Chapter 8

How Citizen Capitalism Promotes Equality

RISING INEQUALITY OF INCOME, WEALTH, AND OPPORTUNITY is now widely recognized as one of the most critical problems faced in the United States today. This concern is reflected in recent bestsellers like Thomas Piketty’s Capital in the Twenty-First Century, Joseph Stiglitz’s The Price of Inequality, and Chris Hughes’ Fair Shot: Rethinking Inequality and How We Earn (among others).¹ It has been analyzed in magazines ranging from The Economist to The Atlantic to Rolling Stone.² It has become the subject of innumerable newspaper stories, online articles, blog posts, videos, and podcasts.

By many measures, the facts have grown alarming. The income reaped by top earners grows while the wages of the working class stagnate; the top 1 percent now take in nearly 24 percent of all income.³ This figure has risen from 20 percent in 2013 and is nearly twice as high as in the 1990s.⁴ Wealth inequality is more extreme. The top 1 percent owns 37 percent of total household wealth.⁵ The top .01 percent (the richest one-tenth of 1 percent) hold 22 percent, a figure that has more than tripled from 7 percent in the late 1970s.⁶ Socioeconomic mobility is declining; between 1981 and 2008, the probability of an American moving significantly higher or lower in the earnings distribution during their working career declined significantly.⁷

Not surprisingly, differences in wealth are reflected in differences in stock ownership; although nearly half of all American households have an interest in the stock market, the top decile hold more than 90 percent of all shares.⁸ Oxfam International estimates that the wealth of the eight richest individuals in the world, six of whom are American, now equals the wealth of the bottom half of the entire global population.⁹

There are several particularly disturbing aspects to today’s economic inequality. First, it is becoming ingrained. Seventy percent of Americans born into the bottom quintile (bottom 20 percent) of family income never make it to the middle class; 43 percent stay stuck in the bottom 20 percent, and the other 27 percent never make it past the bottom 40 percent.¹⁰ The trend is worsening. Between 1981 and 2008, the chances that someone starting in the bottom 10 percent could move into the middle quintile declined by 16 percent, and the chance that someone starting in the middle could reach one of the top two quintiles declined by 20 percent.¹¹ Americans are starting to recognize their declining social mobility. A 2014 survey by the Pew Charitable Trusts found that fewer than 25 percent believed it was common to begin poor, work hard, and become wealthy.¹²

A second alarming aspect of extreme inequality is how it puts large numbers of Americans at risk for quickly becoming penniless. The 2014 Pew survey found that more than 90 percent of respondents said financial stability was more important to them than upward mobility.¹³ Yet in 2015, more than 40 percent of American households did not have enough liquid savings to cover an unexpected $2,000 expense. A car accident, a child’s illness, a partner’s temporary job loss—any one of these common life events would tip a family into destitution.¹⁴

A third disturbing aspect is the growing differences in life expectancy based on one’s level of income and wealth. A study in the Journal of the American Medical Association found that from 2001 to 2014, the life expectancy of those in the top 5 percent of pretax income rose by nearly three years, while the life expectancy of those in the bottom 5 percent increased less than three months. The richest 1 percent of American men now can expect to live fifteen years longer than the poorest.¹⁵ Not only do those at the top of the economic ladder live much longer than those at the bottom, but life expectancy at the bottom may actually be shortening.¹⁶ According to the Centers for Disease Control and Prevention (CDC), in 2017 the average American’s life expectancy declined—for the second year in a row.¹⁷

Finally, a fourth, especially ugly element of today’s wealth and income inequality is the way it tracks and reinforces the racial, gender, and age divides. Blacks earn an average of 42 cents for every dollar that whites earn, with a net worth equal to only 15 percent of whites. This puts many black households at severe risk of financial crisis. Where the average white family has enough liquid savings to cover thirty-one days of income, the typical black family can only cover five days.

Single women with children are even more exposed. From 1983 to 2013, when the median wealth of single males almost doubled, the median wealth of single women with children fell by a shocking 93 percent. By 2013, it had fallen to only $500. Although it’s natural to expect younger households to earn less and have less wealth than older, more established ones, comparative studies find that younger generations are behind where baby boomers were at an equivalent age when it comes to financial security.¹⁸ Such demographic differences in wealth, income, and economic security divide, alienate, and even enrage many people and undermine American ideals of equal opportunity, cooperative civic engagement, belief in the future, and support for capitalism.

Extreme Inequality Harms All

Although it’s easy to see how extreme inequality harms those with the least financial resources, the damage isn’t confined. Some degree of inequality is desirable in a capitalist economy. It motivates people to seek employment, work hard, and invest in their own “human capital” by pursuing formal education or acquiring useful job skills. But extreme poverty and insecurity makes this nearly impossible. It is hard to think about, much less to invest in, the future when you’re scrambling to meet immediate needs.

Further harm comes from the erosion of the middle class that drives consumer demand. If we define middle class as enjoying an income somewhere between two-thirds and twice the median household income, 61 percent of American adults fit into that category in 1971. By 2015, for the first time in four decades, the percentage of Americans in the middle class fell below 50 percent.¹⁹ The middle class is no longer the majority in America. And, as more and more people have less and less money, domestic demand for goods and services falls.

Most economists agree that because of these two factors—reduced human capital investment and declining demand—extreme inequality harms economic growth. A 2014 study from the Organisation for Economic Co-operation and Development (OECD) found that inequality had a significant negative effect on economic growth rates and estimated that the United States would have enjoyed 20 percent more economic growth from 1990 through 2010 if its income disparities had not widened during that period.²⁰

Yet rising economic inequality and insecurity does more than just slow America’s economic growth. It also widens social divisions, erodes support for pro-business policies, promotes nationalist political movements, and triggers protests like Occupy Wall Street’s months-long encampment in downtown Manhattan’s Zuccotti Park. It incites the kind of hostility captured in the title of Douglas Rushkoff’s 2016 book Throwing Rocks at the Google Bus: How Growth Became the Enemy of Prosperity.²¹

Writing for the World Economic Forum—the association of the world’s elite that gathers annually in Davos, Switzerland—hedge fund manager Alberto Gallo observed, “The alternative to redistribution is instability and crisis. Inequality provides fertile ground for populist parties to harvest support … Over time, populist policies can destabilize democracies, turning them toward nationalism, militarism, and anti-capitalism. The outcome of populist regimes in history ranges from higher taxes, to nationalizations and violations of private property, to commercial and military conflicts … The cost of sharing opportunity and wealth may be high for today’s elites, but the alternative is far worse.”²² Increasingly, the very rich speak of pitchforks and guillotines.²³

What’s Driving Increasing Inequality?

As bad as the situation is, there’s reason to believe that without action it will get worse. Few would argue today that increasing inequality is mostly the result of working and middle-class Americans suddenly becoming more lazy and shortsighted. Structural factors drive the trends. Let us consider three in particular: automation, differences between returns to capital and returns to labor, and the connection between wealth and influence.

Automation

Between 2000 and 2016, the US lost five million factory jobs; one study found nearly 90 percent were lost to automation.²⁴ A recent report from consulting company McKinsey estimated that by 2030, automation could destroy as many as seventy-three million more US jobs.²⁵ Nor will the losses be confined to blue-collar work. With the development of artificial intelligence, many experts believe automation will reduce the need for human expertise in a range of professions. Computers and algorithms will replace teachers, doctors, lawyers, accountants, architects, financial advisers, even artists and musicians. Historian and futurist Yuval Noah Harari has predicted the creation of a “global useless class,” i.e., as artificial intelligence gets smarter and more widespread, more and more humans will find their careers displaced.²⁶

Massive job losses would not be a definitive problem if all these newly unemployed Americans had other ways of paying the rent and putting groceries on the table. John Maynard Keynes dreamed of a future in which productivity increases solved what he called “the economic problem” of providing goods and services, and people were able to enjoy a higher standard of living while working only fifteen hours a week.²⁷ Keynes feared the biggest challenge would be boredom.

Returns to Capital vs. Returns to Labor

Keynes also assumed that in the future, productive capital—including the robots, algorithms, computers, and other valuable machines that are going to produce the goods and services people once did—would be so evenly distributed among the population that all could fund their leisure with its returns. Things have not worked out that way. Because wealth is highly concentrated, the ownership of productive capital is highly concentrated. Because the ownership of productive capital is highly concentrated, the income from productive capital is concentrated. So, it is the owners of productive capital, whether physical, financial, or intellectual, and not the owners of increasingly irrelevant “human” capital, who will reap the benefits of increasing productivity. They will continue to become richer and richer, while those who sell their labor to make a living become poorer.²⁸

This thesis is explored in 600-plus pages in Thomas Piketty’s 2014 Capital in the Twenty-First Century, a weighty academic tome that reached the number one spot on Amazon’s bestseller list and sold out at major bookstores. Piketty clearly hit a nerve, and his success inspired critiques. But his basic point—without interventions, structural forces will ensure wealth becomes more and more concentrated in the hands of the rich—is hard to dismiss.

Piketty’s own favored intervention is a wealth tax, i.e., a tax on the market value of all assets owned, such as real estate, bank deposits, and assets in an insurance plan. This is typical of would-be reformers who want to address rising inequality: they look to government-imposed redistribution. The type of redistribution plan can differ. It might be a wealth tax, or a more progressive income tax, or an earned income tax credit, or a universal basic income (UBI) program. The problem with all these approaches, however, is that they run head-on into the third structural reason why inequality seems likely to increase. That third reason is that the rich can use their wealth to buy political power and influence, which they can then use to protect their wealth and to acquire even more wealth.

Political Power and Influence

In 2012, Princeton political science professor Martin Gilens published Affluence and Influence: Economic Inequality and Political Power in America. Gilens had studied nearly two thousand proposed policy changes and the degree of support each enjoyed among poor, middle-class, and affluent Americans (defined as those in the top earning decile, earning more than about $145,000 annually). He found that when a policy was supported only by poor and middle-class Americans, the statistical likelihood of the policy being implemented was near zero. In contrast, when a policy was supported by the top 10 percent, it was adopted 45 percent of the time.²⁹ A 2014 article that Gilens coauthored with Northwestern professor Benjamin Page found similar results. Gilens and Page concluded that while business interests and the affluent had influence, “the preferences of average Americans appeared to have only a minuscule, near-zero, statistically non-significant impact on public policy.”³⁰

These results should not be surprising. Recent history offers innumerable examples of laws and regulations benefiting wealthy interests that had been embraced by Congress, federal regulators, and even the courts, and equally many examples of policies that would have burdened the wealthy that have failed. Joseph Stiglitz catalogs several in a 2015 report he prepared for the Roosevelt Institute, Rewriting the Rules of the American Economy: An Agenda for Growth and Shared Prosperity. They include: subsidies for “too big to fail” banks in the wake of the financial crisis; repeated failures to reimplement a financial transaction tax on stock, bond, and derivative trading by Wall Street firms; strengthened intellectual property rights for large corporations; reduced top marginal income tax rates for the wealthy; raised barriers to unionization; weakened labor standards; repeated refusals to adopt guaranteed pre-K childcare; and reduced benefits from social welfare programs like food stamps, Aid to Families with Dependent Children, and Medicaid. Stiglitz could have added many more, including judicial opinions granting corporations constitutional rights, and changes in the bankruptcy code to make it tougher for students and credit card holders to seek protection in bankruptcy court but easier for derivatives traders to do so. In his entertaining but depressing 2010 book Griftopia, Matt Tiabbi describes in detail how the Troubled Asset Relief Program (TARP) implemented to stabilize markets after the 2008 financial crisis ended up enriching Wall Street bankers and hedge funds. Jesse Eisinger’s recent bestseller The Chicken-shit Club shows how the wealthy can use their wealth to insulate themselves even from criminal prosecution.³¹ Our point is that, if even a minority of the wealthy—including, importantly, wealthy corporate interests—favor a law or regulation, that law or regulation becomes significantly more likely to be adopted. The process works, equally or more powerfully, in reverse. If a significant number of wealthy and powerful interests oppose a policy change, whether for philosophical reasons or out of sheer self-interest, it might be debated, but it won’t be implemented.

Citizen Capitalism as a Path Forward

Through the Universal Fund, Citizen Capitalism offers a potential intervention in the following ways.

First, in terms of income inequality, any citizen eighteen years or older is eligible to become a citizen-shareholder, and all citizen-shareholders will have a right to an equal share in income from the Fund. Of course, if both ultrawealthy and low-income individuals become citizen-shareholders because they will each get the same amount of supplemental income, there is an argument to be made that receiving income from the Fund will not ameliorate the income gap. Thus assuming A has an annual income of $10,000 and B has an annual income of $1,000,000, if A and B both sign up to become citizen-shareholders they both will get the same amount of supplemental income. So if the Fund paid $1,000, A’s income would become $11,000 and B’s income would become $1,001,000, but the gap between A and B’s income would be exactly the same ($990,000) with or without income from the Fund. And this argument is indeed correct. However, it elides the point that unlike a typical mutual fund or most other investment vehicles that usually require some minimum deposit, access to participation in the Fund is not dependent on wealth or income; it is open to all. The Fund is quintessentially a paradigm of equal opportunity.

Second, in terms of wealth inequality, the Fund provides a free on-ramp to wealth creation to interested citizen-shareholders. Wealth usually takes a longer amount of time to acquire than income, and one’s ability to acquire and amass wealth is closely linked to a range of socioeconomic factors, such as a person’s level of education, whether one has the good fortune of being a recipient of an inheritance or the named beneficiary to a trust fund, and one’s social status and ability to access and leverage networks. As such, the ability to acquire wealth is highly dependent on a number of factors and is not the same for everyone. If only reality was like a game of Monopoly where each player starts with the same amount of cash and at the start of the game each has an equal opportunity to buy property and amass wealth. Yet we all know that this is not the case. The Universal Fund offers a means to equalize the playing field. In a way it’s like passing “Go” in Monopoly, where barring some contrary instruction, as each player passes “Go,” no matter what has happened before, they get $200 that they are free to spend in any way they choose. When the Fund distributes income, a citizen-shareholder could decide to reinvest it in another investment vehicle, or put it toward a deposit on a house, or perhaps use this income to start a business. Any of these actions would potentially be wealth creating, and for some segment of Americans, having a supplemental income could be the difference between pursuing these wealth-creating activities versus not at all. In addition, we can also imagine a financial literacy component being built into the Universal Fund that would be available to all citizen-shareholders interested in learning about basic financial and investing concepts.

Third, in terms of differences in stock ownership, Citizen Capitalism promotes equality of opportunity in capital market participation. Capital market participation is currently skewed in terms of socioeconomic standing. It is estimated that barely one-third of households in the bottom 50 percent of income own stock.³² Similarly, according to a 2016 Pew report, lower-income households do not have “extra” money to invest in the market, and at the same time, more than one-third of workers do not have access to a 401(k) or other employer-sponsored retirement plan.³³

A fourth and related point is how Citizen Capitalism avoids reinforcing racial and gender divides in income and wealth inequality. As a quick point of reference, when broken down by race/ethnicity, Hispanics fare the worst—54.9 percent of Hispanic workers do not have access to any type of workplace retirement plan. The Fund is designed to allow all US citizens eighteen years or older to become citizen-shareholders at no cost to them. In addition, the application process for becoming a citizen-shareholder could (and should) be designed in a manner that is accessible, with low barriers to entry. Designing the Universal Fund in this manner would ensure the broadest possible participation while equalizing the playing field for participating in capital markets.

Fifth, in terms of the connection between inequality and how it puts large numbers of Americans at risk, having a supplemental income from the Fund could be a lifesaver (in some cases, perhaps literally). An extra $300 or $1,000 might be the difference between being able to buy back-to-school supplies, or being able to pay for that additional medical test for which there is a deductible, or perhaps being able to make ends meet after one’s unemployment benefits have run out.

Sixth, the Universal Fund responds in part to the structural chasm between returns to capital and returns to labor. Under our current system, productive capital is highly concentrated, and the returns from such capital are highly concentrated as well. The Universal Fund provides a mechanism for all eligible individuals to share in the returns on capital. This would be particularly important for individuals who currently are unable to participate in capital markets due to lack of access or lack of funds to invest.

Seventh, the Universal Fund offers an interesting experiment in how to construct a community of influence. On one hand, Citizen Capitalism empowers those less well-off, giving them a greater sense of agency and access to returns on capital, and potentially reducing alienation from the broader society. On the other hand, all eligible citizens are able to participate. No distinction is made in terms of income, wealth, gender, geographic location, or any other characteristics. Funded by corporate and individual donations, it has the potential to bridge class divisions, as well as reinforce a sense of community and common interest, together with civic engagement. Moreover, employing private ordering rather than government action or market forces, it goes beyond the stale, bitter debate between Right and Left.

To be clear, the claim here is not that Citizen Capitalism and the Universal Fund offer a magical elixir that can cure all societal ills and inequality as it manifests in its various forms. Rather, we believe that the Universal Fund offers a path forward that incentivizes everyday citizens to become engaged in the corporate sector, that incentivizes the corporate sector to act in the best interests of all stakeholders, and that uses the power of private collaboration to address rather than exacerbate inequality across a variety of dimensions.