It’s Super Bowl LIX (2025). The Seattle Seahawks take to the field, having won the coin toss. Their new rookie starter approaches the ball and gives it a powerful boot. To everyone’s amazement, the ball flies perfectly through the air and crosses dead center at the opposing team’s goalposts, for the first ever kickoff field goal in NFL history.1 The crowd goes wild! After two more downs, the Seahawks regain possession of the ball on the fifty-yard line. Instead of the usual scrimmage to run the ball down the field, they attempt another field goal. The ball sails perfectly through the goalposts once again. Three points! And again. And again. The crowd grows restless, because the game isn’t proceeding quite as expected. After scoring thirty consecutive field goals without throwing so much as a single pass, the Seahawks take the trophy as the crowd boos them off the field.
Everyone knows that something’s gone terribly wrong, but they’re not quite sure what. Theories abound that the Seahawks’ new kicker has somehow been genetically enhanced; that Jesus has finally returned and he lives in Seattle; that the whole event is some sort of freak statistical accident due to global warming.
It soon emerges the team has fielded the first ever lightweight place-kicking intelligent shoe. It meets all the existing NFL regulations, but it guides the kicker’s foot to exactly the optimal position. Freed from having to aim, the player simply swings his leg as hard as he can, and all that energy drives the ball 50 percent further than normal to precisely where it is supposed to go.
A loud and shrill public debate ensues, and people fall into four highly opinionated camps. The conservatives believe in the sanctity of the current rules and regulations. They have worked just fine ever since they can remember and are perfect just as they are. If the teams want to innovate, we shouldn’t interfere with their inventive spirit. As long as it’s literally a level playing field, and all teams are permitted to develop similar technologies, things are as they should be. If a team can’t afford to develop its own intelligent shoe, that’s just survival of the fittest, so it’s just tough luck.
In fact, conservatives are suspicious that most or all of the rule changes since the NFL was founded in 1920 have only made things worse. They tout several Washington sports-analysis think-tank studies underwritten by a murky network of wealthy ex-players seeking to protect their respective world records from being surpassed due to any changing of the rules. A well-funded public relations campaign by the nonprofit Americans for Freedom of Footwear promotes the slogan “Kick the bureaucrats, not the innovators” in TV ads showing teams stumbling around the field in leg irons. They stage formal “Foot Ball” fund-raisers across the country for affluent donors.
The liberals are focused on fairness. They don’t want to prevent progress, but they also don’t want to see some teams get an enduring advantage while others perpetually fall further behind. They say the shoes should be allowed, but the opposing goalposts for teams that use them should be automatically narrowed as the game proceeds to keep the number of successful field goals about average.
A loose-knit consortium of PR firms starts a public-interest “IntegRITy” campaign, but no one can quite figure out what RIT is supposed to stand for. An SOS (Save Our Sneakers) benefit concert, featuring familiar do-gooder musical stars, is organized to raise awareness of the problem and collect funds to install the complicated high-tech electronic goalposts in schools and stadiums around the world, but it turns out that no one with less than a master’s degree can figure out how to work them. Raising over $100 million, the firms proudly announce that this will cover an estimated .5 percent of all qualified football fields.
The fundamentalists think anything new should be banned. They romanticize a mostly fanciful past, when life was simple and wonderful before it was corrupted by modern influences. The more extreme among them believe that for good measure, all players should be required to play without shoes at all, the way God intended. Leveraging a well-organized network of church groups, the fundamentalists start a “Ban the Boot” campaign. They bus outraged senior citizens to participate in strident protests before each professional football game, urging a public boycott, after which they receive complimentary admission tickets and drink coupons.
The progressives take a different view. They believe that the purpose of the game is to serve the public interest by staging a skill-based contest that entertains a broad audience while inspiring athletes everywhere to do their best. If rules have to occasionally be tweaked in response to new developments to achieve this goal, that’s perfectly okay. In fact, that’s the primary duty of the NFL’s elected officers.
If pressed, sensible conservatives, liberals, and fundamentalists grudgingly agree with the progressives. They may differ on why things got messed up in the first place, but now that they have, something must be done to put the fun back in the game. Their gripe, however, is that the progressives have yet to put forward a workable idea minimally acceptable to everyone, other than investing more in public education to teach high school players how to kick better.
I’m an economic progressive. I don’t think we should tinker with things just for the heck of it, but the purpose of our economy is to serve the public interest, rather than the other way around. None of us—rich, poor, diligent, lazy, adventurous, or habitual—wants to live in a world where members of a small cadre of superrich can have anything they want while the masses suffer in silent misery. The engines of prosperity can motor on, driving up statistical benchmarks of aggregate wealth and abundance, but if more people are leading impoverished and unhappy lives, we aren’t measuring the right things. The average income can continue to rise, the gross domestic product can grow, the count of Tesla dealerships can double, but if the national pastime is scanning job boards for supplemental part-time work, we’re moving in the wrong direction.
Several economic studies have found that the overall self-reported level of happiness is highest when the economic disparities in society are minimized, even after controlling for all other known factors.2 In particular, the range of incomes is more strongly correlated with lower satisfaction than the overall level of wealth after a certain minimal wealth threshold is exceeded. If you’re skeptical, consider that the average income and percentage of the population working in agriculture in the United States in 1800, adjusted for inflation, were about the same as those in modern-day Mozambique and Uganda.3 I doubt that most people in Thomas Jefferson’s time thought of themselves as wretchedly poor.
Several prominent academics have spent their careers documenting the increasing disparities of income and wealth in the United States and studying their causes, so I won’t regale you with statistics here.4 The short story is that since the end of World War II the country’s economy has grown fairly steadily, with a few blips (most notably in the past fifteen years). Before about 1970, these gains were shared equitably between rich and poor. Since that time, however, nearly all the gains have gone to the rich, leaving the poor behind.
A brief analogy may be helpful to get a feel for the nature and scope of this shift as well as its consequences.5 Imagine a town with one hundred families whose primary source of income is 1,000 acres of orchards. In 1970, the five wealthiest families owned an average of 30 acres of fruit trees each, while the twenty poorest families owned only 3 acres each—quite a spread. A visitor to the town would see a typical assortment of establishments in the town center, such as a diner, shoe store, and haberdashery.
By 2010, an additional 800 acres had been added to the town’s productive farmland—a remarkable 80 percent increase in total wealth. But the wealthiest five families now owned an average of 70 acres of fruit trees each—more than twice as many—while the poorest twenty families still owned only 3 acres each. The peculiar thing is that while the average family now farms 18 acres, up from 10 in 1970, fully half the town is struggling to survive on less than 8 acres. More conspicuously, the richest family in town now owns 360 acres, or 20 percent of all the town’s productive farmland. In short, the additional land went disproportionately to the already rich, to the point where the less fortunate half of the town got little to nothing.
A visitor returning to the town after a forty-year absence observes a remarkable transformation. Once a humdrum collection of workaday stores, it now sports upscale establishments with the latest luxury goods. The town diner has gone out of business because far fewer people could afford to eat out, and in its place stands a gourmet restaurant, frequented almost exclusively by the wealthiest twenty families in town. The shop windows that used to display galoshes now showcase designer pumps, and the haberdashery has become an haute couture boutique. What beautiful improvements— the townspeople must be so pleased! Unfortunately, what the visitor can’t see is that most of the residents never visit these stores. Instead they drive to a Walmart fifty miles away to pick up in bulk the weekly staples they can afford.
Enormous disparities in living standards are a public disgrace, and we need to fix it.
I’m old enough to remember when being rich meant that you had a color TV, and being poor meant you could afford only a black-and-white set. Other than that, people mostly went to the same (public) schools, ate at the same restaurants, and waited in the same lines at Disneyland. But not even the Magic Kingdom can defy economic realities. As far as I can determine, the VIP Tour option for Disneyland was added around 2010. For an additional $315–$380 per hour, you get your own guide and unlimited access to Fastpass lines. A rather poignant comment posted on InsideTheMagic.net reads: “Walt Disney never wanted his park(s) to be for rich people only… . I dream of a day when ordinary people can once again walk right down the middle of Main Street U.S.A. When kids, rich and poor, can get a hug from Mickey or a kiss from a princess.”
To address the scourge of increasing economic inequality, it’s helpful to set a goal. You can pick your favorite, but mine is to target a distribution of income roughly like that of 1970, when the top 5 percent of households brought home about ten times as much, on average, as the bottom 20 percent, as opposed to the twenty times we see today. Not great, but close enough for government work. I’m not at all advocating that we return to the economic and social policies of that age, which arguably weren’t really helping even back then. Marginal tax rates were way too high, racial inequality was rampant, water and air were far more polluted than they are today (at least in the United States), and tobacco companies promoted their products to children.6
Recent American history is full of examples of the government establishing a high-level goal in the interest of promoting social welfare, putting some sensible policies in place, and making it happen. One ongoing example is the push to encourage homeownership in the United States. Studies over time, not to mention common sense, suggest that communities where people own their own homes are safer, more stable, and attractive to investment.7 As far back as 1918, when the U.S. Department of Labor started a campaign called Own Your Own Home, federal and state governments have promoted this goal with tax policies, regulation of financial institutions, and direct support for homeowners.8
As President Johnson said in his proposal to create the Department of Housing and Urban Development (HUD) in 1968, “Home-ownership is a cherished dream and achievement of most Americans. But it has always been out of reach of the nation’s low-income families. Owning a home can increase responsibility and stake out a man’s place in his community. The man who owns a home has something to be proud of and good reason to protect and preserve it.”9
The motivations for the numerous housing initiatives in support of this lofty goal are mixed, to say the least. Many of these programs had surreptitious objectives such as subsidizing the housing industry, creating construction jobs or, most remarkably, enshrining segregation.10 Nonetheless, the country got the job done. From 1900 to today, homeownership increased by 40 percent, so that owners occupy nearly two out of every three homes.11
Another area with considerable success has been the reduction of air and water pollution in the United States. Since the Environmental Protection Agency (EPA) was founded in 1970, aggregate measures of major air pollutants (with the notable exception of carbon dioxide, not classified as such until 2009) have been reduced by a remarkable 68 percent, even though the GDP has increased by 65 percent.12 Growing up in New York City in the mid-1960s, I thought the natural color of the afternoon sky was a brownish orange, and the conventional wisdom back then was that living in the nation’s largest city was equivalent to smoking two packs of cigarettes a day. (Which, incidentally, wasn’t considered a significant health risk.)
Most of this improvement was due to regulation of polluters (mainly by levying fines), standards for equipment manufacturers (such as vehicles), and technological advances. More recently, emissions trading, better known as cap and trade, has begun to gain traction. This is a much more flexible and rational approach because it uses market forces to allocate resources efficiently, replacing a crude system of hodgepodge rules and central controls. Water quality is more complex because of the different measures of purity, but in general it shows similar improvements.
In the financial domain, the United States has a long-standing goal of easing the lot of the elderly. It used to be that, for most people, getting old meant living in squalor. As soon as your useful working life ended, you were in dire financial straits.13 This no doubt contributed significantly to premature death. But easing our elders’ suffering is more than altruism—that could be you in a few years, if you’re lucky enough to live that long. Our Social Security system, adopted shortly after the Great Depression in 1935, and low-cost or free medical care (Medicare and Medicaid) were major steps forward in addressing this problem. In addition to these mandatory public savings programs, there are a myriad of U.S. government policies that encourage saving for retirement by sequestering assets into personal accounts, such as individual retirement accounts (IRAs).
But the biggest win has been in public health. Here the measure is clear and personal: a male born in the United States in 1850 could expect to live on average to be about thirty-eight years old; one born in 2000 can expect to live to about seventy-five years old— whatever that means, because he would only be fifteen years old today. (Much of the increase resulted from a reduction of infant mortality.)14 As my nonagenarian mother proudly remarks, ninety is the new seventy!
The rise in life expectancy is due to many factors but is largely the result of improvements in medical sanitation, the development of vaccines, public efforts to separate water and sewer systems, government initiatives such as the creation of the Centers for Disease Control, and public health education campaigns (smoking cessation, for example).
So the time has arrived for us to establish sensible policies to reduce income inequality. Our initial instinct may be to tackle this challenge by first determining its root cause(s) and addressing each in turn, most notably unemployment. But I suspect that would simply embroil us in endless debates, pitting those who blame the poor for their own failure to thrive against those who blame needless government spending and regulatory interference against those who see those same regulations as hopelessly biased toward the rich against those who believe your income is a numerical measure of how pleased God is with you.
Some would likely argue we should raise taxes and spend more on social programs. Others would counter that this will impede the “entrepreneurial spirit” by reducing the rewards for risk taking and hard work.15 Some would point the finger at layabout welfare recipients. Occupy Wall Streeters might take a similarly dim view of the investment bankers of Goldman Sachs, which Rolling Stone famously referred to as a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”16 Perhaps a new federal jobs program is the ticket, reprising Franklin Delano Roosevelt’s WPA program, which employed almost 8 million people.17
But I propose that these approaches conflate two things we should consider separately: jobs and income. Jobs may be scarcer in the future, but that doesn’t mean that income has to be. Everyone needs an income to live, and the most obvious way to get one is to work for money. So most proposed solutions revolve around ensuring that everyone has an opportunity to earn a decent wage for an honest day’s work, or at least to give people something to tide them over while they try to find one. But it’s not the only way.
In fact, there are two groups of people without jobs. The first are those who are looking for a job and can’t find one. Indeed, that’s the official U.S. Bureau of Labor Statistics definition of being unemployed. The other group is what the bureau calls “not in the labor force,” which includes retirees. This doesn’t mean these people aren’t working, just that they aren’t getting paid for working. (Me, for instance. I was quoted in the New York Times in 2003 as quipping “I used to be retired, … now I’m just unemployed.”)18 I’d like to think I’m a productive member of society, making a contribution, but I’m not collecting a paycheck, which is fine by me.
We tend to cast a skeptical eye on the jobless—unless they have a lot of money. Then it’s okay—indeed, it’s often celebrated. No one expects Paris Hilton to be anything other than an idle rich girl, an image that she has polished to a high art, despite a dizzying array of gigs, product endorsements, TV and movie appearances, and recording contracts, earning her an estimated $6.5 million in 2005 alone.19
You don’t have to have a fortune to live off your assets. It all depends on how you want to live. Just how much is enough?
For years, pundits have lamented that the median household income in the United States has stagnated even as productivity and total income have been rising relentlessly.20 On the surface, this is an argument about increasing income inequality, but it glosses over an important detail: how does the average family feel about that? If people had the opportunity to work more and make more money, would they? Or are they satisfied with their work/life balance as it is?
Here are some facts that suggest many people aren’t working more simply because they don’t need to or want to. Starting with the long-term historical trend, you might be surprised to learn that in the nineteenth century, most people worked about sixty to seventy hours a week.21 They had virtually no free time at all. In 1791, carpenters in Philadelphia actually went on strike to demand a reduction in hours to a ten-hour workday.22 The federal government first got involved in 1916 with the Adamson Act, which set the standard work-day as eight hours, but only for railroad workers. By 1937, this shortened workday became part of the Fair Labor Standards Act.23 While this trend toward fewer working hours is continuing through today, it’s quite gradual. Federal Reserve data from 1950 to 2011 shows an 11 percent reduction in total hours worked per year.24 Today, contrary to public perception, the average working person puts in about thirty-four hours of paid labor a week.25
In contrast to working hours, real wages and incomes have soared. To pick a single example, U.S. males employed full-time year-round have seen their inflation-adjusted average incomes just short of double since 1955. Working women have seen their incomes soar more than that, by 138 percent. Full-time employed people literally have twice as much money to spend after inflation.26
But this story gets really interesting when you look at it on a household basis. According to the U.S. Census Bureau, the median household income in 1995 was $51,719. By 2012, it was virtually unchanged, at $51,758.27 (The 1995 figure is adjusted for inflation.) However, the median net wage of a U.S. worker (inflation adjusted) rose approximately 14 percent during the same period. (The nominal increase was 65 percent less the cumulate inflation rate of 51 percent.)28 So what could account for this discrepancy? Households don’t work—people do. And the number of adults working in the average household dropped 8 percent during that period, from 1.36 to 1.25.29
The number of working adults in a household is affected by a number of factors. Unemployment in 2012 was 2.5 percent higher than in 1995. This is a little tricky to calculate, but the average number of working-age adults in households dropped by about 2.5 percent.30 That’s no doubt part of the story, but what’s the rest? At least one plausible explanation is that people are making more money when they work, so when those benefits are shared (that is, in households), many couples (related or not) simply decide to work less in total.
Whether people make this decision because it’s too much of a hassle to look for more work or a better job or because they just prefer to spend their time doing other things is really just two sides of the same coin. Their decision to find work or to do something else with their time is a rational decision based on the vagaries of their local labor market and how they prefer to live.31 Consider the example of my former employee Emmie Nastor. His biggest objection to his job was not the pay but the (compulsory) hours. He would gladly accept less pay if it means he can reliably get home before his newborn son goes to bed.
So where does the tacit assumption come from that every able-bodied, red-blooded American who can work is going to do so as much as he or she possibly can? It’s a reflection of a skewed concept of progress, or at least wishful thinking, that is baked into our government policies. Many people believe that our legislators tax, borrow, and spend more than they should. I have no informed opinion on this. But the historical way we have addressed our economic problems is to grow our way out of them. What looks like a mountain of national debt today will seem far less daunting when the bill comes due if only we can continue to expand our economy each year. If it still proves to be a problem, we can fall back on adjusting the inflation rate by expanding the money supply, so the cost of repayment is more manageable. The government uses this same logic when it supports retired Social Security recipients with receipts from current workers. (Which will shortly become a problem because the relevant population of workers is trending down relative to the population of retirees for the moment.)
This can-do attitude of bigger-faster-stronger is so deeply ingrained in our American mind-set that benchmarks of countervailing beliefs are difficult to find. When a parent decides to stay home and take care of the kids, he or she falls off the government’s measures of economic value. When someone quits his or her job as a real estate agent to play guitar in a rock band, disposable income may go down even as personal satisfaction goes up.
This is not to say that those with the smallest incomes would make the same decisions. Living from paycheck to paycheck, or on no paycheck at all, is certainly no picnic. But those in the storied middle class may not be as anxious as we might assume to climb to the next level, if the price is their free time and satisfaction with their job.
But this time-tested government principle—that we can grow our way out of our economic problems—offers a practical approach to reducing income inequality. We don’t need to take anything away from anyone, we simply need to distribute future growth in a more equitable way and the problem will take care of itself.
To understand how this can work, let’s start with a simple hypothetical. Suppose everyone were to magically retire today. Just what would everyone’s household income be? First we need to look at how wealthy the people in the United States really are, on average. Combining data from the Federal Reserve and the Census Bureau for 2012, the average U.S. household has a net worth of approximately $600,000 for its 2.6 residents.32 That includes bank accounts, stocks and bonds, private retirement funds, and real estate, after subtracting all debt. It excludes nonproductive assets like cars, furnishings, and personal possessions. But that doesn’t count Social Security. Total Social Security trust fund assets were $3 trillion at the end of 2013,33 which adds about another $25,000, for a grand total of $625,000 per household.
How much retirement income would this generate? The S&P 500, a reasonable proxy for the U.S. equity markets, provided an annual return of more than 11 percent for the past fifty years, while ten-year U.S. Treasury bills, considered one of the safest investments in the world, averaged nearly 7 percent.34 Assuming you held half of a portfolio in stocks and half in bonds, the average return would have been around 9 percent per year. If you wanted to reserve enough money in this portfolio to compensate for the historical rate of inflation (3 percent), you could spend about 6 percent annually. (Not accounting for capital gains taxes, if any. If this doesn’t match your current mileage, note that the inflation rate and typical investment returns, at least for bonds, are well below the historical ranges at the moment.)
Applying 6 percent to the aggregate U.S. wealth, each household could spend about $40,000 per year and still keep up with inflation. That’s in addition to whatever the household might (optionally) earn, and it assumes that people leave their entire estate intact to their heirs when they die rather than spending it themselves, giving those in the next generation an enormous head start on their own retirement. (Except for any estate taxes, of course, which you wouldn’t owe if you died today with $625,000 in assets in the United States because of the lifetime exemption.) In fact, if the population is not growing or it were shrinking (as it is in much of Europe), members of the next generation wouldn’t need to add to this portfolio, which is to say they might never need to work at all.
Another way to arrive at these figures is to look at how the financial markets value all public companies and bonds. At the end of 2011, the value of the U.S. bond market was just under $37 trillion, with U.S. stocks at $21 trillion, for a total of $58 trillion.35 But only about two-thirds of that is owned domestically, so let’s use $39 trillion. (Contrary to popular perception, China owns only about 8 percent of the national debt.)36 Adding the $25 trillion of value stored in homes and subtracting mortgage debt of $13 trillion, that works out to $51 trillion, or about $450,000 per household.37 But that doesn’t include the value of all privately held companies, or loans to companies and individuals, which probably accounts for a portion of the difference between this estimate and the $625,000 above.
That’s now, but let’s talk about the future. Data for the last thirty years shows a GDP growth rate per person, after inflation, of approximately 1.6 percent.38 Assuming this trend is to continue, the total increase in real wealth per person in forty years would be 90 percent. That is to say, the average person in the United States will be almost twice as wealthy in forty years as today, based on current trends. This is consistent with the 80 percent growth experienced in the past forty years, as I noted earlier. And as you might expect from the previous chapters, I think this is a gross underestimate— but that’s just one person’s opinion. This equates to an annual household income, purely from investments, of about $75,000 in today’s dollars. Not bad.
But surely this rosy picture can’t be right. People are struggling. Most people are losing ground. It’s a bloodbath out there. It surely doesn’t feel like most people are earning $40,000 just sitting around doing nothing. All correct—for the simple reason that the distribution of assets isn’t broad enough. These averages don’t mean anything right now because the wealth isn’t owned equitably by all households—the precise problem we’re looking to address. But we don’t need to redistribute today’s wealth to make a serious dent in the problem of income inequality—that ship has already sailed. Instead, we can focus on new ways to distribute future gains. But how?
We can put in place economic incentives to broaden the ownership base for stocks and bonds. The incentives are not for the owners themselves but for the corporations and issuers of the bonds. We can put their self-interests to work for the rest of us, as we do in other aspects of our capitalist economy.
To date, the U.S. government grants most tax policies and economic incentives (often called “loopholes”) to encourage corporations to make certain types of investments, or to reduce the cost of borrowing money (as in the case of tax-free municipal bonds). These same techniques can be used to spread the future ownership of the assets necessary to support retirement or reduced work.
To understand how this works, consider two hypothetical future corporations in the same business: operating online super-stores that sell groceries to consumers with guaranteed delivery within three hours, regardless of location: “My Mart” and “People’s Provisions.” Both are run by talented and well-compensated management teams, but My Mart is owned by the ten superrich heirs of the recently deceased baron of industry Marty Martin, while People’s Provisions’ publicly traded shares are owned directly or indirectly by 100 million people.
Both companies have made tremendous investments in automation, reducing their workforces to the bare minimum possible with current technology. They have become so efficient that the revenue per employee is in the tens of millions of dollars. For comparison, Walmart, one of the most efficient retail companies in the world, generated $213,000 in revenue per employee in 2013. Both companies are extremely profitable, delivering nearly $100 billion in annual profits, compared to Walmart’s $17 billion today. For My Mart, that works out to nearly $10 billion a year for each of the lucky heirs. But its rival People’s Provisions is sending dividend checks each year for $1,000 to nearly one-third of the U.S. population.
Now, which company is better serving the public interest? Both are doing a terrific job of delivering goods and services to their customers, and both are highly motivated to continue to improve so they can increase their market share. But People’s Provisions is also serving the financial interests of a significant fraction of the public, as opposed to a single family of playboys and patrons of the arts. In that sense, it’s delivering far more benefit to society.
Before we can address this inequity, we need an objective way to measure it. One thing the federal government does well is collect and publish statistics. Sometimes this is used to inform policy, but other times it’s intended to make us better consumers by giving us the information we need to make good decisions. For instance, the Energy Star program places EnergyGuide stickers on all sorts of consumer products, such as washers, refrigerators, and televisions, with standardized measures of energy consumption and operating costs.39 By law, the window stickers on new cars must show the EPA fuel-economy ratings and NHTSA (National Highway Traffic Safety Administration) crash-test rating. In the financial sphere, the relative risks of corporate and government bonds are rated by three well-respected private services (Moody’s, Standard & Poor’s, and Fitch Ratings). Institutional Shareholder Services (ISS) issues a widely used measure of corporate governance covering board structure, shareholder rights, compensation practices, and audit quality.
What we need to lay the groundwork for addressing income inequality is a new government measure of just how broadly assets are owned. Luckily, we can take one off the shelf, dust it off, and polish it up a bit.
In 1912, an Italian statistician named Corrado Gini published a paper titled “Variabilità e mutabilità” or, in English, “Variability and Mutability.”40 In it, he proposed a clever measure of dispersion which has come to be known as the Gini coefficient. Basically, you feed in a bunch of data, and the Gini coefficient will tell you just how “even” the series is, expressed as 0 for smooth and equal, and 1 for incredibly skewed. It can be applied to lots of different situations, but its most common current use is to measure economic data of just the sort we are concerned with here. For instance, the U.S. Census Bureau uses it to measure income inequality.41 In 1970, the Gini coefficient for income stood at .394. By 2011, it had climbed to .477. That doesn’t have an intuitive ring to it, but it’s pretty bad.
The same objective measure can be applied to the beneficial ownership of any asset. Suppose you and three friends decide to go in together on a rental property. If you each have one-quarter ownership, that’s a Gini coefficient of 0. On the other hand, suppose you put up all the money but decide to cut in your friends for 1 percent each because you’re a nice person. That’s a Gini coefficient close to 1. But suppose that the arrangement doesn’t work out because your friends act like they own the place, when for all practical purposes you do. So you buy out their interests. The Gini coefficient goes back to 0, because all the owners (that is, just you) have equal shares.
As you can see, just applying the Gini coefficient to an asset doesn’t get at what we want to measure. Instead, we have to make a small adjustment. First we need to define some population, say, adult U.S. citizens. Then assume for calculation purposes that people in the group who don’t own any of the assets have a 0 percent interest. Now the Gini coefficient reflects how widely owned the asset is across the population of interest. We could name such an index, applied to individual assets such as a stock or bond, the public benefit index, or PBI. For ease of use, let’s subtract it from 1, multiply it by 100, and round it to the nearest integer—in other words, make the PBI scale from 0 to 100, where 100 means very equitable, and 0 is highly concentrated.
Consider the PBI for the two hypothetical corporations described above. Even though the patriarch Marty Martin’s ten super-wealthy heirs have equal shares of his fortune, when you count in everyone else, the PBI would be close to 0. However, the more widely held Public Provisions might have a PBI closer to 30.
In a sense, public government-owned assets like national parks, which are available for use by everyone, have a PBI of 100. However, Michael Jackson’s Neverland Ranch, which he built almost entirely for his own amusement, would have a PBI of 0.
The PBI, as defined here, isn’t perfect. For example, it may be complex to compute it for the beneficial owners (as opposed to the nominal owners).42 But it’s probably adequate for the purposes of this discussion.
Now we can get to the meat of the problem. We’ve established a goal (income distribution approximately that of 1970), and we’ve got an objective measure of the public utility of a financial asset (its PBI). But this is just a number we can slap on stocks and bonds like the window sticker on a new car. How do we use it to reduce wealth and income inequality?
Let’s start with corporate tax policies. Some studies suggest that reducing or eliminating all corporate taxes would increase overall wealth.43 The problem, of course, is that this would mostly or exclusively make the stockholders more wealthy, not the general public. But suppose you were to scale taxes, or give tax breaks, to corporations with high PBI scores. This would put the more broadly owned companies at a competitive advantage. They could afford to invest more and ultimately expand their market (and market value), at the expense of more closely held competitors.
For our hypothetical online groceries, suppose that People’s Provisions had an effective corporate tax rate of 15 percent, while My Mart paid the (current) maximum of 35 percent. That would mean that People’s Provisions could afford to put $20 billion more to work than My Mart each year. It could build more distribution centers, offer better service, advertise widely, reduce prices, and increase dividends. Over time, its market share would grow, while My Mart’s share would shrink, generating more profits that would be distributed to an ever-widening swath of society.
Now, how would the stockholders of My Mart be likely to react? After reluctantly accepting the fact that their highly paid army of lobbyists isn’t able to get this tax policy reversed in their favor, they would have a simple decision to make—or, more accurately, to instruct their accountants to make. They might just keep collecting their enormous after-tax profits, but they might be better off selling part of their interest to the public, in order to raise My Mart’s PBI and therefore lower its tax rate, increasing their profits while making the company more competitive.
But People’s Provisions isn’t standing still. Seeing the significant benefits conferred by its broad ownership, it undertakes an investor relations campaign to expand it even further. The company makes a secondary offering of stock, with a twist. Taking a page from its own sales promotions, it agrees to pay the brokerage commissions for any shares sold to a new stockholder, effectively giving the new owners a discount for a “first-time purchase,” and requires that the stock be held for some prescribed period of time, say, five years. It also offers an incentive bonus to its underwriters’ legion of retail stockbrokers for hawking the offering to new stockholders. This offering is so successful that its entire cost is covered by the first three years’ reduction in corporate tax.
Not to be outdone, My Mart responds with a unique promotion: for every $500 a customer spends with the company, it offers a 50 percent discount from the current market price on the purchase of up to ten newly issued My Mart shares to qualified buyers. Each time you shop, you accumulate My Mart Points that you can cash in for stock.
In short, companies subject to this sort of tax incentive will find ways to distribute the ownership of their stock more broadly in order to reap the tax advantages. Even better, the government can monitor and adjust this process by changing how corporate taxes vary in response to the PBI. Similar incentives can apply to the issuance of bonds, though that’s a bit more complex. So, is the problem solved?
Not quite yet. That sounds great, but where are people with no assets going to get the money to buy securities in the first place?
There are lots of ways to address this, and to suggest just one, we could change the way we manage Social Security. Instead of relying on a monolithic and opaque centralized system of investment, we could give individuals more visibility and control over their own vested balances. We could permit people to select from a basket of individual stocks and bonds, or stock and bond funds, to tailor their portfolio as they wish, within certain bounds. This is similar to the way private retirement funds like 401K plans currently operate.
This has several advantages. First, it allows a much broader pool of people to play an active role in managing their retirement funds. By providing both higher visibility and at least a modicum of personal control, it enhances the sense of personal connection to society—a feeling that you, too, are participating in the American dream. Rather than the government simply taking money out of your paycheck with the distant promise that you may or may not get it back if you retire someday, you will understand where it’s going, what it’s worth, and how much you are going to get when the time comes. It’s harder to smash the display windows of a store in East Los Angeles when you are holding its stock in your Social Security account, without feeling that you are in part hurting yourself.
This additional visibility can also address a problem that currently bedevils the Social Security trust funds. Since none of us really has any idea how much of our money the government is investing on our behalf, it’s difficult for politicians to adjust the benefits paid to the actual rate of investment return and demographic trends. This is why changes to Social Security benefits are sometimes called the “third rail” of U.S. politics. But if people can see that the value of their portfolio went up or down this year, and their ultimate payments are tied to it, the whole system will not only make more sense, it can eliminate the need for legislative adjustments altogether. No more unfunded mandates, as is currently the case with our Social Security system.
But this isn’t the only way to get the ball rolling. Negative income taxes, government grants and rebates, and matching funds for various activities we want to encourage can help build each citizen’s portfolio. Rather than wait for someone to get a job before starting a Social Security account, the government could offer to add high-PBI stocks and bonds to the portfolio of people who volunteer for public-service work such as caring for the elderly, cleaning up parks, counseling troubled teens, distributing health education pamphlets, and the like. This could apply to retirees as well as those idled through unemployment or those who simply have some free time to spare.
To encourage commitment and continuity, the government could take a page out of the Silicon Valley startup playbook: restricted stock vesting. You sign up for some public-service activity and are granted a pool of shares that you don’t actually own yet. As you work, these shares become yours (vest) over time. This way, you are always cognizant of the consequences of quitting prematurely, and you have a goal and scorecard with which to monitor your progress.
The idea that everyone is a stockholder in society and has a retirement account automatically opened for them (say) on their tenth birthday would alter the sense of integration and participation in society. It would encourage public service and help people feel productive even if they aren’t directly earning a paycheck.
But the line between preretirement and postretirement needn’t be quite as sharp as it is today. As our cumulative wealth continues to grow, it will become more reasonable to permit people to receive dividend payments earlier than their golden years. In other words, we can allow working-age people to draw partial benefits and also reduce the full-benefit retirement age. In the extreme, your Social Security account, in conjunction with more garden-variety retirement and savings accounts, may provide substantial financial support throughout your working life.
Which brings us back to jobs. Money is not the only reason to work. People like to feel that they are useful members of society. They enjoy making a contribution to the welfare of others in addition to providing for themselves and their families. Most people feel great satisfaction in helping others, increasing their sense of self-worth, and giving their lives purpose and meaning.
In the future, some may decide to sit around all day playing video games if they have sufficient income to support themselves without working. But most people won’t settle for that. They won’t want to remain on the bottom rung of society, no matter how comfortable that rung may be in real terms. Some will still want to work at bona fide paying jobs, if for no other reason than to increase their standard of living, social status, and attractiveness to a mate. These instincts aren’t going to go away. But for others, a regular job may be seen as something of a cop-out, a self-centered way to get more for yourself without giving much back. They may choose to work part-time, or not at all, and instead to volunteer for government-certified public-service projects that will further enhance their retirement nest egg.
People aren’t only going to fish and golf full-time. They will also learn to play piano, paint, write poetry, grow prize orchids, sell handmade arts and crafts, care for wounded animals, exercise, and homeschool their kids. All these things are more than hobbies; they deliver real benefits to society.
The key to dealing with a shrinking pool of available jobs is not to create artificial ones by government fiat. It’s to rebalance the supply of economically motivated workers with the available pool of paid jobs. We can do this by adjusting the incentives for people to do other productive things with their time.
I’m by no means the first one to consider what the world will be like when our basic needs can be met without our own labor. None other than John Maynard Keynes, the legendary economist, wrote a fascinating meditation on this question in 1930 entitled “Economic Possibilities for Our Grandchildren.” In this thoughtful essay, he projects that within a century (which is nearly up, of course), continued economic growth would permit us to meet the basic needs of all humans with little to no effort. As he puts it, “All this means in the long run that mankind is solving its economic problem” (his italics). He goes on to distinguish between absolute needs and relative needs, suggesting that once the former are met, many people will “devote their energies to non-economic purposes.”44 His economic analysis was spot on but, to our disgrace, his expectations for wealth distribution have yet to be realized.
As we transition to a world where most of the work currently requiring human effort and attention succumbs to automation, it’s essential to distribute the benefits of our increased wealth beyond those who land the remaining good jobs or are lucky enough to accumulate private assets. Ultimately, we may find ourselves living in a symbiotic or possibly parasitic relationship with the machines, as I will explain shortly.
So what about Super Bowl LIX and the problem of the intelligent place-kicking shoe? After much deliberation, the NFL hit upon a creative solution. It established an annual $1 million prize for the best improvements in players’ gear, with carefully proscribed limits as to what contestants could and could not do. The resulting inventions were made freely available to all teams in the league.
Soon, innovations were everywhere, some of which necessitated changes to the rules of the game. Most notably, some clever MIT engineering students developed a shoe that allowed players to jump impossibly high in the air and land safely on their feet. With this new footwear, it became increasingly hard to kick a field goal because the opposing team’s players could simply jump high enough to intercept the ball. Professional football games started to feel like the quidditch competitions of Harry Potter fame, in which players fly through the air on magic broomsticks. So the NFL added a height restriction on the games. A ball flying over forty feet in the air was out of bounds, and any player whose helmet crossed a height of thirty feet was automatically offside.
Not only did this restore the fun of the sport, but attendance and revenues were higher than ever as the players developed a whole new class of breathtaking athletic moves. The NFL commissioner, in his annual remarks, described the new gear as the greatest improvement to football since the instant replay.
Still, some people were unhappy with these developments. They preferred the old-fashioned game in which players wore uniforms and gear made only of ordinary materials. So they formed a new league, the CFL (Classic Football League), which became quite popular among a certain set of old-timers and purists.