Wells Fargo Bank was recently punished by the Federal Reserve for cheating millions of American customers, including many in Minnesota. Among other things, the bank created unwanted credit card accounts and vehicle insurance policies. Additional financial frauds in Minnesota were perpetrated by Trevor Cook, Hal Greenwood, Denny Hecker and Tom Petters in the past few years.
As hurtful and reprehensible as these frauds were, they essentially involved swindles that cheated customers or investors out of their money. That is illegal, and it is bad enough.
But there are some legal businesses that are even more damaging than financial fraud. These are “rotten” schemes that prey on people’s particular weaknesses. Writing about Hugh Hefner last fall in the New York Times, conservative columnist Ross Douthat asserted: “His success as a businessman showed the rotten side of capitalism — the side that exploits appetites for money, that feeds leech-like on our vices, that dissolves family … .” In short, these rotten businesses skillfully manipulate people through clever marketing and other techniques to take advantage of psychological or physical vulnerabilities, even addictions, thereby causing targets to consume products or services that are particularly harmful to them. The results include the slow destruction of families, communities and much of American society.
I am not referring to most businesses, many of which market their products to consumers. I am, however, focused on several familiar ones to the extent that they exploit the special vulnerabilities of their customers.
Targeting those with severe injuries
The excessive sale of opioids, increasingly in the news, is one example of rotten capitalism. Persons who have suffered severe injuries, including veterans, are targeted by some in the drug business. Purdue Pharma (the maker of OxyContin) has been criticized for promoting sales of its opioids by inappropriately enlisting doctors in the process. The Centers for Disease Control and Prevention (CDC) estimated that there were approximately two million Americans abusing or dependent on various legal prescription opioids in 2014. Two years later, approximately 20,000 Americans died from overdoses of such legal opioids, and another 30,000 died from illegal ones. Deaths have been increasing each year for some time. Revenues from the sale of legal opioids in 2016 in the United States were estimated to be about $9 billion, according to Time magazine in July 2017. The CDC estimates the “economic burden” (including health care, treatment and other costs) of prescription opioid misuse exceeds $78 billion per year.
Tobacco is also an industry that feeds and stimulates addictive behavior. It is now required by a federal judge to run ads that admit the industry intentionally manipulates cigarettes to make them more addictive. But even though the tobacco industry has paid billions of dollars in penalties for the health damages it has caused, it remains a legal business. The number of tobacco users in America is estimated to be in excess of 40 million. The CDC states that cigarette smoking still kills 480,000 Americans per year, and smoking-related illnesses cost more than $300 billion per year. Tobacco’s annual U.S revenues exceed $100 billion.
Alcohol and gambling, of course, are two additional legal enterprises that prey to varying degrees on the addictions of some people. They advertise, promote and sell to addicts and show substantial indifference to whether their other customers might become addicts — despite occasional statements to the contrary. With regard to the liquor industry, more than one in eight American adults now have an “alcohol abuse disorder,” according to the medical journal JAMA Psychiatry in August 2017. This reflects a significant increase since 2001. The industry’s annual U.S. revenues currently exceed $200 billion. Legal gambling in America is estimated to have annual net revenues (amounts wagered minus winnings paid) of $100 billion, principally from casinos and lotteries. A PBS “Frontline” program in 1997 reported that people with gambling addictions are about 5 percent of bettors in U.S. casinos and on lotteries, and they provide about 25 percent of the profits. Slot machines, for example, are designed to be addictive.
Legal opioids, tobacco, alcohol and gambling are all very available in Minnesota (as are illegal versions). These legal businesses do not usually sell their products in a plain paper wrapper from a nondescript trailer. On the contrary, they market their products widely, conveniently and professionally, using sophisticated psychological techniques, not only to communicate with the general public but also to take advantage of many consumers’ addictive vulnerabilities.
Nudging through association
So how sophisticated is the marketing, really? As a start, I would suggest reading some of Nobel Prize winning economist Daniel Kahneman’s work, such as his book “Thinking Fast and Slow.” As a result of research, Kahneman and other social scientists have demonstrated that our lives are substantially guided by the intuitive and automatic part of our minds, rather than the reasoning and conscious part. Persuasion that is directed at that automatic part is more effective, in part because “laziness is built deep into our nature.” We are therefore vulnerable to manipulation through targeted “priming” messages that overtly or covertly create associations that nudge us where the manipulators want us to go. Advertisers (and political advisers) are well aware of this and related research. They misuse it to market their messages.
Unfortunately, none of this seems to shock us anymore. Tobacco, alcohol and gambling are all generally accepted now as big businesses with very limited restrictions. Their revenues are generally increasing, and more Americans are becoming addicts. Casinos and alcoholic beverages are big advertisers in Minnesota, as is the state’s lottery. And to the extent governments are not directly marketing these products themselves, they are certainly reliant on the tax revenue that is generated. Overprescribed legal drugs may be somewhat different in character, but anyone who watches television is well aware of the excessive marketing of pharmaceuticals in America.
The four familiar businesses discussed above are not, unfortunately, the only ones that engage in rotten capitalism, in varying amounts. Parts of two huge and less tainted industries are now dipping deeply into the rotten formula. Writing about tech last November, David Brooks observed in the New York Times: The social media industry “is causing addiction on purpose to make money. Tech companies understand what causes dopamine surges in the brain and they lace their products with ‘hijacking techniques’ that lure us in and create ‘compulsion loops.’ ” Video games, of course, are also designed to become addictive. This certainly sounds a lot like big tobacco companies adding extra nicotine to cigarettes to ensure they are addictive. No wonder there is new pressure to regulate social media.
The marketing of unhealthy foods
What about food and beverage companies? We know that some advertise and sell sugary and salty foods that are not healthy. We also know that although the causes of obesity are complex, an unhealthy diet with excessive calories, salt and sugar is one of the principal causes. In the United States, the CDC calculates that the proportion of obese adults is increasing and has currently reached about 40 percent of American adults age 18 and above. In 1962, that proportion was only 13 percent. Since then, the consumption of unhealthy foods has expanded. Today, the combined annual revenues of fast food restaurants and snack food and sugar sweetened soda businesses exceed $350 billion, and that does not reflect the total of all unhealthy food sales. The American Heart Association estimates the annual medical costs associated with obesity to be $190 billion. The CDC advises that obesity’s related health conditions include heart disease, stroke, type 2 diabetes and certain types of cancer.
There are other businesses with “rotten” elements not covered here. The sale of pornography and military-style firearms are two other examples that quickly come to mind, as are others.
So what is to be done? First, I suggest we need to re-examine the morality of pushing addictive products on vulnerable people. It is insufficient to say that people should be free to make their own choices when they are being psychologically manipulated to consume damaging products. Executives should take it upon themselves not to exploit the weaknesses of fellow citizens. Governments should not profit from them either. At a minimum, both should stop targeted advertising and product designs that are intended to cash in on people’s vices and physical or mental vulnerabilities, including those of children.
Perhaps we might learn from Dan Parker, a former advertising agent for Coca Cola and McDonald’s. He told The Guardian in January that parts of the food industry are now acting like big tobacco by persuading us to eat more sugar and junk food in spite of the obesity epidemic. Parker has formed a nonprofit in England (Living Loud) to counter the marketing of unhealthy food products. In addition to such nonprofits, we might ask for many more hard-hitting public service announcements directed at rotten capitalism, such as those currently showing the health dangers of smoking. These could use the best crafted psychological messages available: to fight fire with fire.
Second, we might evaluate the costs imposed on taxpayers by the negative effects of these legal, but rotten, businesses. Why do the opioid, gambling and liquor industries not bear more of the billions of dollars of economic burdens created by their products? Polluters often have to pay up — as 3M has recently been reminded in Minnesota by Attorney General Swanson. Why not these other businesses? Governor Mark Dayton is now proposing one step in that direction, to tax opioids. There are additional ways to recoup a greater portion of the costs imposed on society.
Finally, we should consider whether some government agency might be charged with protecting consumers from rotten capitalism, just as we ask the FDA and USDA to ensure that drugs and food are safe. At a minimum, we should be able to agree that children and the mentally disabled should be protected. Might we not also think about vigorous steps to protect alcoholics, gambling addicts and others who are particularly vulnerable?
Perhaps we might learn from Chile. According to the New York Times, the government recently imposed marketing restrictions, mandatory packaging redesigns and labeling rules on foods high in sugar, salt, calories and saturated fat. It is a more robust approach than what we have seen in the United States.
Time to act
Some contemporary commentators express deep pessimism about our ability to protect citizens from the excesses of market capitalism in general. Andrew Sullivan, for example, has a dark article in a recent issue of New York magazine about the opioid epidemic. He concludes: “Ever-more-powerful market forces actually undermine the foundations of social stability, wreaking havoc on tradition, religion and robust civic associations … .” He asks whether it will require 100,000 opioid deaths per year before we act.
It has become painfully evident that the size and scope of rotten capitalism is expanding rapidly, together with the damage it delivers. Steps to combat it so far have been woefully inadequate. While I do not believe that such destruction must be inexorable, I do believe we need to acknowledge the grim effects of rotten capitalism and take firm steps to combat them now. If we can keep a lid on financial frauds through prosecutions, regulation and public education, then we should surely be able to check the worst abuses of rotten capitalism — assuming that we have the will.
Steve Carlson is a former Edina resident (now in Connecticut) and retired finance lawyer and former Minnesota deputy commissioner of commerce (2011-12).