Tackling Economic Inequality, Boosting Opportunity
A Blueprint for Business
A Report by the Committee for Economic Development of The Conference Board April 2016
April 06, 2016
Capitalism has underpinned the most prosperous nation known to man. But today, acute economic inequality threatens our system’s cohesion, capacity, and viability. Much of this inequality derives from lagging real income growth for the majority of hard-working people, placing the American Dream increasingly out of reach as a result. The issue concerns a broad swath of citizens – from low-income to high-income, living in red states and blue states. Yet there is no agreement, indeed intense controversy, over causes and solutions.
The recommendations outlined in this report reflect a consensus achieved through respectful dialogue among CED Members, who began from diverse perspectives reflecting every corner of the business community. All suggested reforms – spanning health care to taxation to higher education – stem from our belief that the greatest potential to lessen inequality comes through creating equality of opportunity. We provide a framework for driving long- and short-term change in the private sector and at every level of government.
- Why Should Business Care?
- Principles for Moving Forward: The Shape of a Solution
- What Business Leaders Can Do: Advocate for Public Policies that Advance Economic Equality
- What Business Leaders Can Do Directly
Economic inequality affects all Americans. The issue is highly divisive and has generated much debate regarding its causes and solutions.
Our nation, at this time, does not have equality of opportunity. For too many Americans today, a realistic chance of success lies out of reach.
Following World War II, the US enjoyed a period of sustained economic growth and improved standards of living that were broadly shared across economic groups. Beginning in the early 1970s, the postwar economic growth slowed, incomes stagnated, and income inequality began to grow.
The Committee for Economic Development of The Conference Board (CED) believes that large disparities in income and wealth pose a threat to the sustainability of capitalism – the economic system that enabled our past prosperity and is the best way to achieve future growth. But capitalism can achieve these outcomes only if its benefits are widely shared.
CED believes that the challenge posed by large disparities in income and wealth can, and should, be solved in a way that remains true to the spirit of free markets. Over the long run, our free market system has fueled significant prosperity and growth in living standards here in the US, while also improving countless lives worldwide. But to remain sustainable, capitalism must evolve to continue to serve the needs of our people through a healthy economy.
Equalizing opportunity – rather than vainly attempting to equalize outcomes – is the path we advocate. We believe in evening the playing field by equipping people with the tools they need to achieve success.
To truly reduce inequality, the US must regain strong, broadly based income growth. And increasing economic growth will require increasing innovation and productivity growth.
CED calls on business leaders and all Americans to unite in this challenge of seeking equality of opportunity and prosperity for all. This policy brief outlines how inequality has worsened, why business leaders should care, and CED’s proposals to achieve equality of opportunity moving forward.
Why Should Business Care?
Inequality profoundly erodes our collective wellbeing.
The financial crisis of 2008 posed the greatest challenge to our free market system since the Great Depression. Even today in 2016, many individuals and households have not fully recovered. Lagging incomes and perceived inequality of opportunity continue to fuel cynicism. Disappointed by their own economic circumstances and fearing diminished prospects for their children, Americans may begin to question the free market system and to fear that it has been manipulated to their disadvantage.
There is a real risk that current economic and political conditions could cause the US to adopt extreme and ill-considered public policies that lead us away from our ideals. The stakes are high. CED believes that free market systems provide the greatest potential for continued innovation, growth, and prosperity. What is needed is to adjust our economic and fiscal policies to provide equality of opportunity in our current era – just as the United States has done throughout its history.
Some Hard Truths about Inequality in a Free Market System
Inequality is integral to our economic system — but it is escalating to dangerous levels.
Free market economies always generate some inequality, for a variety of reasons. Individuals differ in their abilities and endowments. Among investors and innovators, those who find opportunities and take risks to bring their ideas to fruition can be rewarded with substantial incomes, and can create jobs for others. Americans want innovation and investment and, if they are successful, they want to be rewarded. It is the American way.
That said, some analyses suggest that current levels of inequality in the US are at or near those of 1930, which were the highest in modern times. Following World War II in the 1950s and 60s, economic growth and rising standards of living were widely shared. In the early 1970s, growth slowed and inequality began to rise.
Enforcing equality of outcomes does not work; supporting equality of opportunity benefits all.
Economic systems that try to enforce equality of outcomes tend to fail. Not only do they not deliver growth and widespread prosperity, they generate their own forms of inequality and waste through economic manipulation and corruption.
If the returns to successful investments are significantly reduced in pursuit of equalizing economic outcomes, this could lead investors to conclude that their ideas do not merit the risk and hard work. Or, in today’s open, global economy, they will pursue their ideas and create jobs that result from those ideas elsewhere.
Equality achieved by demonizing success or curtailing opportunity is at best temporary. Forced equality will neither enhance productivity and innovation nor raise achievement of the labor force it is intended to help. It is a remedy for inequality in only the most superficial, ephemeral sense.
Inequality that results from high returns on investment or innovation by a few is productive; inequality that results from lagging income growth for the many is destructive.
Some of the increased inequality of the past 40 years is the result of highly successful innovations and investments that have yielded spectacular returns to a small number of innovators and investors. Such efforts provide substantial value to many people, including not only those who first thought of the idea or those who risked their money on it early on, but also all those who work in jobs created by those innovations, or who enjoy the improved products or services those innovations engender.
However, inequality that results from lagging income growth for the majority of working Americans is a serious cause for concern, or even alarm.
Some allege that the spectacular returns enjoyed by some have come directly and intentionally at the expense of those who have suffered lower income growth. This belief is unfounded. The recent innovations that have been richly rewarded have not themselves contributed to the general slowing of wage growth. These new products and services were developed from the ground up, to the benefit of those who gained new jobs as a result.
Principles for Moving Forward: The Shape of a Solution
Our society’s primary objective should be equality of opportunity that reduces inequality.
We believe that equality of opportunity is the only ultimate remedy to inequality. The economy must lift the bottom, not compress the top. If we want our nation to remain exceptional, to remain the world’s leader, then we must set opportunity as our primary objective
Raising the capacity of the US labor force can increase productivity and income in a sustainable way that benefits all. Expanding opportunity will end today’s waste of human resources. Expanded opportunity will utilize people’s skills more fully and open up investment opportunities. That is the way our economy can be set back on track.
However, until we achieve equality of opportunity, we must also pursue policies to ease the current inequality of outcomes.
What we do as a society until we achieve equality of opportunity makes a difference. Equality of opportunity is a vital and valid long-term objective, but many Americans need more immediate support. Moreover, current inequality of outcomes often creates inequality of opportunity for today’s children and youth, which translates into inequality of opportunity for the next generation.
We should measure our success by the extent to which Americans can support themselves through their own work or entrepreneurship.
Income transfers and assistance programs will always be necessary, and especially when equality of opportunity remains incomplete. But income derived from one’s own labor, investments, or savings represents production, self-sufficiency, and security in a way that income from other sources does not. Therefore, growth in “market incomes”1 should serve as the primary measure of our success in achieving greater equality.
Business can and should take a leadership role in easing the hostility in the inequality debate.
CED believes that sustainable capitalism requires a “multi-stakeholder model” of business in which business leaders balance accountability for both short- and long-term results to their investors, employees, customers, and the communities where they conduct business.
Under a multi-stakeholder model, it is in the best interests of businesses to provide rewarding employment for workers. Loyalty and a strong sense of shared purpose yield the best business results. Short-term changes at the expense of workers might bring a temporary uptick in profits, but not long-term sustainable performance.
Today’s global economy necessitates a review of these stakeholder relationships to consider inequality and lack of opportunity. The “social contract” should be refreshed to restore a broad consensus about the value of our free-enterprise system. Business leaders cannot afford to evade this responsibility.
What Business Leaders Can Do: Advocate for Public Policies that Advance Economic Equality
Business leaders are uniquely positioned to facilitate public conversations, support and help shape public policy, and, of course, make changes in their own business practices that immediately impact workers’ lives with regard to equality of opportunity.
On the policy front, helping workers increase their incomes by increasing their skills is a “win-win” for business. A strong economy, one characterized by innovation and robust growth in productivity and wages, benefits all. The following policy recommendations focus on strengthening economic growth and addressing lagging wage growth that affects millions of Americans. A public policy agenda to enhance productivity and increase skills and incomes for the vast majority of Americans will achieve equality of opportunity.
Technology has accelerated workplace change. Increasingly any work that can be routinized or done remotely tends to be automated or moved overseas. But workers who can add creativity to any part of the production or delivery process for goods and services generate innovation and competitive advantage. By developing a workforce focused not on the last job but the next one, the US stands the best chance to be the most attractive destination for investment for new and existing businesses.
By contrast, if we fail to develop our workforce, not only will we have workers who are less capable of succeeding on the cutting edge, but we will also have less investment and fewer job opportunities, even for those workers who have succeeded in their training.
Here are nine public policy ideas to equalize opportunity and promote growth that business leaders should support and advocate:
1. Improve publicly funded education to equalize future opportunity for the children and youth of today
Improving and increasing educational outcomes across the lifespan for all Americans is the surest path over the long run to equalizing opportunity, increasing economic growth, raising incomes, and enhancing productivity.
• Expand access to quality early childhood learning.
High-quality early childhood education provides some of the highest returns among various public investments in our future workforce. Success requires quality-focused accreditation, qualified teachers, performance measurement, and accountability for results.2 All children in the US should have access to high-quality early childhood education to prepare them to enter the world of work with a solid opportunity for success. Public and private funding sources should subsidize early childhood care and education for at-risk children.
• Work with states and unions to enhance K-12 performance.
Accountability for student success in the classroom is critical. Business leaders should advocate at the state and municipal level to implement standards for educational achievement that support college and career readiness.Business can also partner directly with high schools to communicate needed skills and offer job-specific training alongside academic coursework to help students who enter the workforce directly out of high school. Experimental incentive programs to encourage low-income students to stay in school, including personal intervention, mentoring, and incentives, are worth investigation.
• Broaden postsecondary access and improve performance.
The US no longer leads the world in postsecondary educational attainment. Students from low- and middle-income families are less likely to attend and complete college than their more well-to-do peers, even if they are well-prepared academically.4 If more students completed workforce-relevant postsecondary education and training, it would go far in expanding opportunity. Cost is an obstacle: inflation in college tuition has been rapid for decades, even outpacing increases in health care costs. Business leaders and public policy leaders should focus on supporting and improving “broad access” undergraduate institutions such as community colleges, since it is these institutions that have the greatest capacity to reach the large number of underserved Americans who are less affluent.5
We need energetic and creative innovation in the postsecondary sector, including less-expensive, competency-based alternatives to the traditional Carnegie unit/“seat-time” approach to awarding college degrees and credit. Businesses can help by partnering with postsecondary institutions to communicate the competencies they are seeking in workers.
2. Encourage two-parent households
Children raised in two-parent households tend to do better than children raised in single-parent households on almost every important life outcome – including educational attainment. Unfortunately, the rate of out-of-wedlock births and the percentage of children growing up in single-parent households are much higher than they were 50 years ago. This is especially troubling due to its implications for social mobility and cross-generational transmission of disadvantage.6 Changing behavior related to marriage and reproduction is both highly controversial and exceedingly difficult. However, government policy makers should do what they can to encourage two-parent households as a sound foundation for children’s growth and well-being.
3. Reform the health care system
Most Americans still receive their health insurance through their employers, who subsidize much of the premium as an employee benefit. The premium to buy a given health insurance policy is the same whether someone is a high- or low-wage worker, but the cost as a percentage of compensation is much higher for lower-wage workers.
Years of inflation in health care costs have translated into escalating health insurance premiums, which in turn have taken an increasingly bigger bite out of workers’ paychecks and limited increases in take-home pay, especially for low-wage workers. This is one factor contributing to stagnating real wages for low- and middle-income workers.7
Reforming health care would be one of the most important steps that the nation could take to reduce income inequality. Not only would doing so slow the rate of growth of health care costs (and its associated drag on real take-home pay), it would also improve the quality of care, which would further benefit the disadvantaged. In addition to the pain and suffering they engender, untreated health problems are both a cause and consequence of economic inequality, due to their interference with work and learning.
CED has provided detailed recommendations for reforming the health care system in Adjusting the Prescription.8
4. Help all Americans achieve security in retirement through automatic payroll savings
Persons with limited incomes and wealth have trouble setting aside money for retirement. Over half of American households headed by individuals 55 or older have no retirement savings.9
Government and business should consider giving workers the option of a payroll deduction to be deposited into a government–administered 401(k) fund that would complement Social Security. The account options could be kept simple to hold administrative costs down. The worker would then be able to “graduate” to a fullfeatured private 401(k) account when the balance was large enough to make that administratively feasible. Similarly, non-working individuals should have the option to open automatic savings plans through regular contributions.
5. Reform the US tax system
The US tax system can help equalize economic opportunity by encouraging growth and assuring that tax liabilities are distributed fairly. Tax reform is a huge undertaking that won’t be easily accomplished, but it is a critical step toward greater equality of opportunity and reduced economic inequality. We need a constructive public dialogue to reform our tax system so that it achieves fairness, economic growth, and equal opportunity
We need a fair and progressive income tax.
Polling data suggest that most Americans support a progressive income tax but also want the maximum tax rates on the highest income levels to be limited.10 Progressive taxes are appropriate in our free-market system in which some enjoy success, but others do not, often despite equivalent effort. We need a tax system that covers the cost of government, and that people would consider fair even if they did not know whether they would be rich or poor. This will necessarily require compromise between the political extremes – but that is what democratic policy making for all the people is about.
We need to broaden the tax base and remove special tax breaks. Doing so will allow overall tax rates to be lower.
Although well-intended, the nearly countless special tax breaks in our current tax code allow some favored groups to pay less than others. Taken together these special tax breaks reduce the types and amounts of income subject to tax, which requires higher tax rates that reduce incentives to work, save, and invest. We end up with slower economic growth, reduced innovation, and greater inequality due to lower taxes for favored persons and businesses. Removing special tax breaks and broadening the types of income subject to tax will allow lower overall tax rates while also distributing the tax burden more fairly. The Tax Reform Act of 1986 and the tax reform proposal of the Debt Reduction Task Force (the “Domenici-Rivlin Commission”) are good models for reform.
We need a competitive corporate tax system to give American workers jobs and rising incomes.
The corporate income tax is highly controversial, and often misunderstood. Many corporations argue that the convoluted US tax system with its relatively high rates inhibit companies from investing here. Companies are less constrained than ever before in choosing where they locate, invest, and hire. We want firms – whether American or foreign – to invest and hire in the US. This gives American workers jobs and rising incomes. Therefore we need a competitive corporate tax system.
The Earned Income Tax Credit (EITC) should be retained but broadened and made easier to administer.
In effect, the EITC is a federal government wage supplement for low-wage workers. It increases at a fixed percentage of wages from the first dollars earned and is phased out as earnings increase further. By explicitly supporting working families (and at a lesser rate, single workers), it makes work more attractive for those who earn the least. Unlike the minimum wage, it does not deter hiring or fuel inflation since it does not add to employer costs. The EITC can and should be restructured to make it simpler to administer effectively. In particular, its once-per-year payment system should be changed to help families who are challenged to make ends meet week by week.
6. Implement financial sector reform
Modern economies require effective financial sectors. Yet financial institutions can put economies at risk of widespread economic disruption and financial crises brought on by sudden declines in asset prices, such as the financial crisis of 2008. Governments often step in to prevent greater damage to the overall economy by supporting firms that are considered “too big to fail.” However, government’s role in this regard can potentially be an incentive for large financial firms to engage in risky behavior on the assumption of government bailout should they fail. This benefits financial players who already tend to be among the most wealthy. One important goal of financial system reform should be to minimize this “moral hazard” of large firms to act in unduly risky ways because they expect the government to bail them out in case of trouble. The benefits of government action to prevent damage to the larger economy during financial crises should be shared among society at large, rather than being concentrated on a small segment of the well-to-do population.
7. Eliminate outdated and intrusive regulation
At the federal, state, and local levels, many US firms, both small and large, are subject to regulatory overload, which stifles investment while providing little benefit. Regulations that suppress wider economic growth worsen inequality. New regulations should be tested with rigorous cost-benefit analysis, and existing regulations should be reviewed on a regular basis to ensure their continued value and relevance.
8. Step up enforcement against confirmed unfair trade practices
The US has consistent large trade deficits with some countries, such as China and Mexico. The federal government should step up enforcement of any confirmed unfair trade practices. Any US jobs that result from such actions will benefit rank-and file domestic workers. However, international trade is still a small part of US GDP, so this tactic will have a modest overall impact on incomes.
9. Reform immigration laws
Immigration is among the most controversial issues in US politics. Outright restriction and even deportation of large numbers of illegal immigrants has proven difficult. In addition to border control, the federal government should consider policies that require, at a minimum, that immigrants work “above the table” and pay appropriate taxes (many already do) and are not subject to exploitation at such low wages that they present totally unfair labor competition for native-born citizens.
What Business Leaders Can Do Directly
Business leaders can increase equality of opportunity and even reduce the inequality of outcomes, but it will require effort. At work and in their own communities, business leaders can:
- Explore opportunities to improve their business’s performance through upgrading employee skills and increasing wages11
- Commit their businesses to recruiting and considering more disadvantaged and minority individuals in the hiring process, and to seeking out more new and small contractors, especially by expanding their search process to include more non-traditional sources
- Consider the adoption of competency-based hiring practices so that individuals with skills and knowledge they attained through paths other than traditional two- and four-year degrees have a better chance of being hired
- Share their expertise – and information about their recruitment needs – with local high schools, community colleges, and other providers of “wide-access” workforce development
- Voluntarily refrain from “crony capitalism,” so that existing businesses must compete with new and innovative entrants into the marketplace rather than using political connections to cut them off through regulation or legislation12
Without true opportunity, all of our societal objectives – prosperity, productivity, and innovation – remain out of reach. The ills of irremediable inequality and economic stagnation – cynicism and despair – remain. The society that is left is unsatisfying even to those who succeed. And success itself is in jeopardy, as the work force atrophies and the markets for products and services slowly migrate elsewhere.
Equalizing opportunity and building a more dynamic and vibrant economy will raise every member of our society. The public debate over inequality should pull our nation together, not tear it apart.
- “Market income” includes wages, business income, investment income, and pension income on a pre-tax basis. An alternative measure of income used in many analyses of inequality is “after-tax after-transfer income,” which is market income minus tax liabilities plus government transfers. Trends in inequality are broadly similar for all measures of economic well-being, including market income, after-tax after-transfer income, and wealth.
- Unfinished Business: Continued Investment in Child Care and Early Education is Critical to Business and America’s Future, Committee for Economic Development, June 26, 2012 (https://www.ced.org/pdf/Unfinished-Business.pdf).
- How Business Leaders Can Support College- and Career-Readiness: Staying the Course on Common Core, Committee for Economic Development, November 12, 2014 (https://www.ced.org/pdf/White_Paper.pdf)
- One study found that students from the highest quartile of SAT-equivalent scorers, but the lowest socioeconomic quartile, were less likely to graduate from college than students from the highest socioeconomic quartile but the second lowest SAT-equivalent quartile. Anthony P. Carnevale and Jeff Strohl, “How Increasing College Access Is Increasing Inequality, and What to Do about It,” Rewarding Strivers: Helping Low-income Students Succeed in College, Richard D. Kahlenberg (ed.) (New York: Century Foundation Press, 2010), p. 158.
- Boosting Postsecondary Education Performance, Committee for Economic Development, April 30, 2012 (https://www.ced.org/pdf/Boosting-Postsecondary-Education-Performance.pdf).
- Kimberly Howard and Richard V. Reeves, “The Marriage Effect: Money or Parenting?” The Brookings Institute, September 4, 2014 (http://www.brookings.edu).
- Mark J. Warshawsky, “Can the Rapid Growth in the Cost of Employer-Provided Health Benefits Explain the Observed Increase in Earnings Inequality?” The Bureau of National Affairs, Inc., 2012 (http://mercatus.org/sites/ default/files/Can-Rapid-Growth-Cost-Employer-Provided-Health-Benefits-Explain-Observed-Increase-Earnings-Inequality.pdf).
- Adjusting the Prescription: CED Recommendations for Health Care Reform, Committee for Economic Development, April 23, 2015 (https://www.ced.org/healthcare).
- United States Government Accountability Office, Retirement Security: Most Households Approaching Retirement Have Low Savings, GAO-15-419, May 2015 http://www.gao.gov/assets/680/670153.pdf
- “Taxes,” Gallup, 2015 (http://www.gallup.com/ poll/1714/taxes.aspx); “Polls,” The Hill, February 27, 2012 (http://thehill.com/polls/212643-hill-poll-likely-votersprefer-lower-tax-rates-for-individuals-business).
- The Role of Business in Promoting Educational Attainment, Committee for Economic Development, February 2015 (https://www.ced.org/businessboostinged).
- Crony Capitalism: Unhealthy Relations Between Business and Government, Committee for Economic Development, October 14, 2015 (https://www.ced.org/ cronycapitalism).