Workers Pay for the ‘Free-Market’ Economy Myth

February 28, 2019

Why This Matters is a series from Roosevelt staff connecting our individual work—from papers to reports and everything in between—to our broader vision of creating a better, more equitable economic and political system. This series will give readers the top takeaways from our latest writing and thinking, with a focus on why they matter as we redefine the rules that guide our social and economic realities.

Corporate profits are at record highs and unemployment is below 5 percent, yet 40 percent of Americans say that they would not be able to meet a $400 emergency. For too long we’ve been guided by the 50-year-old myth that fewer regulations and lower taxes on corporations and the wealthy will lead to economic growth that benefits everyone. In reality, corporations are hoarding their wealth rather than sharing it or putting it to other productive use.  For example, in 2017, the Trump administration and congressional Republicans argued that they could fix the nation’s economic woes by cutting taxes for corporations. These cuts, they claimed, would boost wages and investment, growing the economy and improving people’s lives. Almost no credible economist, however, was willing to stand by those claims.

In 2019, as in the past, however, we know that this theory is false: The benefits of the 2017 tax law have gone almost entirely to shareholders, not to workers, research, or other productive use. In order to create and sustain an inclusive economy, our laws and institutions must be structured in ways that promote economically productive and socially beneficial activities, such as paying workers more and investing in research and development, while simultaneously ending extractive practices like stock buybacks.

To build an economy that works for all of us, we must redefine the role that corporations play in our society by changing people’s understanding of how the economy actually works. And this change requires a federal policy agenda that encourages corporations to spend more money on wages, training, and research and less on shareholder profits

As Roosevelt’s Nell Abernathy explores in a new issue brief, Americans are increasingly aware that corporations aren’t working the way that they are supposed to (hello stagnant wages). Americans are beginning to understand that to tackle the current challenges in our economy, we must expand the conversation beyond how profits are distributed to one that centers how profits are generated—and who ultimately shares in these gains.

Access to the 21st-century economy should not be in the hands of private interests who champion a myth that allows them to prioritize profits above the public good. Precedent shows us that it doesn’t have to be this way. Prior to 1986, the US  had a top marginal tax rate of 70%, which disincentivized CEOs from seeking higher compensation and in turn meant that corporations were investing their profits in capital expenditures, the supply chain, and higher wages for workers.

To create an economy that works for everyone, we must rewrite the laws that shape corporate behavior. Read this issue brief to understand the policies that are needed to do just that.