Can Increased Ownership Improve US economic performance and democratic governance?

I. The Problem/Facts: Capital Ownership, Technology, and Inequality

II. The American Vision, from the Founders to today

III. Economic Consequences of Employee Ownership

IV. Policy Options

Based on The Citizen’s SharePutting Ownership Back into Democracy Yale University Press, 2013By Joseph Blasi, Richard Freeman, Douglas KruseCouncil of Economic Advisors Seminar, Eisenhower ExecutiveOffice Building, Washington DC. December 3, 2013

I. Problem/Facts -- The New Normal?

Labor's Share of National Income

Gini Coefficient of all Households

Employment/Population

US inequality off the map for advanced country

In US, Wall Street occupiers focus on upper 1% is wrong. Share of pre-tax earned by top 0.1% increased from 2.7% to 12.3%.

But even 0.1% understates inequality. In 2009 400 highest AGI taxpayers (.000285% of all taxpayers – barely three one hundredth of the top 0.1%) obtain 3.2% of taxable interest; 6.5% of dividends; 16% of capital gains.

Forbes 442 US Billionaires have 1.3 trillion in wealth (0.00038% had ~2.4% of US household assets).

Capital ownership, capital income, and the equity and profit shares within the labor share are all highly concentrated

US Distribution of income shifted massively toward small number at top while work increasingly performed by teams/groups (see Appendix).

Inequality in labor income --options, stock grants – associated with capital income is major pathway

But I've got a University degree? A PhD!

Mumbo, Jumbo, Robot Technology will replace you

“Who Owns the Robots/(Capital) Rules the World”

II. The American Vision: OwnershipEvery citizen should own enough property/land to be independent.

Washington: “It (America) will not be less advantageous to the lowest class of people because of the equal distribution of property.”

Adams: “the only possible way of preserving…equal liberty…is to make the acquisition of land easy to every member of society”

Jefferson: “legislators cannot invent too many devices for subdividing property”

Hamilton: “the desire of being an independent proprietor in land is founded on such strong principles in the human breast”; “equality and moderation of individual property” would promote growth

Madison: “without violating the rights of property reduce extreme wealth toward…mediocrity”

G. Washington’s 1792 Policy on Cod-fishery

The fourth largest export industry, expected to be a major source of growth, played a key national security function and shares were common in it for over a century

British worked hard to destroy the entire industry

Washington signs a law on the cod fishery on Feb 16, 1792 on Thomas Jefferson/Tench Coxe recommendation

Tax credits went 5/8ths to the crew and 3/8th to the owners, but the condition was broad-based profit shares for all members of the crew: similar to ERISA

Other Policies That Fit Ownership Vision• Northwest Ordinance of 1787 – Ohio, Indiana, Michigan, Wisconsin, 1/3 of

Minnesota with servitude abolished in this territory

• Jefferson drafts liberal policies on shares of public land for Washington

• Louisiana Purchase – almost a million acres (but some plantations moved in and sullied the idea of “the empire of liberty”)

• Citizens favor foregoing revenue to create shares for broad ownership: most popular policy, largest US petition drive, both party platforms

• Lincoln signs the Homestead Act of 1862 granting 10% of the US and 20% of public land with grants of 160 acres based on sweat equity or liberal pricing and installments

• A succession of Federal acts including women and African-Americans with expanded plot sizes and State versions until the Alaska grant in the 1980s: policies based on grants, credit, installments, low risk

ESOPs to the Rescue?

• Typically, workers do not buy stock; Company worker trusts acquire stock and grant it to workers. ESOP ownership comes on top of wages and benefits functioning like an efficiency wage and mitigating risk concerns.

10,900 companies, 10.3 million workers, about 1 trillion in market value, 97% in closely-held companies, mostly sales of family businesses to the ESOP

• Privately-held ESOP companies half as likely to go bankrupt or close – only a very small percentage of ESOPs are in concession situations.

• Workers in closely-held company ESOPs are four times more likely to be covered by a defined benefit plan.

• Pension assets per employee in ESOP companies are significantly higher than in non-ESOP companies.

• Low rates of default of ESOPs on company stock acquisition loans of 1-2% annually (lower than defaults of LBOs and private equity portfolios)

• BLS study of rates of return from 1991-2011 show ESOPs outperform 401k plans in most years, were less volatile, and mean performance is > all plans

“If all power be suffered to slide into hands not interested in the rights of property which must be the case whenever a majority fall under that description … either they will unite … and become dupes and instruments of ambition, or their poverty and dependence will render them mercenary instruments of wealth… In either case liberty will be subverted; in the first by a despotism growing out of anarchy, in the second by an oligarchy founded on corruption.” -- Observations on “Draught of the Constitution for Virginia,” ca. Oct 15, 1788

“Every new regulation concerning commerce or revenue, or in any manner affecting the value of the different species of property, presents a new harvest to those who watch the change, and can trace its consequences; a harvest, reared not by themselves, but by the toils and cares of the great body of their fellow citizens. This is a state of things in which it may be said, with some truth, that laws are made for the few, not for the many. The Federalist Papers, 62

The Founders Fear: James Madison

III. Economic Consequences of Employee Ownership of Shares, Share of Output

Associated with employee involvement (EI) committees, teamwork: more likely to have EI if have group incentive pay and conversely. Systems called high performance work places. Compensation systems have local group incentives, company-wide incentives, individual incentives, etc. Based on the General Social Survey

Lots of US inclusive capitalism to study

“Preponderance of Evidence” says group incentives work

Reviews on employee ownership conclude that “two thirds of 129 studies [including both performance and attitude studies] on employee ownership and its consequences found favourable effects relating to employee ownership, while one tenth found negative effects”, and that “research on ESOPs and employee ownership is overwhelmingly positive and largely credible.” Meta-analyses that combine estimated parameters from studies report a strong positive association between inclusive capitalist modes of compensation and performance.

The UK Treasury commissioned Oxera (Oxford, London) in 2007 to examine impact of tax breaks for individual employee stock ownership, using confidential financial information. Estimating production functions for 16,844 corporations, this study found that the shared capitalism approaches increased value added per worker by about 2.5% in the long run.

• A study of workers based on over 41,000 worker reports in 14 firms with some form of employee ownership, profit and gain sharing, and broad-based stock options finds that worker co-monitoring helps overcome the incentives to free ride because workers with a greater stake in performance monitor each other more closely and are more willing to intervene to reduce shirking behavior than workers with less stake. Workers in these firms perform better the greater the depth of the incentive compensation system. The systems increased employee attachment, lowered turnover, prompted employee suggestions for improvements, and worked best with other “high performance” labor practices and policies. 

1300 corporations applied in 2006-2008 to make Great Place to Work Institute 100 Best Companies list. They filled out a management survey & had random employees take anonymous surveys → 300,000 responses. We merged with DOL 5500s and S&P Compustat and found:

Many of the 100 Best have some form of inclusive capitalism:

17% ESOPs, 10% majority employee owned, 16% give options to most employees;

More shared capitalism --> high performance work practices and Trust Index of workers;

As shared capitalism and the Trust Index go up together, the market value of the firm rises relative to book value of assets ‘Tobin’s Q’

Sample captures 10% of total sales and total employment and 20% of the market value of all publicly traded corporations in 2007.

Great Places to Work (Blasi, Kruse, Freeman, 2012)

Great Recession bailout of US auto industry with govt moneys. Chapter 11 bankruptcy and union cost concessions → sector recovers pre-2007 sales. Workers get huge bonuses in recovery:Detroit Worker Bonuses Approach Records on Rising Profits

(Bloomberg, Feb 2013). Ford $8,300; Chrysler $2,250. GM expected to exceed $7,325. For new Ford hires, paid ~1/2 what senior workers make, $8,300 adds 23 percent to annual of $36,000 compensation.

Auto-related industries and after-market service businesses US employed 3.1 million.

Mixed record for Employee Stock Ownership Plans (ESOPs) set up as concession bargaining to save jobs; positive record when ESOPs set up as success to retirement of existing owners.

Recent Experience as Part of Recovery

IV. What to do

Proposed Solution: Policies to attain

Long-term American goal where

CITIZENS OWN MORE OF WORK

CAPITAL.

“A ROBOT IN EVERY HOUSE. MY ROBOT IN MY WORKPLACE”

Policy directions

Research, communication and bully pulpit

Explore/evaluate new tax incentives for spreading capital ownership

Explore removal of tax breaks that concentrate capital ownership

Explore use of administrative rules and building infrastructure for low risk share plans

Need careful simulations/evaluations/advice from business/labor experts

“We may have democracy, or we may have wealth concentrated in the hands of a few, but we can't have both.” – Justice Brandeis

1) Commission Working Group to Explore Potential

Establish expert group to assess goal and alternative policies to effectuate it, with expertise of business and labor, socially-minded financial institutions, equity/ hedge funds (and some academics as well).

Assessment should review critically what we know, simulate impacts of different policies, consider possible difference in outcomes from groups currently covered and from compliers to any new policy.

Political leaders with interest can move ideas to different groups across political spectrum

2) Tax incentives

Expand tax incentives for ESOPs closely-held companies by, for example, lowering the estate tax for a retiring founder selling to the workers and allow members of a private equity/LBO firm to receive capital gains treatment on earnings related to a sale to the employees

Approved share plans a precondition for corporate tax incentives (>$1 Trillion over several years). Companies get them if they include all workers in capital ownership/profit-sharing scheme

Progressive capital gains taxes, with lower rates for lower income citizens

3) Remove tax breaks that fail to spread ownership

End Internal Revenue Code 162(m) where employee stock ownership and profit/gain sharing plans for top five executives have been subsidized at $5-15 billion a year for six Administrations or make the deductions conditional on lower risk share plans for all employees.

Create a modest tax incentive for broad-based low-risk restricted stock or stock option plans that are becoming extinct as a result of unintended consequences of other regulatory changes.

De-emphasize Federal support for the high risk purchase of company stock in 401k plans but support dividend deductions for low risk grants of company shares as matches for diversified worker contributions to such plans.

4) Administrative rules and build infrastructure

Include firms with broad-based employee ownership/profit sharing programs in government procurement/tax abatement programs

Seed regional/state centers with grants of several million dollars to develop information and training and state-based policy ideas to facilitate private sector development of share plan

The Value of Worker Equity in Long Run

Two meanings of equity in English: Fairness – equitable solutions to problems; equitable division of the rewards of production

Ownership – equity in one's company and ownership of the fruits of one's own labor.

Reductions of inequality as labor gains part of capital share, as part of more inclusive form of capitalism, via pension fund investment and workers stake in own firm.

Improved operation of firms with employees having ownership through shares or profit-sharing.

Strengthen democracy by creating more equal property ownership and income.

What might work better in reversing trends in section I – Education? Greater government tax and transfer? Higher Minimum Wage? Increased unionism? More public goods?

Appendix on Team ProductionNo national surveys but evidence --> team work is substantial and growing

“Over the last century, the primary approach to organizing has shifted from individual work in hierarchical structures, to more team-based work in hierarchical structures, to team based work in matrix structures, and ultimately to team-based work in multi-team systems” O’Leary, Mortensen, Woolley MIT Sloan School Working Paper 4752-09

Mid 1990s WRPS 32 percent US workers involved with self-directed work teams, total quality management, quality circles or other forms of employee involvement programs, and over half report such programs existing at their firms; 35 percent of non-managers report supervising others as part of their official job. (Freeman and Rogers, 1999)

In 2000s 40% of German manufacturing workers do teamwork (Jirjahn and Kraft IZA Discussion Papers, No. 3291, 2008)

Changes in work and management at workplaces in Sweden and other Scandinavian countries (Åke Sandberg Northern Lights SNS 2013)

Many industry studies showing importance of teamwork and many human resource management studies suggest teams perform better when combined with share plans and fair fixed wages in high performance bundles.