THE BLOG
09/30/2015 08:21 am ET Updated Sep 30, 2016

We Need to Act Now

I'm scared. The billionaire hedge funder Paul Tudor Jones is scared. My friend Ken Langone, a founder of the Home Depot, is scared. We are afraid where income inequality will lead. For the top 20 percent of Americans, life is pretty good. But 40 percent are broke. Every year they spend more than they have. While so many people are struggling, even those on the higher end of the middle class have relatively little after paying the bills: on average, some $1,300 a month. One leaky roof and they're in trouble.

I wrote about this in the New York Times last month, and got an overwhelming response. I'm not the only one who's scared. If inequality is not addressed, the income gap will most likely be resolved in one of two ways: by major social upheaval or through oppressive taxes. We are at risk of losing the capitalist engine that brought us great economic success and our way of life. Ken Langone and I both feel very grateful to this country, and we have been meeting with chief executives, trying to get action on inequality. This country has given me remarkable opportunities. During more than 50 years in the marketing, advertising and public relations business, I was helped by many kind people to fulfill my own American dream. Ken Langone was the first in his family to finish high school and attend college. He has been successful in business as well as in philanthropy. Would young people like Ken and me get those opportunities now? We don't think so.

We business leaders know what to do. But do we have the will? Business has the most to gain from a healthy America, and the most to lose by social unrest or punitive taxation. Business can start the process in two steps. First, invest in the actual value creators -- the employees. Start compensating fairly, by which I mean a wage that enables employees to share amply in productivity increases and creative innovations. This hasn't been happening for decades: real wages have been flat for about four decades, while productivity has increased by 80 percent. Before the early 1970s, wages and productivity were both rising. Now most gains from productivity go to shareholders, not employees. Second, businesses must invest aggressively in their own operations, directing profit into productivity and innovation to boost real business performance. Today, too many corporations reduce investment in research and development and brand building. As a result, we see a general decline in the value of their brands and other assets. To make up for those declines and for anemic revenues, businesses buy back their stock (now at record levels) and thus artificially boost earnings per share.

Someone must break the ice; someone must lead. Companies including Home Depot, Costco Wholesale, Whole Foods, Publix, Qualcomm, Starbucks and Gravity Payments are taking small steps, and compensating employees more. These are the green shoots we need. Similar changes must be made by many more businesses.

As Ken and I talk to business leaders and try to drum up support for our cause, we find almost unanimous agreement on the nature of the problem. Our concern is action. We have been told by chief executives that to pay employees more fairly, they need more support from their boards, from prominent business leaders, from the media and even from the government, to combat the intense market pressure to maximize short-term shareholder returns. So while we celebrate those who do the right thing, how can we move more businesses and chief executives to act now? We really don't want civil unrest or an 80 percent tax rate to jar us into action.

The private sector needs to lead the way, yet government could help. It could provide tax incentives to business to pay more to employees making $80,000 or less. The program would exist for three to five years and then be evaluated for effectiveness. The benefits would be huge. People would have more money to spend, and many would no longer need government help. That would mean a reduction in entitlements. Finally, that other America, the one that hasn't been able to climb out of debt, will know that help is coming -- through hard work and the incremental value a business generates. Shareholders win, in the long run, because satisfied employees produce better results.

Is this idea simply pie in the sky? Not really. Senator Mark R. Warner, Democrat of Virginia, is working on a somewhat similar bipartisan plan to introduce in Congress. I don't know yet what it would cost. But not acting would be far more costly. The urgency is clear. A fair and responsible free enterprise system is still the best engine ever invented to create opportunity and a higher standard of living. Let's keep it running.

Peter Georgescu is the author of The Constant Choice. He can be found at Good Reads.