September 08, 2019
The Ambassador’s Brief, September 8, 2019
The richest 1% have done extraordinarily well over the last four decades. But income has stagnated for the majority. This was not an accident. It was by design.
My book, Rigged, highlights five areas where US policies were deliberately structured to redistribute income upwards.
- IP laws were strengthened, making patent & copyright monopolies longer and stronger
This hugely increased the share of GDP that goes to sectors like pharmaceuticals, medical equipment, computers, and software. And it made stakeholders in these sectors hugely wealthy.
But it was unnecessary. Alternative mechanisms for financing innovation and creative work – such as direct public funding for pharmaceutical research, with new drugs selling as generics – would not have led to the same sort of upward redistribution.
- The financial industry has been exempt from sales taxes – which are imposed in similar sectors
This exemption – and other regulatory advantages – have allowed the narrow financial sector (securities & commodities trading) to more than quadruple as a share of the economy over the last four decades. And it’s produced some of the country’s largest fortunes.
But, there has been no commensurate improvement in the allocation of capital, or the security of savings, that could justify this massive increase in costs.
- Weak corporate governance has allowed management to ‘capture’ corporate boards – and push through massive executive pay increases
CEO pay, adjusted for inflation, has increased 940 percent over the last four decades. Increases for other top executives have been similarly large.
But while CEO pay has soared, returns to shareholders have been historically low.
This contradiction stems from the effective capture of corporate boards (who set executive pay) by management. It’s exacerbated by the near impossibility of holding board members to account for approving these pay increases by removing them: well over 99 percent get re-elected.
- Trade deals have been designed to make it as easy as possible to import manufactured goods from developing countries with low-paid labor
This has directly put downward pressure on the wages of manufacturing workers and indirectly put downward pressure on the wages of less-educated workers more generally.
But, while these policies have been justified in the name of “free trade” almost nothing has been done to remove the barriers that prevent foreign workers in highly paid professions, like doctors and dentists, from practicing in the US.
As a result, these highly paid professions receive much higher compensation in the US than in other wealthy countries.
- Fiscal and monetary policy has focused more on limiting budget deficits and combatting inflation, rather than maintaining high levels of employment
When unemployment is moderate or high, it is difficult for employees to effectively negotiate wage increases – as they have no leverage.
So, in prioritizing limiting budget deficits and combatting inflation – instead of prioritizing lower levels of unemployment – US policymakers have ensured that the benefits of any productivity increases accrue predominantly to employers.
Going forward, just as it has taken deliberate policies to skew the distribution of wealth, it will take deliberate policies to restructure the market:
We can rely more on publicly funded open research and less on government-granted patent and copyright monopolies to support innovation and creative work.
A modest financial transactions tax will sharply reduce the size of the financial sector, without hurting its ability to allocate capital efficiently.
The rules of corporate governance can be changed to make it easier for shareholders to keep boards accountable. For example, mutual funds can be prohibited from voting except where they have been given explicit guidance from investors. Also directors can be made to suffer real consequences for allowing excessive pay, such as losing their annual salary if shareholders vote down a compensation package on a “say of pay” vote.
To bring pay of doctors and other highly professionals in line with other wealthy countries, our trade deals can be focused on making it easier for qualified foreign professionals to practice in the United States.
To limit unemployment and ensure that workers at the middle and bottom of the wage ladder have the bargaining power to secure wage gains, we can have fiscal and monetary policy that is focused on maintaining full employment, rather than being obsessed with budget deficits and inflation.
These and other policies discussed in Rigged can reverse the upward redistribution of the last four decades. When we recognize that it was deliberate policy, and not the natural workings of the market, that gave us upward redistribution, it is much easier to find ways to rectify the problem.