Noema: You have both talked and written extensively about inequality in the U.S. in recent years. The COVID-19 pandemic has exposed that social fracture more sharply than ever. In this first-ever service economy recession, many of those on the front line — from store clerks to caregivers to ambulance drivers — are the least paid and often only a paycheck away from poverty. The sudden eruption of protests and riots over the killing of George Floyd in Minneapolis conjoin the despair of those locked out of prosperity with the pent-up frustrations of the lockdown, adding even more urgency to finding new ways to close the ever-widening wealth gap.
In this context, the massive taxpayer-financed cash infusion to save some of the largest companies that are otherwise viable may present a unique opportunity to more effectively tackle inequality by bolstering the assets of the less well-off. If the same taxpayers who are bearing the costs of the bailout also share an upside when we recover prosperity, wealth will be shared more fairly.
This can be done by establishing a sovereign wealth fund, or national endowment, that pools the taxpayer’s ownership shares from all the bailed-out companies and distributes regular dividends to all citizens. This is called “universal basic capital,” as distinct from the idea of a universal basic income. Instead of only once again relying on redistributing income to close the gap after wealth has been created, the idea is that wealth should be shared upfront: “pre-distribution.”
There are many models out there along these lines. Alaska has long had a social wealth fund that pays dividends to citizens from the revenues of the state’s oil leases. Norway has a similar fund, also from oil revenues, that pays into the general pension system. Australia has what it calls the superannuation fund, in essence a sovereign wealth fund financed by employees, employers and state contributions to its universal pension scheme. The wealth of that fund now stands at almost $2 trillion, a sum greater than Australia’s GDP. Singapore has a similar plan, called the Central Provident Fund, from which citizens can also draw for health and housing needs. It is so profitable from its global investments that it is even able to fund some government services and help keep taxes low.
At this point, an innovative approach to economic recovery could present an opportunity to reduce inequality. The idea is that if everyone in this pandemic is sharing the downside, all could share in the upside as well.
Ray Dalio: Inequality in America has become a national emergency, so this idea couldn’t be more timely. Of course, you have to go beyond the concept to flesh it out, at both the political and structural levels. At the political level, the question will be who buys in to the concept in order to move this forward toward realization. Then there’s the actual structuring of such an endowment or sovereign wealth fund relative to the alternatives for reducing inequality.
I do think Australia’s fund is an important model for figuring out how to structure what you call universal basic capital. It is well worth hearing from Paul Keating, the prime minister who helped design the system when it was initially set up.
So, it will all have to be fleshed out. But it is an idea worth exploring. By allowing everyone to be a capitalist, it would generate more buy-in within a system that today is being torn apart by inequality.
Joseph Stiglitz: This is a good time to raise this idea because there is massive assistance going to many companies across the business sector, where the government is providing liquidity. As taxpayers, we bear the downside risk. If the businesses don’t pay back, we bear the losses. If that is so, we all must also benefit from the potential upside when companies are profitable again. A sovereign wealth fund that holds those equity shares in a trust for all citizens would end up owning significant parts of the economy.
I want to also point out that the parts of our economy that have done really well have been based on technology. Much of the foundation for those technological advances has come from basic research funded by the public. Yet, while the public has been providing that critical intellectual infrastructure, it has captured very little of the return.
Here, too, it would make sense that, since as taxpayers we are paying for all this, we get some of the upside potential through reaping some of the capital gains.
And the same thing ought to apply to natural resources, such as oil. They have been an important part of national wealth and will be so in the future. And yet, as we’ve taken that wealth out of the ground, the public has not seen its share of the national patrimony. Like Norway, we should put a substantial part of the revenues into a sovereign wealth fund from which all get dividends.
So, to me, this idea of pre-distribution through universal basic capital is absolutely critical going forward. It would reduce the burden that would be put on taxation, on redistribution, while augmenting people’s assets. As Ray said, it would generate more buy-in to the economic system because people would feel like they have an ownership stake in that system. That, in turn, would create more stability.
Let me raise one problem, however, that I encountered some years ago when discussing how to reform Social Security. The question being addressed then was why should the immense Social Security fund investments be limited to owning Treasury bills? Why couldn’t Social Security just buy a fraction of the American economy through stock ownership in a vast array of companies?
There was resistance to this idea, which to me was really quite amazing at the time, when the financial viability of the Social Security system was in question. The difference between the average returns on equity over a long period of time and the low average returns on Treasury bills is very large. Making up that difference through stock purchases would have put Social Security on very firm financial ground and allayed concerns over its viability.
But there was a lot of pushback. One concern that opponents had, which I don’t think has any validity to it, was a worry that, if the government owned significant slices of the country, it would exercise those ownership claims by asserting more control. And that would change the nature of the market economy.
I think that’s pretty nonsensical because the amount of such ownership shares would still have been well below a controlling interest. And, in any case, in a democracy with strong institutions, we can make commitments on what kinds of interventions government will make irrespective of ownership stakes or not.
Dalio: Just building on that last point, Joe, with the present COVID-related government interventions of massive bailouts and Fed commitments to purchase securities, we’re far across the line of what is normal. When you have the Fed buying everything from high-grade securities to junk bonds, we’re now in a whole different realm than in those days when Social Security could only invest in Treasuries.
Stiglitz: I agree.
Dalio: But you’re making a good point. What, after all, is the difference between a junk bond and an equity? In reality, a very subtle difference. Still, there’s a perception that equity necessarily entails control and so on. But I wouldn’t let such concerns stall this idea of what you call pre-distribution. Let the other side make the argument. Let’s go forward and see what arguments surface.
But we’ve got to move fast in the political realm because the time is now. New systems are being put in place as we speak.
Noema: As we’ve seen with the Australian fund, there is an awesome power of compounding returns that can build wealth rapidly into trillions in value.
Dalio: In this respect, my own expectation is that we can’t look back at the historic returns of equities to expect what the future returns of equities will be. That is, first of all, because the level of interest rates for so long made equities uniquely lucrative relative to, let’s say, cash or bonds. But when, lately, we’ve had interest rate cuts and corporate tax cuts that provide alternative benefits relative to equity, you’ve had profit margin expansion.
One of the great problems that the world has today, if you’re looking forward, is where do you get excess returns? It’s almost all squashed down while, at the same time, we’re having reflation.
Of course, you will still get better returns on equity, so this is still an interesting concept. There will still be that compounded return component in owning a piece of these companies.
So, this returns to Joe’s point. What matters is the overall environment created by government intervention through the coordination of fiscal monetary policy. You’re getting into the question of: Do you want the government to be a decision-maker in such things? The truth is that if it is already a decision-maker in corporate debt, then it’s essentially also a core decision-maker in corporate equities. That is why I repeat again: We’ve crossed the line already.
Stiglitz: This point that Ray made is not being sufficiently appreciated today, as the Fed starts buying junk bonds and allocating money in the ways that have been proposed. It is making life-and-death decisions about which firms survive and which don’t. So we’ve entered this realm in which the government has become a conventional banker. I feel a little uneasy about it. There were better ways of doing things. But we ought to recognize that this kind of intervention is a watershed moment.
Noema: The idea of pre-distribution is not just economics; it’s also psychological because, as Ray said, it makes everybody a capitalist. It makes everybody an owner. And you feel differently if you’re an owner of the future, an owner of the productive capacity of the country. You are not just a bystander in the system, but a participant.
Dalio: This is very true. But there is another aspect as well. If there is an endowment in the name of the people, they sometimes want to control it. It’s one of the reasons that former Singapore Prime Minister Lee Kuan Yew kept a lot of what was being done as they built up their sovereign wealth funds confidential and out of the hands of the population as a whole. If they don’t understand the power of appreciation, they’d say: “Hey, we got all this money there, let’s divide it up and spend it.” The success of a sovereign wealth fund in bolstering peoples’ assets will depend on whether it can be prudently governed on behalf of the entire public.
Stiglitz: This issue of people wanting to get that money and spend it is not insignificant. In Norway, there is broad support for treating the sovereign fund like an endowment, with safeguards about when you can draw down on that endowment, still preserving the value it has accumulated for the future. But even there, from time to time, one of the political parties tries to dip into it. So it’s a constant battle.
We have to recognize that and think deeply about institutional safeguards. I feel uncomfortable about Singapore’s lack of transparency as a mechanism. But I think we have to create institutions that make it difficult to rob the sovereign wealth fund.
One of my own experiences comes to mind. Once I worked with one of the Native American nations. Like most of the other tribes, they had been cheated out of money ever since the white man took over their land. In this particular case, there was a legal quirk that allowed them to sue the U.S. government, the state government and the city government to obtain some funds they thought were due to them. They were successful in their suit and got a significant pile of money for a relatively small tribe.
I was asked to help create an endowment fund out of that. What happened was that they decided to take at least half of the amount and just distribute it as cash. So it just reinforces the argument that we really do have to work hard to make sure that the kind of sovereign wealth fund we are contemplating is treated like an endowment with strong rules about when you can cash in.
But let me also raise another problem that will surely arise. When Margaret Thatcher was prime minister of the U.K., she sought to persuade people they’d be better off if, instead of only seeking to get redistributed income from the state, they had ownership claims. Though the ownership claims they got were very small, it was used as a justification for giving preferential treatment to wealthy people, like lowering capital gains taxes.
We know that, overwhelmingly, the benefit of ownership goes to the upper one-tenth of the 1 percent. But if people felt that they also owned a stake in their economy, they could be misled to think that lowering capital gains taxes on the richest was a good idea because, as owners, they would benefit as well. That is a standard political economy trick, and what you then get is regressive tax measures and spending policies. That’s at least something that one needs to think about.
Dalio: Out of this discussion, I think we know the main issues that need to be addressed and should try to move forward to explore this idea at a critical moment. It’s almost one of those things that you can’t say “this is this left” or “this is right,” that it is a Republican or Democratic idea. It’s an odd duck that is neither capitalist nor socialist. And the fact that you can’t so easily label it is one of its more appealing aspects.
Stiglitz: I agree. It is an empowering idea that, in the long term, can have an impact on inequality by sharing ownership of wealth beyond just the top.