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An Economy in Waiting

Fighting inequality by turning workers into owners

Illustration by Nicolás Ortega

The 2020 Democratic field now teems with proposals to mitigate rampaging wealth and income inequality, from Kamala Harris’s plan to increase tax credits for low- and moderate-income families to Elizabeth Warren’s wealth tax. Such plans overlook, however, the principal set of relations that skew American capitalism upward: the ownership and operational control of business enterprises.

This failing is puzzling, because ownership and control so obviously matter. People who own companies, or who run them on the owners’ behalf, decide where and how much to invest. They decide how many people to hire, what sort of working conditions to provide, and—within broad limits—how much to pay those employees. All such decisions go a long way toward determining how well an economy serves its participants.

And decisions aside, ownership mightily affects the distribution of wealth and income all by itself. To take just one example, consider a successful midsize company—a regional restaurant chain, say, or a construction firm with $200 million in annual revenue and $10 million to $20 million in net profit. If it’s owned by one person or a small group, as is often the case, these owners may receive a million or more in income every year, and they have an asset likely worth tens of millions. Most of their employees will be lucky to earn $50,000 a year and save up a few thousand in a 401(k) plan. Surely broadening the ownership of business is a good idea.

The failing is doubly puzzling because we Americans have a better system of ownership staring us in the face—an economy in waiting, so to speak. 

Close to 7,000 U.S. businesses are partly or wholly owned by a trust known as an employee stock ownership plan, or ESOP. The list of companies with full or majority employee ownership includes giant firms such as the Publix supermarket chain in the Southeast, with more than 200,000 employees; large and middle-market enterprises such as W.L. Gore & Associates, maker of Gore-Tex fabric, with nearly 10,000; and smaller companies such as King Arthur Flour (300) and New Belgium Brewing (800). These companies are typically more productive than their conventionally owned peers. They grow faster, pay higher wages, and are less apt to lay people off in a downturn. Successful ones—as most are—enable employees to build up serious wealth over time. A recent Rutgers study found that the average worker in a company with an employee stock ownership plan has already accumulated $134,000 in wealth just from his or her stake in the business. Some have a million or more.

But this market-tested, more-egalitarian economy in waiting is mostly missing from the policy portfolios of the 2020 Democratic presidential field—apart from a few notable exceptions. One is New York Senator Kirsten Gillibrand; she played a key role in developing and passing a 2018 law widely known as the Main Street Employee Ownership Act, which modified some government policies to make them friendlier toward co-ops and ESOP companies. And the other is Minnesota Senator Amy Klobuchar, who has co-sponsored several bills on employee ownership. But even they seem to be seeking to jump-start their campaigns with more familiar appeals to the left-leaning electorate, such as #MeToo and health care reform. In the same general camp is Bernie Sanders, who’s traditionally supported ESOP proposals, and has floated proposals to expand employee ownership and representation of workers on corporate boards as part of his 2020 presidential run.

On one level, the inattention to ownership reflects the topic’s inherent wonkiness. Nobody is marching in the streets for employee ownership. Most people haven’t even heard of it. It doesn’t lend itself to angry slogans or neatly packaged programs. A candidate who espoused it would face the task of educating voters on what it is and why it’s important. This fact shouldn’t be a deal breaker—Elizabeth Warren’s proposal to have employees elect some corporate board members doesn’t exactly light up the blogosphere either—but it’s still a persistent obstacle.

Nevertheless, imagine a candidate who began talking about employee ownership the way others are talking about health care or the Green New Deal. He or she would make a point of visiting the many not-well-known employee-owned companies around the country—growing international manufacturers like Web Industries in Massachusetts, for example, or big construction firms like TDIndustries in Dallas. Or how about a little company in Missouri called Phelps County Bank, where about 90 participants in the ESOP have accumulated $36 million in assets? There’d be photo ops galore, and a chance to showcase a practical fix for America’s maldistribution of wealth and income. It would be a start. 

Nor does the wonkiness quotient diminish as one examines the operational history of the ESOP movement. ESOPs came into being in the 1970s, when an iconoclastic lawyer named Louis Kelso persuaded a powerful Democratic senator, Russell Long of Louisiana, to write them into law. Legally, they are trusts subject to regulation under the Employee Retirement Income Security Act, the legislation that governs retirement plans. (ERISA rules distinctly tend toward the more baroque end of the oversight world, which is how the program got tagged with the mock title “Every Rotten Idea Since Adam” among D.C. economics hands.) Still, the basic incentive structure is sound: Company owners who sell to an ESOP get certain tax advantages. The Department of Labor watches the transactions to make sure they’re on the up-and-up. Of course, it’s a safe bet that our Trump-deranged news ecosystem would likely find ESOP plans hard to translate into sound bites. The core proposals aimed at spreading employee ownership—government-guaranteed loans for ESOP sales, for example, or incentives for corporations that are divesting divisions to sell to an ESOP—wouldn’t generate a lot of headlines. 

But employee ownership is much more than a gnat-straining set of regulatory proposals; it is, indeed, a bold suite of reforms not unlike the Green New Deal—one that’s capable of transforming the U.S. economy. Just imagine that crusading ESOP candidate putting a simple pair of questions to the electorate: What if you had an ownership stake in the company you work for? What if it didn’t cost you anything?

Said candidate could then spell out why such an arrangement is not, in fact, too good to be true—how, if anything, it’s a social-democratic version of the sort of debt-engineered business financing that already drives much of the American investment economy. When a company owner sells to an ESOP, the transaction is usually a kind of leveraged buyout. The shares are typically paid for with borrowed money; the loan is repaid from the company’s pretax earnings, not from employee contributions. What employee wouldn’t want that kind of ownership stake? Right now, an estimated 9 percent of the workforce own stock in their employer through an ESOP. If that share increased to 30 percent or more, many more people would have the economic cushion—and the prospect of a comfortable retirement—that they now lack. And today’s ridiculously unequal distribution of wealth would begin to shift—modestly at first but at a greatly accelerated pace over time. 

There are, moreover, strong pragmatic and tactical advantages to embracing the ESOP economy in waiting. Going back to the great populist-labor upheavals of the Gilded Age and beyond, wealth redistribution proposals have long propelled economic reform movements on the left. But such plans suffer from a fundamental flaw: The more ambitious they are, the more opposition they generate. That’s why it’s hard to imagine any of the candidates’ current ideas successfully making their way through Congress. Changing ownership, by contrast, is a sort of pre-distribution. It alters the distribution of wealth and income in the marketplace, without any further intervention by government. It is purely voluntary. It can boost wages, provide an economic cushion, and allow everyday employees to build comfortable nest eggs. Of course, it does nothing for people who don’t have a job. So it’s important for advocates to stress that ESOPs are a complement to redistributionist programs, not a replacement for them.

A big part of any new policy initiative is anticipating the backlash it will provoke. For instance, it’s a safe bet that ESOPs will draw derision from some right-wing skeptics as an impractical and utopian reform—and Exhibit A in that case will likely be the 2002 bankruptcy of United Airlines, which had been majority-owned by its employees. And it’s true that in the 40-plus years of ESOPs, there have been a few spectacular failures, United among them. (It’s also true that there have been far greater bloodlettings in the workforce under the watch of private equity takeovers, hedge-fund boondoggles, and all manner of mergers and acquisitions under the prevailing ownership regime, but that’s a whole other article, for another time.)

So let’s look a bit closer at the United collapse. The airline was owned by (some of) its employees from 1994 until its bankruptcy in 2002. But its ESOP was poorly conceived from the start. One of the company’s three unions declined to participate. Employees had to trade wage concessions for stock—nearly always a bad idea, because workers who are suddenly taking home smaller paychecks are prone to conclude from the very beginning that this ownership stuff is a scam. After only a few years, writes Christopher Mackin, a consultant who worked with United at the time, “employee ownership had become an empty slogan at United with little if any policy substance to back it up.” 

Funny thing, though—many other airlines wound up in bankruptcy, too. Nobody concluded from that experience that investor ownership doesn’t work. Employee-owned companies do fail. But they do so rarely, and at a rate lower than conventionally owned companies.

An allied talking point from the opposition will likely be that ESOPs are too great a risk for workers—that they will compel employees to place all their eggs in one basket, making for greater losses in the event of business failure. But this claim, like the scaremongering around the 2002 United bankruptcy, is simply a canard. Tell me: Which of two companies would you rather work for, assuming that the job and the pay are the same? One is owned by a family or by public investors. It may or may not offer a 401(k) retirement plan. (About one-third of U.S. workers have no access to a retirement plan, and some who do have access don’t participate.) If it goes bankrupt or is sold to a competitor, you’re apt to lose your job. The other company is owned by an ESOP. You accrue stock in the company over time—probably quite a lot of it—at no cost to you. (Department of Labor filings indicate that employee-owned companies contribute 50 to 100 percent more to their ESOPs each year than non-ESOP companies do to 401(k) plans.) You may have a 401(k) as well. (ESOP companies are a bit more likely to offer a secondary retirement plan than other companies are to offer any plan.) If your company goes broke, you may lose your job, and you will probably lose the value of your ESOP shares. If it is sold to a competitor, you will be paid the full value of your shares. So explain to me, please: Which of these is the riskier choice? 

ESOPs are also likely to generate objections from the economic left. For example: Left-leaning candidates are rightly cautious about anything that smacks of government subsidies or tax breaks for businesses. And some of the measures that create and support ESOPs, both existing and proposed, do involve tax breaks. But here’s the thing: These tax breaks aid employee owners, not investor owners. They provide an incentive for people to set up ESOPs, and they help employee-owned companies thrive.

Another possible sticking point for the left: Many Republicans like employee ownership; indeed, roughly the same percentage of voters in both parties support it. In today’s hyper-partisan atmosphere, Democrats may worry about an idea that their opponents might support. But this is a feature, not a bug. Even as economic reformers on the left value employee ownership’s spread-the-wealth egalitarianism, conservatives like making more people into capitalists. Most measures to encourage ESOPs have drawn support from both sides of the aisle. 

So let’s indulge in a bit of our own utopian fantasy and imagine that our candidate storms to the forefront of the primary scrum by making employee ownership a central issue in his or her campaign. What would it look like?

There’d be that beguiling series of photo ops, sure—organized around visits to employee-owned companies, and to the state-level centers (there are a handful of active ones) that support them. Nearly every economic-policy speech and white paper put forth by this hypothetical candidate would highlight the wealth-redistributing structure of ESOP plans as well as their economic performance (far fewer layoffs, for example). In standard stump speeches, the candidate would repeatedly point to the top-heavy and civically unsustainable ownership structure of the existing investment economy—noting, for example, the fact that the top tenth of Americans control 84 percent of all U.S.-owned stock. The obvious segue would then be the prospering, more egalitarian, and participatory models of employee ownership already on offer. (“Right here in New Hampshire there are thriving companies like Hypertherm, where the employees own the whole business!”) For the wonks, meanwhile, there’d be model legislation to expand and incentivize employee ownership throughout the economy. (Full disclosure: Some of the policy proposals I’ve floated in this thought experiment come from a white paper prepared by an ad hoc collection of activists known as the Lake Quinsigamond Group, of which I am a member.) 

The thing about a presidential campaign is that ideas are important, and they generate responses. It would be revealing to see an opponent try to explain why the employee-owned economy in waiting isn’t a good idea. Spelling out an expansive vision for political-economic reform is likewise crucial in the present age of American inequality. And it’s hard to see what an electorate deeply attuned to the injustices of status-quo ownership arrangements would find to fault in a vision of capitalism for people—a system that captures the benefits of free enterprise without so many of the drawbacks. What better time to start mounting this crusade than the present?