were accused of shutting down a county-owned juvenile detention center and then accepting kickbacks for sending juveniles to a private company that took over the facility.] Everyone would agree that having judges on the payroll of that center was wrong. And the right outcome eventually happened: The judges and others involved were caught. But that doesn’t mean that using the private sector inherently leads to corruption. In fact, the public sector also lends itself to corruption, especially when [it involves construction]. Building contracts are often given to campaign contributors, money is sometimes funneled back to members of Congress through their participation in a third-party business and so forth. A private firm, in contrast, does not have as much incentive to overspend on construction because it cares about the bottom line.

Knowledge@Wharton: What was your reaction to the part of the movie that showed Captain Chesley B. Sullenberger III — the US Airways pilot who safely landed a plane on the surface of the Hudson River after its two engines were knocked out by a flock of geese — saying that he would never suggest his children or anyone else’s children become pilots. He blamed the pay cuts and pension reductions by airline companies as the main reasons. 

Smetters: The real problem there is that airlines have enormous legacy overheads, including generous defined benefit programs. So they have these enormous costs. As a result, they don’t have a tremendous amount of room on that side. They are already paying out a lot in employee compensation. The big difference between today and 30 years ago is that the airlines are now deregulated. So we have a lot lower prices than we had. It’s a lot cheaper to fly and there is a lot more competition. But Moore never discussed how much profit these airlines are actually making. Are there a few fat cats making a lot? There is not a lot of evidence that they are. These airlines are constantly teetering on the edge of bankruptcy, not because they are paying too much for the fuel or in big salaries for their top executives; mainly it’s because they have such huge employee costs in the form of very large pensions. So this is, again, another example of Moore being selective.

Knowledge@Wharton: What about the part in the movie that showed the crash of the commuter plane outside Buffalo, N.Y., that was piloted by two relatively inexperienced and overworked pilots? Do we want to be in a plane at 30,000 feet that is flown by people who are perhaps not as alert as they should be?

Smetters: Pilots are not allowed to fly for too long. The airlines limit their hours, including the hours that they are on the ground but inside the cockpit. However, the airlines can’t limit the number of hours performed at a second job that is needed to make ends meet because pilots are not paid enough. But the problem is we have a lot of people who really enjoy flying. It’s kind of like the artists of the world. They complain they don’t get paid enough. We all value art, but [because] a lot of people want to be artists, they don’t get paid [much]. So what should we do? Do we want to start restricting the number of people who want to be artists or pilots in order to boost their wages? Probably not. What will happen over time in the airline industry is that being a pilot will become less attractive financially and so you will have fewer pilots and the wages will start to go up. But no occupation pays well when a lot of people enjoy doing it — unless we simply tell some people that they can’t do what they love.

Knowledge@Wharton: What about Moore’s diatribe against Treasury Secretary Timothy Geithner?

Smetters: Unfortunately — and I don’t mean to slight Geithner — I think Moore has a point. Geithner doesn’t have that distinguished a record, even if he’s a smart guy. The most related experience he had was during a period in which he oversaw a lot of the growth in the financial bubble in the presence of lax financial regulations. The struggle with appointing a Treasury Secretary late last year was that it was hard to find somebody who didn’t look like he was from a company that was getting a taxpayer bailout. There was such resentment against Wall Street and the financial services firms, making it tough to appoint someone from corporate America. Having said that, a good choice would have been to appoint somebody who was well outside the mainstream — someone who had little background in financial services but had a fresh perspective and some entrepreneurial and company-building experience. There has been precedence for that in the past. For example, a person who was right on many issues was Paul O’Neill, CEO of Alcoa, who served as Treasury Secretary during George W. Bush’s first term. He was a sharp guy even if he had a tin ear for politics.

But President Obama fundamentally agreed with the Bush bailouts, and Geithner was a guy who agreed with them, too. So, Geithner and Obama continued the same failed policies of using taxpayer money to bail out the banks. They were all on the same page, whereas a guy like O’Neill might have been a little more resistant to a flat out bailout.

Knowledge@Wharton: What about Moore’s assertion that last year’s banking bailout was engineered by a group of ex-Wall Street bankers now working in the federal government, acting in the interests of their friends who are still on Wall Street?

Smetters: Yes, I happen to agree with a lot of that claim, although Bernanke is certainly not an ex-Wall Street guy. The principal problem was that if Wall Street had done really well with derivatives, the [bankers and traders] would have captured most of the upside. But when they failed, they got to go to the taxpayers and say, “Hey, bail us out.” Heads we win, tails you lose — which creates a large moral hazard problem.

Knowledge@Wharton: Is part of the movie’s appeal the fact that it comes in the middle of record high unemployment in this country?

Smetters: Absolutely. If everyone were doing well materially, this movie would have appealed even more only to the fringe. It has some more appeal to people who are not historically part of the fringe element because they are going through a very difficult time. When people are poor and lose their jobs, they start to reevaluate their beliefs. Sometimes they take on more radical views than they would otherwise.

Knowledge@Wharton: If you were making a movie on capitalism, what would you focus on?

Smetters: I would try to explain where we would be today if we didn’t have capitalism. If you look at the period between the Dark Ages and the Industrial Revolution, the standard of living either remained steady for hundreds of years or actually declined. Without capitalism, we wouldn’t have been able to afford so much of what we have today — the basic sciences, cures, technologies, transportation and even the cameras that Moore filmed with. We are fundamentally enabled by capitalism. Capitalism has provided enormous amounts of wealth, health and longevity. I’m now 42. Going back a century or two, I would probably be [married to] my second wife because my first wife would have died in childbirth…. We can’t ignore the enormous benefits of capitalism.

But at the same time, there are problems. It has to be capitalism with rules. You can’t have one party tricking other parties. You need good quality information so that people are making well-informed decisions. In the mortgage field, a lot of people weren’t making well-informed decisions. You need consumer protection laws. Same thing for financial planning.

Knowledge@Wharton: Is Moore trying to be an entertainer more than a political commentator or satirist?

Smetters: Political commentary was his primary goal, and he used entertainment rather effectively as a means to do that. That’s a perfectly legitimate use of sarcasm and wit. He’s clearly a smart, witty guy.

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