Are You Angry Enough to Reform Capitalism?
Congress passed a law in 1974 to invest wage earners’ money for retirement. Trillions of dollars would be available for low-risk investment in long-term economic growth. This greatest savings-investment opportunity in the history of capitalism should have ended any friction between labor and capital, as they were now one. Wealth would be distributed broadly from the rewards of capitalism going to the wage-earner capitalists, and this diffusion of economic power would also diffuse political power. Capitalism would now be democratic in the source of capital, democratic in participation, and democratic in wealth distribution.
Congress blew it! They did not examine where the money would go or how much it would cost to get there. Under the pressure of Wall Street lobbyists, the money went to speculation and helped fund the current economic disaster. Capitalism became “shareholder capitalism” with the price of the stock as the priority. The wage earners’ capital was not invested in job growth, and worse it was used to pressure companies to sacrifice existing growth programs for short-term earnings. Investment opportunities for low-risk bond income were lost when the Fed took interest rates effectively to zero. The original rules for low-risk investment were abandoned and money managers switched to high-risk investments that eventually crashed and destroyed much of the wage-earners’ savings. Everyone on Wall Street became rich by paying themselves ten times what index funds charge for this incredibly bad performance. Finance capitalism that had traditionally exploited the wage earners’ labor had now learned how to exploit their capital.
Don’t be confused by all of the noise about reform! Washington and Wall Street are only putting finance capitalism back together again while ignoring real reform. A few mild reforms are expected: some reduction in leverage, some increase in taxes, improvement in transparency, and limits on trading, but the mad world of easy credit for speculation, a world where 25 managers of hedge funds “earned” an average of a billion dollars each in 2009, continues. Meanwhile 35 million victims of the economic disaster are searching for jobs while their families suffer.
Citizens now must do the creative thinking that Congress did not do in 1974 in order to invest the remaining $2.3 trillion of their 401 (k) savings in job-producing economic growth that can also rebuild their retirement accounts. The effects of stripping investment in long-term growth will not, however, be reversed quickly. One quicker solution is a public bond that would invite investment of part of the $2.3 trillion remaining 401 (k) savings in the $2 trillion of needed infrastructure repair. A tax-free “Repair America” bond would be a win, win, win, opportunity: millions of jobs now, a safe return on pension savings, elimination of unemployment insurance, and tax revenues from the newly employed.
Another fundamental reform would be tax policy that encouraged corporations to reinvest in growth and pay large dividends instead of wasting money on stock buy backs and deals. BP, for example, demonstrated short-term capitalism when they spent $37 billion on stock buy backs (now worth $17 billion) to hype the price of their stock instead of spending it on fail-safe process control. Tax-free dividends for wage earners could provide the motivation to move hundreds of billions of dollars of surplus sitting on balance sheets into the economy in high-dividend index funds at an annual cost of one-tenth of that now charged by money managers.
Reform must include prevention of subsequent recessions by a government as determined to prevent asset inflation as they are price inflation. Available tools include various taxes, reserve requirements, and risk premiums on interest: only the determination is lacking.
Finance capitalism is not monitored by free-market forces. Evidence of this lies in the upping of annual charges by mutual funds from 1.18% in 1990 to 1.34% in 2010, and that despite enormous increases in volume and technological improvements.
The measurement of corporate performance must be changed from quarterly earnings per share to a three-year running average of sales, profits, and cash flow against management predictions. This would relieve the short-term pressure and give the shareholder an improved understanding of corporate dynamics. A requirement to predict cash flow would have exposed the growing disaster at Enron and prevented most of the damage.
Reforms are needed for appropriate rewards to go to wage earners and complete the new, improved capitalism. Once the impediments are removed, democratic capitalism will spread rapidly based on its own social and economic logic. It will then eliminate material scarcity, unite people in economic common purpose, and stop the violence.
This is # 11in a series of essays on the Carey Center for Democratic Capitalism web site. Along with other materials on the web site they are presented for citizens to gain an understanding of the alternative economic system to the one that has severely damaged the economy. The first step for angry enough citizens will be support of a political agenda that neutralizes the lobbying by Wall Street.