Need for a more inclusive capitalism

In her most detailed economic policy address so far, US presidential hopeful Hillary Clinton last week said 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 long studied the issue, we were glad to hear it.

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 US economic history.

Capital's share of national income has risen, while labour'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, the benefits of economic growth must be spread 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 country's founders believed 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 industrialised 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 such as 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 per cent of workers owned company stock and fewer than 30 per cent had profit-sharing (except Sweden, where the figure was 36 per cent).

In the US last year, close to 20 per cent of private-sector employees owned stock, and 7 per cent 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 US$355 million (S$486 million) of its more than US$1 billion in corporate profits last year to union and non-union workers and managers, on top of salaries.

Our research found that these programmes, 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 south-east, 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 favour only ownership policies that emphasise grants of stock (as in the case of employee stock-ownership plans), restricted stock (which has to be held for a certain period of time, incentivising 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 finalising 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 a bid to reform executive pay, Congress changed that section to limit corporate income tax deductions to US$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 staff.

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 the US, but it's a critical step that will help rather than hurt economic performance. If the middle class is to survive, we must move towards a more inclusive capitalism.


A version of this article appeared in the print edition of The Straits Times on July 20, 2015, with the headline 'Need for a more inclusive capitalism'. Print Edition | Subscribe