The Squandering of America, Robert Kuttner,
Alfred A. Knopf, 2007
This gets my vote for the best book in the category
of “What’s Wrong with our Country and How to Fix It.” Other books spend
the first 300 or so pages describing all that is wrong and then come on
like the cavalry with their own formula solution. Not so with Kuttner’s
book. He makes it clear throughout that the problem is laissez-faire
capitalism, manipulated by financial elites, and that the answer is
managed capitalism, responsive to a democracy.
The book is a great read for those of us who get
all worked up about political economy, populism vs. elitism and the
personalities of domestic politics and finance during the last half
century. But this commentary on the book is limited to our theme of
broadening the ownership of capital and creating a more direct
relationship between the providers and stewards of capital.
Kuttner has many specific suggestions for improving
economic security for those of us who are not wealthy. However, he
focuses primarily on increasing wages, benefits and employment security,
not on building income from owning capital. He does include a
capital-building program to increase retirement income, “a second, fully
funded tier of the Social Security system. Workers and their employers
would contribute equal amounts of payroll deductions.” Accounts would
be portable and gradually replace employer-based pension plans.
However, what about who gets to use the capital and who manages the
investments? His answer: “Workers could elect one of several large and
prudently managed pension funds with public trustees.” That means the
contributions go into the existing financial markets and are controlled
by Wall Street investment managers. This misses the opportunity to
create direct relationships between individuals who would provide
capital and the managers of the businesses ultimately being stewards of
that capital.
There is also a brief description of Individual
Development Accounts, created by Congress in 1999 and based upon Michael
Sherraden’s 1991 book, Assets and the Poor: A New American Welfare
Policy. Federal grants are made to nonprofit organizations, which
partner with depository institutions to administer savings accounts for
the poor. Savings are matched, from 2:1 to 8:1 by the nonprofit.
Qualified withdrawals are for purchasing a home, starting or expanding a
business or for education. The author’s conclusion: “But even if this
approach had real promise, we’ll never find out what it might achieve,”
because of the token funding level. (IDAs will be described more fully
in another commentary.)
Before his writing career, Kuttner was chief
investigator of the U.S. Senate Banking Committee. He clearly describes
the failure of financial intermediaries to serve the interests of the
nonwealthy. Commenting on the 1990s: “Every category of gatekeeper who
had a fiduciary relationship with small shareholders was corrupted . .
.. The supposed representatives of shareholders simply became
confederates of insiders, suborned by the prospect of their own
enrichment.” That could have begun an argument for disintermediation,
for the direct marketing of shareownership to individuals and direct
accountability between business managers and shareowners.
Kuttner also lays the foundation for building a
direct relationship between individuals and the businesses in which they
invest. Concluding a chapter on financial engineering, he says: “If
corporate executives were more effectively accountable to boards of
directors and directors more accountable to shareholders, the system
would not need private-equity firms and hedge funds” to buy and
reorganize businesses. His conclusion: “Unfortunately, serious reforms
of financial markets are nowhere on the horizon. Instead, in the
deregulated climate, new abuses and risks continue to proliferate.”
There would be a limit, however, to what the
government can do to make managers accountable to shareowners. As shown
in the book’s chapter, “Wall Street Rules,” even the regulatory reforms
of the 1930s did not fix the disengagement between individuals and
corporate management. There needs to be a different, direct
relationship between the ultimate providers of capital and the stewards
of that capital.
What government could do is encourage direct
ownership of business, through changes in the tax laws and securities
laws. Individuals could receive a tax credit for the amount invested,
up to an annual limit. (The credit directly reduces taxes by the same
amount, in contrast to a deduction, which only reduces taxable income.)
Businesses would have to meet corporate governance standards of
shareowner rights, director independence and limits on executive power
and compensation. Investors would need to meet some basic educational
or experience requirements. People who aren’t already qualified could
take a course through local community colleges or high schools.
Interest, dividends and capital gains would be taxed at the going rates,
recovering taxes to offset the investment credit.
This would empower individuals to bring the
discipline to corporate management that has not come from government
regulation. If we had active, informed individual ownership of
corporations, the opportunities would be reduced for private equity
firms to join with management in buying and reselling a corporation. It
may seem like a complex, politically difficult proposal, full of
potential objections. But more government rules just mean that
lobbyists and lawyers earn big fees finding new ways to do the same old
thing.
Reading his section “The Flawed Accountability of
Trading Markets,” I thought Kuttner was headed toward a similar
proposal, with statements like: “In our capitalist democracy, the great
exception to democratic voice is the business corporation” and “the
preeminence of finance over enterprise is wrecking the corporation as a
community of collaborators with long-term stakes.” He describes Lou
Kelso’s employee stock ownership plans. But then, Kuttner’s call turns
out to be for more regulation like the New Deal: “The need was to create
multiple political and economic counterweights to the abuses of
laissez-faire and concentrated financial power, not just to liberate
shareholders.”
In the epilogue, “Redeeming America” the author
sums up that “restoring a financial economy that would serve the goal of
connecting investors to entrepreneurs, rather than inviting insiders to
reap windfall gains by manipulating paper, would require a degree of
reregulation of the sort not seen since the New Deal.”
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