Last year, we released a paper titled “Social Wealth Fund for America” that argued that the US should create a new investment fund, give every American adult one share of ownership in the fund, fill the fund up with assets, and then use the return on those assets to pay out a universal basic dividend to every citizen-owner. Around the same time, policy thinkers in the UK were pushing a similar proposal to create Inclusive Ownership Funds (IOFs) that would gradually take control of 10 percent of the equity of large domestic corporations and then use the return on that equity to pay out a capped dividend to the employees of those corporations.
The organization Momentum recently endorsed a motion in favor of IOFs ahead of this year’s Labour Party conference. The motion calls for the creation of IOFs along the lines discussed above, but also calls for the creation of a national wealth fund (similar to our social wealth fund) that would be capitalized by dividends that are paid out to workers in excess of the amount of the dividend cap. This combo of firm-level IOFs and a national wealth fund would gradually socialize a significant swath of British capital.
On these shores, Lenore Palladino of the Roosevelt Institute published a piece on Wednesday endorsing the idea of implementing IOFs in America. Palladino notes that these funds would ensure that the profits of US corporations are shared more widely and correctly observes that such socialization of corporate equity is necessary if we really want to chip away at our nation’s extreme level of wealth inequality.
Palladino’s entry into the debate is a breath of fresh air in the ongoing transatlantic debate about funds socialism. Unlike some other American policy commentators who have offered up bizarre metaphysical arguments that seek to prove that shareholders don’t really own companies, Palladino persuasively argues that, in addition to receiving the benefit of corporate profits, shareholders exert top-level control over corporations through their appointments of board members and corporate directors as well as through their votes on shareholder resolutions. Any egalitarianism worth its salt must thus aim to socialize share ownership whether through social/worker funds or some other mechanism.
Despite her endorsement of IOFs, Palladino does present some potential difficulties such a policy might have. Her analysis of those difficulties is the best I’ve seen so far. I will discuss those difficulties below, but before doing so, I must, for my own purposes, point out that the People’s Policy Project social wealth fund is designed to avoid every one of the potential problems identified by Palladino. This is not to say you should favor our social wealth fund over IOFs necessarily: in the world of politics, not everything is about technocratic superiority. But the technical differences between different approaches to funds socialism is at least worth considering as this discussion moves forward in the US.
1. Dividend Inequality
The first problem identified by Palladino is that, because IOFs pay out corporate dividends to the workers in each firm, that opens up huge inequality between workers in different firms and different sectors. For instance, the per-employee dividend of Apple workers would be $10,405 while the same dividend for Walmart workers would be $400. The dividend in the transportation and warehouse sectors would be $7,214 while the dividend in the retail sector would be just $836.
In addition to these inequalities, workers in smaller firms not covered by the IOF scheme would receive no dividend. Public sector workers would similarly see no dividend. And of course, nonworkers would also be excluded.
After walking through this information, Palladino concludes: “To ensure that IOFs would not further entrench existing inequities, this initial snapshot shows that policymakers would need to account for sharp sectoral differences in terms of employment and dividends.”
Our social wealth fund proposal does not have this dividend inequality problem because it provides every adult American one share of ownership in the fund and pays out an equal dividend to those citizen-owners. In our plan, it does not matter whether someone is in the public sector, the private sector, a capital-intensive sector, a labor-intensive sector, or whether they are working at all. Everyone receives the same universal basic dividend.
2. Worker Misclassification
The second problem she discusses is that corporations might lean more heavily on independent contractors, like Uber and Lyft do, rather than formal employees to do the work of their firm. Since the IOF only pays out dividends on the firm level to the employees in each firm, independent contractors would be excluded from the dividend payments. This would be unfair, among other things.
The universal basic dividend design of our social wealth fund solves this problem because it pays out the same dividend to all adults whether they are classified as employees or independent contractors.
3. Wage Substitution
The third problem is that corporations might use the existence of the dividend to lower formal labor compensation. If Apple is made to pay a $10,405 per year dividend to their workers as part of the IOF scheme, then they could theoretically lower their wages by a similar amount. Because the dividend is only paid to workers as a condition of working at Apple, then it becomes basically part of the labor compensation package. Thus, Apple might be able to offer a worker lower wages by pointing out to them that their wages-plus-dividend are still $100,000 total (or whatever they typically pay for that position right now).
I don’t know how serious a concern this is in reality. But to the extent that it is a concern, once again our social wealth fund proposal avoids the issue entirely. By paying a universal basic dividend to all adults, the dividend is not contingent on working at a particular firm or even working at all. This design defeats the theoretical wage substitution problem because an employer cannot dangle the dividend out as a carrot to get you to join the firm.
Lastly, Palladino notes that corporations might rely heavily on buybacks instead of dividends when they want to shift cash out of the firm. The reason is that, if the IOF owns 10 percent of the corporate equity, then 10 percent of every dividend issued by corporations would have to go to the IOF and the workers covered by the IOF. But if corporations used that same dividend money on buybacks, none of it would have to go to the IOF because the IOF does not sell shares. The value of the shares held by the IOF would go up due to such buybacks, but again, because the IOF does not sell its shares, it cannot access the price gains of the buybacks.
The buyback issue is not really a big problem. You can ban buybacks. You can allow IOFs to sell shares back as part of buybacks so that they get some free cash from the buybacks while still maintaining their share of corporate ownership. And so on.
Although this is not a big problem, I have to point out once more that the social wealth fund does not have this problem. The social wealth fund we propose is a big fund that owns all sorts of assets, including corporate equity, corporate bonds, and real estate. Under our proposal, the fund pays out a dividend equal to 4 percent of the 5-year average of the market value of the fund. Unlike the IOFs, the social wealth fund can liquidate any of the assets it has to pay that dividend, meaning that it has the ability to convert the price gains of buybacks into dividends that benefit the citizen-owners of the social wealth fund.
As the 2020 presidential election heats up and candidates start thinking about fresh ways to really dig into the problems facing our country today, funds socialism is a natural place to start. Copying Labour’s Inclusive Ownership Fund idea would be a big step forward. Adopting the the 3P social wealth fund proposal would, of course, be even better.