Unleashing the Transformative Potential of an Equitable Economy

6 page overview, The Next System Project & The Institute for Policy Studies Reversing Inequality

While there is now widespread understanding that extreme income and wealth inequality is growing and has negative impacts on society, most proposed solutions fail to address deeper systemic drivers.  If we misdiagnose an illness, we are likely to prescribe an insufficient or even dangerous remedy. If we misdiagnose the causes of inequality, we will likely put forward misguided solutions. For example, if we believe that inequality is primarily driven by changes in technology and globalization—what economists call a skills-biased technological change—
then our solution will focus on investing in workforce education and skills expansion.

While technological change and globalization have supercharged inequalities, they are not the primary drivers.  A more critical explanation for inequality is the ways in which the rules governing the economy have been distorted by power differentials and political factors. These rules—including tax, trade, regulation, public subsidies, and expenditures—have been tipped to advantage asset owners over wage earners, and transnational corporations over domestically-rooted enterprises. As a result, we are living with a particular flavor of a market economy—hyper-extractive monopoly capitalism—that is transferring wealth from workers and communities upwards to a small segment of the population.

One example of this is share of productivity gains flowing to capital (investors, wealth holders) compared to labor (workers, wage earners). Over the last several decades, almost all productivity gains have flowed to capital. This has resulted in decades of stagnant wages for the majority of wage earners.  With several decades of these rigged rules, we have entered a new phase of inequality where extremes are driven less by wage differentials and more by return on capital.  

Between 1980 and 2000, a great deal of inequality was the result of growing wage disparities, with real wages stagnant for the bottom 70 percent of wage earners. The average gap between CEO and average worker compensation grew from 20 to 1 in 1965 to over 300 to one in 2013. But since 2005, the updraft of wealth has been largely driven by return on capital—in other words, wealth creating wealth.

If we understand these forces as the principle drivers of inequality, then investing in education to upskill low-wage workers may have some positive impact on individuals, but will fail to address the overall engine of inequality.  This is not to dismiss the vital work of policy interventions that “lift the floor,” such as the fight for a higher minimum wage.  Indeed, many other countries have significantly lower levels of inequality because they have livable wages and more robust social safety nets. But to reverse inequality in the U.S., we will have to take these fights to the next level and address the concentration of wealth and power at the top end.

The Role of Systemic Racism. Another driver of inequality is systemic racism and a legacy of discrimination in wages and wealth-building. These forces are impossible to separate and disentangle from other drivers of inequality. Policy interventions that don’t incorporate an understanding of systemic racism will fail to reverse or compound existing inequalities.

The Challenges of Reducing Inequality on a Finite Earth. False solutions like a New Deal 2.0 program, including government stimulus packages, fail to recognize the ecological limits to traditional growth and the need to operate within the earth’s carrying capacity.  The only path forward is building resilient communities that can bounce back from environmental and economic challenges.

WHAT WILL IT TAKE TO REVERSE INEQUALITY?

This paper describes a full menu of “interventions” to reduce income and wealth inequality and address some of the systemic drivers of inequality. They fall into four categories, including policies that:

  • Lift the Floor, establishing minimal standard of living and safety nets
  • Level the Playing Field, by ensuring investments in public goods and elimination of the distorting influences of power and privilege
  • De-concentrate Wealth, through interventions that directly reduce the concentration of wealth and power
  • Rewire the System, to undercut inequality drivers

A Way Forward. It’s hard to imagine many of these solutions moving forward at the national level in the current political environment, but there are opportunities to incubate them in states and localities and lay the groundwork for a future political realignment. One way forward is to build power and win some of these rule changes by focusing on “pressure points” that can accelerate the transition to the next system.

This will require game changing campaigns that accomplish three things:

  • Reduce the concentration of wealth and power, break up institutions, or redistribute wealth and power.
  • Open up economic opportunities for those excluded in the current system.
  • Capture the imagination of a wide constituency of people willing to fight for policy change.

Three examples in the paper are:

  • Dividends for all: linking common wealth sources of revenue to programs that expand economic stability
  • Taxing excessive carbon solution and directing revenue to investments in renewable energy, green infrastructure and just transition efforts.
  • Expand tuition-free higher education by creating education trust funds funded by progressive taxes on wealth.

6 pg. SUMMARY, August 2017 by CHUCK COLLINS

The US economy’s deep systemic inequalities of income, wealth, power, and opportunity are part of global inequality trends, but US-style capitalism and public policy make these inequalities more acute. Their observable and felt harm to our civic and economic life is corroborated by research from many disciplines, suggesting that a move toward a more egalitarian society would certainly realign most aspects of economic and social life for the better. But inequality keeps moving in the wrong direction, toward more concentrated wealth and power. What is the pathway to real change? 

For starters, we must understand what we are up against. Inequality does not spring mainly from technological change and globalization, though these both compound and complicate the growing rift. But the main drivers and accelerators of inequality are the imbalances of power and agency embedded in our political and economic system.

Reducing inequality requires a “next system” analysis and playbook that advances systemic solutions for a systemic problem. The United States can learn from other advanced industrial countries with significantly less inequality, adapting policies and practices to US needs and circumstances. We can also learn from our own history, especially the dramatic reductions in inequality between 1940 and 1975, when the rules of the economy were focused on building broader prosperity primary for
white households. Future approaches to reducing inequality must tackle the racial bias at the core of the rigged rules of the economy. That said, part of the path is uncharted. In particular, grappling with ecological limits to growth means that many of the New Deal and post-World War II policies that reduced inequality for earlier generations will no longer work given today’s levels of population, resource consumption, and ecological risk. Together, the extent and widely felt effects of inequality challenge us to put a fine-tuned combination of historical insights, policy innovations, best practices, and fresh thinking to the test. Just as urgently, we also need a vision of a more equal and opportunity-rich society.

This summary will not include a review of inequality data nor summarize the widespread negative impacts of inequality on our democracy, economy, and civic life. One compelling argument spelled out in the longer paper is the tremendous societal benefits of transitioning to a more equitable society.

While there is a growing understanding that extreme income and wealth inequality has negative impacts on society, most proposed solutions fail to address deeper systemic drivers.
If we misdiagnose an illness, we are likely
to prescribe an insufficient or even dangerous
remedy. If we misdiagnose the causes of inequality,
we will likely put forward misguided
solutions.
Explanations for why inequality has grown in
the past four decades abound, and some are
bitterly contested. Many traditional economists
attribute growing inequality largely to
“skill-biased technological change.” Wage
differentials, some economics argue, mirror
a hard fact of life: some workers possess the
advanced skills needed to adapt to technological
change and some don’t. Policy-makers
who buy this theory focus on individual education,
skill building, and job training. Other
policy-makers embrace cultural explanations
and attribute income and wealth inequality
to differences in individual initiative, effort,
pluck, and intelligence advocate for hands-off
laissez faire policies. Both approaches fail to
address system drivers.
Current levels of inequality have little do to
with differences of individual skill or effort.
Many other countries are weathering the
same technological transition that the US
faces and doing so with considerably less
inequality. Blaming either technological
change or personal merit and performance
CHUCK COLLINS: REVERSING INEQUALITY
THE NEXT SYSTEM PROJECT & THE INSTITUTE FOR POLICY STUDIES
fails to address the deeper power imbalances
and structural drivers of inequality that are
not linked to either—and also fails to lead us
to interventions that will reduce it. Instead, we
must reckon with why power shifts and public
policies have tipped the economic rewards
in favor of asset owners at the expense of
wage earners and why benefits increasingly
redound to transnational corporations instead
of domestic enterprises.
Power Shift. As wealth concentrates, so does
political and social power, including the clout
to dictate the rules governing the economy,
such as tax and trade policies.
Since the mid-1970s, we have lived through a
massive power shift. Organized labor’s clout
has ebbed while transnational corporations’
power has grown. As the power of workers
has waned, that of financial capital has
increased. In parallel power shifts, transnational
corporations’ clout has increased while
that of Main Street businesses has shrunk,
and the power of campaign contributors has
risen while that of voters and civil society
institutions has diminished. Together, these
trends have enriched the fortunate few at the
expense of the overwhelming majority.
Rule Changes. As power shifts, so do the
rules of the economy. These rules have been
changed to benefit asset owners at the expense
of wage earners. Laws governing taxes,
global trade, wage levels, and government
spending priorities all increasingly tilt toward
capital. Inaction to reduce inequality is also a
systematic failure of our current rule-making
process. With the political system increasingly
captured by large asset owners and transnational
corporations, lawmakers and enforcers
trying to discourage corporate and financial
industry consolidation have been thwarted.
Declining Return to Labor. Rule changes
that increase the power of capital and reduce
the power of wage earners combine with
the hard-wired tendencies of capitalism to
generate inequalities. These rule changes have
shifted the US economy into a new stage,
with the surge in capital income working as
a driver of income and wealth concentration
over the past 15 years. Wealth is now creating
more wealth at an alarming rate.
Systemic Racism. Another overlapping
systemic driver is institutional racism’s role
in distorting income and wealth outcomes,
particularly for Blacks and Latinos. Rigged
rules in the economy have historically been,
and continue to be, racially biased—which
means the solutions we need have to be
grounded in an understanding of historic and
present day systems of racial advantage and
disadvantage.
AN AGENDA TO REDUCE
EXTREME INEQUALITY
Several types of policy changes are required
to reduce and reverse extreme inequality. We
need rules and policies that:
• lift the floor
• level the playing field
• break up the over-concentration of wealth
and check unbridled corporate power.
READ THE FULL REPORT AT THENEXTSYSTEM.ORG/INEQUALITY
THE NEXT SYSTEM PROJECT & THE INSTITUTE FOR POLICY STUDIES
Beyond these interventions, we also need
policies and practices that:
• “rewire” capitalism for shared prosperity.
Together, these four categories provide a
framework for developing possible solutions.
1. Rule Changes That Lift the Floor. Policies
that “lift the floor” try to reduce poverty and
establish a basic minimal standard of material
security for all. Many European social democracies
are considerably more equal thanks
partly to their strong social safety nets and
policies that maintain a high floor of income,
health, and basic services.
Examples of rule changes that raise the floor
include:
• Minimum wages set at living wage level
• Universal health care
• Robust labor standards and protections
• Free access to universal education,
lifelong learning, and job retraining
• Universal basic income
• Job guarantee
• Adequate and compassionate welfare
support
Policies that raise the floor not only reduce
poverty and economic deprivation—they
also reduce economic insecurity and stress
throughout society. In the US, until stricken
ourselves, we greatly underestimate how
easily and rapidly job loss, divorce, or major
illness can lead to destitution, homelessness,
and death—and how many Americans have
lived this experience.
2. Rule Changes that Level the Playing Field.
Policies and rule changes that level the playing
field eliminate the unfair wealth and power
advantages that flow to large asset owners
and transnational corporations while opening
up opportunities for those historically excluded,
especially through racially rigged policies.
Examples of such policies include:
• Investment in education
• Reductions in money’s distorting influence
on politics
• Revision of free trade policies
3. Rule Changes that Deconcentrate Wealth.
While promoting policies that lift wages and
level the playing field, we must also reverse
the rigged rules that exacerbate wealth concentration.
Otherwise, wealth will continue to
concentrate, further polarizing the economy
and society. Examples explored in detail in
the report include:
A. Tax policies that tax the top:
• Restoring progressive taxation
• Elimination of tax preference for income
from wealth
• Protection and expansion of inheritance
taxation
• Elimination of the cap on social security
withholding taxes
• Taxation of wealth (in the US and globally)
B. Enforcement and expansion of
anti-trust laws
• Breaking up mega-banks, with expansion
of the community and public banking
sector
CHUCK COLLINS: REVERSING INEQUALITY
THE NEXT SYSTEM PROJECT & THE INSTITUTE FOR POLICY STUDIES
• Ending policies that make dominant
financial institutions “too big to fail”
C. Revamp CEO pay and corporate incentive
systems
• Eliminate taxpayer subsidies for excessive
executive pay
• Penalize companies for excessive state
and local CEO/worker pay gaps
4. Rule Changes that Rewire the System.
Some interventions effectively rewire institutions,
reduce the excesses of extractive
capitalism and consumption, and promote
broader income and wealth distribution.
These include:
• Broader ownership and worker ownership
of enterprises
• Policies and institutional forms that set a
better balance between corporate interest
and public interest
• A transparent financial system designed
for people and planet
A. Broader Ownership of Enterprises.
Broadly owned enterprises, which range
from having employee shareholders to full
worker ownership, build wealth and assets
for workers and promote greater equality.
Research indicates that such firms are better
for workers, more rooted in communities, and
more productive and stable than traditional
investor-owned companies. They serve as an
important pillar in a next-system economy,
leading toward greater equality and broadbased
prosperity, as well as providing a
foundation for more democratic workplaces
and communities.
B. Rewiring Finance. In our current finance
system, voluminous debt and interest payments
basically transfer wealth from the
bottom of the wealth scale to the top. Part of
the solution is to strengthen and expand institutions
in the financial sector, such as community
development credit unions and banks,
that are rooted in local economies. Other
solutions include creating new intermediaries
and monetary mechanisms operating in the
public interest. Forming such local institutions
should help keep money in communities,
discourage capital flight, and displace predatory
lenders in the financial services market.
Solutions include:
• Creation of a network of state-level public
banks
• Creation of a National Infrastructure and
Reconstruction Bank
• Taxation of financial speculation
• Expansion of the community-based
financial sector
C. Transform the Corporation. The concentration
of corporate power has endangered
our economy, democracy, and planetary
health. Incremental checks and balances
have not worked, so the only alternative now
is to end corporate rule and break up large
corporate entities. Besides reining in and
regulating today’s corporations, we must
also rewire the corporation as we know it.
Interventions range from consumer action to
socially responsible investing to changing the
rules inside and outside corporations to foster
greater accountability. These include shareholder
power reforms, board independence,
and establishment of community rights.
READ THE FULL REPORT AT THENEXTSYSTEM.ORG/INEQUALITY
THE NEXT SYSTEM PROJECT & THE INSTITUTE FOR POLICY STUDIES
Fundamental change will require reengineering
the corporation as we know it, including:
• Federalizing the corporate charter
• Banning corporate influence in our
democracy
• Establishing accountability to broader
sets of stakeholders
• Expanding the benefit corporation sector
GAME CHANGING
CAMPAIGNS
In our current national political arena, many
of the solutions put forward here are not
on the policy agenda. But the groundwork
for a future political realignment can be laid
now, starting with issues upon which there
is a broad public support. We can build
power and win some of these rule changes
by focusing on strategic “pressure points”
that can accelerate the transition to the next
system. This will require pressing forward
with game-changing policy campaigns that
capture the imaginations of key constituencies.
A proven shortcoming of incrementalist
strategies—working for small and symbolic
victories—is that they fail to stretch our imaginations
as to what is possible and desirable
and so fail to fully engage us and harness our
collective energy.
We need game-changing campaigns that
would do three things:
• Reduce the concentration of wealth and
power, break up institutions, or redistribute
wealth and power
• Open up economic opportunities for those
excluded in the current system
• Capture the imagination of a wide constituency
of people willing to fight for
policy change
Three examples of such campaigns explored
in depth in the full report are:
• Dividends for all: linking common wealth
sources of revenue to programs that
expand economic stability
• Taxation of excessive carbon pollution,
with revenue directed to investments in
renewable energy, green infrastructure,
and a just transition
• Expansion of tuition-free higher education
by creating education trust funds funded
by progressive taxes on wealth
UNLEASHING EQUALITY
The initiatives outlined in this report could
change our current political economy in
fundamental and beneficial ways—revolutionizing,
for example, corporate structure and
banking and finance. Moving to an egalitarian
society, one that healed the wounds of
extreme inequality and exclusion, would itself
help forge a new system.
In a more egalitarian society where people
are more economically secure, we can break
free of the “work-and-spend cycle”, break
free of exploitative bosses, corporate control,
and the ever present fear of joblessness. We
can be free to stay more rooted and to build
up our communities and the infrastructure of
people-centered democracy (and protest). An
egalitarian America would be a fundamentally
different—more congenial and resilient—place.