The unhinging of compensation from social return

Let me start by reiterating that I believe strongly in the free market concept. What I don’t believe in is the unfettered and unregulated market. Every society needs rules to play by and the financial markets are no different. While pundits and lobbyists will scream about over regulation being the cause of all our woes, science (economics) will generally not agree. Economists will disagree over the methods and types of regulation but very few argue complete deregulation is the way to go. It seems to me the argument should center on what our goal as a society is and how to craft regulation to achieve that goal.

I believe we have entered an era where the goal is limited to putting as much money in our pockets as possible today with no regard to the future or what is right for our country and society as a whole. I think a clear example of this (and one that contributed to countless instances of fraud by corporations) is the intense focus on “making the quarterly numbers”. Companies literally destroyed themselves and their shareholders by cooking the books to meet these expectations. Each and every one of us bears some of the blame for this. We expected 8-10% return on our investments year after year and if an otherwise solid company did not deliver we beat the hell out its stock price. We chased the guy who would give us that return regardless of that companies fundamentals. We are complicit.

Another example of misguided government policy being reflected in our society is the tax system. The tax rates on profits from investing are far less than those on W-2 earnings (work). What does this tell our society and children? We punish those that actually perform work and produce things or services and reward those that speculate. Again, the vast majority of investment activity is speculation, not the capitalization of business which is an important part of our financial system. Whether we like it or not, government policy has a very direct impact on society and what motivates it. In this case I see a government policy (taxation) that has a very bad effect on our society: it rewards speculation and punishes work.

Moving on to compensation for work performed. High levels of compensation used to reflect high levels of benefit to society as a whole. Engineers, Doctors and other benefit producers once commanded the highest of salaries. The massive profits and salaries found in the financial sector have not equated to a commensurate level of social benefit. How, exactly, does society benefit from corporate socialism? We have to ask ourselves if this is OK or do we want to create a society that promotes a concept of high pay equating to high social benefit? Ok, stop howling. No I don’t think government should be setting wages. I do think, however, there is a role for government and social policy to encourage those professions that will help the country in the present and future. Policy that encourages social returns not just profits.

It is a question of value systems and what we wish to measure (a Stiglitz concept). Virtually every measure we use to value things is monetary. We don’t consider one iota the social benefit of a thing. I am not sure this is a very bright approach in the long haul.

The libertarian myth is that if left alone everything will be OK. Economies, businesses and individuals are too intertwined for this to work. The pursuit of one individual too often harms another and society must account for this. Furthermore it is these libertarians that tend to take great pride and credit for their successes and but no responsibility for the negative impacts of their actions (again, credit Stiglitz for this observation). Governments role is to balance the needs of all individuals as best it can, not maximize profits.

What can you do?

Stop consuming. Even though wages have stagnated and even declined for the past ten years we are encouraged to keep consuming at an ever increasing rate. Our corporate masters demand it. Our politicians demand it. Society demands it. It is unsustainable.

How Wall Street steals from us with the help of the government

Let’s talk about the 401k. It was never intended to be a replacement for the pension plan but slowly and quietly corporate America has made it so. I don’t really see the return of the pension plan nor do I believe pensions are all that great of an option. I do, however, think it is time to stand up and fight against the criminal enterprise that the modern 401k has become.

Investing, investment banks and stock markets came into being as a way to put money where it will be best used. Those with excess cash used these vehicles to put money into entities that needed cash to create or expand businesses. In return for that cash investors were rewarded with a piece of the action. Banks and brokers took a modest fee for doing the deal and paperwork. Simple enough.

What this has grown into is so far from the original need and intent it is hardly recognizable. In fact only a small percentage of today’s investment activity is centered on capitalization of business. The vast majority of activity is simply moving money around in the effort to collect more money from others. I intentionally do not use the phrase “make money”. Money is not “made” by this activity, it is simply transferred from one entity to another. Some call this socialism although we are used to hearing about money moving from the few to the many. In this case most often money is transferred from vast numbers of small investors into the pockets large investment companies. Computerized high speed trading is the preferred vehicle for this activity though there are others. Small investors and even large funds do not have access to this sort of equipment and are therefore excluded from the game. The playing field is unequivocally tilted in favor of the big players. This sort of “investing” hinges on having a vast number of relatively low tech, naïve investors putting money into the system for the inside players to feed on.

Enter the government and our tax deferred 401k contributions. This program is carefully engineered to get you to keep those funds flowing into our stock market system. You can’t invest that money ANY other place and retain the tax deferred status a 401k enjoys. Not in your own business, education, home improvement or any other place you might get a return. You can only put it in the stock market (or cash I suppose). I charge that this is a complicit and intentional collaboration between Wall Street and our government with the nefarious intent of feeding the financial sector machine. You can’t throw a stone in DC without hitting a former financial sector alumni now working in our government. Yes, I think that matters. The attempted privatization of SS was another shot at getting YOUR money in a place where the financial industry could get at it. Do you think they will manage that money for free? Even if all they skimmed was 1% that amounts to billions in profits not earned, but moved from each and every taxpayer into the coffers of the investment corporations. It is a redistribution of wealth to the top of the pyramid from the bottom. Corporate socialism is what I will call this. While done behind closed doors in the most corrupt of nations our system is far more sophisticated: we engineer government policy so it can be done out in the open.

So what do we do? This system, once again, usurps the free market concept. In a free market we would be allowed to invest our dollars wherever we want that provided the best return (for the individual). Instead we are told where we must invest OUR dollars. If the restriction to investing within the financial sectors products were lifted imagine the howling you would hear from their lobbyists – the very people who scream the loudest about maintaining open and free markets. There needs to be a mechanism that allows us to use this tax deferred money in a way that most benefits the individual, not the financial sector. I don’t really know what that mechanism is but I am working on it. If you have ideas, let me know.