It’s hard to know what Henry Ford would make of the World Economic Forum, the annual gathering of the Capital Class in Davos, Switzerland. He’d certainly not like the preponderance of Audis on the icy roads. But the Ford Motor Co founder would probably approve of two talking points that will course through conversations among this year’s assembly of plutocrats: paying employees more and taxing them less.
The problem of rising inequality of wealth and opportunity has dominated the WEF since the financial crisis. Despite much lip service to what many of the ultra-rich perceive as a long-term existential threat to their fortunes, the gap has widened inexorably. As charity Oxfam pointed out this week, the share of wealth owned by the richest 1 percent of the world’s population has increased from 44 percent in 2009 to 48 percent in 2014, and is set to exceed 50 percent next year.
Capitalist economies will always have some inequality, but extreme discrepancies between the haves and have-nots can spawn violent disruption. It doesn’t take the wisdom of a Henry Ford to explain why that is bad for business. As self-described lucky tech billionaire Nick Hanauer put it in an essay entitled “The Pitchforks Are Coming… For Us Plutocrats” in Politico magazine: “Unless our policies change dramatically, the middle class will disappear, and we will be back to late 18th-century France. Before the revolution.”
The reduction of wealth inequality requires broad shifts in public policy and many thousands of corporate acts embodying what Goldman Sachs might call long-term greed, akin to Ford’s momentous decision to double the wages of his factory workers in 1913. There are signs of progress from both governments and capitalists.
On the policy front, look no further than U.S. President Barack Obama’s State of the Union address from last night. Obama called for changing incentives in the American tax code, to make them less generous to accumulated and inherited capital and more generous to earnings from the job. The privileged would pay $320 billion more in new taxes over 10 years, and lower- and middle-class families would gain $175 billion of credits.
Some 99 percent of the funds garnered from higher taxes on capital gains would, according to the White House, come from the wealthiest 1 percent of taxpayers. On the other side, a second-earner tax credit would help families making up to $210,000. The White House also wants to triple the childcare tax credit and expand its availability to households with incomes of up to $120,000.
This is precisely the sort of shift needed to stifle the march of inequality, according to Paul Marshall, who as a leading European hedge fund manager has certainly been a beneficiary of a trend he considers unsustainable. Speaking at the Reuters Breakingviews Predictions Panel in London last week, Marshall noted that the composition of taxes in the European Union falls disproportionately on labor – with 60 percent on work, 20 percent on consumption and the rest on property and unhealthy items.
Marshall is worried that change will be difficult to achieve, particularly in the United States, because the Capital Class has too much political influence. The American experience matters because, as Marshall wrote recently in the Financial Times, “the United States is still the lodestar of the world economy.”
On the private side, Ford’s clearest heir of the moment is Aetna, a $33 billion Connecticut-based insurance company. Last week, it voluntarily lifted the wages its lowest-paid workers receive. The company led by Mark Bertolini said 5,700 staffers will see their hourly wages rise on average by 11 percent to $16 an hour. For some workers, the rise will be as much as 33 percent. The move will cost Aetna some $25.5 million a year.
Bertolini is under the influence of French economist Thomas Piketty, whose best-selling “Capital in the Twenty-First Century” has put numbers and theory behind the worries about inequality. Yet Aetna’s shareholders didn’t seem to mind this apparently expensive gesture. Aetna stock rose 3 percent, adding $1 billion of market value, in the following week.
Investors presumably saw the upside of Bertolini’s decision. The most basic is that higher pay can improve dedication and reduce expensive turnover. The desire for better workers was one of the primary drivers of Ford’s wage epiphany. He wrote: “Low wages are the most costly any employer can pay. It is like using low-grade material – the waste makes it very expensive in the end.”
For Bertolini himself, there’s another advantage to giving his workers a raise. Those working 40 hours a week at the new minimum wage will make about $33,000 a year. That has the effect of reducing Bertolini’s take-home pay of around $4.76 million to 144 times that of Aetna’s lowest-paid worker’s, down from around 190 times at the previous minimum. That’s still an absurdly high ratio, but it’s a step in the right direction.