Rewriting the Rules: Frequently Asked Questions
December 3, 2015
1. What are “the rules”?
Rewriting the Rules defines “the rules” as:
The regulatory and legal frameworks that make up the economy, like those affecting property ownership, corporate formation, labor law, copyright, antitrust, monetary, tax and expenditure policy, and other economic structures. They also include the institutions that perpetuate discrimination, including structural discrimination—an entire system of rules, regulations, expenditure policies, and normative practices that exclude populations from the economy and economic opportunity. Unequal socio-economic outcomes for women and people of color are rooted in this kind of structural discrimination, in addition to other forms of bias.
All economies require some laws and regulations in order to function. Rules assign property rights, outlaw unfair practices, and prioritize ownership claims. Rules provide incentives for some economic activities (for example work) and discourage others (for example stealing). The rules that govern our financial markets, corporations, and jobs directly impact the lives of all Americans; as a result, all rule-making is inherently political. There could be no functioning market economy without rules, so what we often call “deregulation” is in fact “re-regulation”—a change in the rules to benefit a specific set of stakeholders. For example, the last 35 years of supposed “deregulation” and “reform” on Wall Street and in the tax code has overwhelmingly benefited the wealthy at the expense of average Americans.
The rules that govern our economy create winners and losers, and today’s rules protect the fortunes of the rich while making it harder for ordinary Americans to afford a middle-class life. For this reason, the Roosevelt Institute believes we must rewrite the rules of the economy in order to promote equal opportunity for all Americans.
2. Will fighting inequality hurt growth?
Over the past 35 years, U.S. economic policy has been guided by “trickle-down economics”—a theory which holds that wealthy individuals and large corporations hold the secrets to economic progress and that efforts to create equity would hurt economic efficiency and slow growth. As a result, we’ve subsidized and incentivized many of the wealthiest Americans’ unproductive behaviors at the expense of ordinary Americans.
But there has been a radical shift in economic theory since the middle of the 20th century, and a raft of new evidence forces us to reexamine long-held beliefs. We now understand better the strengths and limits of markets, and recognize that markets do not exist in a vacuum: They are shaped by our legal system and our political institutions. The best research today tells us we can improve economic performance and reduce inequality at the same time. Put simply—the notion that we have to choose between shared prosperity for many more Americans and economic growth is false.
Today, a large share of rising corporate profits and incomes at the top come from economic activities that are economically unhealthy. This behavior—which includes making risky short-term investments on complex financial assets instead of stable long-term investment in business growth—is called “rent-seeking.” Rent-seeking can and should be deterred through targeted tax increases and regulation. Rather than inhibiting economic growth, rebalancing incentives toward more productive investment and innovation will actually enhance growth.
Beyond macroeconomic effects, fighting inequality lays a foundation for long-run growth by providing individuals the opportunity to find success in the labor market and reap the benefits of their economic contributions.
The Rewriting the Rules agenda strives not only to improve distributional fairness but also to improve overall economic performance by setting incentives that encourage positive, sustainable economic behavior while discouraging unproductive rent-seeking.
3. Isn’t government part of the problem? Won’t more government intervention stifle business growth and the free market?
Getting Americans to trust that government can not only work, but work in their favor is indeed a major obstacle to the Rewriting the Rules agenda. Bad government policy, dictated by powerful interests, played a large part in creating the 2008 recession, so it is understandable that many question whether the government can contribute to real economic improvements. The reality, however, is that there could be no markets without the laws and regulations that structure them, so it is not only possible but essential to reconsider policies when they fail to provide broad prosperity.
The argument that free markets could solve our economic issues is based on the false premise that markets provide the ideal distribution of goods and services and that government only obstructs this balance. In reality, unregulated businesses will go to great lengths to generate undue profits by creating monopolies, driving down wages, and taking on unsustainable economic risk. Rather than promoting fairness, champions of a so-called free market are often making a thinly-veiled appeal for rules that benefit themselves over others. Since the late 1970s, tax breaks for corporations and the wealthy, anti-labor policies, and financial deregulation have all been passed under the guise of free market reform. Such policies have hurt the middle class and overall economic performance.
Rather than continue to dwell on the false dichotomy between regulation and free markets, we should accept that all markets require some regulation, and should begin to consider how various policy options will affect regular people.
New evidence suggests that, while improving market distribution, the policies contained in the Rewriting the Rules agenda would pose no threat to economic performance, and in fact would likely improve it. There are a number of government interventions, like investments in education, research, and infrastructure, that can help businesses thrive while proactively fostering innovation, growth, and long-term stability. Conversely, better policy could counter the burden of student debt and the difficulty of securing health care, thus promoting entrepreneurship.
Balancing government policy to support growth without enabling nefarious practices is essential to ensuring long-term economic health. Inequality in America is a choice, and we can make a better one without sacrificing our country’s potential growth.
4. Why tax the rich more? Why should we punish people for having success?
Proponents of trickle-down economics argue that tax cuts for the wealthy would put additional capital in the hands of capable investors, who would put the money to use in ways that would boost growth. The rise of this belief has led to a tax system that is riddled with loopholes for large corporations and the wealthiest individuals. Unfortunately, after 35 years of experimenting, it is now clear that tax cuts for the wealthy fail to deliver widespread benefits. While effective tax rates for corporations and high earners dropped, there was no discernible benefit to economic growth or business investment.
The result is a severe tilt of the tax system in favor of the wealthy. As a result of provisions like the Step-up Basis at Death, which helps wealthy families to avoid capital gains taxes, and the carried interest loophole, which allows hedge fund managers to escape income taxes, America’s wealthiest 0.1 percent pay a lower rate than the next wealthiest 0.9 percent, and the top 1 percent pays only 20 percent of their income in federal taxes, despite a statutory income tax rate of nearly 40 percent and average annual earnings of nearly $1.5 million. Tax breaks for the wealthy rob the public of considerable revenue: The low capital gains rate alone cost the U.S. government $161 billion in revenue in 2013, 70 percent of which went to the top 1 percent.
The accumulation of these small changes in the tax code has left the United States with one of the least generous tax and transfer systems in the world. The Luxembourg Income Study finds that among working-age adults, the United States stands apart from most advanced economies by having among the highest inequality of market income as well as the highest inequality of post–tax and transfer income. Higher taxes on the rich, therefore, do not represent class warfare, but simply a restorative force on an imbalanced system.
5. What does inequality matter if everyone has the same opportunity to work hard and get ahead?
In theory, closing America’s enormous gaps in economic opportunity would do much to alleviate the most troublesome aspects of inequality, but in reality inequities of income and mobility are inextricably linked: Rising inequality undermines upward economic mobility, so no policy agenda that ignores distribution could be said to address mobility in a meaningful way.
Research shows a direct correlation between inequality and intergenerational immobility, and the U.S. sits at the upper end of both spectrums, even when accounting for factors like intelligence and college attendance. This means that, even given the same talent and training, wealth can still play a decisive factor in an individual’s ability to succeed. The pattern of low income and low mobility is especially pronounced among people of color; African American children born in the bottom quintile are half as likely to increase their wealth as are their white counterparts.
All of this is corroborated by evidence that shows policies that fight discrimination and improve distribution lead to higher earnings both for current workers and for their children.
Clearly policy cannot and should not determine how much money people make, but it can do much to limit the exploitation of vulnerable populations, unfair corporate practices, and other harmful economic behaviors that have driven down wages and driven up inequality over the last 35 years. These efforts, in addition to investment in education and infrastructure, will be a major facet of efforts to restore broadly shared opportunity to all Americans.
6. Even with these changes, won’t systemic discrimination still oppress women, minorities, and other vulnerable populations?
The comprehensive economic agenda we have suggested will go a long way to promoting equity for those who are currently marginalized and oppressed, but changing economic rules alone will not be enough to combat persistent and unchecked discrimination against women, people of color, and immigrant populations. Policies like universal paid sick and family leave, criminal justice and immigration reform, and improved enforcement of labor standards are necessary to help the communities who have been left behind, but they are not sufficient. In addition to these critical reforms, our nation will need sweeping cultural change to ensure equal inclusion and opportunity for all. This is why our team partners with advocacy organizations and supports movements that push for cultural and social transformation. Research, advocacy, and activism are all essential components of any movement hoping to end structural discrimination.
7. How is any of this different from what liberals have been saying for decades?
This isn’t about liberal or conservative, new or old; it’s about doing what works. For the last 35 years, we have experimented with trickle-down economics, and the results are in: Average Americans have seen their incomes stagnate, and the promised growth has failed to materialize. Our comprehensive approach builds on the the latest economic research and outlines an evidence-based agenda that will reduce economic inequality and improve growth. Where many progressive agendas are focused simply on redistribution, we are focused on fundamentally rebalancing the structures of our economy to improve market income and market performance. Our agenda includes new ideas from leading scholars and policy experts, like rules to curb Wall Street malfeasance, as well as classic, common-sense initiatives, like raising the minimum wage and protecting workers’ right to bargain collectively. Not every policy is new, but they are all designed to work for regular Americans.
We’re open to ideas across the political and temporal spectrum as long as they restore balance to our economy and help more Americans achieve a better life.
8. How does all of this relate to the sharing economy?
In Rewriting the Rules, the Roosevelt Institute argues that inequality is not driven by natural evolutions like technological advances or globalization, but by the rules that mediate how the economy reacts to these changes. The gig economy is no different.
Without benefits or minimum wage guarantees, peer-to-peer platforms like TaskRabbit may appear to create inherently unstable jobs, but this is only because politicians have yet to adapt our existing laws and institutions—like the worker’s compensation protections and the National Labor Relations Board—to new economic realities. Manufacturing work was similarly unstable prior to New Deal reforms, and it would have remained so if Franklin Roosevelt had not worked to pass the Fair Labor Standards Act and other labor reforms, which guaranteed things like the minimum wage.
Just as the Industrial Revolution necessitated the formation of new institutions, like Social Security, so too will the digital revolution. We may need to reimagine employer–employee relationships or labor institutions that will better serve participants in the sharing economy, but we cannot assume the emerging economy will naturally ensure balanced and equitable growth.
These are themes the Roosevelt Institute is proud to work on through our Next American Economy project.
9. Which of these policies should come first?
There is no silver bullet to fix our economy. No single law or regulation will correct decades of policy missteps. At the same time, we know that a tentative, piecemeal approach to change will not suffice. We need a comprehensive agenda that fundamentally rewrites the rules of our economy.
The erosion of economic security and mobility of average Americans didn’t happen overnight, and neither will the process of restoring balance to our broken system. We need to focus on a range of important areas at once and allow for incremental improvements to pave the way for further reform.
However, we must also remember that, for too long, policymakers have prioritized the voices of those with the most power and privilege while those who face intersecting layers of oppression (e.g. trans women, disabled people living in poverty, queer/LGBT people of color, etc.) are expected to wait their turn. So while our efforts must be comprehensive, it is important that we prioritize those who have been silenced time and time again. Efforts to overhaul the prison industrial complex, for example, cannot be sidelined by issues seen as “mainstream” to those fighting against economic inequality. These systems are all interlocking, and by targeting those that oppress those who are the most vulnerable in our society, we can ensure those disadvantaged groups are not left behind yet again.
10. How does the public feel about this?
Americans overwhelmingly believe we need an economy that works for the middle class, not an economy governed by trickle-down. Recent polling by the Roosevelt Institute shows that an agenda to rewrite the rules of our economy in order to level the playing field and grow the middle class and America outperforms trickle-down policies.
The polling shows that only 21 percent hold a favorable view of trickle-down, while 84 percent of voters believe leveling the playing field in favor of working Americans and small businesses will lead to greater economic growth and raise the incomes and living standards of the middle class and working families. Raising taxes on the CEOs and the wealthy, reforming our financial markets, curbing corporate short-termism, paid leave, and investing in infrastructure all received over 70 percent public support.
Furthermore, according to a 2015 CBS-New York Times poll, 61 percent of Americans feel money and wealth should be more evenly distributed, while 66 percent believe that only the wealthy can get ahead in today’s economy. The same poll found that 74 percent of Americans—including 62 percent of Republicans—agree that corporations have too much influence on American life and politics.
These polls and recent movements like Fight for 15 and a Union demonstrate a hunger for real change that will rewrite the rules of the American economy so that prosperity and opportunity is available to all Americans, not just the wealthy few.
11. This report seems to focus overwhelmingly on the 1 percent and the middle class, but what about the country’s poorest citizens?
Our arguments and policy solutions aim to increase opportunity and boost incomes for the poorest Americans and for members of the struggling middle class. Too often conversations about poverty in America are focused solely on social welfare programs that address the worst symptoms of poverty but fail to address the root causes of inequality. We support social welfare programs, but Roosevelt’s Rewriting the Rules agenda seeks a world in which markets begin to distribute wealth equitably and these programs are increasingly unnecessary.
Many of our policy suggestions tackle the structures just under the surface that contribute to poverty. Pursuing full employment and a tight labor market through better monetary policy, for example, would benefit both median and poor workers. From 1992 to 2000, when unemployment dropped below 4 percent, wages at the 20th percentile grew by roughly 17 percent while the median wage grew nearly 14 percent. Improved financial regulation is no different; as the housing bust and foreclosure crisis shows, a poorly regulated financial system can cause broad instability, which—both directly and indirectly—falls hardest on people at the bottom. Other policies we propose, like investment in public transportation, will help reduce the “high cost of being poor,” which many scholars have identified as a factor in reducing mobility.
Lastly, while many of the issues addressed in Rewriting the Rules may seem to be “middle class” concerns, there are broader theoretical reasons to focus on these policies. All people are subject to the risks of getting sick, losing their job, retiring with no savings, or being unable to work. A broad commitment to social insurance programs like Medicare and Social Security benefits everyone and reduces both the anxiety of middle class insecurity and the crushing burden of poverty.
12. Isn’t growing inequality really caused by globalization and technological advancement?
Globalization and the technological advances hold enormous potential to drive global integration and create profound opportunities for expanding general welfare. However, they also create opportunities for businesses to obstruct healthy economic growth by garnering profits through complex restructuring and arbitrage (“rent-seeking,” as defined above). The path we end up on depends on the rules that we choose to govern our economy.
A simple international comparison helps explain the point:
Like the rest of the world, the United States is experiencing rapid economic change. No economy is immune to the world’s increasing integration, interdependence, and technological advancement, yet other countries are experiencing nowhere near the rise of inequality seen in the United States. Despite experiencing the same exposure to technology and globalization, many other countries have managed to shape their economies in ways that have produced more shared prosperity with equivalent economic growth. So what makes America different? Logic dictates that the difference must lie in the rules we choose to structure our economy: Other countries have done a better job of using policy to promote fairness, incentivize investment, strengthen wages, and preserve open competition.