Wealth Redistribution

It's been happening for decades and it isn't great

I know a lot of people have an immediate negative response to calls for redistribution of wealth. “That’s socialism!”, “That’s tyrannical!”, “That’s unfair to people who worked for their money!”, “It will ruin innovation and remove incentives for hard work!” are a few of the sentences the guy I just made up would say (in my defense I have heard some of these from real human beings). It might surprise the reader, but I actually agree with most of these statements. The truth is that wealth redistribution in the U.S. has been happening for decades and it has been continually upward towards the wealthiest Americans at the expense of everyone else.

So many policies contribute to wealth transfer, upward or downward, depending on how they are written and how they are implemented. A completely free market (which does not and has never existed) might tend to transfer wealth upward and concentrate it since capital is a form of power and facilitates a cycle of accumulation as described by the professors of political economy Nitzan and Bichler in their book that I’m slowly working through. I emphasized might because the legal system is the most basic part of a functioning market, and without someone to enforce contracts and the underlying threat of police/court intervention, rich people might not find it so easy to force unfair labor conditions since in overall numbers they are a very small minority. Then again, they might go right back to the feudal days and all hire their own private armies to keep peasants in check.

I believe it’s time to stop acting as if there is some “natural” state of society or markets, and realize that society is what we make it. David Graeber and David Wengrow’s book The Dawn of Everything surveys anthropological and archaeological evidence to highlight that there have been a great variety of human societies and modes of cooperation and competition, and that many societal structures of past humans lasted thousands of years longer than we have had modern nation-states or capitalism. Society is created by our individual choices, our collective action, and our willingness to accept certain conditions. Often, our concept of fairness gets twisted beyond recognition as people (free-market economists) try to equate economic models with “laws” of human behavior as fundamental as the laws of physics. This excellent research paper on the ideological biases of economists gives many examples of this type of rhetoric. To quote just one passage:

Friedman (1953) describes in his famous essay that “positive economics is, or can be, an 'objective' science, in precisely the same sense as any of the physical sciences.” 1 Similarly, Alchian asserts that “[i]n economics, we have a positive science, one completely devoid of ethics or normative propositions or implications. It is as amoral and non-ethical as mathematics, chemistry, or physics.” 2 Boland (1991) suggests that “[p]ositive economics is now so pervasive that every competing view has been virtually eclipsed.”

These silly, and ultimately false, assertions can easily lead people to believe that when using economic research, they are making decisions based on facts revealed about fundamental laws of society, rather than normative claims which are dependent on a variety of assumptions that often don’t hold up in the real world.

As a quick aside, since I had to remind myself what positive and normative mean, this succinct definition from Investopedia helped out, “A positive statement is one that can establish hypotheses that can be empirically tested. In contrast, a normative statement is instead based on opinion or subjective values.” The problem with believing that positive economics can be like a physical science is that economists are dealing with highly complex and massive systems of social interaction, more like weather forecasting than like predicting the trajectory of a ball thrown out of a window. Any small difference between an economist’s model of a situation and the real world, or even a future unforeseen event like a natural disaster, or war can render a model useless. In the case of neoliberals like Friedman quoted above, the underlying assumptions they integrate into their models greatly affect the outcomes the models have. Starting from incorrect assumptions about free markets leads to models completely detached from reality.

All of this economist bashing is to say, we can’t rely on some “fundamental law of economics” to determine how we define what is fair. Once the social context changes, that law is no longer applicable because it depended on the exact material conditions it was created in. This isn’t to say that there are no broadly applicable economic theories, just that they can never reach the status of a universal law like those of physics (and even physical laws apply in specific contexts). Getting back to redistribution of wealth, I want to consider what is fair since that’s a tricky word with different meanings to different people. I think a lot of people would agree that stealing from someone is unfair. I think many people would also agree that a system that benefits one group of people arbitrarily while harming others is unfair. I’m going to stick with these two simple ideas for now.

Recently, the independent news site Popular Information wrote an article detailing the massive amount of wage theft employers are committing across the U.S. The article states that “More than 200,000 workers across the country are owed $163.3 million in back pay, according to a website maintained by the Department of Labor (DOL).” And this is just the amount that investigators have already determined is owed. They go on to say:

In 2014, the Economic Policy Institute (EPI) estimated that wage theft costs workers more than $50 billion per year, most of which was unreported. A 2023 CBS investigation found that “[o]ften, employers threaten to report workers who complain of wage theft to immigration.” Those who do come forward often wait months, sometimes years, for the resolution of their complaint. But even if they win their claims, it’s not guaranteed that they’ll see their owed wages. CBS found that “more than a third of those successful cases — totaling nearly a billion dollars — showed no money was ever recovered.”

The whole article is worth reading as it gives detailed examples and reports. The final part I’ll quote at length is illustrative of the idea of fairness I mentioned above:

“When someone steals a six-pack of beer from a grocery store or a sweater from a boutique, it is generally treated as a criminal matter. The billions of dollars in wages stolen from workers, however, are almost always treated as a civil offense. 

At the federal level, the DOL is only empowered to impose civil penalties against repeat offenders or when it finds that the wage theft was "willful." According to the Peterson Institute, among 148,000 wage theft violations between 2005 and 2020, 91% were first-time offenders. And the DOL found only 2% of those first-time violations were willful. In cases of willful or repeat offenses, the DOL imposes no penalty 41% of the time.”

While writing this post, I came across a new report in New York that the attorney general has settled wage-theft suit requiring Uber and Lyft to pay out $328 million in wages stolen since at least 2015 (Uber accounts for the vast majority of that). The statements from both the Uber and Lyft representative speak to the corruption of the wealthy: “We look forward to continuing this work in order to provide New York drivers the independence and full range of benefits available to those in other states, like California and Washington.” This read to me as, “only once you force us to pay workers fairly through lawsuits and regulations will we do so.”

Wage theft is a form of wealth redistribution that has been going on since the founding of the U.S., funneling money upward. It has taken many forms, from preventing workers from taking breaks, forced overtime without pay, stealing tips, to just plain underpaying people for the hours they worked. Our laws treat it generally as a civil offense, where employers may only face the penalty of paying what they originally owed employees, or they may have to pay a small fine on top of that. With a lack of federal investigators in the U.S., many companies get away with it on a regular basis and employers and shareholders are enriched by stealing from their employees with basically no consequence. I think almost anyone would agree this is unfair.

To go a step further, I think that when considering fairness, we need to consider the wealth and power that people already have. Our justice system has always given judges the power to consider mitigating circumstances. Instead of having a two-tiered system which explicitly treats crimes committed by the wealthy as less serious than crimes committed by the poor, I think the wealthy should be subject to a higher level of scrutiny. A manager stealing thousands of dollars from workers should be punished more severely than a person stealing $250 worth of food from a store. Someone stealing for need faces jail time and someone stealing to increase their already considerable wealth faces a fine, exactly the reverse of what I expect most people would consider is fair. Especially because the wealthy have the resources to avoid detection for longer, and to find any possible legal loopholes that exist, they must be aware they will face severe consequences for their actions.

Wage theft is pretty straightforward, but there are many other, more subtle policies which redistribute wealth out of the pockets of workers and customers and into those of the already wealthy. One such example is found in an article by Lina Khan, the current FTC chair who I have written about before. She co-wrote this 2017 article for Yale Law & Policy Review entitled Arbitration as Wealth Transfer in which she and co-author Deepak Gupta, detail research into the effects of mandatory arbitration clauses in contracts. Starting with an overview of the history of arbitration clauses, they point out that:

Over the last few decades, the Supreme Court has steadily expanded the reach of forced arbitration clauses—clauses that companies embed in the fine print of standard-form contracts to deny consumers and workers the right to band together to sue those corporations in court.

Since the 1980s court decisions have empowered companies to force arbitration, but the article claims that several more recent cases since 2010 have accelerated that trend. Some regulators are attempting to regulate (imagine that) the cases in which arbitration is allowable, but they face pushback from corporations who would like impunity in their activities. The core of the article describes recent research on the impacts of forced arbitration and how it perpetuates inequality. The authors point out “arbitration has regressive effects”, meaning that arbitration transfers wealth from the poor to the rich. They highlight that many forms of law contribute to or prevent wealth transfer, stating:

When Congress passed the Copyright Term Extension Act—extending copyright protection on existing copyrightable material by twenty years—experts described the law as a wealth transfer from individual users to large, rights-holding companies. Scholars have also argued that curbing unjust wealth transfers was a primary aim of the Sherman Antitrust Act. Others have even identified legal uncertainty writ large as transferring wealth from poor to rich.

That last sentence is incredibly important. Basically, without a clearly stated goal of a policy, policies will tend to transfer wealth upwards. This is likely due to a variety of causes, but as I mentioned above, the wealthy already have power, and they have the ability to hire lawyers as well as generally coordinate efforts and public opinion among many people to their benefit in a way that the poor do not. Often, politicians work from a mistaken idea of fairness which is that a policy with an intention of helping poor people is unfair, but a policy worded in a “neutral” manner is fair. The same argument is used to cut important regulations. This is in spite of the fact that historically, regulations often exist to protect the rights of the poor (workers or consumers), and that reducing regulation very often has the result of allowing the wealthy to take more money from the poor. A cynic would say this is the goal of deregulators, I prefer to say it doesn’t matter what their stated goal is because we know the outcome and we should reject the claim that it is fair.

A strength of the law article is that it historicizes arbitration. This is important to understand any issue, but especially to recognize how the system was created and why it doesn’t have to be this way. Interestingly, they state:

Until the 1920s federal courts refused to enforce arbitration agreements. But in the early decades of the twentieth century, as the number of corporate transactions—and, by extension, disputes—grew, businesses wanted courts to give arbitration agreements the force of law. Arguing that arbitration would relieve congested courts, business interests lobbied Congress to let them set up private solutions that would be faster and cheaper than public courts. When officials expressed concern that arbitration would let “the powerful people . . . come in and take away the rights of the weaker ones,” supporters of arbitration legislation assured them that the device would be used only between consenting merchants of roughly equal bargaining power, and not against workers or consumers.

Initially, arbitration was intended only to handle disputes among corporations, but along with the neoliberal shift ushered in by Reagan which changed law in precisely the way that would benefit corporations at the expense of workers and eventually consumers, in the 1980s the Supreme Court issues an ahistorical ruling which reinterpreted the arbitration law as being intended to favor private arbitration over court cases. The article goes on to detail two cases which broke from precedent to promote private arbitration over public court cases, in one of which

Justice Sandra Day O’Connor criticized the majority for ignoring legislative history. “Today’s decision is unfaithful to congressional intent, unnecessary, and . . . inexplicable,” she wrote. “Although arbitration is a worthy alternative to litigation, today’s exercise in judicial revisionism goes too far.”

They detail much more history showing the original purpose and effect of arbitration laws and how they have changed, but the real power of the article comes in section II which describes “how forced arbitration transfers wealth upwards.” Noting that much of U.S. industry has become an oligopoly, dominated by a few large and powerful companies, private arbitration makes it much easier for these companies to avoid any sort of accountability. Specifically, on page 12 of the article, they note that forced arbitration clauses in contracts prevent workers from recovering wages their employers stole from them. Class action lawsuits are one of the best ways for workers to recover stolen wages, but forced arbitration clauses require workers to go into individual arbitration,

which studies suggest disfavor workers. For example, a 2011 study of employment arbitration outcomes found that the employee win rate in arbitration was lower than employee win rates reported in employment litigation trials, and that both the median and mean award amounts were “substantially lower” than award amounts reported in employment litigation. This in itself suggests that forced arbitration in the employee context transfers wealth upwards.

However, they go on to point out the broader chilling effect of private arbitration which discourages people from even bringing complaints against their employers. The same is true of consumer claims against corporations, they get less money and win less frequently in private arbitration than in court.

For decades court decisions which changed arbitration law have led to a massive transfer of wealth from workers and consumers to wealthy executives and shareholders. We are starting to see some pushback by regulators now, but it is a slow process. To me, the main lesson to learn from this is that we must always consider power and wealth when we change policy. Any arguments that rely on ostensibly neutral terms like efficiency or productivity will inevitably lead to corporate capture of wealth. Law should always consider the broad societal benefits of preventing upward wealth redistribution. One worker quoted in the article about the New York wage-theft ruling said “I’m going to help my family,” Jadda said. “And I was going to school but I couldn’t afford to pay it so I’ll go back to school again.” As noted above, wealthy individuals and large corporations already have massive power in society to accumulate more and more wealth. They should not be helped along by policy which allows them to dictate the terms of their accountability to the people they harm.

The kneejerk reaction to oppose wealth redistribution (which most people incorrectly associate with welfare or policies that help the poor), does have some valid arguments, they are just directed at the wrong people. As it currently happens, wealth redistribution harms workers and consumers to benefit those who don’t need more money. Without comprehensive worker protections, we are left to rely on a patchwork of unions, class-action lawsuits, and individual state actions to rein in some of the worst crimes of employers. Fortunately, it seems it only took 15 years and a global pandemic to start to learn our lessons from the global financial crisis and now several Biden appointees are taking their roles seriously. But most of these proposed rules will take time to pass and face constant pushback from corporate lobbyists, as well as courts. They require long-term public support and a broad rejection of the distorted view of fairness that excuses corporate malpractice and ignores the harms to individuals.