By Jim Sorenson and Terrence R. Keeley
American wealth inequality has become a problem. In his final address to the nation, President Biden warned, “an oligarchy is taking shape in America of extreme wealth, power, and influence that literally threatens our entire democracy, basic rights, and freedoms.” He was not wrong to sound this alarm. In the United States today, about 30% of all wealth is owned by the top 1% of households, while the bottom 50% own a mere 2.5%. Multiple studies show excessive inequality on this scale can be corrosive. Social harmony depends upon a sense of community, mutual respect, and a shared belief that outcomes are just. Each of these conditions is strained when financial capital concentrates amongst a privileged few.
The problem is that no society has ever reduced wealth inequality on this scale painlessly. According to Stanford historian Walter Scheidel, over the past 2,000 years, only four forces have reversed growing economic inequality: mass-mobilization warfare, transformative revolutions, state collapse, and catastrophic plagues. In other words, grossly unequal societies have become more equal only when vast amounts of wealth have been destroyed. In Scheidel’s telling, large-scale financial inequality has only ended when the wealthy became significantly less wealthy very quickly.
There is a much more constructive way forward, however. We can lower American wealth inequality by proactively enriching Americans who are struggling financially, using capitalist tools to do so. In short, the best way to reverse the free market’s historic tendency to disproportionately enrich the top is to spread its powers to those who have not had access to them. We can achieve this historic feat by expanding access to proven wealth-creation tools to tens of millions of Americans who have never had access to them before.
Our proposed strategy is simple. Individual American wealth has been created in three primary ways:
- Homeownership
- Long periods of broad stock market ownership; and
- Direct ownership in the businesses we work for
These three tools of capitalism and free markets can and should now be used to create wealth for all workers who are asset-poor. Doing so would generate the ultimate win/win/win/win for governments, businesses, private investors, and those living on the edge. Enlarging access to homeownership, self-funded retirement accounts, and employee stock ownership plans (ESOPs)—three proven wealth creation channels that have enriched millions of Americans for decades—would create more wealth for more Americans without requiring others to sacrifice their resources.
Unlocking home equity is key to promoting broader homeownership
Homeownership has been the primary way millions of Americans have built individual wealth. Unfortunately, the rate of home ownership in recent decades has been steadily declining. One market-driven way homeownership could be dramatically increased is by unlocking appreciating home equity for first-time home buyers, enabling them to come up with a down payment and more affordable mortgage debt. Capital for shared appreciation loans could come from institutional investors on a fair, pro rata basis to home buyers. Home equity is America’s second-largest asset class at $35 trillion, but it sits largely untapped. Jump-starting a shared home equity market that facilitates homeownership would help reverse the pernicious trend of investors acquiring homes for renters. Policy initiatives and regulatory changes could also be designed to unlock this appreciating asset class, creating a scalable solution that benefits millions of first-time and existing homeowners who have been left out of the housing market.
Broader stock ownership can be achieved through retirement reform
Promoting broader stock ownership could also be easily achieved. The Federal Reserve reports 25% of US workers have no retirement savings. According to the Economic Innovation Group, more than 40% of all full-time working Americans have no access to a retirement plan; for those who do, another 20% have no employer match. This means a stunning 75% of full-time workers earning less than $26,400 per year have no viable way to save for their retirement—and no practical way to accumulate wealth through stock ownership.
Here, there is a ready-made, commonsense, cost-effective, bipartisan solution: the Retirement Savings for Americans Act (RSAA). Kevin Hassett, President Trump’s nominee to head the National Economic Council, said, “this legislation would put millions of Americans on the path to financial security and help them build intergenerational wealth.” Co-sponsored by Senators Hickenlooper (D-CO) and Tillis (R-NC), as well as Representatives Smucker (R-PA) and Sewell (D-AL), the Retirement Savings for Americans Act would effectively provide all working Americans with access to the same type of retirement savings accounts that all federal employees currently enjoy. Shouldn’t every American worker enjoy the same benefits given to federal workers?
Employee stock ownership plans give workers stakes in their companies
Finally, some 32 million working Americans are employed by 2.9 million privately held firms owned by individuals at or near retirement age. A final, market-oriented policy our leaders in Washington could easily promote would massively expand the third proven vehicle of wealth creation: employee stock ownership plans. As with retirement savings, bipartisan legislation on ESOPs has also already been proposed in the Senate. All Congress and President Trump need to do is say yes.
Capitalism and free markets have created unsurpassed American wealth and prosperity. Wealth inequality can be dramatically reduced by giving everyone the same tools others have long used to get ahead. There are simple ways to broaden home and stock ownership, and employee stakes in the companies for which they work. All we need is the will to act.
Jim Sorenson is the Chairman of the Sorenson Impact Group.
Terrence R. Keeley is the author of “Sustainable” and CEO of the Impact Evaluation Lab.