This piece originally appeared in POLITICO.
Many Washington conversations about inequality focus on income. The amount of money that American workers and families make is indeed important for their economic security—on average, wages and salaries account for nearly 80% of income for U.S. households. The income inequality and wage stagnation that have persisted for decades certainly pose threats to the health of the U.S. economy. From Securities and Exchange Commission rules about CEO pay to the official federal poverty line, we use income as the measure for assessing economic standing.
But a singular focus on income misses a larger and more intractable problem that drives economic instability and social distress: wealth inequality.
While income measures the cash flow into a household, which mostly flows right back out to pay the bills, wealth includes so much more: savings, equity in businesses, stock ownership, equity in real estate, bonds and other property, such as land. And while income inequality is staggering and growing, wealth inequality in America is even worse, by orders of magnitude. According to recent data by inequality scholars Thomas Piketty, Emmaneul Saez and Gabriel Zucman, a stunning 75 percent of household wealth and 97 percent of capital income—the kind of income generated by wealth, such as dividends, interest and capital gains—is concentrated in the top 10 percent of American households. According to another study, nearly half of American households couldn’t come up with $400 in an emergency to meet an unexpected expense, while a tiny slice of the population controls trillions of dollars in assets. It’s important to remember, too, that households of color are disproportionately on the low end of the wealth inequality spectrum; in 2016, white family wealth was seven times that of black families and five times that of Hispanic families.
While sufficient income allows a household to meet near-term needs, wealth allows a household to build resilience and plan for the future—to weather the loss of a job or a major illness or other disruption in income, to seek higher education, to save for a home, to start a business, to simply take a vacation, to retire. When we focus solely on income as the measure of inequality, we can miss these larger implications, as well as potential policy solutions.
As it happens, some of our founding fathers understood this. Our nation’s values are based on ideals of broad-based property ownership. While many of America’s founders believed in limited government, they also worried about the problem of concentrated wealth, having fled a system of concentrated wealth and inherited privilege. For them, democracy required the existence of a broad middle class with enough assets to sustain themselves and as little dependence on the state and others for their livelihood as possible. They considered broad-based property ownership as a necessary condition for reasonable taxes, small government and economic liberty. Many founders also believed that this economic independence undergirded citizens’ ability not to be manipulated by political leaders who had agendas that did not really serve their interests.
The benefits are not just economic. Recent research by Jung Kim of Rutgers University has shown that one form of wealth, an ownership stake in the company where one works, together with engagement in the company, actually makes people better citizens. They are more likely to actively participate in political activity, vote in elections, attend civic meetings and sign petitions—exactly what the founders predicted.
If we want the United States to be a country that provides opportunity to all its citizens, then we need to rethink how Americans acquire wealth and develop policies that help more workers and families acquire and develop the assets they need to achieve stability in the long term. But what are the politically tenable ways to do that?
The first federal policies to promote a broad middle class were based on land and were promulgated at a time when most citizens were engaged in agriculture for a living. More recent policies have focused on home ownership, which is a critical store of wealth for many American families. But home ownership is more than just a wealth-building tool: Owning a home has important benefits for personal and family stability. In the founders’ views, a citizen who has lost a home is a citizen who is more dependent and prone to manipulation by political interests. Many founders believed in small government, reasonable taxes and broad-based property ownership, in part because they believed the latter could help ensure the first two. Unfortunately, this trilogy has fallen out of American political discussion.
While some people on both the left and the right believe that we should ameliorate the growing inequality in our economy with a universal basic income, we suggest that American values might be more aligned with policies that promote earning and owning. Certainly, in this time of widespread economic precarity, a guaranteed income stream might offer households some measure of confidence, but a base of asset ownership might offer a more practical approach to improving household economic well-being. Indeed, it seems unlikely in our fractured political environment that an agreement to fund universal basic-income plans could be reached, at least not at a level that truly addresses the crisis millions of Americans face.
But the idea of expanding access to ownership already has shown bipartisan appeal. A measure to help the Small Business Administration promote more employee stock ownership passed both houses of Congress earlier this year and was signed into law by President Donald Trump in August. There’s more we can do along those lines. Here are three practical policy options that could help more working Americans build wealth.
Reward businesses that offer profit and equity shares.
Congress could use its purchasing power to buy goods and services from businesses that expand employees’ assets. The federal government spends over a half a trillion dollars a year on contracts for goods and services, and may be considering a major infrastructure investment in the future. Congress could bring an asset-broadening approach to these investments by giving a preference to businesses that offer meaningful profit sharing or some form of broad-based equity participation to their employees. Such requirements should not be seen as too onerous—already about 7,500 corporations provide some meaningful equity participation to their employees, and many stock market companies and startups sponsor equity participation or profit-sharing plans. For example, according to the General Social Survey, the top quartile of employees with equity participation plans held about $175,000 in ownership assets in 2014. These businesses see shares as an important part of their approach to building a successful business, and indeed firms with shares and supportive corporate cultures tend to have better performance. In addition to better business performance, companies with employee share ownership together with high engagement strategies tend to provide jobs with better pay and benefits than jobs at industry peers without shared ownership. In this way, broad asset ownership as a general policy might be able to reduce reliance on government.
Incentivize retirees to sell businesses to employees.
In our economy, there is a “silver tsunami” of aging baby boomers that includes entrepreneurs, small business people and family farmers who built tens of thousands of companies and agricultural businesses over the past half-century. These owners have most of their wealth tied up in their businesses, and many will need to sell them to support a comfortable retirement. Many of these businesses will not be taken over by family members. Some may be bought by investors or competitors who plan to liquidate them, leaving communities struggling with a loss of jobs and wealth. A significant number of middle-market companies are now being taken over by private equity on a model that often concentrates ownership even further among the few. But what if government policy provided even stronger incentives for these business owners to sell their businesses to their employees and managers instead? What if private equity also developed models to participate in this economic inclusion?
Iowa provides a successful state-level example of such a policy. A few years ago, former Governor Terry Branstad worked with Democrats and Republicans to pass legislation that reduced the state’s corporate income taxes for retiring business owners when they sold to the employees and managers through an employee share ownership plan. The Iowa effort mirrored an existing tax incentive at the federal level. Iowa also offered modest funds for feasibility studies to help the business owner and the employees work out the details. Versions of this policy are now under consideration with support from both Democrats and Republicans in New Jersey and several other states.
Promote public-private citizens trusts.
These trusts, similar to the Alaska Permanent Fund that now pays annual dividends to every Alaska citizen, could be established in every state. These trusts would acquire income-producing assets and use the income stream from these assets to pay a dividend to citizens of that state. In contrast to Alaska’s fund, the trusts could establish universal asset accounts for every citizen. Like Alaska’s fund, they could pay significant dividends that would function as a “second income” for citizens and help build their wealth. This could make more citizens capitalists. With a sensible use of credit, these trusts would acquire assets the way investors do, using the income on that capital to pay back the loans used to acquire them.
Alaska funded its Permanent Fund with income shares and royalties from mineral and oil exploration. The fund was designed by that state’s Republicans decades ago to invest profit sharing from the state’s mineral and oil industries in assets that fund a significant annual dividend for every woman, man and child in Alaska. While this may sound like a universal basic income policy, the income could be based on an underlying asset and the amount of the dividend could vary from year to year, depending on market conditions, so citizens could see the connection between their asset ownership and income. Other states could adapt this model. For example, states that give tax abatements for energy or other projects could require that a percent of profits be paid into a state permanent fund in which all citizens own shares.
Other large public assets with future income streams, including ownership stakes in major infrastructure projects, could also contribute to these funds, underscoring citizens’ ownership interest in these public assets. The wealthy could also receive tax incentives to contribute to these trusts. These state permanent funds could be managed by an independent state authority protected under each state’s constitution, just as in Alaska’s case. Alaska has successfully subcontracted parts of its Permanent Fund portfolio to different financial managers under strict rules that the U.S. Treasury could imitate. In recent years, the Alaska dividend has exceeded $1,000 per citizen—$4,000 for a family of four—a potentially meaningful “second income” for a typical family.
Each state and the federal government could consider making initial Citizen Asset Building Block Grants to the funds of each state to start the funds. Federal enabling legislation could facilitate these state permanent funds and create federal tax incentives and interest rate incentives that would enable funds to borrow capital to buy assets. Federal credit could perhaps be extended to the trusts. The booming private-equity industry now uses significant tax advantages to buy businesses and repay these loans with a special tax regime to shield its gains. Why not adapt these financial technologies to create private citizens trusts that benefit citizens more broadly?
Our country has built great wealth—over generations—but our current challenge is how this wealth can be more broadly beneficial to all Americans. Can the political leadership envision investing in a future that is even brighter than our past?
Tweet If we want the US to be a country that provides opportunity to all its citizens, we need to rethink how Americans acquire wealth and develop policies to help them achieve stability in the long term.
Tweet How can we help Americans build wealth? 1) Reward businesses that offer profit and equity shares. 2) Incentivize retirees to sell businesses to employees. 3) Promote public-private citizens trusts.
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