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That Inequality Thing

This is an open question to my friends and colleagues who have more experience in economics than I do.

I’m trying to understand the factors behind accelerating economic inequality. I have no formal training in economics, so my understanding is naive, I’ll admit. So please bear with me.

I get the argument that the problem could lie in the difference in growth between wages and capital (Piketty, right?). That is, that capital is growing faster than wages, so people who have capital are getting richer faster than people who don’t, and therefore subsist on wages. I have read some counter-arguments, but so far they’re all neoliberal trickle-down arguments, and we’ve seen the effects of that since the 1980’s and before, so I’m gonna go with this line of reasoning until someone shows me a better counter-argument.

I get the proposal that raising wages puts more money in employees’ pockets and makes them better consumers (Henry Ford, right?). Furthermore, I understand what theoretically happens when you combine these ideas. Any raise in wages (“growth” in wages) that’s politically feasible in the US would likely still be smaller than the current growth in capital. So you might slightly slow the inequality gap, but in the long run, you’re just delaying the problem. A wage raise would be a temporary injection of cash into employees’ pockets, making them happy for awhile. But unless you get them to use that extra cash to invest in capital, you don’t really make a difference, right?

I think I understand the carrot/stick approach that governments can use to tweak things: roughly, the carrot is lowering taxes or adjusting interest rates, and the stick is increasing them or applying stricter regulation. A higher minimum wage is a carrot to wage earners, but a stick to capital owners. Tax incentives to start a business are a carrot to investors, and more palatable because trickle-down adherents argue that new businesses mean new jobs. Which means more wages.

What I don’t understand is this: what are the incentives — the carrots — to redistributing capital, as opposed to creating jobs? What are the ways a government uses to make the people who have capital want to redistribute it?

Sure, there are sticks you can use to redistribute capital, like capital gains taxes. But you can’t influence an economy with sticks alone. And sure, you can incentivize the flow of capital by devaluing your currency, but that seems like bad monetary policy because in the long run, you’re moving your capital offshore, not redistributing it to your own citizens. That’s a stick to both wage earners and to domestic investors. And lowering interest rates appears to be moving capital from one rich guy to another, but that’s not the kind of redistribution I was thinking of.

For example, are there any business tax incentives specifically for creating employee-owned businesses? Or incentives for established businesses to create employee profit-sharing programs? Maybe instead of saying “no corporate taxes for a year!” a government could say “no corporate taxes in perpetuity as long as XX% of your business is owned by employees!” Are there small business loans that specifically incentivize employee ownership? Maybe more generous repayment schedules if YY% of the company is in employees’ hands?

That would probably lead to the need for some corporate training in how to be an effective investor, but surely there are some success stories out there in employee-owned business-land, right? It seems like a population that’s smarter about investing is going to lead to a better economy. It also seems that a company where employees care about the health of the company are going to work harder in its favor.

Are there any carrots for raising wages? Setting a minimum wage is a stick, I get that. And shifting your taxes off to employees by making them all contractors seems like a common fix that many companies do, artificially raising wages in response. Companies pay a higher hourly, but pay the person as a contractor not a contractor, so that social security and insurance are externalized, and placed on the wage earner, not the company. The gross wage may look great, but the net wage is often actually lower than what it would be as an employee (e.g. Uber et al). What are the incentives to a company to hire and support employees rather than contractors? Is there a tax break on social security, for example, if you’re paying it for ten people rather than one? Or 100? 1000? I don’t buy the “every contractor is an entrepreneur” line that on-demand economy companies often use, because every contractor lacks what the companies have: access to capital.

So there’s my question for the day: how do we currently provide incentives, rather than compulsions, to redistribute capital? And what ways could we be doing it that we’re not currently doing?

If you’ve got suggestions for further reading, please email me. I’d like to hear how we can effect some change in this area.


Published in economics equity

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