AP News Comment: Expanding Ownership, not Raising Minimum Wage, Is Key to Reduce Income Inequality

AP writer Chris Rugaber reports today that a majority of 36 interviewed economists by the Associated Press last week say rising stock market gains and compensation are accruing to the top 20% income earners and therefore the economy does not have as many potential spenders to support economic growth.  Economists say 80% of stock market gains accrue to the top 10% of Americans and their spending does help the economy.  However, they concur that broader wealth distribution in more households would lead to more robust spending on non-discretionary items most households need, and discretionary items they would like, to have.  AP Story: Rising Income Gap Holding Back Growth.  Mr. Rugaber then highlights President Obama’s solution: raising the minimum wage from $7.25 to $9.00, which would raise annual income 24% ($3,500) from $14,500 to $18,000.  There is much debate about the impact of raising the minimum wage on employment rates, and I don’t propose to solve here.

I will submit the most proven way to generate wealth, even as noted in this article, is long-term compound capital appreciation in a broad stock market index.  The solution to income inequality is for fiscal policy to reward worker ownership and investment in their own labor!  Raising the minimum wage does constrict employer decision-making and margins especially in low margin service businesses.  More importantly, a $3,000 one-time raise will not, by itself and even if neutral on hiring, generate the incremental wealth in that cohort to grow an economy or allow the individual to become independently wealthy.  The solution is for government to give employers a refundable tax credit for up to $10,000 of employee 401(k) matching and/or non-cash contribution of $0.01 company stock (voting or non-voting) as a performance bonus to a company employee stock ownership program or directly to the employee.  Government should reward employers to reward their employees with more ownership in the fruits of their labor. It’s a near and long-term win-win-win for employee, employer, and government.  I support this policy for all workers without income limit, but if necessary, we can start with individual income up to $100,000, $250,000 for joint filers.  Employers retain hiring and pay for performance bonus flexibility.  Hard working employees and savers can earn stock compensation that can appreciate long-term.  Government helps the most needy who want to contribute and prosper.

The stock appreciation chart below shows the value of $10,000 invested today plus $10,000 invested every year compounding at a 5.3% real rate of return over a 30-year working career.  As you will see the S&P 500 analysis, the compound annual growth rate from 1871 to 2013 is 8.98% (assuming 100% dividend reinvestment) and 6.77% adjusted for annual inflation.

The 30-year present value is $1.9 million or $5.3 million in 30 years.  That number is financial independence and is a viable public policy solution, good for all.  Dramatically expanding ownership in labor and generating compound capital appreciation over a 30+ year career is the most proven model to reduce income inequality.  Let’s get going.

 Note: S&P 500 compound annual growth rate from 1871 to 2013.  8.98% total return (including dividend reinvestment). 6.77% adjusted for annual inflation rate.

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