Carey Center for Democratic Capitalism
March 6, 2007
Open letter to political candidates:
Your agenda lacks specific reforms of the economic system. By studying and assimilating my proposals you can present a comprehensive populist platform for economic reform. The people have a deep sense that the system is unfair, but they do not know what to do about it. Enormous latent democratic power is there to be activated.
The political parties are now gridlocked between the Republicans who proclaim free-market benefits at the same time that they successfully lobby corruptions of capitalism and then use the money to corrupt democracy. The Democrats have a pathetic agenda that criticizes globalization and wealth concentration but only offers wealth redistribution by government.
The most critical component for social progress is the economic system that can maximize wealth and distribute it broadly. I can help complete your agenda with my book, Democratic Capitalism, The Way to a World of Peace and Plenty. It sets forth the reforms that can harmonize capitalism and democracy.
Optimistic Americans are counting on democracy to produce new leaders in urgent times. I quote from my book on page 442:
A hopeful solution, in these troubled times, is emergence of leaders with the intellect of Jefferson, the relentless determination of Washington, and the capacity of Franklin to get things done, people of statecraft who will draw on the will, wisdom, and votes of the majority to reform America and lead the world to peace and plenty.
Please visit my website:www.democratic-capitalism.com where you can read my bio, find out about Carey Scholars, and sample various materials produced during my thirty years of experience running companies, and my twenty-year study of the world’s economic-political systems. My experience included designing and implementing Care and Share, a profit-sharing and stock-ownership plan while CEO of ADT, Inc, my contribution to ways to build worker ownership. I recently received an announcement that Robert Rodriguez is the new Chairman of Community Board 11 in East Harlem. Robert was in the first class of Carey Scholars in 1993 from Cardinal Hayes High School in the Bronx, and is a graduate of Yale.
Social progress depends on movement to the superior economic system, but few understand that demand. Although Marx pointed it out in the mid-19th century the intellectual community has persisted in their preoccupation with political solutions and the world has continued in folly and violence. All political agendas so far do not indicate an understanding of this economic priority or appreciation of what economic freedom really means. The reforms proposed here are original with me, but I was pleased to find them confirmed through my study of the 18th century Enlightenment, including Adam Smith and the American Founders, with later refinements by Marx and Mill.
Economic freedom-properly understood and implemented-at home, and economic common purpose abroad means a grasp of Adam Smith’s few conditions for the proper functioning of economic freedom. These includes peace; neutral money, that is, a simple medium of exchange without influence on the commercial process; and control of the speculators, “prodigals and projectors,” as Smith called them. The excessive liquidity and volatility that now dominates world commerce is a flagrant contradiction of Smith’s conditions. Trillions of dollars are traded daily in currency, a casino of speculation that dwarfs all commercial transactions by many multiples.
Many are predicting an economic upset of significant magnitude during the next two years. If you integrate democratic capitalism into your agenda you will be positioned to respond to this crisis.
The reforms proposed in my book address the impediments to be removed, but they also outline why this is a special time for democratic capitalism to flourish. Peter Drucker described in The Post-Capitalist Society how every few hundred years there are transformative events that redirect human history: The founding of our great country was the last of those events. As described in Federalist Papers # 1, we were the first country organized by educated, studious people engaged in reflection and choice instead of force and accident. Now, the post-capitalist age should be another transformative event that opens the whole world to the benefits of freedom enjoyed by Americans. Economic freedom has demonstrated that it can feed, clothe, shelter, educate, provide health care and hope to the two billion humans struggling to live on $2 a day. Economic common purpose has demonstrated that it can unite people and gradually stop the violence. Satisfaction of this universal human yearning to be free and live well is now a pragmatic opportunity.
This opportunity includes the reality that the wage earners are now a major source of capital and that Information Age industries demand the democratic work culture to release the cognitive power of their people. The capacity of economic common purpose to displace the violence has been demonstrated by the European Union when they stopped centuries of killing millions of their young men in stupid wars. China and India have demonstrated the power of economic freedom by releasing 500 million people from desperate poverty in a decade. Democratic capitalism is so powerful that it works not only in free societies but also under authoritarian regimes, if the mission is improving the lives of the people. China understands economic common purpose and is going around the world making commercial partnerships with the message “Let’s get rich together!” China has increased both imports and exports with Africa from a few billion dollars to almost $30 billion in only a few years. In contrast, as you well know, America is going around the world with the message: “Do it our way, or else!” while devastating the economic base of millions of innocent people.
The democratic part of democratic capitalism is ownership participation that motivates wage earners to innovate and produce more wealth that, then, becomes automatically and broadly distributed. At present, there are 25 million wage earners benefiting from direct types of ownership and all wage earners are owners through their pension plan and 401(k) savings. The “ownership society” has arrived, but the wage earner has yet to enjoy the rewards because corrupted capitalism, which previously exploited their labor, has now learned how to exploit their capital, an intolerable contradiction that must not be allowed to continue.
Chapter 5 in my book “Worker Ownership, The Democratization of Capitalism,” confirms that worker ownership has enormous appeal to the whole political spectrum as the long-sought third way. Please read in my book the enthusiastic testimonies to Jeff Gates’ Ownership Solution. My favorite is Coretta Scott King who commented:
Somewhere in between unbridled capitalism and the welfare state, there has to be a more just and equitable economic system, which provides genuine opportunities for all citizens, while preserving incentives for investment.
Democratic capitalism continues to grow and demonstrate its superior capacity to build and distribute wealth, but it has been limited by the lack of assimilation by the intellectual community, by lack of support by political parties, by lack of institutional investors’ honoring their long-term fiduciary responsibility, by lack of advocacy in education, and lack of appropriate visibility in the popular media. It is offered neither to Liberal Arts students as the way to improve the human condition nor to Business School students as the way to manage for superior performance. It is the core of the post-capitalist society, a potentially unifying force of great power. It is available for you to integrate it into your agenda.
The problem, however, is not just greedy people who make obscene amounts of money on money, but, rather it is bad government policies that are theproduct of the lobbying by these ultra-capitalists.For example, Congress had the greatest opportunity in the history of capitalism with ERISA in 1974, when they mandated full funding of future pension needs. As much a $100 billion a year was available for investment in the job-growth economy as well as in educational, environmental, and infrastructural needs. But Congress made a colossal mistake in assuming that the stock market would effectively convert these savings into job-growth investment. Instead, the money became the monster that converted the economy into short-term and greedy, and this initiated a quarter-century of sacrificing future growth for present earnings. Institutional investors’ results were measured quarterly and annually and they passed this short-term measurement onto companies. Enormous rewards or punishments for a few cents per share in quarterly earnings conditioned the CEOs like Pavlov’s dog: They learned quickly how to avoid the electric shock of corporate takeover to snap at the stock-option bone.
We are in the middle stages of a financialization of our economy in which people are again treated as disposable cost commodities, and finance capitalism dominates rather than supports the job-growth economy. In this perversion of the post-capitalist society, taxes are shifted from capital to the middle class, the revenues and profits of financial services explode, the manufacturing base shrinks, and wealth becomes even more concentrated. In my book, I discuss the effect of this financialization that has put other great nations into irreversible decline during the past few centuries. Please read the CATO letter in the “letters” section.
“Private equity” is an example of the financialization of our economy that some have called “21st century capitalism.” It is a buy it, strip it, flip it game played by celebrities of politics and industry. In most cases, they follow mercantile philosophy by suppressing wages and benefits. “Acquire and fire” has been the technique for a quarter century, now enhanced by more aggressive cuts in pensions and health care. One of the rationales for going private is to relieve public companies of the ERISA induced short-term pressure. It would be a lot simpler if the institutional investors would change measurement of companies to one based on long-term performance.
For example, in 2002, Goldman Sachs and Bain Capital acquired Burger King. The strip it included $22.4 million in “professional fees,” quarterly management fees of $29 million,a $367 million special dividend financed by borrowed money, and finally $30 million in management fees to terminate the agreement. They then flipped it by taking it public again which “earned” them $1.8 billion, more than triple their original investment.
The demeaning of dividends is another manifestation of the financialization of the economy. Before the last quarter of the 20th century, 5- 6 % dividends represented one-half of the return from capitalism; the rest was a modest, secure annual appreciation in stock value. Under pressure by finance capitalists, however, dividends shrunk to under 1% and have not recovered to more than 2%. Why? Because Wall Street does not make money on dividends and would prefer that the money be kept in the companies either to attract a deal, finance a deal, or be used to buy back stock.
For example, Exxon Mobil, the world’s most profitable company, recently demonstrated the financial capitalist’s preferred distribution of surplus: $20 billion for capital improvements; $30 billion to buy back stock; and $7 billion returned to the economy in dividends. Was there a public debate on this distribution of corporate surplus? Certainly not! But this is where the profit motive and public policy intersect. Presumably, the distribution of surplus by public corporations should maximize public benefit as well as the private benefit of the wage earner capitalist. None of this happened because distribution of surplus is dominated by finance capitalists with most of it going into their favorite toy, stock buy-backs.
For another example, Motorola plans to spend $2 billion a year on stock buy-backs, five times the dividends returned to the economy. Corporate raider Carl Icahn however, has bought 1.4% of the stock to force them to increase the stock buy-back. Motorola is sitting on $11 billion in cash, and they produce about $3 billion a year in new cash. The stock went up on Icahn’s move, probably including purchases by the institutional investors supporting, as always, the short-term effect, while ignoring the long-term benefit for their constituency.
Few are pointing out the broad economic benefits of returning surplus cash to the owners of the capital. Instead it has become the source of record riches for the handlers of the peoples’ capital. In the last quarter century, over a trillion dollars has been wasted on stock buy-backs and non-strategic acquisitions. In the post-capitalist economy, this money should have been returned to the people as a “capital wage,” a large return on their pension and savings capital to be spent or saved, both of which uses would have benefited economic growth.
Defenders of stock buy-backs argue that they enhance the value of the wage earners’ stock, which it may do for the short time it takes for the speculators to make more money. The long-term value of retirement money will be more affected, and negatively so, by a quarter-century of sacrificing future growth for present earnings, and by the baby boomers selling stock to live on in retirement instead of buying stock for their pension funds.
A cruel example of the domination by finance capitalism is the seduction during the past five years of the least credit-worthy home-buyers, wooing them from fixed-rate mortgages to floating rates. The terms offered were irresistible: for example, no principle repayment for over a year. The packaging of these loans into mortgage-backed securities with the credit risk passed along like a hot potato has become a big industry in finance capitalism and provides an estimated 15% of the industry’s fixed-income revenue. Credit- derivative contracts have gone up to $26 trillion, $9 trillion more than early 2006 and seven times as much as in 2003. Respected Wall Street economist Henry Kaufman observed: “The real surge of these instruments is not just about reducing risk; it is fueling speculation.” (WSJ 8/24/06) Like victims out of a Dickens novel, the weakest will lose their homes. But the worst is yet to come: Mortgage delinquencies have doubled in the last two years. The loans are too far removed from the source, and there are too many layers of handlers of money in the process. Our economy has no relative experience of this phenomenon. No one knows its true make-up, and it is unclear who is actually holding the risk. In the meantime, speculators are using derivatives to “short” foreclosures, that is, they expect to make money betting that more people will lose their homes.
The above are examples of the damage to the people from corruptions of the economic system at home, all products of the “ideologues of the liberalization of capital markets.” In foreign policy, these ideologues joined forces with the “ideologues of the American Empire” to stop the momentum towards a beautiful world of economic common purpose and thereby caused terrible economic damage and war. I offer studies of three disasters of lasting consequence in my book: the CIA’s dumping of the democratically elected leader of Iran in 1953; fundamental errors of policy in Vietnam caused by a small group sharing a narrow cultural conditioning; and the devastation of the Indonesian economy by the combination of hot money and currency speculation followed by IMF actions that made the problem worse.
All of these disasters could have been avoided if America’s priority were economic common purpose and if America had purged the corruptions in our own economic system. America’s image can change quickly, however, because democratic capitalism not only can eliminate material scarcity in the world, but also do it in a moral way that will make it easier to unite people. This economic system that we can present to the world is one that we will be proud of and one we know will have universal appeal.
The priority is to reform the economic system at home first, and then help unite the world in economic common purpose, the only way to stop the violence. It will take hard study and hard work however, because finance capitalism has successfully lobbied government policy from the beginning and their domination has become even greater during the last quarter century. Reformers must write rules for the economic system that truly have the mission of “controlling currency and credit for the general welfare.” The following policies would be essential in such a reform:
- Make dividends tax-free for low-income and middle-income wage earners. This new “capital wage” will be a financial incentive to return hundreds of billions of dollars a year to the wage earners and to the economy. If half of these dividends were spent, it would energize the economy and add jobs; if only half were reinvested it still would amount to many times the modest savings now from dividends. From this single action, the peoples’ capital would be activated, dividends would again be an important component of capitalism, ownership plans would spread, and companies would be highly valued for large steady dividends as well as fast growth. Very little tax revenue would be lost by this action that should be coupled with elimination of tax cuts for the wealthy.
- Move the economy from short-term and greedy to long-term and patient simply by changing the measurement of corporate performance from quarterly earnings per share to a three year running average of sales growth, profits, and cash flow against management’s predictions. This requires no new laws just promotion by various government agencies which means that their loyalty will have to shift from Wall Street to Main Street. It will follow the advice of respected investors like Warren Buffett. This cash flow protocol, for example, would have prevented most of the damage to the peoples’ pensions by Enron.
- Take the privilege away from speculators to borrow many multiples of their own capital to make bets by bank reserve requirements, tighter brokers’ margins, and taxes that penalize short-term gains and reward long-term holdings. This discipline would eliminate asset inflation in stocks and real estate that has caused great damage to the people in recessions and depressions.
- Align the personal financial motivation of the handlers of the money with the objective to maximize the peoples’ money available on retirement. For example, use tax policy to change brokers’ compensation from commissions that motivate them to churn stock sales to straight salary. This was Mr. Merrill’s way to avoid a conflict of interest when he founded Merrill Lynch.
- Stop the practice of using interest rates for political purposes. Nearly zero-cost money for the past five years has over stimulated the real estate market and helped get Bush reelected; at the same time, it hurt the bond income of pension plans and funded the speculators for their high-risk adventures. Low returns on bonds made the apparent higher returns from the stock market, hedge funds, private equity, and deals irresistible to the pension fund managers seeking quick returns.
- The implicit assumption by Congress that the trillions of dollars of fully funded pension money would pass through Wall Street and fund economic growth for Main Street was not only wrong but did not anticipate that the money would be used to pressure companies to actually sacrifice long-term growth-a double whammy! Reformers must ask the question: Where does the money go? How much does it cost to get there? This is “Capitalism 101” and there are many ways to get the money into new equity for job growth and into bonds for education, health, infrastructural, and environmental needs. Broad based index funds held to retirement at an annual cost of less than .15% coupled with tax-free 5-6% dividends is one alternative.
- Government agencies must promulgate no more suspensions of free market disciplines such as the bail-out of Continental Illinois in 1994. The argument that these bail-outs prevent systemic damage does not pass examination.
- Regulate hedge funds through disclosure and accountability requirements similar to other financial institutions. Successful lobbying has opened up these high-risk adventures for pension money investment.
- Pass laws to repair the damage done by the repeal of Glass-Steagall in 1999. The conflict of interest between bankers loaning too much money in exchange for their investment bankers getting deals with huge fees was the original reason for the law in 1932. This was exactly what happened at Enron within a year of the repeal when the bankers gave incredibly easy credit to fund Enron’s various misadventures which then got their investment bankers the deals with the huge fees. Many of the deals then lost more money.
These policy changes in the domestic economy will finally control currency and credit for the general welfare and organize government support to make democratic capitalism the universal system. The following are changes in the international monetary system, needing American support, that will spread economic freedom and economic common purpose globally:
- Tobin taxes on international currency speculation should be instituted. A win/win, they exert some control on speculation while providing hundreds of billions of dollars for helping developing counties, health care, environmental needs, and infrastructure.
- End American subsidies to cotton farmers in agreement with the European Union to end sugar subsidies and Japan to end rice subsidies. The consumers would save hundreds of billions of dollars, and workers in poor countries would have jobs, and the hypocrisy would be taken out of America’s “fair trade” posture.
- Reform the global reserve system in which wealth flows from the poor countries to the rich. Joseph Stiglitz has estimated that the present system costs developing countries over $300 billion a year, four times total foreign aid assistance-- money that is desperately needed to pull people out of extreme poverty.
- Support BIS, the central bankers’ club in Basel, Switzerland, in their new efforts to eliminate the damaging boom/bust cycles caused by asset inflation. Their first paper on this subject was issued in April, 2006.
- Support efforts of BIS to control hot, or short-term money, from rapidly leaving a country exacerbating a financial crisis as it did in Asian countries in 1998. This can be accomplished by requiring a mix of short and long-term investment and/or protocols that convert short term to long term in a crisis.
It is a long and complicated list but the handlers of money have filled the policy vacuum for a long time. There is no question that democratic power is there for reform; the question is whether enough reform-minded people will do their homework? I believe that these proposed reforms can be pivotal in the 2008 election, and this means that they will be pivotal in the direction of our nation and the world in the 21st century. With American leadership, it can be a world of plenty from economic freedom, and a world of peace from economic common purpose.
Locust NJ March 13, 2007