Addressing the roots of populism by democratizing capitalism
By Former Rep. Earl Pomeroy (D-N.D.)
Eight years after the crisis, the latest primary exit polls show voters’ top concern is the future of our economy. Seven out of ten Republicans in Illinois and North Carolina and roughly eight out of ten Democrats in Missouri and Ohio were worried about the future of the economy. These voters’ frustrations are not driven by ideology, but rather, the economic reality of the past few decades. Businesses have increased productivity by 72 percent since 1973, yet worker wages have risen only 9 percent. The middle class is shrinking and an estimated 60 percent of Americans do not have adequate retirement savings. And many voters don’t see a solution in sight from Washington.
While the responses to economic insecurity issues differ starkly among Republicans and Democrats, there is bipartisan recognition that employee ownership produces positive results for businesses and workers alike. Economists from the right and the left agree, businesses structured as Employee Stock Ownership Plans (ESOPs) enjoy superior performance while their workforce materially benefit from having a “piece of the action” tied to the success of the companies where they work.
New research on ESOPs from Vice President Biden’s former chief economist Jared Bernstein is the latest example of the growing body of research in support of ESOPs. His study “Employee Ownership, ESOPs, Wealth, and Wages,” uses empirical data to assess the equalizing effects of ESOPs on wealth and wages. ESOPs, Bernstein discovers, give middle-and-lower-rung workers a share in their companies’ investment pie. ESOPs have more equitable wage distribution and are also more likely to offer a 401k or similar retirement plan in addition to stock shares.
In addition, Bernstein and others have found that ESOPs are more stable employers. In 2008, during the recession, ESOPs grew employment at a rate of 1.9 percent, while non-ESOP employment shrank by 2.8 percent. They help keep jobs here in America because workers have skin in the game, and they support more stable growth.
While serving in Congress, I saw first-hand how ESOPs in North Dakota transformed the financial lives of many Americans. A prime example is Fargo-based Border States Electric, one of the largest electrical distributors in North America. The company formed an ESOP in 1984 when a majority owner retired and sold his shares. It became 100% employee-owned in 2000. Since this critical transition, the company has grown from less than $300 million in annual revenue to $1.7 billion with 80 branch locations in 16 states. Each year, Border States employee owners share in the success of the company with cash bonuses and generous company contributions to the ESOP. As a result, it’s common to find retirees with significant wealth in their ESOP account—even from positions of relatively modest wages.
Right now, there is rare bipartisan support for legislation that would support the increase of ESOPs. The Promotion and Expansion of Private Employee Ownership Act would provide the same incentives currently afforded to the owners of C corporations to the owners of S corporations and establish a government office to help facilitate company transitions to ESOPs, similar to offices at the Small Business Administration. It has 28 cosponsors in the Senate and 66 in the House of Representatives, including Democratic presidential hopeful Sen. Bernie Sanders (I-VT).
While ESOPs aren’t a comprehensive solution to the income inequality issue, they work, enjoy bipartisan support in Congress, and should be one aspect of public policy where common ground can be found in this noisy election year. The chance for employee ownership should be made available to more workers and steps can be taken to encourage this uniquely successful way to structure businesses in today’s marketplace.
Our country’s problem with income inequality will only be made more difficult as more people reach retirement. Bernstein’s study clearly shows how ESOPs can help Americans save for their future, and Congress, the White House, and presidential candidates would do well to consider them as they seek to tackle income inequality, retirement security, and economic growth.