Issue #1, Summer 2006

The Wealth of Neighborhoods

While President Bush’s ownership society only gives more to those who already have, a more equitable, progressive ownership society is taking shape at the grassroots.

President George W. Bush’s “ownership society” is a seductive idea: who wouldn’t want to become the owner of their home, health care, retirement, and destiny? From the “home on the range” to the adulation heaped on high-tech entrepreneurs, the concept is rooted in the American experience. No other nation places more value on the importance of individual autonomy. Ultimately, however, Bush’s promise of an ownership society is an empty one. In exchange for ownership, we receive increased risk while the wealthy and corporate interests benefit, as in his Social Security privatization plan. In Bush’s world, everyone gets a little piece of the pie, but at the cost of giving the wealthy extremely large helpings. Bush has, in fact, exacerbated a long-running trend: not only is income inequality greater in the United States than in any other advanced society, but the ownership of wealth is literally feudal in nature–and getting more so. The top 1 percent garners more income than the bottom 100 million Americans taken together. A mere 1 percent of wealth-holders, however, own just under half of all financial assets. A slightly larger group, the top 5 percent, own roughly 70 percent of all business assets. In 2003, the top 1 percent alone received 57.5 percent of all capital gains, rent, interest, and dividend income.

With recent rollbacks of the estate tax, incentives for retirement savings from which the well-off disproportionately benefit, and tax cuts that reward wealth, these inequities will only deepen. Morally, this is offensive to progressives and anyone with even a semi-serious conception of justice. Practically, this is troubling–and should be–to people across the political spectrum, because societies in which wealth disparities are so great are unstable societies. Divisions are magnified. The bonds of citizenship and brotherhood are weakened. The social fabric is frayed. A nation that begins down this path ends up with a country that begins to look more like a developing nation in Latin America and Africa: high walls keeping a restless and poor population out of sight and out of mind.

Decrying such inequities is nothing new. Yet, unfortunately, the progressive response of the twentieth century–redistributive tax structures and public assistance–no longer has the capacity to alter the dominant trends. Not only has income inequality continued to expand despite large-scale entitlement programs like Medicaid and Social Security, but there is little prospect that significant new programs will come into being any time soon. In a world of deepening deficits, an aging population, global competitive pressure, and persistent public skepticism of government, the appetite for the tax hikes and entitlement programs needed to rebalance these inequities is weaker than ever.

Although the redistributive door is largely closed, the ownership door is, in fact, open. Not ownership in Bush’s skewed sense, but rather ownership in a democratic sense through the possibility of community-based investment in, and control over, wealth creation. Employees, companies, non-profits, cities, and states are using diverse and innovative strategies to create community wealth. It is wealth that improves the ability of communities and individuals to increase asset ownership, anchor jobs locally, expand the provision of public services, and ensure local economic stability, rather than just boost corporate profits and shareholder fortunes. A common thread runs through the employee-owned firms, community development corporations, and even the traditional co-ops: the idea that real wealth equality can only be built by communal involvement in the means by which that wealth is produced. Such approaches provide ownership for millions of Americans–in many cases, through a tangible asset that can appreciate and be passed on to subsequent generations. Others create community wealth by enabling businesses and jobs to stay in the United States.

But more than that, these ownership strategies give people a real stake in their community, strengthening the bonds of citizenship and the connections between people, institutions, and places. These are not incidental by-products of a progressive ownership society; they lie at its core. A country where more people have a tangible stake and believe they can create better lives for themselves and their children is a strong society–and a strong democracy. “Necessitous men are not free men,” Franklin Roosevelt urged. Or as an earlier President, John Adams, reminded a young nation: “The balance of power in a society accompanies the balance of property.”

Interestingly, the idea of using investment strategies to benefit non-elites has been difficult for some progressives to grasp–it sounds too much like the other side’s programs. However, properly structured, such strategies can be a practical and effective way to combat wealth inequalities. Indeed, at the grassroots level, a progressive ownership society is already quietly taking shape–one that enables the poor, blue- and white-collar workers, and the middle class in general (broadly, the vast majority of perhaps the bottom 95 percent of American society) to create and gain the benefits of wealth ownership. These various strategies, and they are indeed very diverse, are beginning to change who gains from wealth ownership and investment. Some do it directly, helping low-income individuals increase savings and asset-holding. Others do it indirectly, but nonetheless importantly, by increasing the numbers of non-profit corporations that have established businesses to help finance neighborhood development or various social missions. Still others use municipal and state strategies to build community wealth. And all of these efforts are found throughout the country, in states “red” and “blue.”

Community Wealth Strategies Several proposals have emerged in recent years that move government policy beyond conventional redistribution and toward wealth creation. For example, prompted by the Clinton Administration, a bipartisan coalition came together in the late ’90s to provide federal backing for Individual Development Accounts (IDAs). In the typical IDA, the government directly matches the savings of poor families or individuals up to a certain level, thereby doubling their efforts and allowing them to benefit from the ownership of capital. Although IDAs are still very much in the experimental stage, roughly 400 community-based organizations currently administer some 20,000 individual accounts; in the San Francisco Bay Area, participants have consistently saved 5 percent or more of gross income despite averaging less than $20,000 per year in household income.

Bush has committed only modest federal funding to the initiative, but it has nevertheless spawned a number of proposed variations in recent years, many with bipartisan backing. In 2005, for instance, the America Saving for Personal Investment, Retirement, and Education, or ASPIRE Act, was jointly introduced by two Republicans and two Democrats: Senators Rick Santorum, Jim DeMint, Jon Corzine, and Charles Schumer. ASPIRE would provide every child with a starter deposit of $500, with children from households below the national median income eligible for an additional $500. In Great Britain, a similar “baby-bond” measure is now law, with the first “Child Trust Funds” opened last year.

The most far-reaching effort so far proposed, however, is that of Yale Professors Bruce Ackerman and Anne Alstott. This would provide every young person a “capital stake” of $80,000 on reaching adulthood, to be used for any purpose they chose. An interesting wrinkle here challenges existing wealth inequality directly: the program would be financed through a 2 percent wealth tax. Bill Gates, Sr. and Chuck Collins of United for a Fair Economy have suggested an additional angle of attack that, like the Ackerman-Alstott approach, also simultaneously challenges existing wealth inequality through the tax code. They propose a revised estate tax to begin at $2.5 million in assets, with the proceeds used to support a “wealth-building” fund to finance a variety of individual and community-benefiting strategies.

These programs and proposals, while noteworthy, are in some ways old wine in new bottles: they focus on wealth creation, but still mainly rely on the redistribution of funds through government policy as their means of doing so. But beyond Washington, in the “laboratories of democracy” that are the states, leaders in the private, public, and non-profit sectors are exploring even more creative ways to build community assets for broader groups and for communities.

Employee-Owned Firms The most intriguing and instructive approach in the new mix is the employee-owned firm. “Worker ownership of the means of production” used to be a hoary radical demand; today it is increasingly an accepted reality. Few realize that roughly 11,500 U.S. businesses are now wholly or substantially owned by their employees–up from fewer than 300 a generation ago. The 10 million individuals involved in employee-owned firms include more people than the entire membership of private-sector labor unions.

Take, for example, the 7,500 employee-owners of W. L. Gore and Associates, manufacturer of Gore-Tex fabric, who control facilities in 45 locations around the world. Management is both sophisticated and participatory: workers may lead one task one week and follow other leaders the next week; teams disband after projects are completed, with team members moving on to other teams. The firm, which regularly ranks on Fortune’s “Best Companies to Work For” list, enjoyed revenues of $1.84 billion last fiscal year.

Other enterprises range in size and impact. Appleton Co. in Appleton, Wisconsin, is a world leader in specialty-paper production and is owned by roughly 3,300 employees. Reflexite is an optics company with approximately 420 employee-owners in Avon, Connecticut. In Harrisonburg, Virginia, ComSonics–owned by its 200 employees–makes cable television (CATV) test and analysis devices and boasts the largest CATV repair facility in the United States. These companies were not birthed from some sort of commune or communal movement. Rather, the typical employee-owned company is established when a retiring owner of a medium-sized business decides to sell to his workers, taking advantage of special tax incentives for firms organized through employee stock option plans (ESOPs).

Previously, much attention on ESOPs has tended to highlight employee-ownership failures. Press reports have often implied that United Airlines’ financial problems, for instance, were due primarily to its innovative ownership structure. But United suffered from the legacy of a bitter strike that occurred nearly a decade before its ESOP was formed. Moreover, flight attendants–the largest group of employees–were not included as ESOP members. And, of course, nearly all American airlines have experienced massive financial difficulties since September 11. The only profitable major American airline in recent years has been Southwest, which, strikingly, has significant employee ownership.

Indeed, the vast majority of ESOPs involve highly successful businesses, not the decaying old-economy companies often emphasized by the press. In fact, they are commonly dynamic and high-growth firms. A recent survey by Rutgers University sociologist Joseph Blasi, Rutgers economist Douglas Kruse, and BusinessWeek reporter Aaron Bernstein demonstrated that such firms have consistently higher productivity records than comparable non-employee-owned firms. Average hourly pay in ESOP firms is also significantly higher than pay for comparable work in non-ESOP firms. And employee-owners of ESOPs commonly end their careers with higher retirement benefits than others with similar jobs.

Yet the real advantage of employee-owned firms goes beyond the companies’ walls to the wider community. Consider what happens when the typical small-business owner is nearing retirement. Too often, they have a hard time convincing a son or daughter to take over the family business or find a willing buyer, especially one interested in running the business where it is. Often, these small businesses (which collectively employ half of the entire private-sector labor force) and their jobs disappear. As a result, the government must spend large sums to retain these positions or create new jobs elsewhere. In Ohio, for instance, it is estimated that it can cost the state between $75,000 and $100,000 in assistance to attract a new job to the state. Yet the cost of retaining jobs through ESOP buyouts averages less than $500 per job, mostly for legal and other technical assistance. For the states, employee-owned firms provide an inexpensive way of keeping jobs in communities and keeping communities healthy and vibrant, both through the jobs retained and the assets accumulated for each worker. In this way, employee-owned firms not only help create wealthier, more equitable communities, but in doing so actually reduce the burden on state and local governments.

Hybrid Non-Profits While employee-owned firms are a private-sector solution to creating more wealth and assets for working people, there are a host of strategies being employed by the non-profit sector as well. Most involve either a non-profit enterprise that owns and develops assets on behalf of low-income communities or one that sets up a business to finance services for selected groups. A recent Chronicle of Philanthropy study estimated that more than $60 billion was earned through business activities by the 14,000 largest non-profits in 1998. Income from fees, charges, and related business activities are estimated in other studies to have grown from 13 percent of non-profit social-service-organization revenues in 1977 to 28 percent in 1997.

One of the most prominent of these hybrids is the community development corporation (CDC), of which there are now more than 4,000, operating in virtually every reasonably sized U.S. city and in many rural areas. CDCs first attained major federal backing in the 1960s, when then–New York Senators Robert Kennedy and Jacob Javits teamed up to provide bipartisan support for significant-scale CDC development both nationally and in New York (especially in the Bedford-Stuyvesant neighborhood of Brooklyn). Although most CDCs are mainly involved in low-income housing, several have evolved into multifaceted approaches to community wealth-building, combining the administration of individual wealth programs (like IDAs); the development of community infrastructure including affordable housing and community facilities (community centers, child care, parks); and the direct ownership and investment in “anchored” community-owned businesses.

Two of the most impressive are the New Community Corporation (NCC) in Newark, New Jersey, and the oddly named Mid-Bronx Desperadoes, established in the South Bronx in 1974 at a time when “arson for profit” had become common and local unemployment was 85 percent. NCC owns an estimated $500 million in real estate and other ventures, including a shopping center and some 3,000 units of housing. It employs 1,500 neighborhood residents, with profits used to help support day-care and after-school programs, job training and health education, a nursing home, and a medical day-care center for seniors. Mid-Bronx has amassed over $200 million in real-estate assets, including 2,300 units of affordable housing and an ownership stake in a large shopping center. The proceeds from managing and developing these projects, in turn, go toward supporting community services, including a highly successful job-training program. By moving in where most market actors fear to tread, CDCs revitalize communities, create jobs, and begin to use a community’s wealth to its benefit.

Issue #1, Summer 2006
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Progressive Econ Student:

Great article. However, I don't readily see the connection between having a more progressive distribution of wealth and community development initiatives.

For example, the community development corporation in my own small tourist community is a victim of elite capture, controlled by real estate developers at the expense of locals. This possibility is mentioned in the article, but I see little reason to believe that this is not generally the case.

On the contrary, the example of employee-owned corporations seems quite promising. You have inspired me to look into ESOPs.

Jun 26, 2006, 7:41 PM

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