Income inequality in America has become so severe and polarizing that 2015 could look a lot like 1935, according to University of Toronto business professor Roger Martin.
Almost 80 years ago "capital was beating up labor, so we got the NLRB, which changed the balance of power between capital and labor," Martin tells Yahoo Finance, referring to the National Labor Relations Board, which protects workers' right to unionize. If the current income imbalance in America doesn't change there will be another "intervention that will change the power dynamics," Martin writes in the October issue of the Harvard Business Review.
But the power players now are different from those of the past, says Martin. More than half of the current top 50 companies by market cap are "talent-based" like Apple (AAPL) and Google (GOOGL) rather than the resource-heavy corporations of the 1930s. And "a small percentage of that talent is extracting a greater and greater percentage of the value [of those companies], and that's what's driving inequality," says Martin.
But doesn't talent deserve to be rewarded? Yes it does, says Martin, but the question is by how much?
"We have reached a tipping point where talent takes too much," says Martin in the video above. "The median person in the American economy has to be asking: 'When will I start moving ahead again while the top one percent rockets up into space?'"
So who is this talent that Martin says is taking too much for themselves? They're the corporate executives whose compensation is stock-based, which creates incentives for CEOs to cut labor costs; venture capitalists; tech billionaires; and hedge fund managers who create value for themselves rather than the broader economy, he says.
"One trader's gain is simply another trader's loss," Martin writes about hedge fund managers. "It's nothing like building a company that gives the world a better product and generates employment."
Martin says these imbalances need to be corrected. Talent should take less from the economy, which could be accomplished by raising taxes on the wealthiest Americans and taxing the "carried interest" earned by billionaire hedge fund managers as income, which would be a higher rate, says Martin. He also favors banning pension funds from lending stocks for short sales by hedge funds. There's irony in that practice since those same pension funds pay for workers' retirements.
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