Drew Field
Direct Public Offerings

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.”