Economy

The Key To Closing The Income Gap Is An Idea Almost Nobody Is Talking About

CREDIT: Center for American Progress

The Commission on Inclusive Prosperity, convened by the Center for American Progress, unveiled a detailed argument about the economic and political future of industrialized nations on Thursday.

After simmering for years among progressive politicians, concern about economic inequality and flagging upward mobility in America seem destined to define the next federal election cycle for both parties. Jeb Bush’s (R) fundraising organization for a possible 2016 White House bid calls itself Right to Rise, and Mitt Romney (R) says that enhancing economic mobility and reducing poverty would be focal points of his campaign should he run again.

That is the political context into which the Commission on Inclusive Prosperity issued a comprehensive slate of policy recommendations on Thursday. The Center for American Progress-convened group, co-chaired by former Treasury Secretary Larry Summers and his British counterpart Ed Balls, laid out almost 200 pages of ideas for restoring the connection between people and profits. The report casts unchecked economic inequality as a threat to democracy itself, and offers specific suggestions for how to reverse wage stagnation, class tension, and corporate profiteering in both the United States and other industrialized republics.

The commission’s report makes detailed arguments for a host of familiar policy solutions to rising inequality, slack consumer demand, and a labor market that fails to reward workers for their productivity. It spells out the rationale for a higher minimum wage that will rise automatically in the future, family-friendly labor policies around paternal leave and universal pre-school access, broadened public investment to make both education and housing more affordable and accessible, larger and better-targeted investments in public infrastructure, and tax code changes to support the middle class.

When it comes to corporate governance and how American businesses behave, though, the report calls for a set of policies that have received much less attention in the past few years. Restructuring corporate culture is essential to preserving democratic political systems, the report argues. In its policy chapter and an appendix about U.S.-specific recommendations, the commission sets out two distinct ideas that would break new ground if they become prominent parts of the 2016 political landscape.

First, policymakers should promote “inclusive capitalism.” Companies should be encouraged to experiment with various systems that “compensate a broad base of workers — not just top executives — on the basis of group performance rather than individual performance.” The report details various ways of achieving that, including by giving employees stock, forming companies as worker cooperatives where employees hold direct ownership stakes, or providing cash pay to workers based on the capital gains their productivity brought to the company as whole. In addition to serving the core goal of broadening the group of people who share in corporate profits, these systems have been shown to provide permanent gains for the companies themselves.

Second, policymakers should combat the corporate tendency to think in the short-term rather than basing decisions on long-term outcomes. The sort of short-term thinking that shareholder demands impose on public companies create an artificial restriction on business investment, with one study finding that private companies invest twice as much of their assets into their business each year as public companies. The report’s recommendations for encouraging long-view thinking are mostly focused on executive compensation, because “as executives have become increasingly incentivized to focus on short-term share prices, the firms they manage have turned away from investments in innovation and long-term capital formation, as well as wage growth and workforce investments.”

To avoid creating short-term profit incentives, the commission report recommends eliminating or sharply curtailing the tax deductions corporations can take for executive compensation. A handful of lawmakers have suggested such a change in recent years without success, despite ample evidence that the deductions force the public to subsidize a failing system. The report also suggests ways to combat that broader failure of the so-called performance pay system for executives, such as requiring much longer vesting periods for stock options and imposing stricter rules on how the options can be exercised once they vest.

When industrialized countries fail to ensure inclusive prosperity, people stop trusting that hard work and careful planning will provide personal reward. The breakdown of that basic tenet of the social contract creates not just economic harm, the authors write, but “political alienation, a loss of social trust, and increasing conflict across the lines of race, class, and ethnicity.”

The decline of inclusive prosperity in the decades since World War II has brought threats to the democratic ideal of self-ruling pluralistic societies. As a result, “advocates and apologists for anti-democratic regimes argue that the democracies are no longer capable of managing their problems or creating a sense of social dynamism.” As with other grand economic transition periods such as the New Deal era and the tech boom of the 1990s, the commissioners write, policymakers in today’s industrialized world must navigate huge changes brought on by globalization and technology in ways that do not leave huge swathes of the populace behind — or the consequences could be far worse than the elevated economic strain and declining trust in public institutions that capitalist democracies face today.