Finally! Legislators who listen to Paul Krugman and Thomas Piketty

Meet the California legislators taking on income inequality across party lines, by listening to the actual experts

By Paul Rosenberg

Contributing Writer

Published May 5, 2014 5:41PM (EDT)

Thomas Piketty, Paul Krugman                                       (Reuters/Charles Platiau/Anton Golubev)
Thomas Piketty, Paul Krugman (Reuters/Charles Platiau/Anton Golubev)

Everybody is talking about inequality, it seems, but now legislators in California are trying to actually do something about it. On April 24, they took the first committee vote on a bill, SB 1372, that would put corporate taxes on a sliding scale, from 7 percent up to 13 percent, rewarding companies who pay their CEOs more reasonable compensation packages, while charging higher rates for those who pay their CEOs exorbitantly, compared to their average workers. (Rates are 2 percent higher for financial institutions.)

The bill, co-authored by state senators Loni Hancock and Mark DeSaulnier, has already drawn the support of former Secretary of Labor Robert Reich, who spoke at a press conference [video] before the vote, saying, “I'm here to testify on behalf of this bill, because I think it begins the process of shifting incentives on corporations back toward the kinds of incentives we had 30 or 40 years ago, when CEOs were paid, on average, 30 times what the average or median worker in their corporations were paid.” Washington Post columnist Harold Meyerson chimed in and argued that “Congressional Democrats should emulate their California counterparts” with a similar proposal.

It's an important bill, an innovative idea, but even more importantly, it comes out of a new, bipartisan caucus devoted to fighting poverty and inequality via a wide range of actions—a caucus that's already generated 20 bills this year. On the national stage, Tea Party Republicans in Congress may have enforced a total disconnect from the American people, who overwhelmingly support raising the minimum wage, think CEOs are paid too much and would like to see a much more egalitarian distribution of wealth. But in California, Democrats hold enough political power that they're in a position to begin connecting supermajority support for broadly shared prosperity with empirical research on how to bring it about. What's more, rather than trying to ram through a pre-planned, base-pleasing agenda, mirroring Tea Party Republicans in Congress and many state legislatures, they're trying to entice Republicans to join them.

DeSaulnier, who started the caucus, vividly recalls how it started. “One day I was on the floor and Loni sits behind me in the Senate, and somebody was talking about the middle class and I turned to a couple of my colleagues and said, 'You know, we always talk about the middle class, rebuilding it—which is great—but what about the 25 percent of Californians who can't get out of poverty into the middle class?' So I said, 'Why don't we start a caucus?'”

It started on the Democratic side, but DeSaulnier was determined to broaden the base. “I made a deliberate attempt to go to people and say I want this [caucus] to be bipartisan, and from my perspective, the whole idea of the American social contract is to get people to a point where they can sustain themselves,” he explained.

It's an idea so novel that most coverage of this new bill has managed to miss it entirely, falling back into the tired, tried and not-so-true formulas of knee-jerk partisan analysis. That's not hard to do, given that the bill passed the Senate Governance and Finance Committee in a 5-2 party-line vote, with Democrats in favor and Republicans opposed. But as Meyerson noted in his column, the divide was actually not that sharp:

All the Democrats voted for it, but even the two Republicans who voted against it were muted in their criticism. Republican Sen. Steve Knight, a Tea Party stalwart, acknowledged that executive compensation is “out of whack” and called the plan “not a bad idea” before before saying it’s not the government’s responsibility to address the problem.

DeSaulnier took an even more optimistic view, explaining to Salon: He [Knight] said it's a good idea to do something about CEO compensation, but he wasn't sure about mandating how they do it, and my response was "Steve, we're not." This is tax policy; we're actually giving a cut to corporations. The bill is meant to be revenue-neutral, so were hoping there'll be enough people who lower their rates that they'll get the tax cuts. So it's a carrot-and-stick approach.

This ties in to DeSaulnier's intention to build bipartisan support for the broader agenda of fighting poverty and extreme inequality—an agenda reflected in the caucus name, “The Ending Poverty and Inequality in California (EPIC) Caucus,” a name that intentionally echoes the legacy of Upton Sinclair's EPIC movement, which almost elected him governor in 1934.

The big difference between Sinclair's EPIC and DeSaulnier's is the decades-long period of dramatically broad shared prosperity following World War II, which clearly demonstrated the power of bottom-up economic policies—from minimum wage laws to labor laws to Social Security and Medicare—so that they were no longer just a matter of ideological battles and debates, but could be evaluated empirically, tinkered with and improved on. It also formed such a broad consensus that even Ronald Reagan and George W. Bush have taken major actions to preserve and expand this framework.

From the beginning, DeSaulnier had a very specific model in mind. “In California, the caucus I think has done the most over the past 20 years is the environmental caucus, of which I'm a member. And what it does is it gets all these environmental experts from all over the world – because it's California – come and talk to us. It becomes a sort of a petri dish of legislation,” he said. “So I thought, 'Well, if we could do it for the environment, imagine if we could do it for poverty and inequality.'”

“So far it's been taken up much better than I would've ever anticipated,” he added. Robert Reich, who now teaches at UC Berkeley, was an early invitee. Looking forward, “Joseph Stiglitz is going to come out to speak to the caucus; we're trying to get Paul Krugman, and because of the discussion, we can get you a list, there are about 20 significant bills, not just this one.”

But equally important, he's been courting bipartisan participation. “I went to the Republican leader, who is a friend, and I said, 'You know we can have Francis Fukuyama come as a neocon, we can have Paul Krugman come, and we can argue about our approach to it, but I think we all agree that doing investments in getting people to be [able to] take care of themselves is a good thing.' So that's the approach I've taken with the business groups, too, and they've been open to it.”

This bridge-building intention is evident in SB 1372 as well. As already noted, it was structured to be revenue-neutral. It's not supposed to be a silver bullet, but it is intended to be a first step, to help change corporate incentive structures, to encourage lower levels of income inequality.

Under SB 1372, there would be nine rates, starting with a 7 percent tax rate on companies with a CEO-to-average-worker ratio of 25 to 1 or less, all the way up to the top rate of 13 percent assessed on companies with a ratio of 400 to 1 or more. California currently has a corporate flat tax rate of 8.84 percent, except for financial institutions, which pay 2 percent more—a difference that would be carried over into the new rate structure as well. Not only does it make sense as policy, it's politically savvy as well, since it favors the vast majority of smaller businesses, which have not seen such wild explosions of pay differentials. Not coincidentally, DeSaulnier was a small business owner himself, as well as being a union member when he was young.

The legislative analyst has projected that the bill will increase state revenues by $100 million the first year, and $300 million in years to come, but since the intention was to be revenue-neutral, DeSaulnier told Salon that adjustments might be made to encourage Republican support—provided the basic logic was preserved. After taking note of Steve Knight's comments in committee, he said, “I've also been visited by a couple of Republicans who have suggestions on things we could do the bill to get them to support it. So we have to sort of strategize. It's in our Appropriations Committee now, I've got probably a month before I bring it up on the floor. So I've got some time to tinker with it and try to get their votes.”

But “tinkering” doesn't mean abandoning the basic logic, he explained. “I had one Republican just tell me that I might be able to get their support if we just cut -- if we tried to incentivize, not punish. So he wanted to take the stick part away and just have the carrot.” Of course, this would mean blowing a hole in the budget—so much for “fiscal conservatism”! And this illuminates the deeper challenge that DeSaulnier and the Democrats are facing: the challenge to draw Republicans back into a policy-making framework guided by consistent principles as well objective data.

This helps explain some of the themes they struck in the press conference before the first committee vote. Although DeSaulnier has been able to engage the California Chamber of Commerce as a supporter of the EPIC Caucus, the Chamber still opposed SB 1372, putting it on their list of so-called “job-killer bills”—as they label any bill they oppose, no matter how weak the logic. It was a move that former Secretary of Labor Robert Reich confronted head on:

I understand there are groups not surprisingly like the California Chamber of Commerce that think somehow this is a job killer. Just the reverse. Remember, the biggest problem the economy has right now is that the middle class, the lower middle class and the poor don't have enough money in their pockets to buy what the economy is capable of producing. The job creators are not the CEOs, the job creators are not the rich. The job creators are the middle class, the lower middle class and the poor, with enough money to buy, and this bill creates incentives that reduce the amount of money going to the top, and increase the amount of money going to typical workers. This is a job creation bill. This is the opposite of a job killer bill.

Similarly, a top labor leader appeared, only to cite as his guiding authority the most preeminent authority on management in 20th Century America. California Labor Federation Chief Officer Art Pulaski said:

Perhaps the most renowned of the corporate gurus, Peter Drucker, once admonished all of his companies to make sure that they do not exceed a CEO-to-worker pay ratio of 10 to 1. He said anything beyond that would be destructive to the workforce and to the society. As was said earlier, it's no longer a 10-to-1 ratio, it's not 20-to-1, it's not 40-to-1, it's not 100-to-1, it's not 200-to-1, in some cases it's 1000 and more to 1—and there's something fundamentally wrong when this happens. And it affects not just the workforce of those companies, but the whole economy.

So I'm here to say that I'm happy to be part of what really, in its essence, is a non-partisan bill. It's a non-partisan bill that gives corporations the opportunity to choose to lower their tax rates by simply accommodating the advice of Peter Drucker years ago and making sure that the disparity is diminished and that we're more fair to the economy and help to rebuild the middle class.

No one expects a single appeal like this to have earth-shattering consequences. No one expects this bill, by itself, to reverse the trend of increasing income inequality. What's more, even some progressive economists question if it's the way to go in the first place.

“I'm a little troubled by trying to do this through the tax code,” said Dean Baker, co-director of the Center for Economic Policy and Research. “It will be very hard to get good numbers on full CEO compensation.”

Both Reich and DeSaulnier point to Dodd-Frank's provisions for CEO pay disclosure, to be implemented by the SEC and posted on its website. But, as Think Progress noted, this is not without problems:

A Securities and Exchange Commission rule requiring publicly owned companies to disclose their pay ratios was finally approved in the fall, but it leaves companies substantial wiggle room in how they calculate the median worker’s compensation. The rule requires only disclosure and features no monetary incentive or penalty to curb pay ratios.

On the other hand, DeSaulnier also said that California's Franchise Tax Board could get involved if the SEC figures prove problematic -- but that would entail additional costs and bureaucratic overhead, which he hoped to avoid.

Baker also raised another key concern: “Also, if this is in the form of ratio, then companies will just game it and contract out low-paid work.” The bill has provisions to address this as well, DeSaulnier noted. These include counting contracted employees in the calculations, as well as a 50% tax increase for companies that dramatically shift from full-time U.S. employees to to contracted and foreign full-time employees. If more adjustments prove necessary, he's prepared to make them.

Overall, Baker prefers another approach: “I would much rather see measures that empower shareholders to put a lid on CEO pay. One possibility would be to zero out directors' pay if a CEO pay package is voted down in a Say on Pay shareholder vote. This would give directors serious incentive to ensure that their pay packages were reasonable.”

But given the nature of the EPIC Caucus—and the possibility of others following its lead—there's no reason that both approaches can't be pursued in tandem, and no reason the current bill can't be improved with better information going forward.

The fact that an organized structure now exists to nurture such thinking and generate laws as a result—that is something that could really start moving America back toward a state of broadly shared prosperity, this time with all races and ethnicities included. It's something that every legislature in America should consider creating for itself. And something every citizen can help agitate for.

By Paul Rosenberg

Paul Rosenberg is a California-based writer/activist, senior editor for Random Lengths News and columnist for Al Jazeera English. Follow him on Twitter at @PaulHRosenberg.

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