Ten Ways to Combat Upward Redistribution of Income

by Dean Baker (January 1, 2015)


Image: Upward Redistribution of Income Chart

The big gainers in the last three decades (aka the one percent) like to pretend that their good fortune was simply the result of the natural workings of the market This backdrop largely limits political debate in Washington. The main difference is that the conservatives want to keep all the money for themselves, while the liberals are willing to toss a few crumbs to the rest of the country in the form of food stamps, healthcare insurance, and other transfers.

While the crumbs are helpful, the serious among us have to be thinking about the unrigging of the economy so that all the money doesn't flow upward in the first place. Here are 10 ways in which we should be looking to change the structure of the market in 2015 so that all the money doesn't flow to the one percent

In all these areas changes will be difficult, since the one percent will use their wealth and power to ensure that the rules not be rewritten to benefit the bulk of the country. However, this list should provide a useful set of market-friendly policies that willowy more equality and more growth.

1. Expanded Trade in Medical Care

The Affordable Care Act extended coverage to millions of people and, for the first time, allows people the freedom to quit jobs they don't like and still have access to insurance. Nonetheless, we still pay close to twice as much per person for our health care as people in other wealthy countries.

If our trade policy were not dominated by protectionists, it would be directed toward making it easier for qualified foreign physicians to practice in the United States, potentially saving patients tens of billions every year. Even with the federal government committed to protectionist policies, nothing stops state governments from seeking out lower-cost care for Medicaid patients in other countries. The savings, which can run into the hundreds of thousands of dollars in some cases, can be shared with beneficiaries.
Below is my list of the top 10 places where progressives can focus in 2015 on restructuring the economy in ways that prevent income from flowing upward. The list is hardly exhaustive, and I left out some obvious important areas, like strengthening unions, because everyone should know them. Let's hope for a good year and some real progress in turning the economy around.

The views expressed in this post are the author's alone, and presented here to offer a variety of perspectives to our readers.

2. Prescription Drugs

This is part of the hea1thcare story, but a big-enough part to deserve a separate mention. Patent monopolies can allow drug companies to charge prices that are 100 times higher than the free-market price. The hepatitis-C drug Sovaldi sells in the United States for $84,000. The generic version is available in India for less than $1,000. State Medicaid programs can pay to send patients to India, along with one or more family members, and still have tens of thousands of savings that can be shared with beneficiaries.

3. Wall Street Sales Tax

The financial sector continues to rake in money at the expense of the rest of the country, courtesy of bailouts, too-big-to-fail insurance, and being largely exempt from taxes applied to other industries. Even the IMF argues that the financial sector is undertaxed.

While most members of Congress and presidential candidates are too indebted to Wall Street to push for a financial-transactions tax, states can get a foot in the door. It is possible to tax the transfer of mortgages on property within the state. A modest tax of 0.2 percentage points won't affect normal mortgage issuance, but it will discourage the shuffling of mortgages and raise some serious revenue. This money can be used to fund needed public services and, in part, to support lower taxes in other areas.

4. Limiting CEO Pay

CEOs are able to arrange paychecks in the tens of millions of dollars in large part because corporate directors are effectively paid off to look the other way. The incentives can be radically altered if directors stood to lose their stipends if a say-on-pay vote by the shareholders was defeated.

State governments can put this into law for corporations chartered in their state. Also, any corporation can put this rule into their own bylaws. Since fewer than three percent of pay packages are voted down, any director who is confident enough that they will not be in the bottom three percent should be happy to support such a change in bylaws.

5. Limiting Pay at Nonprofits

Nonprofit organizations like universities, hospitals, and charities are hugely subsidized by taxpayers. Since most of their contributions come from people in the top income bracket, the ability to deduct charitable contributions effectively means that taxpayers are paying 40 cents of every dollar a rich person contributes.

Since taxpayers are out for much of the cost, it seems only fair to put some rules in place. (Actually, we already do.) How about a pay cap of $400,000 for any employee of a nonprofit? This is twice the pay of a cabinet officer. If a university or other nonprofit can't find competent people who are prepared to work for twice the pay of a cabinet secretary, perhaps it is not the sort of organization that taxpayers should be supporting.

States can also get into the act on this one. Most states offer special tax treatment to Nonprofits. They could apply the two-times-a-cabinet-member's-pay rule to the Nonprofits within their state.

6. Applying Sales Tax to Internet Sales

Jeff Bezos has become one of the richest men in the world because he was successful in expanding Amazon into a huge retailer that doesn't have to collect the same sales taxes as corner grocery stores. There is no excuse for giving special exemptions to Amazon and other Internet retailers. The states that don't yet tax Internet sales in their state should move quickly to do so. It makes no sense to subsidize giant retailers like Amazon at the expense of traditional mom-and´┐Ż pop retail outfits.

7. Democratizing the Sharing Economy

Start-ups like Airbnb and Uber have quickly turned into multi-billion-dollar businesses, in large part by evading the regulations that apply to their traditional competitors. The plan here should be to modernize the rules for taxis, hotels and other outposts of the "sharing" economy and be sure they apply to everyone equally. You don't get to operate an unsafe taxi driven by an alcoholic just because it's ordered over the Internet.

In the case of Airbnb, local governments could quickly add some new competition by having local websites where people could list available rooms without paying fees to Airbnb. The advantage to the cities is that they could be sure that these rooms met fire safety and other requirements. Then the only people who listed on Airbnb would be people renting fire traps or other illegal units or who were too ill-informed to save themselves the Airbnb commission. (This gives "sharing" economy a whole new meaning.)

8. The Overvalued Dollar

Our economists are learning and have discovered the problem of secular stagnation. This means that many economists now recognize that the economy can suffer from a persistent problem of inadequate demand, leading the economy to run at below-potential levels of output and to have excessive unemployment.

Unfortunately, most economists still don't feel they can talk about the most obvious cause of the lack of demand: the country's large trade deficit The annual deficit is currently more than $500 billion (at three percent of GDP).This has the same effect on the economy as if consumers were to massively cut back their annual consumption by $500 billion and instead put this money under their mattress. The lost demand translates into more than six million jobs.

The obvious solution is to reduce the value of the dollar against other currencies in order to make US goods and services more competitive internationally. The value of the dollar is a matter that is determined at the national policy level. In principle the United States could be negotiating for a lower-valued dollar in a big trade agreement like the Trans-Pacific Partnership. Instead it is pushing for stronger patent protection for Merck and Pfizer, stronger copyright protection for Disney and Mickey Mouse, and a system of business-friendly courts that can override laws in the United States and elsewhere.

9. Shorter Work Years and Work weeks

If we can't directly increase demand in the economy through lowering the value of the dollar, we can still increase the number of jobs by reducing the amount of time that people work on average. This is the secret of Germany's economic miracle. It has bad slower growth than the United States, yet it has seen a huge increase in employment in its recession recovery. The average work year in Germany has 20-percent fewer hours than in the United States.

One of the policies that has helped bring about job growth in Germany is work sharing. This policy encourages companies to cut back hours instead of laying off workers. Workers are compensated for their lost wages through the unemployment insurance system. Most states have work-sharing programs as part of their unemployment insurance system. The compensation rate is generally lower in the United States than in Germany (typically 50 percent, compared with 60 to 80 percent in Germany), but it still beats losing a job.

Other policies that go in the same direction are paid family leave and paid sick days. These policies are important in their own right but can help better divide the available work among those who want jobs. Another great feature of these policies is that we don't have to wait for the president and Congress to take action. They can be implemented at the state and even local level.

10. The Federal Reserve Board

The last and possibly most important item on the list is the Federal Reserve Board It will be coming under pressure from the Wall Street types to raise interest rates. The point of higher interest rates is to slow the economy and keep people from getting jobs. The Fed would do this because more jobs will mean that workers have more bargaining power and would be in a position to raise wages. In short a Fed move to raise interest rates is very directly about keeping workers from getting higher wages. (Most workers have only been able to achieve real wage gains when the unemployment rate has been low.)

Fortunately, there are efforts to apply some pressure in the opposite direction, most importantly by the Center for Popular Democracy. They aim to let the Fed governors in Washington and presidents of 12 district Fed banks know that people who care about jobs are watching the Fed's actions. This should make it harder for the Fed to take steps to deliberately throw people out of work: and reduce workers' bargaining power.