Herman Mark Schwartz

In his Academy project, Schwartz examines the reasons for the increase of ethno-nationalist, anti-immigrant, anti-system parties in wealthy OECD countries. While the economic causes lie in rising income inequality and relatively slow economic growth, the social roots lie in increasing geographic inequality of income and decreased employment opportunities. What explains these two politically salient problems? Most analysts say rising individual income inequality reduces aggregate demand because the rich have a lower marginal propensity to consume. This correct but incomplete answer, Schwartz argues, leads to inadequate policy responses. Instead, he uses a new dataset, constructed from the Forbes Global 2000, the Osiris database of publicly listed firms, and Compustat, to argue that massive inequality in corporate profitability explains not only low individual consumption growth, but also low productive investment and government taxation—and thus spending capacity. Schwartz notes that corporate profit strategies now rest on the acquisition of intellectual property rights (IPRs), which generate monopoly rents but also reduce the need for large investments and enable massive tax evasion. Production chains are split among small IPR firms—physical capital-intensive firms that produce components or own real estate—and large, labor-intensive firms that execute assembly or services. Schwartz points out that this system produces greater profit inequality, which in turn drives further wage inequality, investment aversion, and tax evasion. Schwartz’s analysis aims to inform policy solutions for better, faster growth.