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The Importance of Kicking Up: Changing Market Structures So the Rich Don’t Get All the Money

Most progressives focus their efforts on getting better pay and benefits for those at the bottom and middle. This includes policies like raising the minimum wage, stronger overtime rules, and better Medicaid benefits. This is good and important work, which I have often engaged in myself.

However, it is also important to address the other side of the equation, all the money going to the rich. Many want to do this by having a more progressive tax structure. That would be good and could help to reduce inequality. But for both economic and political reasons, a better approach is to change market structures so the money doesn’t go to the rich in the first place.

There is far too little recognition of the extent to which the market is malleable. The idea that the market just generates inequality is nonsense. The market will generate inequality if we design it to generate inequality, as has been the case over the last four decades. If we design it differently, it will lead to more equal outcomes.

My favorite example is patent and copyright monopolies. This is both because they are economically important, but also because the issues should be easy to understand. These monopolies are quite obviously creations of government. It is not somehow a fact of nature or a given of the market that I can have someone arrested if they make a copy of my book or sell a drug I developed without my permission.[1]

It is amazing to me how many people, including economist people, fail to see that these monopolies are government created and can be weakened or strengthened as we choose. The basic story is straightforward, these monopolies are ways in which the government provides incentives for innovating and creative work. But, if we are worried that the people who innovate and do creative work are getting too much money at the expense of everyone else, then it is a really simple thing to make these incentives less generous.

It is frankly mindboggling that this point seems to never come up in debates on inequality. I have heard any number of liberal economists do handwringing exercises over the concern that the spread of robots, artificial intelligence, and other new technologies will redistribute income from people who work with their hands to the people who “own” these technologies.

But, owning technologies is not an economic outcome, it is a legal one that results from the policies we put in place on patents and copyrights. How could anyone not see this?

It is possible that we will face some loss in the rate of productivity growth with weaker and shorter patent and copyright monopolies, but even this is far from certain. At the aggregate level, the strengthening of these monopolies has not been associated with a pickup of productivity growth and there is little evidence that stronger protections lead to more rapid growth in cross-country analyses. I have argued that in the case of prescription drugs, which cost us $450 billion a year (2.2 percent of GDP) there is good reason to believe that a system of direct public funding would be more efficient.

Anyhow, while we can debate the best mechanisms for supporting innovation and creative work, it is essential that people understand this is a policy choice. Bill Gates, Larry Ellison, and many other members of the super-rich got their billions because we structured the market in a way that allowed them to get incredibly rich. We could have structured the market differently.

The same story applies to finance, another industry which has produced a large percentage of the super-rich. The structure of the financial industry is also determined by government policy. If we applied a modest financial transactions tax, similar to the sales tax applied to most goods that consumers buy, it would radically reduce trading volume and the fortunes made in finance.

Private equity (PE) funds have produced many great fortunes for the people who run them. These funds make money by gaming the tax code and bankruptcy law, to the disadvantage of workers’ pensions and other creditors. In recent years, they also have not been producing the promised returns for their investors.

The necessary reforms here are to write the rules so they cannot be so easily gamed (e.g. limit tax deductions for interest) and to require pension funds to disclose the terms of their contracts with PE funds, as well as the returns on their investments. The latter should be pretty straightforward. If the PE folks are really producing great returns, they should be happy to advertise that fact. Alternatively, if they have been costing pension funds money, people have a right to know.

There is a similar and possibly more dramatic story with hedge funds. According to recent research, the returns on the endowments of the Ivy league schools have badly lagged a simple portfolio of 60 percent equity and 40 percent bonds. Harvard was the big winner in this category, with its endowment lagging this portfolio by an average of 3 percentage points annually.

Harvard has an endowment of close to $40 billion. This means that Harvard was effectively throwing $1.2 billion a year into the garbage in order to make the hedge fund folks even richer. This is money that could have been used to provide more financial aid or to pay its workers more money, but the University’s administration felt it was more important to make some of the richest people in the country even richer.

It is amazing that universities sign the same sort of contracts with their hedge fund managers as pension funds do with private equity companies. They don’t disclose the terms of their contracts. This means that no one will ever know exactly who got rich by costing Harvard’s endowment billions.

I remember a few years back I was asked to send a letter to my former school arguing that it would be worth a modest cost to its endowment to divest from fossil fuels. (As it turned out, if they had moved to divest quickly, their endowment would have done very well since this was before oil prices plummeted.) Anyhow, I can understand debating whether it is worth the cost to a school to take a more proactive position on global warming, there is a clear tradeoff in that there will be less money for things most of us consider good.

It seems harder to make the case that a school like Harvard should lose money on its endowment so some hedge fund managers can get even richer. But there is where we are now.

Anyhow, in these and other areas we can see that the rich got rich because the market was rigged to allow them to get rich at the expense of the rest of us. We need this to be the focus of public debate. It is important to argue that even low-income people should be able to get access to health care through Medicaid or other programs. It is important to argue about the need for higher minimum wages. But we should never accept that the before-tax distribution of income is just given.

The rich wrote the rules in ways that ensure that they get a disproportionate share of income. We have to attack these rules. Obviously, they prefer that we would ignore the rules and just pretend that they got rich due to their talents and hard work. If we accept that story, it will be much harder both as a matter of politics and policy to achieve progressive change.

Notes.

[1] In case I have any literalists reading this, I know that people don’t get arrested for patent or copyright infringement. I would have to file a civil suit where I could get money for their violations and a court order prohibiting them from further infringement. If they continue to infringe then they get arrested for violating the court order, not for infringement.

This essay originally appeared on Dean Baker’s blog.

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Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC. 

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