Broadening Ownership of Productive Assets:
Time for a Major Collaborative Transformative Effort
It is time to begin to build a global coalition in support of new ways to hold and use productive wealth on behalf of local communities. Such an effort must encompass–but also go beyond--beyond issues of trade and global financial difficulties. Thirty-five years of American experience suggest some of the reasons why the time is ripe for such an effort–and some of the powerful developmental trends which can be built upon.
Wealth and income inequality in the United States have increased dramatically over the past three decades. Since the mid 1970s, households in the top 5 percent have seen their share of national income increase by a third (from 15.9 percent to 21.5 percent); and the inflation-adjusted income gap between the average family in the top 5 percent and the average family in the bottom 20 percent has grown from $142,658 to $235,392 (in 1999 dollars). The top 1 percent’s share of household wealth nearly doubled (from 19.9 percent to 38.1 percent).
Growing inequality has negative consequences for our sense of community. It contributes to the marked decline in generalized trust, social capital, and civic engagement over the same time period. And an economy characterized by free-ranging, investor-owned corporations which open, close, and relocate according to narrow financial criteria makes economic dislocation virtually inevitable.
The tremendous upheavals and devastation left in the wake of the rust belt plant closures during the 1980s, as well as the ongoing abandonment of inner city areas by business and investors, are only the most obvious examples of a common phenomenon which has not significantly declined even in the most recent economic boom. Indeed, corporate migration within the U.S. has accelerated sharply since 1996 from fewer than 5,200 occurrences annually from 1980 through 1994 to more than 11,400 a year in the late 1990s. More than 11 million jobs were eliminated between 1993 and 1999 alone.
Since the New Deal, we have sought to redress economic inequality through tax-and-transfer measures that redistributed income. In recent years, however, such traditional measures have been politically stymied.
In the face of these unyielding trends, a growing number have begun to advocate remedies that are asset- or wealth-based. The basic concept is that giving relatively poor and other Americans a capital stake up front may be politically feasible and in some areas more efficient than trying to compensate after the fact for inequality through redistributive policies. As Harvard’s Richard Freeman puts it: “Equality of income obtained in the first instance via greater equality of assets, rather than as an after-the-fact ... state redistribution of income from rich to poor, would enable us to better square the circle of market efficiency and egalitarian aspiration.”
Most of the asset-based strategies and policies now being proposed involve giving lower- income Americans some form of individual savings or equity account. A critically important related alternative involves community-based, asset-holding economic institutions. They can take additional steps (1) to help stabilize local economies and (2) to foster greater participation.
Employee ownership is one of several community-based ownership strategies which deserve our attention. Worker-owned firms in the form of Employee Share Ownership Plans (ESOPs) have grown rapidly. In 1974 there were only 200 ESOPs. By 1980, there were 4,000 ESOPS and equivalent programs involving 3.1 million employee-participants and $20 billion in assets. By 1998 there were 11,500 ESOPS (and similar stock bonus plans) with 8.5 million employee-participants and $400 billion in assets.
Other forms of employee ownership plans have evolved alongside ESOPs. Some 3,000 broad-based stock option plans (plans that grant stock options to at least half the full-time employees) now involve some 7 million employee-participants. Another 4,000 stock purchase plans (which can give employees a 15 percent discount on company stock and which receive preferential tax treatment) involve 15.7 million employees. Finally, at last count, at least 2 million employees were covered by 401(k) plans invested primarily in company stock.
The total number of employee-owners in the U.S. dwarfs the number of private sector union members, a mere 9.4 million workers in 1997. According to a recent estimate (which does not include employee share purchase plans) employee-owners controlled 8.3 percent of corporate equity in the U.S.
As impressive as these ownership trends may be, most of these plans provide little worker control or participation. Yet worker participation and control are important elements in anchoring ESOP firms in their communities especially when employees (a) hold a majority of shares and (b) are able to vote their shares for or against buy-outs or relocations. In the long run, restructuring decision-making in employee stock ownership companies will be important if the community stabilizing potential of worker ownership is to be actualized, especially in publicly traded firms.
Community Development Corporations
A second community-based ownership strategy which has emerged in American urban areas over the past 30 years is the community development corporation (CDC). The CDC was developed in the 1960s and adopted as an innovative tool in the War on Poverty. CDCs were widely seen by many political leaders as a new engine for economic development. The original concept was one that integrated both for-profit and non-profit functions at the level of the urban neighborhood.
CDCs have built an impressive record of housing and commercial development; they have continued to proliferate at a dramatic rate from less than 200 in the early 1980s to 3,400-3,600 in 1998. CDCs have produced an estimated 550,000 units of affordable housing, 71 million square feet of commercial/industrial space, and 247,000 private sector jobs.
While most CDCs have focused exclusively on housing, some have become major creators of jobs, especially in areas otherwise underserved by the private sector. For example, New Communities Corporation (NCC) in Newark, New Jersey, employs more than 1,400 people, making it one of the largest private sector employees in the city. Among other projects NCC owns and operates a Pathmark supermarket and neighborhood shopping center. The supermarket is one of the most successful in the entire Pathmark chain, with yearly profits of over $1 million. As its majority (two-thirds) owner, NCC has made important decisions in connection with hiring (100 percent local); prices (lower prices on essential items for a healthy diet); and hours (open 24 hours to meet resident needs). As sole owner of other franchises in the shopping center (e.g., Dunkin Donuts, Mail Box, Pizza Hut, Taco Bell, etc.), NCC has also been able to give its hourly workers (even part-timers) full health benefits. In addition, NCC uses its share of the profits from Pathmark to help support the CDCs job training, day care, educational, and health programs.
The experience of New Communities suggests how CDCs can help impact inequality and economic stability. First and most obviously, CDC jobs can provide an alternative that not only offers more money, but also, in the context of welfare reform time limits, arguably a more stable source of income. Because CDC-owned businesses are largely free of narrowly defined profit maximization pressures, they often can choose to stabilize jobs, rather than maximize top-dollar returns to the bottom line. That is, they can keep job-providing businesses running during good economic times and bad at only modest profit rates that either would not interest a private investor or would-be entrepreneur in the first place or would encourage them to move on to greener pastures. CDCs can also use some portion of retained surpluses to fund community services that both provide service jobs and meet community needs. Finally, CDCs can choose to sacrifice some portion of profits in the interest of higher wages or more benefits for employees or lower prices for residents.
Community Development Finance Institutions
A related development is the growth of new financial institutions dedicated to the needs of a particular local area, usually one that is under-served by traditional commercial lenders. Community Development Finance Institutions (CDFIs) include community development banks (such as South Shore Bank of Chicago) which operate at a profit by making investments in low-income communities. Also included are community development credit unions, community development loan funds, and micro-credit/microenterprise programs. CDFIs received a considerable show of support from the federal government in 1994 when Congress overwhelmingly approved a Community Development Financial Institution Fund in September of 1994. The CDFI Fund provides assistance to certified CDFIs in a variety of forms, including equity investments, deposits, loans, grants, and technical assistance. In its first two rounds, the CDFI awarded $75 million to 74 CDFIs and $30 million to 93 banks, thrifts, and CDFIs for lending and investing in low-income communities under the Bank Enterprise Award Program.
Other avenues for community-based ownership development include community land trusts, which help provide affordable housing; leasing of municipal property for development that is designed around community needs; and expansion of local public enterprise to include cable TV and internet service in low density areas where they are not otherwise being provided.
The role of government
The emergence of community-based institutional forms has been assisted in varying degrees by federal, state, and local policy over the last thirty years.
CDCs, as noted, were strongly supported by the federal War on Poverty. The federal government still remains the CDCs biggest funding source. At the state level, there are model programs assisting CDCs in housing provision in Ohio among several other states. Local government support and cooperation has also played a key role in CDC success. Community Development Financial Institutions have also expanded with Federal action.
As for worker ownership, ESOPs began to take off after Congress approved a provision in 1974 tax legislation which allowed companies to deduct contributions of stock or cash to a worker trust. Over the next twelve years new ESOP tax incentives were passed in every Congress; one of the most important being a 1984 law allowing owners of closely-held private companies to be excused from the capital gains tax if they sold at least 30 percent of their company to employees. Seventeen states also have some level of legislatively mandated support for worker ownership, and five states have had active state worker ownership programs.
Policies in support of community-based economic institutions appear to be increasingly politically viable. There is considerable evidence that the idea of worker ownership, for one, is politically popular across partisan lines. Politicians and commentators who have spoken out in favor of worker-ownership include Jesse Jackson, Jesse Helms, Ronald Reagan, Bill Clinton, George Bush, Mario Cuomo, Dick Gephardt, Jack Kemp, Bill Bradley, William F. Buckley, and George Will. Rep. Dana Rohrabacher of California, a former Reagan speech writer and one of the House’s more conservative Republicans, recently introduced the Employee Ownership Act of 1999, with the goal that by the year 2010, 30 percent of all United States corporations would be owned and controlled by employees of the corporations. The bill would create a new kind of employee-owned and controlled corporation in which employees would own at least 50 percent of voting stock and would get to vote on all corporate issues on a one person, one vote basis. The bill’s 34 co-sponsors run the political gamut, from very conservative Republicans like Rohrabacher and Ron Paul of Texas to liberal Democrats like Dennis Kucinich and Marcy Kaptur of Ohio.
Although community-based institutions we are examining are currently relatively modest in scale, given adequate support, a major expansion in the next century is now a realistic possibility. The developmental and policy work done over the last 30 years has established a firm foundation upon which to build in the future. What is needed is a coming together of the various groups and constituencies involved to join hands with others involved in globalization and other struggles. Given the foundations which have been established over the last several decades–and given tough-minded organizing and political will, the first decades of the 21st century could be the launch pad for a major escalation of transformative institution-building.
Gar Alperovitz is Lionel R. Bauman Professor of Political-Economy at the University of Maryland. He is author, with Jeff Faux, of Rebuilding America; and with Thad Williamson and David Imbroscio, Making a Place for Community, published by Routledge this month.