Abstract

Employee Stock Options and the Origins of Neoliberalism

Employee stock options have been one of the primary engines of the dramatic rise in economic inequality in the United States since 1980. But the origins of these strange financial instruments date to much earlier. The use of stock options as a compensatory device first took off in the go-go 1920s. The swiftly rising stock market made payment dependent on rising stock prices attractive, and the inauguration of a substantial tax differential between income and capital gains led executives to press their luck and try to get earnings from options taxed under the latter category. The importance of options to the rise of inequality in the 1980s and 1990s, then, might appear as another similarity between the first and second ‘Gilded Ages’. But it was in the 1950s and 1960s, at the height of the New Deal Order, that options next gained ascendancy. The rising use of options was a product, moreover, not of the Republican but of the Democratic party. It was the Revenue Act of 1950, passed by a Democratic Congress and signed by Harry Truman, that created a special class of options that were taxed at the far lower capital gains rate. Economic historians have argued such options contributed little to the rise of executive salaries and the pushback against the egalitarian legacies of the New Deal in the 1950s and 1960s. New evidence, however, demonstrates that it was the stock options of mid-century that did much to pave the way for the explosion of economic inequality in the 1980s and 1990s. The Neoliberal Order, in short, was not the rejection of the New Deal Order — it emerged from the previous era’s own policies and contradictions.