A cure for income inequality

There are a few signs pointing the way for change in the real issue of our time: income inequality. While they are isolated, they point clearly to one unassailable fact, that change won’t come from the top.

Ever hear of the “Iron Law of Wages”? The term refers to an idea ascribed to 19th-century socialist philosopher Ferdinand Lassalie. The concept is simple: Wages cannot fall below subsistence levels because, if they do, workers will be unable to work. The idea is more popularly credited to the 19th-century political economist David Ricardo, who suggested that competition among companies would squeeze profit margins and this would press wages toward subsistence levels.

The concept should strike a chord since it rather adequately describes the “hollowing out” of middle-class income in the United States, where real income (income adjusted for inflation) has remained steady or slightly negative for 90 percent of working Americans while increasing from 275 percent to 480 percent for the top 1 percent. The reasons for the disparity are assigned to a variety of factors — a change in corporate culture from balancing obligations to clients, employees and stockholders to exclusively focusing on stockholder values; globalization, or the ability to ship jobs overseas to less expensive labors markets; greed on the part of executives and the clubby atmosphere of corporate directorship willing to pay executives excessive salaries and bonuses; and the more-than-favorable treatment by taxing authorities systematically shifting the tax burden from the wealthy to the less wealthy.

{mosads}The problem is now endemic, since the corporate tax system has allowed loopholes for corporations to ship profits overseas where they are not taxed, periodically allowing for repatriating the profits at less than most statewide sales taxes (5 percent), and now allowing for mergers with foreign companies in order to avoid or dramatically reduce domestic taxes.

It has become so endemic as to have spawned the phrase “economic patriotism” and prompted calls from marginal political and entertainment types like Ralph Nader or Bill Maher suggesting that corporations that make their money in the U.S., but find ways to avoid paying taxes, should be taxed in different ways as a penalty for disloyalty.

But that requires congressional action and that is clearly not in the cards and Congress’s record on employee income support has been thwarted by recent failures to increase the minimum wages, support wage parity, extend unemployment insurance, provide relief for student debt or reform or balance the tax burdens. It was clearly displayed recently by a political cartoon with a politician mouthing words of support for workers while on his way to his bank to deposit corporate donations.

Enter into this scenario two events. First an insurance company manager’s appeal to Robert Reich and second, a family squabble in a Northeast retail food chain named Market Basket. Reich has been prominent (as the former secretary of Labor under President Clinton) in pressing for jobs and the middle class. He received and posted on his Facebook page a letter from an insurance company manager who had just been given a directive to limit the number of bathroom breaks for his employees and cut their lunch hour by 15 minutes. He wanted to know what to do.

The family feud at Market Basket erupted publicly when the longtime CEO Arthur T. Demoulus was ousted by more profit-seeking members of his family. Market Basket is a regional food retailer known for its low prices and loyal workforce. The family had been complaining that it was not receiving enough money from the 71 stores in Massachusetts, New Hampshire and Maine. ATD, as Demoulus is known, had for the past 20 years paid above-market wages and generous benefits while pricing goods at decidedly lower prices than competitors. Apparently, even though the chain earned over a half billion dollars in the past 10 years, family members felt it was not enough.

In Reich’s case, he threw the question out to his more than 2 million followers for their insight and as a result suggested the manager start by addressing upper management with a number of studies that indicate that goal-oriented management, rather than regimentation, provides better outcomes.

The Market Basket situation is more complicated. Nine managers were fired for objecting to ATD’s ouster and other managers and store employes effectively went on strike in support of those ousted. What is even more impressive is that customers started boycotting the stores and have effectively shut the chain down. The outcome is not certain, but there is a move afoot for ATD to buy out the disgruntled members. The chain is valued at $3.5 billion.

You can be sure in both cases that the trend toward shareholder values over human capital has not abated. But they are hopeful signs. These two situations suggest the means by which abatement has to take place — namely, pressure from the bottom. Corporate capitalists dominate political power and legislators are beholden and unwilling to rebalance the playing field. Democrats, traditional ones (which does not include most of the current class of elected Democrats) have to mobilize this discontent with boycotts, strikes, court cases and demonstrations that effectively shutdown the oppressors one company at a time. Corporations that manifest a virtuous corporate culture like Costco, Apple, Procter & Gamble and Starbucks need to be lauded publicly for their employee policies and companies like the unnamed insurance company (above) and Wal-Mart, McDonalds and Papa John’s, to name a few of the publicly notable ones, should be struck for better wages, better benefits, less profiteering and a better balance between executive and employee income. The Democratic Party should endorse and finance the effort.

The unfortunate truth is that American workers’ ability to bargain for wages and benefits has been substantively diminished to the point where the only remedy is economic action. Unions and unionizing have been hamstrung by “right to work” concepts and their own spotty performance, the government is no short-term solution and the corporate culture has no pressure to do anything more than exploit the environment.

Russell is managing director of Cove Hill Advisory Services.