A Proposal for Restoring Economic Equality from The Moguls Club, Tragic Commons Chapter

 

            It is always heartening to see a denizen of the Tragic Commons publicly exhort others to put aside self-interest and act for the common good.  I commend Peter Georgescu's plea, published in the Times last week for his fellow members of the Tragic Commons chapter of the Moguls Club--millionaires and billionaires all--to do something to address income inequality.

            He is rightly concerned about where income inequality will lead.  “If inequality is not addressed,” he writes, “the income gap will most likely be resolved in one of two ways: by major social unrest or through oppressive taxes, such as the 80 percent tax rate on income over $500,000” suggested by Thomas Piketty” in his blockbuster Capital in the Twenty-first Century.

            Georgescu was a refugee from communist Romania who came to the United States with nothing in 1954.  He was “helped, by may kind people to fulfill the American dream.”  But he doesn't think young people today will have the same opportunities.

            “We are creating a caste system from which it is almost impossible to escape,” he observes. “We are at risk of losing the capitalist engine that brought us great economic success and our way of life.”

            “Who,” he asks, “will be courageous enough to start the ball rolling toward a solution of this problem?”  The government is the logical solution, he notes, but, without a trace of irony, he observes that the Congress is paralyzed.

            Never fear. 

           “We business leaders know what to do,” he writes.  First, businesses must invest in their employees by enabling them to “share amply in productivity increases and creative innovations.”

            Second, profits must be plowed back into businesses to continue increasing productivity and innovation. Profits must not be used to pay for gimmicks that simply increase stock prices or earnings per share.

            Georgescu finds widespread agreement among his brother moguls.  But “they need more support from their boards, from prominent business leaders, from the media and even from the government to combat the intense market pressure to maximize short-term shareholder returns.”   So how can we get there?

            A tax incentive to businesses to pay more to employees making $80,000 or less, he suggests, would do the trick.

            Say what? 

            Business leaders understand that everyone would benefit if they were to pay their employees more and reinvest more of their profits in their businesses.  Happy employees don't take to the streets with pitchforks and they also don't demand that business moguls be taxed at “oppressive” rates.  

            Why do CEOs need a tax incentive to do what's in their own best interests?

 

            In the Tragic Commons, sadly, that's simply how conditions are.  Everyone benefits when they do the “right thing.”  Unfortunately, it’s rational for most people to do the selfish thing, and that's what makes the Commons so tragic.

            When Georgescu sees the heads nodding in the Tragic Commons chapter of the Moguls Club, though, he doesn't notice the sidewards glances of those heads as they contemplate their fellow club members.

            In the Tragic Commons, nobody wants to be a sucker by making the first sacrifice. Everybody waits for someone else go first.  But nobody ever does.

            That Georgescu wants the taxpayers to provide an incentive to businesses is truly ironic. Tax incentives are voluntary. You get them only if you engage in the behavior being incentivized.  But businesses always compare the cost of the behavior being rewarded with the reward.  If the value of the reward exceeds it's cost, then businesses modify their behavior to get the reward.  Otherwise not.

            What Georgescu is proposing is another “heads-I-win, tails-you- lose,” scheme from the Mogul’s Club playbook.  A tax incentive would neutralize the cost to business of any sacrifice while sticking taxpayers with the bill.

           

            Georgescu wants carrots.  But sometimes, in the Tragic Commons, what you really need are sticks. If you want to solve this kind of a collective action problem, its usually more effective to punish the selfish behavior you want less of.  

            High marginal tax rates of the kind Georgescu wants to avoid are exactly the right way to incentivize businesses to share the wealth with employees. When the government is poised to take 80% of all compensation above $500,000, moguls think twice about taking that money for themselves.  They get so little out of those marginal dollars that it makes more sense to use the money to grow their businesses.

            Mr. Georgescu's heart is in the right place.  But if he truly wants to avoid the pitchforks, he's going to have to understand that there are no free lunches in the Tragic Commons.  The members of the Moguls Club are going to have to make some sacrifices.