January 15, 2007
Herbert M. Allison, Chairman and CEO
Fred R. Buenrostro, Jr.
Dear Messrs Allison and Buenrestro:
Your organizations are violating their fiduciary responsibility to maximize the retirement benefits of the wage earners by supporting the wrong economic system. In this letter I outline how you can use your democratic power to help economic freedom eliminate material scarcity in the world, and economic common purpose unite people and stop the violence. The alternative that you now support is leading towards more folly and violence, including nuclear.
Society, in the 21st century, has a pragmatic opportunity for economic freedom to eliminate material scarcity, and economic common purpose to elevate spirits and unite the people of the world.
Society, in the 21st century, has momentum towards more folly and violence including nuclear. The direction will depend on which economic system has priority and you have a major role in choosing that direction. The stark difference is between the economic system dominated by finance capitalism or the democratic economic system of participation and sharing. The former, ultra-capitalism, is a combination of mercantilism that treats the wage earner as a disposable cost commodity, successfully lobbies rules for short term profit, and tries to maximize profits by wage and benefit suppression in an environment of fear and intimidation. In contrast, democratic capitalism, maximizes profits by motivating and rewarding the wage earner for their innovation and productivity in an environment of trust and cooperation.
This post-capitalist age will displace the post-modern age in which comprehensive solutions to improve the human condition were abandoned. These secular philosophers could not find a moral basis common with religion because they looked in the wrong places; they concentrated on political and cultural changes and ignored the economic solution.
The post-capitalist system will maximize the creation of wealth by motivating the participating wage earners, and distribute it broadly through wage earner ownership. This system is described in detail in my book Democratic Capitalism, The Way to a World of Peace and Plenty. It is a synthesis of Adam Smith, Karl Marx, and John Stuart Mill. It was Mill that integrated Marx’s visions with private property, competition, and skilled management thereby completing the definition of democratic capitalism. It has been demonstrated that economic freedom can feed, clothe, shelter, educate, provide good health and hope for all humans, and that economic common purpose can steadily reduce the violence. For example, China and India have used forms of economic freedom to take 500 million people out of extreme poverty in a decade; the European Union has substituted economic cooperation for killing millions of each generation of their young men.
The enormous lobby power of finance capitalism has successfully resisted democratic capitalism and as a consequence it has had a long gestation period since Marx and Mill. Recent developments however, make its emergence inevitable: Information Age industries depend on the democratic work culture of participation, decentralization, and empowerment to release the cognitive power of their people, and trillions of dollars of pension and 401 (k) savings make the wage earner the majority owner of corporate America.
This historical opportunity is in suspense because of a spectacular failure of American leadership. The country that has been the beacon for freedom has instead corrupted the economic system with record concentration of wealth, and corrupted its foreign policy with militaristic, imperialistic actions.
Institutional investors’ fiduciary responsibility to maximize the wage earners’ retirement savings required support of democratic capitalism, not ultra-capitalism, defined as modern mercantilism that treats the wage earner as a disposable cost commodity and finance capitalism that is dominant over, not supportive of, the productive economy.
ERISA initiated the greatest investment opportunity in the history of capitalism but with the help of the institutional investors is converted American capitalism to short term and greedy while reversing economic momentum in emerging economies. Most ot the money went into the stock market and deals not into growth investment. Capitalists who had traditionally exploited the wage earners’ labor learned how to exploit their capital, an intolerable contradiction that cannot continue much longer. There has been no transparency or accountability for these trillions of dollars. The tax deferrable feature helps keep the wage earner ignorant of their investment and without any influence on the policies of the institutional investor. Despite books written on the superior performance of index funds with an annual cost of .15% most of the money is still being massaged by the money managers. There is a fundamental conflict in that the financial motivations of the handlers of money,, at every stage are contradictory to the interests of the customer, the wage earner.
This lack of transparency and accountability will change. With the Democrats in power they will make political capital by exposing the total costs and conflicts of interest and probably pass oversight laws, like SOX, that hurt more then they help. Even more compelling, the lawyers are discovering a new enormous opportunity and several lawsuits, including one against Fidelity, had been filed, as I am sure you are aware.
I am proposing in this letter that TIAA-CREF and CALPERS, do not get trapped in playing defense but rather take the lead to usher in the post-capitalist age with maximum creation of wealth broadly distributed.
The attached chapter 3 from my volume 2 not yet published outlines how this perversion of capitalism happened and how the institutional investors can change the domestic economy from ultra-capitalism to democratic capitalism qualifying America then to again lead the world in economic common purpose. These thee actions are proposed for your consideration:
- Pressure on companies to use surplus for investment in growth and dividends instead of stock buy backs and non-strategic acquisitions. Pressure government to make these dividends tax free for low-and-middle income wage earners, a “capital wage” for their ownership. Hundreds of billions of dollars will thus be returned to the wage earner to be spent or saved both adding economic growth. This capitalism combining income and appreciation will make profit sharing and ownership plans universal and will add spendable income for reciprocal purchases and make free trade the way eliminate material scarcity in the world.
- Change the measurement of corporate performance from quarterly earnings per share to a three-year running average of sales, profits, and cash flow against management’s predictions. This simple change will emancipate companies from the short-term pressure to fire people and shut down long-term growth programs. The measurement of cash flow against prediction would have prevented most of the damage at Enron.
- Reduce the amount of borrowed money for speculation that has caused asset inflation throughout our history and damaged the people. Our government takes aggressive action to stop price inflation that erodes the wealth of the few but denies responsibility to stop asset inflation that has always allowed the rich to get richer before the poor get poorer. There are ample tools available to prevent asset inflation such as taxes, interest rates, bank reserves and brokers’ margins.
During the last quarter-century America has entered into a financialization phase that has been a terminal condition for other strong nations since Spain in the 16th century. It saps the growth out of the economy with the myriad ways of cashing in growth investment for present consumption. The simple changes recommended above can reverse this momentum and restore the American dream. The institutional investors such as you can be the agents of such change.
Let me know if you wish to meet to discuss these propositions about how to move to the post capitalist age.