To lower wealth inequality, the U.S. must increase capitalism.
American capitalism has lifted all boats — more than doubling real median family incomes since the 1950s — but it has also resulted in very unequal outcomes in asset ownership. In the U.S. today, about 30 percent of all wealth is owned by the top 1 percent of households, while the bottom half own a mere 2.5 percent, unadjusted for promised Social Security and defined benefit pension payments.
Yet, contrary to popular opinion, lowering American wealth inequality requires more capitalism, not less. To help resolve the gap between America’s richest and poorest, we must let free markets lift the bottom up.
Americans are uniquely called to democratize prosperity. More than any other country in history, we have excelled at creating it. The reason for this is simple: capitalism. More than any other nation, Americans have embraced Milton Friedman’s philosophy that the purpose of business is to make money, within the constraints of law and prevailing social customs.
The results have been astounding. While the U.S. accounts for 4 percent of the global population, it has 38 percent of the globe’s millionaires. Last year, American households owned about $160 trillion in financial and real assets, equivalent to about $550,000 per adult. Only Switzerland has higher average wealth per adult. Adults in the U.K. and Germany, Europe’s largest economies, average about $300,000 and $250,000 in wealth, respectively. In Japan, it is even lower, at around $215,000.
Greater wealth is usually viewed positively, but greater wealth inequality is seen by many as a problem to be fixed. According to Pew Research, “The wealth gap between America’s richest and poorest families more than doubled between 1989 to 2016.” American wealth disparity also has a strong racial component: while the average white household has $1.32 million in wealth, the average black household has $307,000.
President Donald Trump now has an opportunity — and given his election mandate, perhaps even the responsibility — to reverse wealth inequality. He should do so by using capitalism to enrich his country’s poorest.
We know taxing ourselves to greater equality won’t work because we’ve tried that already. Since 1989, over the same time the wealth gap has doubled, the share of federal income taxes paid by the top 1 percent of earners has risen from 28 percent to 40 percent. Increasing taxes on our highest earners did not and does not reduce wealth inequality.
Besides, there is also a practical limit to how much wealthy Americans could actually do. If the U.S. raised marginal tax rates to 100 percent on all income over $500,000, that would still not be enough money to close the current federal deficit. In fact, confiscating every penny from every American billionaire would not fund the federal government for a single year.
Too much capitalism isn’t driving our unequal outcomes. The problem is we don’t have enough. So what is the solution? American household wealth has been created in three primary ways: homeownership, long periods of broad stock market ownership, and direct participation in the value creation process of successful, new private businesses. These same tools of capitalism and free markets should be further democratized, generating wealth for those who would otherwise be left behind.
Broadening American Homeownership
Homeownership has been the primary way that millions of American families have built wealth. Expanding homeownership most especially in lower-income racial-minority communities would have significant ancillary benefits beyond wealth generation. Relative to children of renters, children of home-owning parents have a more stable life, greater educational attainment and higher income mobility. This difference is especially stark among low-income families. Homeownership correlates with improved health, educational, and career outcomes, all vital components of family well-being.
Two particular demographic challenges need targeted rectification. The home ownership rate for black Americans is significantly lower than that of white Americans (44 percent vs. 73 percent). If the U.S. wants to level up through greater homeownership, both the public and private sectors must focus on ways of improving access for younger generations, as well as black and Hispanic families.
Increasing the supply of affordable housing is also a crucial part of the equation. Here local, state and federal policies that open up surplus land on favorable terms to home builders for affordable housing developments along with reforming local land-use and zoning policies would go a long way to address the problem.
One especially innovative way homeownership could be dramatically increased is by deploying the power of markets. This would involve unlocking appreciating home equity for first-time home buyers, through interest-free shared appreciation loans from investors who in return participate in home price appreciation with the home owner on a pro rata basis. Capital for these shared appreciation loans could come from institutional investors. Home equity is America’s second-largest asset class at $35 trillion, yet it sits largely untapped. As an asset class, home equity generates attractive, diversified, low-risk inflation-adjusted returns. Additional policy changes could include tax incentives for investable instruments backed by consumer-friendly shared appreciation mortgages (such as municipal bonds issued by local Housing Finance Agencies) to attract private capital, jumpstarting a new asset class. Removing constraints on privately funded shared appreciation mortgages imposed by Fannie Mae and Freddie Mac would also help spur this solution.
Revolutionizing American Retirement
The Federal Reserve reports 28 percent of non-retired adults have no retirement savings. More than 40 percent of all full-time working Americans have no access to a retirement plan. About 75 percent of full-time workers earning less than $26,400 per year have no viable way to save for their retirement. Millions of hard-working Americans are unable to build up their own retirement nest egg simply because they have no nest.
If President Trump wants a commonsense bipartisan solution to remedy these ills, he need look no further than the Retirement Savings for Americans Act (RSAA). Kevin Hassett — the director of the National Economic Council — says that “this legislation would put millions of Americans on the path to financial security and help them build intergenerational wealth.” Co-sponsored by Senators John Hickenlooper (D., Colo.) and Thom Tillis (R., N.C.), as well as Representatives Lloyd Smucker (R., Pa.) and Terri Sewell (D., Ala.), the RSAA would effectively provide all working Americans with plans modeled on those provided to federal workers and members of the uniformed services if they can’t get one through their employer.
As explained by Hickenlooper and Tillis, RSAA contains five essential tenets: (1) eligibility/auto-enrollment; (2) matching contributions; (3) portability; (4) intergenerational ownership (allowing benefits to be passed to one’s rightful heirs); and (5) diversified investment options. Under RSAA, all full- and part-time workers who lack access to employer-sponsored retirement plans would be eligible for retirement savings accounts involving automatic 3 percent deductions of their income. As long as they remain employed, participating low- and moderate-income workers would also be eligible for federal matching funds up to 4 percent of their income. Investment options would be identical to the Thrift Savings Plan for federal employees, which permits larger equity exposures in early years, graduating to fixed income as retirement approaches. Such “lifecycle” funds maximize returns in one’s youth while providing safer, more predictable income streams in retirement. As with some of our other suggestions, such a plan involves modest government support (in this case an estimated $40 billion a year), but the return on public investment from providing access to the wealth-generating capacity of the markets would be many multiple times the cost.
Expanding Employee Stock Ownership Plans
The last proven strategy for wealth creation involves owning a share of the business one works for. A market-friendly policy the Trump-Vance administration could promote involves a trusted and historically popular program: employee stock ownership plans (ESOP). Here, bipartisan legislation has also already been proposed in the Senate.
Pending legislation would enable the voluntary sale of U.S. businesses to American workers through an ESOP structure without risking any taxpayers’ dollars. By equipping the Department of Commerce with a zero-subsidy investment facility, Congress could prevent the offshoring of U.S. manufacturing firms, enhance the resilience of U.S. supply chains, and enable American workers to accumulate substantial retirement assets. By supporting licensed private investment funds, Congress could further support the private market to finance the sale of privately held businesses to their employees through an ESOP at zero subsidy cost to the taxpayer. Leveling the playing field for a sale to an ESOP would enable American businesses to remain domestically owned as an alternative to foreign mergers and acquisitions, bolstering supply chain resiliency and U.S. strategic competitiveness. ESOP participants have more than twice the average retirement balances of other Americans, proof of their effectiveness in building and retaining personal wealth over decades.
Promoting Wealth Equality the American Way
The last time a solid majority of Americans said they were satisfied with the way things were going was January 2004. Then, the S&P 500 was 82 percent lower and accumulated U.S. homeowner equity was 72 percent less. Since 2004, Americans have become much wealthier and, according to a range of polls, seemingly less happy.
But there is no need for despair. A more equal America can be built by allowing capitalism to lift the bottom up. Taking from the rich and giving to the poor seldom makes either side happier: People want to earn their own success, not be handed someone else’s. The U.S. can and should strive for greater wealth parity by proactively enriching the poor. The best way to achieve this is by expanding capitalism, not thwarting it.
Enlarging access to homeownership, self-funded retirement accounts, and employee stock ownership plans — three proven wealth creation channels that have enriched many other Americans for decades — would bring America’s poorest greater financial resources without penalizing the success of others. The American dream is about earning one’s own riches. Capitalism and free markets have created unsurpassed American wealth and prosperity. Let’s put these powers to full use for the benefit of everyone working at the margins in this country.
Terrence R. Keeley is the author of Sustainable and CEO of the Impact Evaluation Lab. Jim Sorenson is the chairman of the Sorenson Impact Foundation.