Whatever Happened to ‘Every Man a King’? How we can “make haves out of the have-nots without taking it away from the haves.”

Whatever Happened to ‘Every Man a King’?

FEB. 11, 2014

Thomas B. Edsall

A passionate group of labor economists has taken up a cause championed 40 years ago by the lateSenator Russell Long of Louisiana: to turn every worker into a capitalist.

Long, the chairman of the Senate Finance Committee from 1966 to 1981, inherited a populist commitment from his father, Huey Long, the Louisiana governor who famously campaigned on the slogan “Every Man a King.”

In 1973, Long became intrigued by the idea of granting corporations generous tax incentives to distribute stock to employees through Employee Stock Ownership Plans, or ESOPs.

Long’s question was, could ESOPs “make haves out of the have-nots without taking it away from the haves?” Working on assurances that this was indeed the case, Long said, “That’s the kind of populism I can buy.”

Beginning in 1974, Long won enactment of a series of bills establishing tax incentives favorable to corporations that transferred company stock into ESOPs. In 2012, the National Center for Employee Ownership estimated that the number of ESOPs had grown to 12,000, covering 11 million workers with $858 billion in assets. Companies employing at least 10,000 workers with ESOPs include PUBLIX Supermarkets; WAWA; WinCo Foods; and the employee-owned private equity firm, Alliance Holdings.

After Long retired in 1987, however, some of the tax breaks he sponsored were eliminated or weakened as Democratic and Republican administrations sought new federal revenues to reduce the deficit.

Robert Hockett, a law professor at Cornell, wrote in 2006 that ESOPs had expanded employee ownership of firms, but that “there is indeed a gap to be filled — that firm ownership remains nowhere near as widespread as home andhuman capital ownership.”

Now, three prominent labor policy experts have taken up Long’s cause. They are convinced that a major expansion of employee ownership is the most effective tool available to remediate inequality. The three experts — Richard B. Freeman of the economics department at Harvard, and Douglas L. Kruseand Joseph R. Blasi, both professors at the School of Management and Labor Relations at Rutgers – have been promoting worker capitalism in numerous papers and books. Together they edited “Shared Capitalism at Work:Employee Ownership, Profit and Gain Sharing and Broad-Based Stock Options” and last year they released “The Citizen’s Share: Putting Ownership Back into Democracy.”

In “The Citizen’s Share,” Blasi, Freeman and Kruse make a broad, ideologically cross-cutting case on behalf of profit sharing and employee ownership:

“It offers a new way to address the concentration of both economic and political power that many citizens believe is distorting the country. It offers a new perspective on how to fight the links between the Washington politicians, K Street lobbyists, big corporations, and political donors that fuel many Tea Party members’ opposition to government. It offers a new perspective on how to resolve the huge disparities in wealth and income.”

They make the following specific arguments.

First, they contend that policies promoting employee ownership have strong public support and that these policies reflect the convictions of the founders, including Thomas Jefferson and James Madison.

Politicans on both sides of the partisan divide support ESOP proposals.

Senators from the left, including Democrats Ben Cardin of Maryland, Amy Klobuchar of Minnesota, Mary L. Landrieu of Louisiana and Debbie Stabenow of Michigan, and senators from the right, including Republicans Roy Blunt of Missouri, Pat Roberts of Kansas and John Thune of South Dakota, are, for example, co-sponsors of The Promotion and Expansion of Private Employee Ownership Act of 2013.

As far back as 1974, Ronald Reagan, then governor of California strongly endorsed the concept, telling Young Americans For Freedom that “capitalism can work to make everybody a ‘have.’ ” In an analysis reminiscent of Russell Long’s, Reagan said:

“Income, you know, results from only two things. It can result from capital or it can result from labor. If the worker begins getting his income from both sources at once, he has a real stake in increasing production and increasing output. One such plan is based on financing future expansion in such a way as to create stock ownership for employees. It does not reduce the holdings of the present owners, nor does it require the employees to divert their own savings into stock purchases.”

Second, Blasi, Freeman and Kruse point out that there are already extensive mechanisms in place for employee ownership, not only formal ESOPs but also a variety of profit sharing plans. Because of this, they argue, major innovations are unlikely to be needed; improvements in existing laws and practices should suffice.

The authors cite responses to a question on employee ownership asked in a 2006 General Social Survey. The survey found that 47 percent of private-sector, full-time wage and salary workers now have access to some form of sharing in the firm where they work — cash profit sharing, cash gain sharing, employee stock ownership, employee stock options or ESOPs.

Third, and most important, is the authors’ claim that it is economically advantageous to give employees an ownership stake in the firm for which they work. Blasi, Freeman and Kruse provide evidence that employees with some form of worker ownership accumulate more savings than employees in non-participating firms, and that firms with some form of capital sharing perform better in the competitive marketplace than those that do not.

They write that “workers with profit sharing or employee stock ownership are higher paid and have more benefits than other workers. This means that the substantial profit sharing and gain sharing and ownership stakes for the typical worker in these plans tend to come on top of, not in place of, fair fixed wages and benefits.”

In addition, the authors cite studies showing sharp increases in productivity, higher employee morale, lessened turnover, and fewer bankruptcies in corporations that adopt ESOPs.

These findings raise a series of questions.

If the various forms of worker capitalism or profit sharing produce such benefits, why hasn’t the free market itself forced every company to adopt similar plans?

Asked about worker ownership, Robert Frank, an economist at Cornell and a specialist on issues concerning inequality, wrote in an email that he is “skeptical,” and cites his analysis of employee ownership in his book, “The Darwinian Economy,” in which he argues that if a worker-owned firm has all the advantages its proponents claim:

“It would enjoy a prodigious competitive advantage. Since wages account for about 70 percent of a typical firm’s total cost, increasing productivity by 15 percent would reduce total cost by more than 10 percent. The firm could cut its prices by almost that amount and still remain profitable, which would enable it to peel off most of its rivals’ customers.”

Frank pointed out that “any firm that enjoyed these advantages should sweep the market like a prairie fire, reaping enormous profits in the process.”

Freeman addressed this question in a series of email exchanges with me. He began by noting that there is management opposition to profit sharing with rank and file employees “because the people who control the firm may have to take lower profits — if I am in charge of the firm and sharing profits with you raises productivity, but it means that I take less in profits, I will not favor going to a more shared system.”

In addition, Freeman argued, “magnitudes are important.” The gains from employee share programs are modest, a “productivity edge of about 2 percent or so on average,” which may be trumped by other marketplace factors, including “some small monopoly advantage” held by competitors.

Freeman emphasized that many liberal-left economists and policy makers are locked into the view that labor and capital are intractably adversarial. Consequently they “favor a European style big government/strong union solution to inequality” rather than solutions of a more cooperative nature such as ESOPs.

Blasi, in a more detailed response, emailed that “both Democrats and Republicans until recently really believed that inflation-adjusted wage income growth or lowering taxes alone could maintain and grow the middle class.” In fact, Blasi argues, changing economic conditions dictate that “the sustaining of a middle class and mobility requires a capital ownership and a capital income policy.”

In addition, Blasi writes, the “economic share policy tradition in American history has been sidelined by scholars in the modern and post-modern era. Until now, if you argued for ESOPs you were using ‘small ball’ ideas.”

Liberal opposition to ESOPs is based in part on the view that the program amounts to a collection of tax subsidies for corporations and the wealthy. The tax breaks for ESOPs originally included a tax credit for company contributions: a deferral of taxes on shareholders who sell stock to an ESOP; deductibility of corporate dividends on ESOP-held shares; the exclusion from tax liability of 50 percent of the interest income from loans to an ESOP; and a 50 percent estate tax exclusion on the gain from the sale of shares to an ESOP.

Blasi, Freeman and Kruse acknowledge that some critics see ESOPs as pioneering “a form of special-interest tax incentives from the Treasury.” Their counterargument: “We see the ESOP as the continuation of the Founders’ desire to reduce inequality and preserve democratic practices by extending property ownership to more Americans.”

The Blasi-Freeman-Kruse proposal has the crucial political advantage of appealing to some on the political right because it would, in fact, make employee share programs more attractive by boosting tax subsidies — a form of cutting taxes.

Most significantly, the Blasi-Freeman-Kruse proposal stands apart from alternate policy initiatives designed to address growing inequality because it directly addresses the concentration of wealth and political power at the top.

For that reason alone, the idea of expanding employee ownership deserves serious consideration. The proposal does not resolve the question of how to give workers a sufficiently large share of capital to materially impact their economic status. Still, there are not that many viable options available to those who are committed to improving the disadvantaged position of labor versus capital. Politicians and policy-makers cannot afford to disregard a proposal with demonstrable potential.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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