October 30, 2020
I’m not going to get too into mapping out an agenda for the Biden administration. I still remember speaking at the zombie conferences (stealing that line from my friend, Josh Bivens) in November and December of 2016. We had all sorts of great plans for the Clinton administration. But there are still some points that can be usefully made even if Biden doesn’t win. (Okay, I realize the world will look pretty scary if Trump gets four more years and can let lose the fury of hell on anyone who doesn’t kiss his rear.)
The key point is the one I make all the time: the bad guys have deliberately structured the market in ways that redistribute income upward. While it is understandable that the right likes to pretend that the rich getting all the money was just a happy outcome of the natural forces of globalization and technology, it is malpractice for a progressive to go along with this charade.
It is also important to reduce the huge flows to the top. While proposals to raise the minimum wage, drastically improve welfare state provision of items like child care and health care, and make it easier for workers to organize, are hugely important, there is a limit to how much we can improve living standards at the bottom and middle if we don’t take a whack at the top.
I realize many folks think we can do this with more progressive taxes. While we can and should make the tax system more progressive, we rarely collect as much from taxing the rich as we expect when we pass the taxes. The rich are very good at evading and avoiding taxes. Some will argue that we just need better enforcement. We do need better enforcement, but the idea that we will somehow succeed in collecting taxes on the rich, in a way that all previous generations have failed, seems more than a bit far-fetched.
It makes much more sense to not structure the market in a way that gives the rich so much money in the first place. This seems a much better approach both practically and politically. As a practical matter, it is far easy to alter the structure of the market so that it is not generating so much inequality than trying to tax back the excessive fortunes that we dropped in rich peoples’ laps.
On the political side, the market does enjoy tremendous legitimacy. This is for good cause; it is a very effective tool for generating wealth. It should be an easier political sell to propose changes that both make the market more efficient and generate less inequality than to propose taxing away the vast fortunes that the rich earned because of the way we structured the market.
Three Market Reorienting Baby Steps for Biden to Reduce Inequality
Over the last four decades, we have altered market structures in numerous ways that have had the effect of shifting more income to the top. (This is the point of Rigged [it’s free].) I’ll hit on three of the themes in that book:
- a corrupt corporate governance structure that allows CEOs to rip off the companies they work for;
- the system of patent and copyright monopolies, which transfers over $1 trillion a year from everyone else to beneficiaries of these rents;
- a bloated financial system that allows some people to get tremendously wealthy while providing no service to the real economy.
I have a maximalist agenda in all three areas, most of which I discuss in Rigged, but I know that Joe Biden is no radical. So, I will instead lay out some simple steps that hopefully will be politically feasible, and can be a foot in the door for further changes later.
Giving Corporate Boards Incentive to Do Their Job
I will start with the corporate governance structure, in part because I think this problem has been horribly neglected by progressives. As I have argued many times, CEOs rip off the companies for which they work. They get their $20 million paychecks not because they produce $20 million in value for shareholders, but because the boards that set their pay primarily owe their allegiance to the CEO and top management, not to shareholders.
While it is standard to say that companies are run to maximize shareholder value, this claim is hard to reconcile with the fact that returns to shareholders have not been particularly good over the last two decades. And, the relatively modest returns of the last two decades enjoyed a substantial boost due to the large reduction in the corporate income tax over this period, not the hard work of CEOs.
It is more than a bit bizarre that the fact that CEOs work to maximize their own pay, rather than shareholder value is not more widely recognized. We routinely see CEOs manipulating stock prices to maximize the value of their options or walking away with huge severance packages after they have nearly wrecked the companies for which they work. This is not maximizing shareholder value.
This is not an argument for crying for shareholders, since we all know the enormous skewing of share ownership. Nonetheless, a dollar in the pocket of shareholders, which includes pension funds and middle-class people with 401(k)s, is better than a dollar in the pocket of CEOs, all of whom are in the top 0.001 percent.
But more importantly, the exorbitant pay at the top contaminates pay structures throughout the economy. If CEOs got paid $2-$3 million, as they did before the enormous upward redistribution of the last four decades, we would see much lower pay for the second and third-tier executives as well. And presidents of universities and non-profits would likely get closer to $500k than the $1-$2 million many now pocket. Other top-level administrators would see their pay correspondingly reduced. And, as fans of arithmetic everywhere know, less money for those at the top means more for everyone else.
The fact that shareholders stand to gain from reining in the pay of CEOs and other top execs means that they are allies in this effort. To my mind, the big issue is changing the incentives for corporate boards. As it stands now, they have little incentive to rein in the pay of their friend, the CEO.
My plan on this is to add a little bite to the “Say on Pay” provision that was part of the Dodd-Frank financial reform bill. This provision requires companies to submit their CEO pay package to a non-binding vote of the shareholders every three years. The vast majority of packages are approved since it is hard to organize shareholders and there is not much consequence to having one turned down.
My proposal is to change the rules so that directors lose their annual stipend (which is often in the range of $200,000 to $300,000) if a CEO pay package is voted down. My guess is that if even one or two packages go down, we will see boards start asking the questions they are supposed to be asking, like “can we get away with paying our CEO a few million less?” or “is there someone just as qualified who would do the job for half the pay?”
The job of directors is first and foremost to keep top management in check by asking questions like this, but it is a safe bet that almost none ever do. If we could change incentives, so they did start putting serious downward pressure on CEO pay, we might be looking at a very different pay structure in the not distant future.
I also like the logic. Will the right call people socialists for proposing that shareholders have more control over the companies they own?
Playing with a Post-Patent World
It is amazing how many people, including progressive-type people, view patent and copyright monopolies as just part of the natural order of things. These government-granted monopolies are quite explicitly forms of government intervention in the market. They hugely raise the price of items like prescription drugs, medical equipment, and software. They also redistribute an enormous amount of income upward, likely more than $1 trillion a year (half of all corporate profits). But no one would expect Joe Biden to make a frontal assault on this bulwark of inequality and waste.
But, we can maybe envision a modest step that could end being a big foot in the door. Suppose the National Institutes of Health were to substantially ramp up funding in one specific area, with the explicit condition that all the results would be fully open and all patents in the public domain. (Cancer research would be an obvious candidate since Biden’s son died of cancer and he seems to feel strongly about developing effective treatments and cures.)
In this case, new treatments would be available at generic prices from the day they were approved by the FDA. Instead of the next breakthrough cancer drug selling for hundreds of thousands of dollars for a year’s dosage, it might sell for hundreds of dollars, or at worst a figure in the low thousands. Drugs are almost always cheap to manufacture and distribute. It is government-granted patent monopolies that make them expensive.
If we could get some serious funding for open-source cancer research and it paid off with successful treatments, it would set a great example. This would likely lead to enormous pressure to do the same with the development of drugs to treat other conditions. Ideally, we would have gone this route with developing vaccines and treatments for the coronavirus, but the idea of collaborative research was obviously alien to Donald Trump and his team.
Making the Financial Sector More Efficient
The financial sector is also an enormous source of waste and inequality. While we need a well-functioning financial sector to make payments and allocate capital, an efficient financial sector is a small financial sector. Unlike sectors like health care and housing, which provide direct value to people, finance is an intermediate sector, like trucking. While we need trucking to get goods from one place to another, but if our trucking sector increased five-fold relative to the size of the economy over five decades (as has finance), it would likely mean we have a very inefficient trucking system.
Not only is the financial system inefficient, but it also has also generated many of the great fortunes in the economy. It is hard to argue that these great fortunes were earned by producing great value for the economy, rather they are a story of being able to game the system to get money at the expense of others.
I have long argued for a financial transaction tax as a great way to downsize the financial sector and get a large amount of revenue. Biden has also indicated his support for a FTT. I hope that he does push for one, although he will certainly have a difficult fight in Congress.
While a FTT is hopefully on the table, there are two smaller, but nonetheless, important measures that Biden can look to pursue. The first is to have the IRS prepare tax returns for people, instead of forcing them to do it themselves or pay hundreds of dollars to tax preparers.
This should be a hugely popular measure. No one enjoys filling out a tax return or paying money to a tax preparer. The idea here is that IRS would fill out a return for every taxpayer, based on the information it already has from W-2s and other tax forms, and mail it to everyone for their review. If people were satisfied that their taxes were calculated accurately, they would just accept the calculation and either pay what they owe or get the refund the IRS had calculated.
If they were convinced the IRS had erred, they would have to complete their own return, with the necessary documentation. In the vast majority of cases, people would likely accept the IRS calculation, meaning that they did not have to do anything.
This should not be rocket science, many European countries have had this sort of system in place for more than two decades. This would save people a huge amount of grief, as well as tens of billions paid each year to tax preparation services. The only losers in this story are H&R Block and the other companies that provide these services and/or software.
In the same vein, Biden could look to establish a national system of low-cost 401(k)-type accounts that people could contribute to on a voluntary basis. The idea here is that the current system is often complicated and expensive. Many accounts charge people over 1 percent annually just to hold their money. (Individual funds, held through these accounts, charge additional fees.) This means that someone with $100k in a retirement account is paying $1,000 a year or more, for essentially nothing.
The government already offers this sort of account for government workers through its Thrift Savings Plan. The cost is less than one-tenth of one percent annually. Illinois, California, New York, and other states are setting up these systems at the state level. The federal government can do this at an even lower cost and allow people to remain in the same system throughout their whole working lives, even if they move across state borders.
Here again, the only losers are the financial industry players that made a fortune gouging workers. If $2 trillion were shifted from high-cost accounts to a government account, the savings would be on the order of $20 billion a year. Also, since roughly half of all workers do not even have the option to contribute to a retirement account at their workplace, we would likely see many more workers contributing to retirement accounts.
There are of course other areas in finance where a Biden administration could and should look to crack down on the industry. Private equity has a whole bag of tricks that largely depends on tax games and running up debts that can be dumped off on other parties, like workers and suppliers. Reining in these abuses should be on the administration’s agenda. Simplifying the tax code, ideally by changing the target of the corporate income taxes from profits to returns to shareholders, should radically reduce the resources devoted to tax avoidance and evasion.
There are other ways in which Biden can and should look to rein in finance, but this should be a very good beginner’s list for a moderate president. Besides, I don’t want to spend too much time writing up proposals for a second Trump administration to ignore.
We’ll see what happens next week. Let’s hope we can have some great battles to fight with the Wall Street Democrats.