Whose Pie? And Why ESOP’s?

Sen. Russell Long wearing "OWN" button

Sen. Russell Long

By The Honorable Russell B. Long

Excerpted from floor statement of November 17, 1983 on the “Employee Stock Ownership Act of 1983,” and reprinted in three parts in the Congressional Record, July 30, July 31 and August 1, 1985.

Employee stock ownership has grown in popularity all across this country over the past decade.

I am convinced that this ownership issue goes to the very heart of just what sort of economic system we mean to have in the United States, and just what sort of Nation we intend to leave for succeeding generations of Americans.

Employee stock ownership is not a partisan issue; rather, it is an issue that cuts across party lines in an attempt to bring out the best in our free enterprise system. It is only fair and right that those who work to make this economy succeed should have an opportunity to share in that success. It is a matter of simple common sense and basic equity.

If we want this private property system of ours to succeed, we simply must insure that as many Americans as possible have an opportunity to earn an ownership stake in that system. A continuing fundamental weakness of our system is that so many Americans own so very little while a relatively few Americans own a great deal.

This does not mean that we should redistribute the wealth of current owners. The intent is not to take from those who own to give to those who do not. Rather, the goal is to provide incentives for financing to be structured in such a way that, in the future, more Americans will have a chance to accumulate a capital estate.

Incentive-side Economics

Mr. President, in the 97th Congress, we enacted a sweeping set of tax incentives designed to promote the growth of investment. Under the banner of supply-side economics, the Congress reformed the depreciation rules, cut the capital gains tax, and enacted several other amendments with the idea of encouraging capital spending.

We should continue our encouragement of this emphasis on such “hard” economic factors as capital investment and research and development. However, this approach will be shortsighted if we continue to overlook the “soft” factors that impact productivity — the motivation, commitment, and dedication of our work force.

Incentives for employee stock ownership provide a way to link these two factors and to end the costly mis-match between our national goal of improved productivity and our system of incentives and rewards.

Whose Capitalism ?

The economic strength and political stability of this Nation stem largely from our commitment to a private property, free enterprise philosophy. To date, however, we have not strongly encouraged the use of financial techniques designed to provide widespread access to capital ownership. Consequently, in this, the world’s most avowed capitalist nation, we have only a scanty sprinkling of capitalists.

In 1976, for example, the Joint Economic Committee studied this ownership issue and found that 50 percent of the market value of individually owned corporate stock in the United States is held by just 0.5 percent of the U.S. population and 72 percent is owned by a mere 6 percent of the population.

Perhaps the most disturbing aspect of the present state of our private property system, however, is noted by the National Bureau of Economic Research, which reports that for the majority of American families, their most important wealth is now their entitlements under our pay-as-you-go social security system.

Thus, for the majority of Americans, their most significant asset is an assurance that their children will be taxed on their behalf. Mr. President, I question the wisdom of both U.S. economic policy and U.S. tax policy when the end result is to leave most Americans dependent for their subsistence on taxes paid by an already over-taxed population.

The financial press indicates that the Nation’s pool of productive capital will increase by $2 to $5 trillion by the end of this century. Yet unless we develop financial incentives to spread this newly created wealth more broadly among our citizens, this Nation’s crippling legacy of concentrated ownership will continue and the great bulk of that new wealth will become owned largely by the already-wealthy.

This likelihood led the Joint Economic Committee to conclude in its 1976 annual report:

To provide a realistic opportunity for more U.S. citizens to become owners of capital and to provide an expanded source of equity financing for corporations, it should be made national policy to pursue the goal of broadened capital ownership.

Whose Productivity ?

This concentration of wealth is not only unjust; the evidence indicates that it is harmful to the efficient and successful operation of a market economy.

In a 1980 Gallup survey, which asked workers who they thought would benefit from improvements in their productivity, only 9 percent felt that they, the workers, would. Most assumed that the beneficiaries would be others — consumers or stockholders or management.

Although increased productivity has a generally positive ring to it, for the average hourly worker increased productivity suggests that the company will benefit at his expense — for example, through speed-ups or through job insecurity due to automation.

The inference is clear. When employees themselves become stockholders, their attitudes toward productivity will change. This commonsense conclusion gains support from a series of studies of companies with the foresight to embrace employee ownership. One of the first studies focused on employee-owned cooperatives in the Pacific Northwest in which the average output exceeded industry productivity levels by more than 30 percent.

In a related finding, a 1977 report on employee-owned companies by the Survey Research Center at the University of Michigan–sponsored by the Economic Development Administration of the U.S. Department of Commerce–found that companies with a substantial degree of employee ownership are 1.5 times more profitable than comparable conventionally owned firms. They also discovered that the more equity the employees own, the more profitable the company. Managers surveyed indicated a noticeable improvement in work attitudes and a positive effect on productivity.

Similar results are reflected in a 1979 study of 72 companies with employee stock ownership plans (ESOPs) sponsored by the ESOP Association of America. The typical ESOP company studied had been in business for 24 years and had established its ESOP 3 years prior to the study. Over the 3 years, an average of 7 percent of the stock of the company was transferred to the ESOP each year; at the time of the survey, the typical ESOP in the survey held 20.6 percent of the company stock.

During those 3 years with an ESOP, annual sales per employee increased an average of 25 percent, total annual sales rose an average of 72 percent, and annual profits grew an average 157 percent. In addition, the results showed a close correlation between ESOPs and a growth in both employment and tax revenue, the study finding an average 37 percent jump in total jobs per company and an average 150 percent increase in company-paid taxes.

A 1981 survey of 229 ESOP companies by the Journal of Corporation Law at the University of Iowa School of Law found that while other companies’ productivity was declining during the 1975-79 period, productivity in ESOP companies was increasing. In addition, one-third of the companies surveyed reported reduced employee turnover and improved quality of work.

In May of this year [1985], the American Business Conference published the results of a 2-year study designed to explain how and why mid-sized growth companies have outpaced the Nation in sales, profits, jobs, and exports. In the high-growth companies studied, employees own over 30 percent of the company stock–a surprisingly high proportion for companies averaging over $200 million in annual sales.

On the basis of the research to date, it is clear that companies with employee ownership are likely to be more productive and more profitable than those without, and the more ownership held by employees, the better the performance of the company. Just as the company with employee ownership will have an advantage over a conventionally owned competitor, so too, will the U.S. economy enjoy a competitive advantage with policies and programs supportive of widespread employee ownership.

It does not require an industrial psychologist to explain this phenomenon–a phenomenon, I should add, that is being repeated time and again across the Nation as more and more companies are establishing employee stock ownership plans. A sense of ownership is crucial to the efficient and successful functioning of our private enterprise system–a system based on individual initiative and on sharing in the gains that one’s efforts bring about.

As an additional benefit, it appears that the tax incentives provided for corporate financing with ESOPs may well pay for themselves in the form of more jobs and generally higher tax payments–by both employees and employers.

Employee ownership can also help to create a more widespread unity of interest and incentive, thereby fostering better relations between management and labor. It can serve as a new stabilizing element, an element that may encourage these traditional foes to act more in the national interest by beginning to operate more in a much needed spirit of cooperation and compromise.

Stock ownership by employees — both management and rank-and-file employees — can create a work environment in which issues are resolved more constructively. Getting both sides to work together to solve problems they share in common can be a very powerful force for dismantling alienation and distrust.

Unions need new ways to deliver victories to their members, and management must find new ways to deal with union demands. Employee stock ownership provides a fruitful new area in which these adversaries can resolve their differences.

Relieving the Fiscal Strain

A strong case for expanded ownership could be made on equitable grounds alone–or on motivational grounds alone. Certainly a nation that puts its faith in a private enterprise system should conduct its economic policy so as to insure that the voting public has a personal stake in that system.

Rather than creating a constituency for private property capitalism, however, we have been steadily adding people to the make-work rolls, to the income security rolls, and to the countless other State and Federal programs designed to disguise the onus of welfare. This is clearly not the direction in which Federal tax policy should encourage the American economy to move.

Only recently have the consequences of this short-sighted approach begun to surface. The fiscal strains are the most obvious, with the growth of Federal transfer payments revealing one troublesome dimension of the problem. In 1960, these payments to individuals totaled 26.4 percent of total budget outlays; by 1980, they had skyrocketed to more than 50 percent; $27 billion was paid out in 1960; 23 years later these costs have risen to more than $400 billion. Just since 1970, transfer payments have grown more than $250 billion. These trends simply must be reversed….

Toward a Private Sector Solution

It would be helpful if we could reduce the Government spending devoted to public sector employment. Without continued public spending, we cannot maintain these people in the new jobs to which they have been drawn by the inflationary spending of the past. We find ourselves running faster and faster to keep people employed in what are often artificially created jobs; meanwhile deficits con-tinue to grow at an alarming pace.

This approach stems, in part, from the belief in the deliberate stimulation of aggregate demand as a means of creating full employment. But to blindly follow that approach requires that we elevate the tax system and government-stimulated demand to a position higher than the Nation’s wealth-production system, upon which all tax revenues and everyone’s ultimate standard of living depend. It is production that creates income and only income that can be taxed or spent.

The expanded ownership concept suggests that continued heavy reliance on taxation and Government spending is not a sound long-term approach to maintaining market demand and economic growth in a private property economy. Our long-term economic and tax strategy should offer incentives for the private sector itself, as the principal producer of goods and services in the economy, to become a more direct and efficient distributor of the purchasing power needed to consume those goods and services.

We can begin to move in that direction by encouraging companies to finance newly formed capital so that it is broadly owned, and then encouraging a substantial payout of the earnings on that capital in order to put purchasing power into consumers’ hands.

The concept of a market economy is based on the premise that each person’s outtake from the economy is directly related to that person’s productive input. In a technologically advanced, capital-dominated economy such as ours, that presents a problem. Where capital instruments account for a major portion of an economy’s input and capital owners are few, we must call on Government to redirect the income flows that would otherwise flow to this already income-saturated few.

Market mechanisms reward productivity–the ability to produce a product or a service to meet market demand. Productivity is, in part, dependent upon individual effort. However, and this is particularly true of our crucial infrastructure, to a great extent productivity is dependent upon technological advances and efficiencies converted to productive capital.

Since the dawn of the industrial revolution, our enhanced ability to utilize labor-saving technology has enabled this Nation to gradually shift the burden of industrial production off of our labor force and onto the Nation’s nonhuman resources–the machinery, equipment, processes, and other advances that have been the hallmark of 20th century economic progress.

If the market system were permitted to operate in a totally laissez-faire manner, the bulk of the national income would flow to the owners of this Nations’s productive capital. Those few owners, however, could consume only a small portion of the Nation’s output.

When capital owners are few, the private property conduits of a market economy create vast reservoirs of savings for those few– savings that can then be reinvested to acquire more income-producing assets.

If there were many owners, those same conduits could begin to broadly irrigate the economy with purchasing power.

By producing the economic pie, we necessarily create the problem of how it is to be distributed. Redistributive taxation is one way to achieve a more equitable and a more workable distribution of income, but for this purpose it is strictly a hindsight, remedial approach. And, of course, Government can never return as much as it takes, so its costs insure a net loss in the transfer.

This bill suggests a positive, forward-looking approach, one that begins to link the concern for production with the concern for widespread income distribution. It suggests that as we increase the economy’s overall power to produce, we should simultaneously provide incentives to systematically increase the economic power of households to consume.

The long-term goal of ESOP-type financing is to create income-generating mechanisms to supplement the income earned through employment. The goal is to link a growing number of American households to the economic growth–as well as the capital income–represented by newly created capital, the capital whose creation our tax system was recently amended to encourage.

The free enterprise market mechanisms of incentive and reward have brought more and better goods and services to more people here and throughout the world than any other system in history. Yet those mechanisms are not indestructible. If they are to be preserved, we need an institutional framework that operates in their support. That support lies in the direction of a more democratic form of private property ownership.