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70 Finance and economics
The Economist
September 22nd 2018
R
ECENT decades have not been particularly good ones for
thosewho toil on, rather than own, themeans of production.
Labourmarkets havemade a slowand incomplete recovery from
the trauma of the Great Recession. The crisis only briefly dis-
lodged corporate profits as a share of
GDP
from historically high
levels. Across much of the world, the share of national income
flowing to labour has fallen over the past 40 years.
Taxing the rich in order to fund spending on the poor is a
straightforward solution to inequality. But the well-heeled are
adept at squeezing through tax loopholes, and at marshalling the
political clout needed to chip away at high tax rates. Those frus-
trated by enduring levels of inequality are contemplating ever
bolder ways to redress the lopsided balance between owners
andworkers.
In an ideal world, untrammelled markets would ensure that
every firm and every worker earned precisely what they de-
served. But as economists since Adam Smith have recognised,
markets are inevitably distorted by the unequal distribution of
power. As Smith wrote: “People of the same trade seldom meet
together, even formerriment and diversion, but the conversation
ends in a conspiracy against the public.”
The socialists of the19th century reckoned that the bestway to
check the power of capital was collective ownership. Experi-
ments with state management of the economy in the 20th cen-
tury made the shortcomings of such systems horribly clear. In
practice they tend to be violently coercive, and their inability to
take advantage of the distributed knowledge of markets often
produces a grinding stagnation. (China may have so far avoided
this outcome, but it has also signally failed to produce an equita-
ble distribution ofwealth.)
The market for ideas is, however, stocked with gentler, more
practical leftism. Perhaps, for instance, the state could own a
share of the economy’s assets onbehalfof the population. In a re-
cent paper Matt Bruenig, a left-leaning writer, argues for the cre-
ation of an American “social wealth fund”. The fund, he says,
should accumulate stakes in equity, bond and property markets,
and then disburse a share of its investment income each year as a
“universal basic dividend”. Even in the most egalitarian decades
of the past century, the richest 10% of the population owned the
majority of the wealth. Money passes down the generations
through gifts and bequests, but also through the extra education-
al and entrepreneurial opportunities it affords. A social dividend
would counteract this entrenchment of advantage.
The proposal has a certain appeal. If funded through taxes on
existing wealth—like property and bequests—such an entity
could be a simple way to reduce the unfair opportunities afford-
ed to the rich at birth. And there are workable examples already
in operation. Alaska’s fund, financedwith royalties from its oil in-
dustry, is worth 113% of its
GDP
. It is invested in a diversified port-
folio that has yielded annual returns of nearly 10% over its life-
time. The fund’s dividend payments appear to reduce wealth
inequality and poverty, without discouraging recipients from
finding work. Norway’s government, through oil-funded sover-
eignwealth funds created to protect its generous social safety-net
against future declines in oil revenues, controls nearly 60% of the
country’s wealth. Yet the country has not turned into a grey so-
cialist dystopia.
Complications could arise if such a fund operated at a scale
proportionate to America’s economy and capital markets, how-
ever. The disciplining effect of the market might well be muted if
the state accumulated stakes in most firms. Recent work by Mar-
tin Schmalz and others suggests that large-scale stock ownership
by passive asset managers (like BlackRock and Vanguard), who
often control sizeable stakes in many firms within an industry, is
associated with less competitive behaviour by firm managers.
Active ownership by the state might address that problem. But it
could introduce others, such as greater scope for corruption.
More significantly, a social wealth fund raises difficult ques-
tions about the structure of the economy. It would create a con-
flict between workers’ interests as wage earners and their inter-
ests as recipients of dividends: more revenue flowing towards
pay-chequeswouldmean less for profits. Left-leaning criticswor-
ry that a social wealth fund might undermine efforts to strength-
en labour unions. Afundmight, ironically, soften public attitudes
towards capitalism’s more ruthless aspects. Working people
could feel differently about lay-offs, offshoring and automation if
their dividends stood to swell as a result. More worryingly, the
public could become more accommodating of corporate behav-
iour designed to increasemarket power. Abuses bymonopolistic
tech firms might prove harder to rein in when they contribute to
soaring profits—and to dividends for all.
Own goals
Other ideas for empowering workers attract similar criticisms.
Stronger unions would have every incentive to bargain down
capital’s share of companies’ profits, but very little incentive to
support competition-boosting reforms thatmight undermine the
stability of those profits. Offering labour representatives seats on
companyboards, apolicy supportedbyElizabethWarren, a sena-
tor from Massachusetts, seems likely to improve workers’ for-
tunes. But it might also make them complicit in preserving rev-
enues at all costs, the better to plump upworkerwages.
None of the more radical proposals to tackle inequality are
riskless, in otherwords. But a social wealth fund that turnswork-
ers into owners of, rather than antagonists to, capital might ap-
peal to workers without alienating powerful business interests.
And if such a fund were to cultivate a sense of economic solidar-
ity, it might well encourage other steps towards a more equitable
society. Don’t dismiss the idea.
7
We the shareholders
Aradical idea for reducing inequalitydeservesmore attention
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