Banking Hearing on Income Inequality

thank you very much mr. chairman I appreciate it I appreciate your letting me go first I'm gonna apologize in advance I've got another commitment and so I can only stay for one round here it's a terrific panel and you all just great topics that you've hit on and brought some new parts to the conversation but since I'm only gonna get to do this once around this discussion I wanted to raise another issue that layers into this and ask for your thoughts on it there's a new report out I hope you've seen it it's from Harvard Business School professors Michael Porter and Jan Rifkin and the report is called an economy doing half its job now here's what the researchers find and I just want to quote it to make sure we get this exactly right they find that corporate profits in America are at an all-time high and the Dow Jones Industrial Average continues to hit new records but living standards for the average American have fallen over the last 15 years Porter and Rifkin from the Harvard Business School note that this recent divergence of outcomes with firms especially larger firms thriving and workers struggling is unusual in the United States because quote American companies and citizens have tended either to thrive together or to suffer together but no more now there's a pretty simple explanation for this recent divergence corporations no longer share their prosperity with their workers just they share their prosperity only with their shareholders according to research by Professor William lisanna of the University of Massachusetts at Lowell back in the early 1980s large corporations dedicated less than half their earnings to their shareholders the rest went to investment in their equipment and in their employees but from 2003 to 2012 those big companies dedicated ninety-one percent of their earnings to their shareholders either in the form of stock buybacks or dividend payments now why have companies shifted their priorities so dramatically in such a short period of time well because CEOs are now compensated almost entirely based on the company's share price as a result CEOs love buybacks and dividends because they boost share prices even if they come at the expense of long term investments in the company and in its workers so here's my question if we can't count on CEOs and senior management to reinvest at least some of the corporate profits in their workers like they used to what steps should the government take to fill that void and I'd like to hear from all of you Lisbon Gate would you like to start Thank You senator Warren that is an excellent question and it really goes to the heart of what our economy is for demos has been doing some investigation into these issues of how much increasingly large low-wage employers that are extremely profitable our financial izing essentially and concentrating the effort the the result of the production of their workers my colleague Katherine Rowland actually wrote a report on our country's largest private employer Walmart who spent 6.6 billion dollars just last year buying back its own stock in the market and she calculated that if that money were instead invested in the human capital of the workers who make that wealth it could give the lowest paid workers those who make under 1225 an hour which is almost a million Walmart workers a raise of over $5 an hour just from what they spend buying back their own shares so this has a very very real effect on the working lives of workers and families so some of the things that government can do you have to say and to think about what it would mean if that million workers made $5 more an hour in terms of what they could buy I think that elsewhere in the economy and the overall growth in the economy and growth in jobs growth and demand growth in jobs sorry miss Mackay I didn't mean no no absolutely because low paid workers are the job creators who are waiting to have more money in their pockets to spend in our economy I'll just say a few things that could be done one Congress could stop giving preferential treatment to this kind of income to wealth income stocks and dividends overwork it's important to remember that less than half of Americans own any stock at all so when we give this preferential treatment we have to remember who to whom it's going the part of the picture of that declining ability for the people who are actually doing the work to get a bigger slice of the pie that they spend all day baking is the decline in unionization which has also business as a result of policy choices so Congress could pass for example the employee Free Choice Act and make sure that there is more collective bargaining power in our economy and in our enterprises thinking about all of that money that unfortunately is not going to the public good in many many cases you have to look at the effective corporate tax rate their Institute for Policy Studies shows that 26 of our biggest corporations spent more paid their CEOs more than they paid to the government in taxes so we should be closing tax loopholes and havens and ensuring that corporations which are at an all-time high in profitability are sharing some of that revenue and and and we can make a new commitment to the quality of life of all Americans thank you very much you may have covered a lot here dr. Sufi I were over but would you like to add something that's a great question I think another way of saying the same facts that Professor Porter and his co-author are saying is that the capital share of income the amount of income that is going to the owners of capital has gone up dramatically over the last 15 years and in just thinking about the reasons for that one reason I think is that capital markets have become quite ruthless in the sense that they want profits and they want them in the short term and I think senator Warren your exact we write that we may worry and I think there is research to back this up that it excessively leads managers to focus on short-term gains rather than more longer-term investments such as job training such as trying to boost the productivity of their workers which i think is that is the best way ultimately to try to get wages and income up so I think going forward as I mentioned before I think expansion of the income Earned Income Tax Credit I think public infrastructure projects it's amazing to me that consensus among people economists even economists at the University of Chicago who I sit down at lunch with who are we would all consider quite right leaning say look interest rates are zero basically and there may be very good infrastructure projects to do it may help with this labor share problem and it seems like that consensus is not here on Capitol Hill but you definitely see it among economists I think those are the solutions I would point to thank you would you like to add to it I'd like to just repeat or sort of say certainly closing the tax loopholes and reinvesting in human capital small business entrepreneurs are its human capital and that's what communities need today I think also looking at perhaps and this doesn't quite address what you're saying but there there are funds that could be used to help deal with this home equity issue which is a huge as a huge impact and then also reducing student debt again if you close tax loopholes and you have more income let's invest in young people and so that they don't have to increase their debt to go to university thank you Mississippi dr. Hirsh I would reiterate and agree with most of what's been said here on the panel so far and I think that there's a very simple answer to your question if the private sector is not willing to invest even though their corporate sector is holding more than two trillion dollars in cash reserves even though they can borrow billions at essentially zero interest rates right now and are sitting on this cash rather than doing something productive with it if they're not willing to invest then the public sector has a role just to step up and invest there is no shortage of public goods and public services investments that will increase the productive capacity of the US economy and create jobs that will lead to rising incomes and aggregate demand that will then crowd in investment from businesses when they see a growing market the investment will come to serve that market and while we're in this time of high unemployment high excess capacity and the productive economy this is the the really the way that we're going to get out of this spot thank you very much those are very very thoughtful answers and I very much appreciate it you know my Republican colleagues like to say a rising tide lifts all boats and what they're saying is if we create the environment where corporations and investors thrive then working families will thrive too we now have two decades of hard evidence disproving that theory corporations may be turning their backs on their workers but that doesn't mean that the American government should do the same we can do better than this and you've given us some great ideas to work with thank you Thank You mr. chairman

Channel: Senator Elizabeth Warren

Views: 80,674

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Id: Xr45zZkwLfc

Length: 10min 10sec (610 seconds)

Published: Wed Sep 17 2014

Reddit Comments

[u/ExpandThePie]

There is no workable policy solution to wage inequality in the United States. It was not a policy change that led us to where we are, and it will not be a policy solution that can get us back. While there are certainly some major historical events that contributed to the affluent middle-class of the middle-20th Century, a major player was the predominant social contract that companies would not be anything without their employees, and it was the right thing to do.

I point everyone to the social contract theory of John Rawls, http://en.wikipedia.org/wiki/A_Theory_of_Justice.

So the question is not how to we incentive higher wages, it is how do we change the sense of liberty and justice to realign the predominant social contract to one in which those at the top seek to lifts all boats rather than just their own.

This is difficult to do because many in high places of business and government have convinced themselves that they do not owe society anything and that anyone can achieve what they achieved if they try hard enough. These fallacies contribute to their sense of liberty and justice -- for example, raising taxes is unjust and reduces their liberty because it penalizes them for doing well.

Instead, visible leaders need to reassert that justice demands fair wages, even for easily replaceable employees. It is the right thing to do, not the mandated thing to do.

[u/timmzors]

I've recently been considering some of the potential policy effects of instituting a universal basic income, and many of them revolved around changes to the labor market. http://en.wikipedia.org/wiki/Basic_income

Today, the labor market isn't very fluid, and the contract between employer and employee does not have equal or even comparable bargaining power, especially at lower levels of income. People need jobs, and when jobs are not in abundant supply (think the current economy) people need to take the jobs they are offered without being able to wait for something that maximizes their income.

A business hires someone because they are creating more value to the business than the cost of paying the employee - however, they pay based on what they need to keep someone in a job, which can be relatively low if there are no other good options. There is limited way to link income to the value created by an employee partially for this reason. What a basic income could accomplish is provide more ability to stay out of the labor market unless an employee is fairly valued. It would at least make it more possible for employees not to be at the mercy of whatever job they were offered in a relatively unconscionable contract situation.

Interesting, but just thought I would mention as it could create an incentive for higher wages, although its a difficult policy to think through in a pure thought experiment.

[u/prismjism]

Joseph Stiglitz released his white paper for the Roosevelt Institute back in May: Reforming Taxation to Promote Growth and Equity

Executive Summary:

This white paper outlines concrete policy measures that can restore equitable and sustainable economic growth in the United States, in the context of the country’s recurring budgetary crises. Effective policies are within our grasp, because these budgetary crises are the result of political and not economic failings.

Tax reform in particular offers a path toward both resolving budgetary impasses and making the kinds of public investments that will strengthen the fundamentals of the economy. The most obvious reform is an increase in the top marginal income tax rates – this would both raise needed revenues and soften America’s extreme and harmful inequality. But there are also a variety of other effective possible reforms related to corporate taxation, the estate and inheritance tax, environmental taxes, and ensuring that the government gets full value when it sells public assets. This white paper describes the gravity of the economic situation in the United States, but also shows that there is a way out.

[u/[deleted]]

You want higher wages for workers? Democratize the enterprise.