Challenge Inequality by Changing Who Owns Capital

Last week, I wrote about labor's declining share of national income and recent research blaming that phenomenon on the weakening of union power. As a follow up to that post, it deserves pointing out that, by itself, labor's declining share does not tell us much, something Ashok Rao pointed out a few days ago. The distribution of income is the real issue here, and there is no necessary connection between a declining income share for labor and the maldistribution of income. However, once we've established that income is being unjustly distributed, looking at labor's share of the national income helps us figure out why that is so.

If inequality is rising, but labor's share of the national income is holding strong or rising, then that suggests the rise in inequality is being driven by the divide between highly-paid and lowly-paid employees. On the other hand, if inequality is rising, and labor's share of the national income is declining, then that suggests the rise in inequality is being driven by wealthy owners passively scooping up more and more of the income.

We happen to find ourselves in the second scenario: income inequality is increasing and labor's share of the national income is falling. This combination suggests that more and more income is flowing to capital, which is flowing to rich owners, which is a significant cause of the maldistribution of income. More direct measurements confirm that this is precisely what's going on: between 1996 and 2006, the largest driver of the rise in income inequality was capital gains and dividends.

On first glance, this is a rather grim diagnosis of the cause of rising inequality. Wrestling income back from capital owners is not an easy thing to do when capital is privately held. If we push too hard, we risk a capital strike or capital flight, both things we really want to avoid. There are some things we could do around the edges -- an increased capital gains tax for instance -- that would help even the score without changing the pre-tax distribution of income between capital and labor. But those measures are also limited by the finicky temperaments of capital owners.

Although things seem quite gloomy on first glance, they are not nearly as hopeless on a second look. While it is true that pressuring capital owners to give up more of the national income has obvious limits, there are other ways to go about this. Most notably, we can change who owns the capital. If the last half-century of American capitalism has shown us anything, it is that it is possible to almost entirely detach owning capital from actually managing it. Every publicly-traded company is a testament to the fact that entities can passively own shares of a company with which they have basically no relationship, and collect handsome amounts of capital income for doing so.

Governments have already stuck their heads into this game, with government pension funds like CalPERS leading the way. Just as private individuals can own capital and soak up all that sweet capital income, so too can government entities. In the case of the Alaska Permanent Fund, government has shown that it is able not only to soak up capital income, but also to spread it around. From its capital income earnings, Alaska sends out a check to each of its citizens every year, a check socialists have long referred to as a social dividend.

So in fact, the shift of income from labor to capital presents really interesting possibilities. Since anyone, including the government, can passively buy up "productive assets" -- e.g. stock in publicly-traded companies -- it is entirely possibly for us to capture a sizeable chunk of the overall capital income without trying to scrape it back from capital owners in the ways people usually contemplate. If we followed the lead of Alaska and used that re-captured capital income to pay out social dividends, the rise in income inequality caused by labor's declining share of national income could be entirely whipped.