On July 17, 2015, Joseph R. Blasi and Richard B. Freeman write an OpEd in The New York Times:
In her most detailed economic policy address so far, Hillary Rodham Clinton said Monday that she wanted “to give workers the chance to share in the profits they help produce” through a two-year tax credit that would encourage profit-sharing.
As social scientists who have studied the issue for years, we were glad to see it get attention.
The stagnation of earnings for most Americans, despite rising productivity, and the shrinkage of the middle class, because of soaring inequality, are without precedent in our economic history.
Capital’s share of national income has risen, while labor’s share has fallen — even though it includes lavish compensation of executives who are paid disproportionately through stock grants, options and bonuses. To restore prosperity for all, we need to spread the benefits of economic growth to entrepreneurial citizens through profit-sharing and the ownership of capital. This isn’t some radical notion; it has a long tradition in America.
Many of the founders believed that the best economic plan for the republic was for citizens to own land, which was then the main form of productive capital.
Washington signed into law tax credits to help revive the cod fishery destroyed by the British during the revolution, requiring that everyone had a share in the profits, from the cabin boy to the captain. The Northwest Ordinance of 1787 offered land cheaply to settlers. Jefferson concluded the Louisiana Purchase in 1803 to help further the notion of “an empire of liberty” through broad land ownership. Lincoln’s landmark Homestead Act of 1862 gave federal land grants to settlers. (As a result of the Civil War, it was passed without representatives of the South, where land was concentrated in the hands of slaveholders.)
As America industrialized in the late 19th century, the economy became dominated by big corporations. And yet some family-run businesses, and entrepreneurs who were concerned about the place of workers in an economy dominated by gigantic enterprises, sought to extend the benefits of capitalism to employees. Companies like Pillsbury, Kodak and Procter & Gamble introduced widespread profit-sharing and employee stock ownership.
The economic boom after World War II solidified the view that regular increases in fixed wages and benefits could carry the burden of “sharing the wealth.” Sadly, since the 1970s, wages have stagnated, and the idea of profit-sharing has been largely forgotten in public debates.
It’s time to revive it. The United States already has more extensive profit-sharing and employee share ownership than many other advanced economies. In the European Union in 2010, fewer than 10 percent of workers own company stock and fewer than 30 percent have profit-sharing (except Sweden, where the figure is 36 percent).
In the United States last year, close to 20 percent of private-sector employees owned stock, and 7 percent held stock options, in the companies where they worked, while about one-third participated in some kind of cash profit-sharing and one-fourth in gain-sharing (when workers get additional compensation based on improvement on a metric other than profits, like sales or customer satisfaction).
An exemplar was Southwest Airlines, which paid $355 million of its more than $1 billion in corporate profits last year to union and nonunion workers and managers, on top of salaries.
Our research found that these programs, when combined with worker participation in solving problems, and increased training and job security, raise productivity and benefit workers. In every year, about half the winners in Fortune’s list of 100 Best Companies to Work For have some type of broad-based profit or gain-sharing or stock ownership for regular workers. Google, Intel and Starbucks all have broad-based stock grants or options for their employees.
Wegmans has profit-sharing. W. L. Gore, the maker of Gore-Tex, and Publix Super Markets, which operates in the Southeast, are owned by employee stock ownership plans, wherein a workers’ trust typically borrows money to buy shares that are paid out of company revenues.
Some scholars have worried that employee-share ownership is too risky when workers buy the stock with their wages or 401(k) retirement savings; Enron is the classic example. We agree. We favor only ownership policies that emphasize grants of stock (as in the case of employee stock-ownership plans), restricted stock (which has to be held on to for a certain period of time, incentivizing workers to stay) or stock options.
How do we achieve this? First, the notion needs more powerful advocates from business and politics, like Mrs. Clinton. In New Jersey, lawmakers are finalizing legislation to expand tax incentives for small-business owners to sell their businesses to their employees and managers; Iowa has adopted similar legislation.
Second, we need to reform a little-known tax loophole, Section 162(m), of the Internal Revenue Code. In the early 1990s, in an attempt to reform executive pay, Congress changed that section to limit corporate income tax deductions to $1 million for the top five executive salaries, but allowed virtually unlimited deductions for a variety of top-executive performance-based pay, including equity and profit-sharing. Corporations, which have exploited this loophole to offer lavish compensation packages, should get these deductions only if they offer a profit- sharing or share-ownership plan to all employees.
Finally, all levels of government — federal, state and local — should offer incentives to companies that implement profit-sharing and employee-share ownership. Such incentives should include tax breaks, tax incentives and preference in the awarding of government contracts.
Spreading around profit-sharing and the ownership of capital is not the only answer to solving the challenge of soaring inequality in America, but it’s a critical step that will help rather than hurt economic performance. If the middle class is to survive, we must move toward a more inclusive capitalism.
Unfortunately, Hillary Clinton’s statement “to give workers the chance to share in the profits they help produce” is vague and lacking specifics. Even if workers shared in the profits, unless they are empowered with direct, personal OWNERSHIP of the corporations they work for via Employee Stock Ownership Plans (ESOPs), the current wealthy ownership class will continue to OWN and dominate the concentration of ALL new capital asset projects into the future.
Nowhere do Joseph Blasi and Richard Freeman acknowledge that productivity gains are due to technological invention and innovation, not to an increased capacity of natural human abilities.
Technological change makes tools, machines, structures, and processes ever more productive while leaving human productiveness largely unchanged (our human abilities are limited by physical strength and brain power––and relatively constant). The technology industry is always changing, evolving and innovating. The result is that primary distribution through the free market economy, whose distributive principle is “to each according to his production,” delivers progressively more market-sourced income to capital owners and progressively less to workers who make their contribution through labor.
The author do vaguely acknowledge that fundamentally, economic value is created through human and non-human contributions. “Capital’s share of national income has risen, while labor’s share has fallen — even though it includes lavish compensation of executives who are paid disproportionately through stock grants, options and bonuses. To restore prosperity for all, we need to spread the benefits of economic growth to entrepreneurial citizens through profit-sharing and the ownership of capital.” The REAL solution is not profit-sharing in the conventional sense but personal capital OWNERSHIP expansion.
The authors acknowledge that “In the United States last year, close to 20 percent of private-sector employees owned stock, and 7 percent held stock options, in the companies where they worked, while about one-third participated in some kind of cash profit-sharing and one-fourth in gain-sharing (when workers get additional compensation based on improvement on a metric other than profits, like sales or customer satisfaction).” The problem is that, even using an ESOP as the employee ownership structure, the odds are that the majority of ESOPs are structure to favor the management employees and thus the distribution of ownership shares is uneven.
Also, we need to incentivize corporation to pay out fully their earnings to their OWNERS, which then can be deducted from their corporate tax, which effectively would eliminate the corporate income tax for those corporations doing so. Otherwise, the corporate income tax should be raised to say 90 percent of corporate earnings. When corporations require monies to expand, rather than retained earnings and debt financing (neither of which creates any new capital owners), they would issue and sell new stock, which would be purchased by the ESOP and other citizens using Capital Homestead Accounts (http://www.cesj.org/learn/capital-homesteading/ch-vehicles/capital-homestead-accounts-chas/), financed with insured, interest-free capital credit loans repayable out of future earnings on the investments.
The insurance aspect of insured, interest-free capital credit, eliminates the risks of investing in corporate capital projects that do not pan out. Such insurance can be provided by private sector commercial risk insures and/or a government reinsurance agency (ala the Federal Housing Administration concept). See http://www.cesj.org/learn/capital-homesteading/capital-credit-insurance-reinsurance/
In conclusion, the authors have done a good job presenting the case for expanded capital OWNERSHIP. But they also include the term “profit sharing,” which is vague in its actual structural meaning. What we need is to create an OWNERSHIP culture with the focus on broadening personal capital OWNERSHIP sharing so that EVERY child, woman, and man can effectively become a capital owners, and over time build an estate portfolio of full-dividend payout stock in the viable corporations growing the economy. This will provide EVERY citizen with a powerful and lucrative second income source and a secured retirement separate from any job and other benefits associated with being employed.
Comment from Mark Goldes:
SECOND INCOMES – A PEACEFUL REVOLUTION!
Louis Kelso, father of the Employee Stock Ownership Plan – ESOP – utilized at 11,000 companies, argued the need for second incomes.
Second Incomes would be totally independent of jobs and savings.
By about age 50, almost everyone would have substantial income from diversified investments.
Create what Kelso called The Second Income Plan. Poverty and inequality will sharply decline.
See SECOND INCOMES under MORE at: aesopinstitute.org Then visit cesj.org which has an extensive agenda devoted to this vital work.
Open a door to universal prosperity and the most genuine free society in human history!
Congress implementing this program is one hell of a challenge. But, given the bleak alternatives, it can and must be done.
Almost everyone has an urgent need to see this take place – it can appeal to many millions – especially the many who are hurting.
Human survival now demands we accomplish the seeming impossible – fast enough to matter.
The AESOP website demonstrates that is already happening in the energy arena.
A Peaceful American Revolution is overdue!
| “All truth passes through three stages,” wrote the nineteenth-century philosopher Arthur Schopenhauer. “First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.” The idea that employees should own a good part of the company they work for was indeed both ridiculed and opposed before it became the quasi-mainstream notion that it is today. But it didn’t proceed smoothly through Schopenhauer’s stages. It has regularly cropped up and faded away. It has undergone periodic reinvention. Today’s most common form—the ESOP—owes its existence not to any deep historical roots but to a small band of devotees who rallied around the ideas of an iconoclastic lawyer and self-taught social theorist named Louis Kelso. Retooling Capitalism |
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