Why Canada needs its own Elizabeth Warren to make corporate power the central issue in the coming federal election

At the Democratic presidential debate on Tuesday night, Democratic presidential candidate John Delaney argued that some of his more left-wing opponents’ proposals simply weren’t workable. One of those left-wing opponents, Senator Elizabeth Warren, wasn’t having it.

Warren fired back at Delaney: “We can’t choose a candidate we don’t believe in just because we’re too scared to do anything else.”

For Senator Warren, a Harvard law professor who has spent her entire career studying business law and has a good sense of what is possible and what isn’t, Delaney’s attitude was defeatist.

“I don’t understand why anybody goes to all the trouble of running for president of the United States just to talk about what we really can’t do and shouldn’t fight for,” she said. “I don’t get it.”

Warren went on to hammer home her principal point – that large corporations are the main source of corruption in Washington. “It is giant corporations that have taken our government and that are holding it by the throat,” she said, “and we need to have the courage to fight back against that, and until we’re ready to do that, it’s just more of the same.”

Is Warren’s analysis of corporate power relevant to Canada?

There is substantial evidence that Warren’s analysis of corporate power applies equally to Canada.

In a recent book, Dr. Lars Osberg, professor of economics at Dalhousie University, found that the relatively stable inequality of the post-war years in Canada has been replaced by a troubling decades-long trend of increasing concentration of income and wealth at the top.

In 2015, the richest 20 per cent of Canadians now held more than 12 times the share of total incomes than the poorest 20 per cent. The middle class was “disappearing” and the incomes of the poorest remained abysmal.

Osberg traces the rise of the incomes of the ultra-rich to the forces driving salaries in the upper echelons of the corporate world and the effects of capital income and inheritance (inheritances are not taxed in Canada). Outrageous CEO “compensation” packages are a part of the problem in which much of executive compensation comes not from regular earned income, but from stock options taxed at a much lower rate than the income of average taxpayers.

Like Warren and many other observers, Osberg traces the underlying trends that have increased the power of corporations relative to workers and consumers, to government policy changes made since the late 1970’s that favour large corporations.

So what are Warren’s ideas to reduce the corporate hold on our politics and to begin to reverse the 40 year trend towards greater inequality?

Here are some of her key policy ideas:

• implement a “wealth tax” of 2% on fortunes over $50 million;
• break up big corporations like Google, Facebook and Amazon;
• implement a $2 trillion industrial policy to boost exports and create high-paying jobs;
• crack down on private equity’s “Wall St. looting” and restore the legal separation between consumer banking and investment banking that was removed in the U.S. in 1999;
• overhaul corporate governance by putting workers on boards of directors of large corporations; and
• reverse the trend of declining union membership in the private sector by introducing the most dramatic labour law reforms seen in the U.S. since the 1930’s Wagner Act – the legislation that essentially legalized U.S. unions in the first place.

Wealth tax

Warren has called for an annual “wealth tax” of 2% on fortunes over $50 million, slightly higher on billionaires. Working with Emmanuel Saez and Gabriel Zucman, the eminent University of California at Berkeley economists, Warren’s staff calculated that her tax would hit the richest 75,000 people in the U.S. while raising $2.75 trillion in a 10-year period.

These “ultramillionaires,” as she calls them, would no longer pay only on what they earn, which clever accountants can minimize, but on the overall value of their assets.

Warren’s plan would require the top 75,000 households to pay an annual tax of 2 percent on each dollar of their net worth above $50 million. It would rise to 3 percent on every dollar above $1 billion.

Wealth taxes do more to relieve inequality than raising income tax rates, according to Steve Wamhoff, the director of federal tax policy at the Institute on Taxation and Economic Policy.

New research also indicates that raising marginal income rates wouldn’t do much to lessen inequality, because much of the wealth among the richest Americans stems from private business profit taxed at lower rates and appreciated assets that go untaxed until they’re sold.

It won’t be easy for the wealthy (and their accountants) to avoid Warren’s tax, because of reporting and enforcement guardrails included in the plan, according to Professors Saez and Zucman.

High-net worth individuals are audited at a much higher rate than every other income group. The IRS audited about 14.5 percent of returns reporting at least $10 million in income in 2017, nearly double the examination rate for any other income bracket.

An activist industrial policy

Warren’s jobs proposal turns inside out the trade-related  assumptions pursued by the past several U.S. administrations, Democrat and Republican alike. Where they have pursued more globalization of commerce as an end in itself (and as a profit center for U.S.-based multinational corporations and banks), Warren’s goal is to bring production and good jobs home.

And she knits it all together with a coherent plan, beginning with a new Department of Economic Development “with the sole responsibility to create and defend quality, sustainable American jobs.”

The new Department will replace the Commerce Department, subsume other agencies like the Small Business Administration and the Patent and Trademark Office, and include research and development programs, worker training programs, and export and trade authorities like the Office of the U.S. Trade Representative. The new Department will have a single goal: creating and defending good American jobs.

Globalization and the decline of good paying, unionized U.S. jobs didn’t just happen, Warren points out.

According to Warren, America chose to pursue a trade policy that prioritized the interests of capital over the interests of American workers. Germany, for example, chose a different path and participated aggressively in international trade while at the same time successfully supporting its domestic industries and its workers.

Specifically, she calls for leveraging government-subsidized R & D to promote good domestic jobs. If the research and development that goes into new products is funded by American taxpayers, those products will be built by American workers. Warren also wants management of the value of the dollar to take into account the impact on domestic production.

In her Green Manufacturing Plan, she further proposes the federal government allot $150 billion every year for the next decade to purchase renewable, green, American-made energy products, which in itself would amount to a 30 percent increase in the government’s annual procurement.

In addition, she views these new tools of domestic economic development as having regional development potential as well, so that good jobs can be spread to the nation’s regions that have been left behind by the bi-coastal shift of capital.

And she wants government procurement to be used explicitly for domestic production and job creation. Warren also proposes a dramatic expansion of worker training to rendezvous with the anticipated new jobs.

If capitalist, trade-oriented Germany can undertake a great deal more economic planning than we do, says Warren, it’s time for America to start planning a future of cutting edge industries and good jobs. Every four years, the newly created  Department of Economic Development would produce a National Jobs Strategy, and all trade-related policies would fall under the new department.

While other progressive critics have offered telling indictments of America’s free trade deals, Warren is the first to nest that critique in an affirmative strategy for reclaiming good jobs and fostering cutting edge industries.

According to Warren, America’s  finest industrial hours came during World War II, when national planning was a necessity and trade was shut down. The subsequent postwar boom was an era when prosperity was broadly spread. Warren is promoting a return to that kind of trade.

Breaking up “big tech”

Warren has also called for a break up of big tech companies like Facebook, Google and Amazon – an idea thrust into the mainstream as part of an emerging movement that favors an aggressive attack on corporate power through anti-trust law.

Warren’s proposal to classify some technology giants as utilities and undo previous industry mergers jolted Silicon Valley. It also hit a nerve among Democrats and Republicans in Congress, who’ve grown increasingly concerned that curbs on anti-competitive conduct are poorly enforced.

That all but ensures that restraining the power of dominant tech companies will be a focus of the 2020 campaign as Democrats seek to unseat President Donald Trump.

Rethinking anti-trust

Warren’s broadside is part of a wider rethinking of antitrust enforcement in the U.S. that until now has has been mostly relegated to legal conferences and academic papers. At its heart is the view that antitrust officials have fallen down on the job, leaving broad swaths of the economy dominated by large firms insulated from competition. Plenty of lawyers and economists dispute there’s a problem, but its proponents have pushed the break-em-up idea to center stage in the antitrust circles of Washington and academia.

There’s a split on how to deal with the issue. One view calls for throwing out the current playbook and reorienting antitrust enforcement away from its emphasis on consumer prices. Lynn advocates for reining in the ability of big platforms to squeeze sellers. One way to do that — which Warren embraces — is prohibiting tech platforms from moving into different lines of business where they can abuse their power as middlemen.

Another camp supports stepped-up enforcement under the existing framework based on consumers. That’s a balanced approach that was articulated at a conference last week in Washington that featured former Justice Department and FTC officials. It’s an approach Warren would reject, said William Kovacic, a former FTC commissioner who is now a professor at George Washington University Law School.

Warren has called for legislation that would treat large tech companies like Amazon as utilities and ban them from owning participants on their platforms. Under that scenario, Amazon’s marketplace, for example, would be split from its Amazon Basics business. Google search would be spun off from the rest of the company. Warren also said she’d seek to undo past mergers that she said undermined competition, including Facebook’s acquisition of Instagram and Google’s purchase of DoubleClick.

Preventing tech platforms from moving into other lines of business — think Facebook’s move into crypto currency — is an idea backed by Lina Khan, an antitrust scholar who wrote an influential paper on Amazon’s threat to competition. Khan, who was recently hired to work for the House antitrust subcommittee, lauded Warren’s proposal. She argues that separating lines of business addresses the risk that technology platforms like Amazon and Google will discriminate against companies that depend on them.

Corporate governance: workers on the boards of directors of large corporations

The insight tying together Warren’s proposals is that if corporations are going to have the legal rights of persons, they should be expected to act like decent citizens who uphold their fair share of the social contract and not act like sociopaths whose sole obligation is profitability — as is currently conventional in American business thinking.

Warren’s plan to deal with the power of big tech is to require any corporation with revenue over $1 billion — only a few thousand companies, but a large share of overall employment and economic activity — to obtain a federal charter of corporate citizenship.

The charter tells company directors to consider the interests of all relevant stakeholders — shareholders, but also customers, employees, and the communities in which the company operates — when making decisions. That could concretely shift the outcome of some shareholder lawsuits but is aimed more broadly at shifting American business culture out of its current shareholders-first framework and back toward something more like the broad ethic of social responsibility that took hold during WWII and continued for 35 years or so afterward.

Business executives, when pressed about topics of social concern, frequently fall back on the idea that their first obligation is to do what’s right for shareholders. A new charter would remove that crutch, and leave executives accountable as human beings for the rights and wrongs of their own decisions.

More concretely, corporations worth over $1 billion would be required to allow their workers to elect 40 percent of the membership of their company’s board of directors.

Warren also tacks on a couple of more modest ideas. One is to limit corporate executives’ ability to sell shares of stock that they receive as pay — requiring that such shares be held for at least five years after they were received, and at least three years after a share buyback. The aim is to disincentivize stock-based compensation in general as well as the use of share buybacks as a tactic for executives to maximize their one pay.

The other proposal is to require corporate political activity to be authorized specifically by both 75 percent of shareholders and 75 percent of board members (many of whom would be worker representatives under the full bill), to ensure that corporate political activity truly represents a consensus among stakeholders, rather than C-suite class solidarity.

It’s easy to imagine the restrictions on corporate political activity and some curbs on stock sales shenanigans becoming broad consensus points for congressional Democrats, and even part of a 2019 legislative agenda if the midterms go well. But the bigger ideas about corporate governance would be a revolution in American business practice to undo about a generation’s worth of shareholder supremacy.

Reigning in Wall St.

Warren unveiled new legislation — the Stop Wall Street Looting Act of 2019 — which takes aim at a very specific corner of the financial industry: private equity firms and investment funds that make money by buying and selling companies. The bill would overhaul the way private equity is governed and require the industry to change some of its most lucrative business practices. It would also offer more protections for workers when their private equity-owned employers go south.

At its most basic, the legislation would change a lot of the incentives around the way firms do business, require them to have more skin in the game, and make it a lot harder for them to make money if the businesses they buy fail. It would mean that to make a lot of money, they’d have to make really good bets that payoff for employees of the companies they own.

The proposal is also another way to shine a spotlight on economic inequality and the ways workers often lose out to moneyed interests on Wall Street.

What private equity does

Private equity firms raise money privately, as the name suggests. Their investors are generally institutional investors, such as pension funds, or accredited investors — investors who meet a certain set of criteria that allow them to make riskier bets. Some big-name examples are the Blackstone Group, the Carlyle Group, and Bain Capital, where former Republican presidential candidate Mitt Romney spent part of his private sector career. If private equity funds become big enough, they sometimes start to issue stock.

The general idea behind private equity firms is that they buy companies that are struggling or that they believe have a high potential for growth, repackage them or speed up their growth, and then sell them to another firm, take them public, or find some other sort of exit for them.

Warren’s legislation calls for putting a stop to what she calls “legalized looting” — overhauling the rules and regulations surrounding the private equity industry. She notes that since 2009, investors have put $5.8 trillion into private equity globally, and today, 35,000 private equity-owned companies employ 5.8 million workers. And in her view, there’s a lot of bad behavior going on:

The firms can use all sorts of tricks to get rich even if the companies they buy fail. Once they buy a company, they transfer the responsibility for repaying the debt they took on to the company that they just bought. Because they control the company, they can transfer money to themselves by charging high “management” and “consulting” fees, issuing generous dividends, and selling off assets like real estate for short-term gain. And they slash costs, fire workers, and gut long-term investments to free up more money to pay themselves.

Warren’s plan, outlined in full in her proposed legislation, would make a number of changes to how private equity firms are governed. Here are some examples:

Private equity firms extract monitoring and transaction fees from the target companies they buy and take dividends from those firms for themselves and investors. Warren’s bill would put a 100 percent tax on those fees and ban dividends for two years after a transaction.

The bill requires funds to share responsibilities and liability for the target company’s debt, including for pension-related violations. So if a company takes on a bunch of debt in its turnaround effort and fails, the private equity fund is on the hook to deal with the fallout, which isn’t the case now.

The bill closes the carried interest loophole which reduces the effective personal income tax rate of hedge fund and private equity managers whose annual compensation is in the millions, to 24% – a rate close the average tax payer.

It also moves certain parties — namely, workers and consumers — up the totem pole in bankruptcy proceedings. This means workers have a better chance of getting their full pensions when their employers go bankrupt. It also prioritizes worker pay in bankruptcy proceedings.

“What this does is it rules out the most excessive behavior of private equity that really disadvantages the companies they buy, the workers who work there, and the creditors, the people who loaned the money to buy the company,” said Eileen Appelbaum, co-director and senior economist at the Center for Economic and Policy Research, who released an economic analysis of the bill.

Warren is also proposing a re-instatement of the U.S. Glass-Steagal Act. The Act, first passed in 1933 in the wake of the 1929 stock market crash and during a nationwide commercial bank failure and the Great Depression, was repealed in 1999. Warren’s legislation essentially re-establishes the main feature of Glass-Steagal and separates traditional banks that have savings and checking accounts and are insured by the Federal Deposit Insurance Corporation from riskier financial institutions that offer services such as investment banking, proprietary mutual funds, insurance, and hedge fund and private equity activities.

Labour law reform

Warren’s plans for labour law reform are mostly found in her support for the Protecting the Right to Organize (PRO) ACT. Co-sponsored by 40 senators and 100 members of the House, the PRO Act offers a litany of labor law reforms. The larger context here is that the United States has among the weakest workers’ rights protections of any industrialized country—on par with Myanmar, Pakistan and Ethiopia. Over the past 40 years, employers have aggressively fought unionization through (perfectly legal) tactics like “captive audience” meetings, when workers must sit and listen to anti-union presentations, or the (sometimes legal) firing of striking workers.

The PRO Act would strengthen the right to organize and strike by, among other things, eliminating so-called right-to-work laws, banning permanent strike replacements, legalizing secondary boycotts and picketing, and broadening the definition of “employee” to include many current independent contractors. Compared to the Employee Free Choice Act (EFCA), the reform law pushed by the labor movement during the 2008 election cycle that ultimately died in the Senate, the PRO Act is a progressive smorgasbord. But the PRO Act does fall short of EFCA in one significant regard: While EFCA enabled workers to organize through a majority sign-up process (“card check”), the PRO Act only requires card check if an employer is found to have violated labor law during a failed union election. Every current senator running for president backs the bill.

Warren has also co-sponsored the  Workplace Democracy Act (WDA) along with potential Democratic nominees Bernie Sanders, Corey Booker, and Kamala Harris. For decades, Sanders (beginning as a congressman in 1992), has been pushing the Act. The WDA can be seen as a forerunner of the PRO Act; it also legalizes secondary boycotting, stops companies from delaying a first contract with workers and gives bargaining rights to many workers who are currently classified as independent contractors. (Unlike the PRO Act, it would let all workers unionize via card check as a matter of course.)

Conclusion: Why Warren’s ideas are relevant for Canada.

Over 35 years ago, Dr. Lars Osberg, professor of economics at Dalhousie University, published Economic Inequality in Canada, which looked at inequality in Canada’s post-war economy. He found that in the years between 1950 and 1980, economic inequality between the top and bottom 20 per cent of family units Canada was relatively constant: the top 20 per cent took about 10 times the income share of the bottom 20 per cent.

Things weren’t great, but at least it wasn’t getting worse.

Fast-forward to the 2018 release of another book by Osberg: The Age of Increasing Inequality: The Astonishing Rise of Canada’s 1%, and things have changed significantly.

Osberg found that the relatively stable inequality of the post-war years has been replaced by a troubling decades-long trend of increasing concentration of income and wealth at the top.

While the federal New Democratic Party has put forward a few ideas over the years to tackle this problem, no Canadian political party has come close to proposing the kind of coherent, detailed set of policies that would truly reverse this trend as U.S. presidential candidate Elizabeth Warren has done in the past six months

Canada’s federal election is scheduled for October 21.

Canada needs its own Elizabeth Warren to challenge corporate power.

Will Canada’s centre-left parties step up to the plate?