Opinion, Berkeley Blogs

Elizabeth Warren's approach to combating inequality makes sense

By Steven Vogel

As the Democrats take over the House and Democratic presidential hopefuls begin the slog toward the 2020 primaries, their party is also debating its economic policy vision for the future.

Senator Elizabeth Warren, who just announced that she is forming an exploratory committee for a presidential bid, offers a program that focuses more on what the political scientist Jacob Hacker calls “pre-distribution” — the pretax allocation of economic gains. Pre-distribution focuses on how the seemingly arcane rules of the marketplace — like labor and financial regulation — affect who profits most from economic activity in the first place.

In contrast, democratic socialists like Senator Bernie Sanders represent the traditional liberal agenda of redistribution through the tax system as well as generous social-welfare spending. Redistributive policies take the market allocation of profits as a given and devise ways to moderate the resulting inequalities after the fact.

Let me be clear: We need all of the above to combat the rampant inequality of wealth and power in the United States today. We need progressive taxation to narrow the income gap and to generate revenue for public investment. And we need government support for child care, medical care and other services to support those who cannot work and to empower those who can.

But the Democratic Party would be smart to embrace Senator Warren’s approach and a broader pre-distribution agenda as its next big idea because it deals with the root causes of inequality in America and therefore the voter frustration that helped make Donald Trump president.

Pre-distribution is less costly than redistribution because it mostly entails regulatory reforms rather than big spending items, like free college or job guarantees. So it would not provoke many Americans’ deep-seated mistrust of big government as much as calls for redistribution would.

Conservatives argue that pretax earnings simply reflect the free operation of the market, but they don’t. There is no pristine free market — just real-world markets thoroughly sullied by imbalances of power and regulations that favor corporations over workers. We should not be shy about revising these regulations to achieve more equitable growth. This would not undermine the capitalist economy; it would enrich it.

We tend to speak of the government and the market as adversaries in economic policy debates. They aren’t. The government makes the market work, with vast implications for public welfare. Getting serious about pre-distribution means delving into all the things that governments do to enable modern markets to function properly, from corporate law to antitrust.

Last summer, Senator Warren introduced the Accountable Capitalism Act, which tries to tackle the deeper causes of inequality in wealth and power in our country. It would require large corporations to obtain a federal charter of corporate citizenship. Employees would elect at least 40 percent of board members.

Executives would have to hold the stock shares they receive as compensation for at least five years. And corporations would have to get approval from 75 percent of their shareholders and 75 percent of their directors to make political campaign donations.

Corporations are legal entities with distinct privileges, like limited liability, so it would be perfectly reasonable for the government to require corporate boards to include labor representatives. This would encourage corporations to maximize profits by investing in their workers rather than by cutting labor costs.

Beyond corporations, a broader pre-distribution agenda would include labor regulation, financial regulation and antitrust. For example, the government should revise labor regulations to strengthen employees’ bargaining power, which would give them a fairer share of corporate returns. The government should crack down on noncompete clauses, which undermine workers’ ability to sell their labor to the highest bidder. And it should restrict mandatory arbitration clauses in employment contracts, which require workers to give up their right to take their employers to court; such clauses were endorsed by a 5-4 Supreme Court decision in May.

This pre-distribution approach to labor would likely appeal to swing voters — in particular, ones who voted for both Barack Obama and Mr. Trump — more than the job guarantees proposed by Senator Bernie Sanders because pre-distribution means fair pay rather than government largess.

Likewise, financial regulation is not just about preventing financial institutions from taking excessive risks or protecting small investors from their own folly. It is also about something more fundamental: who gets the returns from financial activity.

In recent years, the relaxing of regulations has allowed financial firms to enjoy greater profits and bank executives to win higher compensation without delivering more value to ordinary investors. So the government should reinforce the Dodd-Frank rules that constrain financial institutions from padding profits via risky trading — not further ease them, as the Trump administration proposes. It should bolster consumer protection, not gut the Consumer Financial Protection Bureau. And it should enhance the fiduciary rule, which requires investment advisers to put their clients’ interests first, not refuse to enforce it.

On antitrust, the government should be warier about corporate mergers, and more aggressive in stopping dominant firms from squashing their competitors. Over the past few decades, weak antitrust enforcement has meant higher profits for companies that dominate their markets, fewer opportunities for challengers, larger salaries for managers, higher prices for consumers and lower wages for workers.

Financial regulation and antitrust are central to Ms. Warren’s proposals for leveling the economic playing field. She came to prominence for her strong advocacy of consumer financial protection, and she has pushed for tougher antitrust policies to curtail the economic and political power of large corporations.

The pre-distribution agenda, while rooted in the minutiae of government regulation, actually has a simple core message. It is not about rigging the system to benefit the poor and the middle class, but about unrigging it from benefiting the wealthy and the powerful. It is about shaping markets to allocate returns from economic activity more fairly in the first place rather than trying to correct inequities after the fact.

In essence, it is about giving consumers more value for their dollar and workers the wages they are due. What could be the problem with that?

Cross-posted from The New York Times