Generally, the private nonprofit and government options provide the strongest and most socially efficient risk-sharing solution. The least satisfactory from a community perspective is a noncompetitive, private for-profit system.
Attempting to create a system that involves competition between a mix of nonprofit and unregulated for-profit providers creates an inherently destructive dynamic. Nonprofit providers are committed to providing everyone with affordable care; for-profit providers are concerned only with maximizing profits. If not prevented by government regulation, the for-profits will cherry-pick the pool of insurance buyers by offering lower rates than the nonprofit — but only to the young and healthy who are the least likely to need expensive care.
This leaves the sick and elderly to nonprofit providers. To raise the premiums on their narrowed customer pool sufficiently to cover the claims would place those premiums out of reach of any but the richest members of society, who have no need of such insurance in the first place.
The nonprofit thus either stops covering those in evident need and competes with the for-profit for the low-risk population or is forced into bankruptcy. Either way, those with the greatest need go without care. This is exactly what happened in the case of health insurance in the United States, and it did in some wonderful nonprofit providers.4
There is a deeper problem that no form of insurance risk pooling can resolve on its own. Many previously insurable risks are escalating out of control for reasons that lead back to a dysfunctional economic system.
Health care costs are an example. Part of the reason for their escalation can be traced to price gouging by pharmaceutical companies, the practice of defensive medicine driven by the fear of lawsuits, and aggressive end-of-life care that may at best extend life by a few months. Possible solutions include encouraging greater competition among pharmaceutical makers by limiting patent protection, reforming the tort system to distinguish between defensible questions of judgment and true malpractice, and expanding coverage for hospice care. Action on these issues falls more to government than to either nonprofit or for-profit insurance providers.
If we look further upstream, we find causes that fall entirely outside the province of health care institutions. These include the toxic contamination of our air, water, and soil; heavy advertising of junk food rich in salt and sugar; and sedentary lifestyles devoted to watching TV and playing video games. We could be healthier and achieve enormous health care savings by increasing the availability of nutritious food to inner-city residents, banning junk food from schools, lowering the amounts of sugar and salt allowed in processed foods, improving food labels, and levying a fee on junk food advertising to cover related health care costs and public education programs. We also could provide easy access to home and neighborhood primary health care (as Cuba, for example, does) and lay out public spaces in ways that encourage walking and bicycling.
We need a similar approach to reducing the impact of catastrophic weather events, which are almost certain to increase. We must deal with the cause by reducing carbon emissions while at the same time investing in remediation actions such as improving levees, removing brush, changing land-use patterns, and revising building codes.
Above all, we must keep in mind that our best insurance when tragedy does strike is a strong and resilient community that mobilizes quickly for mutual assistance. Building strong, equitable, and resilient communities brings us back to the seven critical system interventions outlined in the previous chapter.
Again, the look upstream brings us back to the need for a New Economy.
Retirement
So what about retirement and our dependence on our 401(k)s to provide support in our elder years? Here we encounter perhaps the most cunning and diabolical element of the Wall Street con. We are lured into placing our retirement funds with Wall Street investment houses by an impossible and carefully cultivated dream of ten to twenty years of secure and effortless retirement luxury. After our money is in Wall Street hands, we have a stake in political decisions favorable to Wall Street interests — and in believing and perpetuating Wall Street’s phantom-wealth lies. The prospect that Wall Street is interested only in its own commissions and is gambling away our money on phantom-wealth Ponzi schemes that cannot be sustained and would not in any event fulfill the promise is too frightening to consider, because society offers us few alternatives for dealing with retirement.
Recall the Malaysian forestry minister mentioned in chapter 2 who wanted to cut down all the trees and put the money in the bank to earn interest. Debates about individual retirement accounts and putting Social Security money in an interest- bearing “lockbox” are based on the same phantom-wealth fallacy.
Retirees cannot eat money. They need real food, shelter, medical care, clothing, recreation, and other goods and services — all of which must be produced and provided by working people at the time the retirees’ needs are presented.
In the real world, retirement is necessarily a contract between retirees and the working people who agree to devote a portion of the fruits of their labor to providing for the retirees’ needs. The threat facing future retirees is not insufficient money — which government can easily create with an accounting entry — it’s demographics.
In 1935, when the newly signed Social Security bill set the retirement age at sixty-five, males at birth had a life expectancy of sixty years. The average person was dead at sixty-five. Life expectancy rose to seventy-four by 2005 and is expected to grow to eighty-five by the end of this century. The accepted retirement age, however, has stayed almost the same, creating an increasingly impossible expectation that those of working age (from around twenty to sixty-five) will reduce their own consumption relative to the value of what they produce, sufficient to support extended vacations of ten to twenty years’ duration for a rapidly growing population of folks over sixty-five.
In 1960, there were five working people per retiree. Because of longer life spans and the greater percentage of people reaching retirement age, that ratio was 3.3 to 1 in 2004 and, unless the retirement age changes dramatically, will be down to 2 to 1 by 2040.5 At some point, working people struggling to keep their children fed and clothed will say, “Enough already.” Whether we assume that they will be compensated by money from Social Security taxes or phantom-wealth returns created from nothing by Wall Street is a technicality. Either way the burden is unsustainable.
Another conceptual flaw is the Wall Street argument that private investment accounts are a proper retirement solution. We have no idea how long we will live or what our end-of-life medical needs will be. I might have died in an accident or suffered a lethal heart attack the day before I reach sixty-five, in which case I would have needed no retirement account at all. Or I might live to 105 and spend my final years in intensive care, in which case I might need a retirement account in the millions of dollars. Most people fall somewhere in between, but no one knows what his or her individual need will be.
Retirement is not an individual savings issue; it is an insurance issue that requires a pooling of risk and an inter-generational contract. The basic design of Social Security is sound on both these counts so long as the ratio of retirees to workers does not become so high as to place an unbearable burden on the working generations. This issue can be resolved only by changing our expectations regarding the appropriate retirement age.
The larger society can and should manage Social Security as a universal insurance pool to provide for the care of the physically and mentally incapacitated of any age, but it has neither the means nor the moral obligation to guarantee any able bodied person a ten- to thirty- or forty-year fully funded vacation. Most of us need to remain active contributors to the real-wealth economy for as long as we are able.
A major shift in our thinking is required to recognize that the truly satisfying life is one of creative engagement. If we organize societies to make work fulfilling and engaging, then it becomes a source of self-fulfillment for everyone, including those
of us in our elder years. So we are back again to the New Economy.
This brings us to another question that may already have occurred to you. If we eliminate Wall Street, how will we provide equity funding for productive enterprises?
WHAT YOU AREN’T SUPPOSED TO KNOW ABOUT THE STOCK MARKET
According to the corporate-ethics guru Marjorie Kelly, the public sale of newly issued corporate common stock in 1999 netted $106 billion. That was the only money from stock sales that went to the issuing corporation. It was less than 1 percent of the $20.4 trillion in corporate shares traded in that same year.
Even more surprising, Federal Reserve data reveal that during the twenty years from 1981 to 2000, the overall net flow of money to corporations from stock sales was a negative $540 billion, meaning that the corporations spent more money from their treasuries to buy back their own shares than they raised by selling new shares.6
One might wonder why corporate management would use company money to buy back its own shares rather than use it either to pay dividends to shareholders or to invest in new productive capacity.
The effect of such purchases is to inflate the price of the stock, which defenders of the practice point out serves shareholder interests. Another answer is offered by the independent market observer and author Thornton Parker. Using Federal Reserve statistics, Parker found that from 1982 to 2008, the largest net sellers of corporate stocks were households — to the tune of $5,082 billion, or just over $5 trillion. Corporations during this same period were net buyers by $737 billion.7
At first blush, it makes no sense. The presumed function of share markets is to facilitate the purchase of corporate shares by households to raise money for productive corporate investments. Corporations should be net sellers and households should be net buyers.
Parker provides a telling explanation. When corporate executives sell the shares they receive as part of their compensation packages, the proceeds go to them, not to the corporation, and therefore count as household sales. The data thus suggest that since the 1980s, the function of the public share markets has been to fund the private fortunes of corporate executives who took a major portion of their compensation in newly issued shares.
Ownership, as discussed in chapter 13, should be in the hands of people who have a stake in the long-term health of the enterprise and the community and ecosystem in which it is located. Rather than turn our retirement savings over to Wall Street con artists, we will do much better as individuals and as a society to favor direct, long-term investments by individuals in companies of which they have personal knowledge. An owner who needs to cash out his or her shares can sell them to another owner, a new stakeholder, or even the company itself in a private transaction.
Wall Street operates a sophisticated con game that leaves us dependent on a series of scams that it presents to us as financial services essential to our well-being. By pushing down wages relative to the cost of living, Wall Street makes us ever more dependent on consumer credit and borrowing against our home equity. The greater our desperation, the higher it pushes fees and interest rates. It collects our insurance premiums in exchange for promises of payment in the event of a personal disaster that it has no intention of keeping.
It entices us to put our savings in the care of professionally managed phantom-wealth funds with fantasies of a luxurious ten- to twenty-year work-free vacation at the end of our lives that would place an impossible burden on the working population. It would have us believe that when we buy shares of stock on Wall Street exchanges we are providing investment funds for companies to expand productive output, when in fact we are mostly converting our personal financial assets to the personal financial assets of Wall Street privateers.
Daily expenditures should be covered by living family wages. Insurance is best provided by nonprofit insurance pools managed for the benefit of their participants. Old-age security depends on an intergenerational contract. Savings should flow to real investment in real productive enterprises and infrastructure.
As we shall see in part V, the leadership for change will not come from within the Wall Street–Washington axis. It will come from a powerful citizen movement that reframes the public debate and the political context. The movement will know it is on a path to success when a sitting president issues a Declaration of Independence from Wall Street and outlines a New Economy agenda.
CHAPTER 15
A PRESIDENTIAL DECLARATION OF INDEPENDENCE FROM WALL STREET I HOPE I MAY ONE DAY HEAR
In a February 2010 interview with BusinessWeek, President Obama sought to reassure corporate America that he was on their team. “We are pro-growth. We are fierce advocates of a thriving, dynamic free market. But we do think that there have to be some rules of the road.”1
These words were less reassuring for those of us looking for signs that there is a New Economy vision lurking in our visionary president’s mind. Rules of the road are essential to prevent crashes, but if the road ends at the edge of a cliff and is populated by gas- guzzling SUVs with jammed accelerators and defective brakes, then rules to order the flow of traffic are not sufficient.
During the 2008 presidential campaign, the soaring rhetoric of candidate Obama led many of us to hope he would be the kind of president who would build a new road that skirts the cliff and populate it with safer, more efficient, and maneuverable vehicles.
During the heat of candidate Obama’s campaign, I drafted the economic address to the nation that I hoped he might give early in his administration as part of a commitment to deliver on his promise of change. It provided an overview of the New Economy agenda in the format of a presidential address in candidate Obama’s style.
Even if President Obama overcomes the disappointment of those who were hoping for a build-a-new-road president and wins a second term, it now seems unlikely that we will hear from him anything resembling the following speech — unless a shift in the political context compels it.
The speech, in this updated and expanded version, thus becomes a marker for the political dimension of the task now before civil society. We must create a political context that makes the U.S. president — and other heads of state the world over — feel compelled to give such an address as their declaration of national independence from Wall Street and its global counterparts — and to follow through on its commitments.
Here is the address.2
Fellow Citizens:
My administration came to office with a mandate for bold action to deal with the evident failure of our most powerful economic institutions. They have crippled our economy; burdened our federal, state, and local governments with debilitating debts; divided us into the profligate and the desperate; corrupted our political institutions; and threatened the destruction of the natural environment on which our very lives depend.
After the September 2008 financial crash, the U.S. government stepped in to save Wall Street’s biggest institutions with massive public bailouts. The banks took this taxpayer money and used it to pay executive bonuses, issue stockholder dividends, finance acquisitions, play speculative games, and fight even modest reforms. They did virtually nothing to get the economy going again by funding productive, job-creating enterprises or giving relief to desperate homeowners with underwater mortgages.
It is time to face up to the fact that the Wall Street institutions now in place are creations of a failed economic ideology that says if government favors the financial interests of the rich to the disregard of all else, everyone will benefit and the nation will prosper. A thirty-year experiment with the trickle-down economic policies promoted by this ideology has demonstrated that it works well in the short term for fat-cat Wall Street bankers who manipulate the financial system to make money without the burden of contributing to the production of anything of real value.
This creates unearned phantom-wealth claims over the real wealth produced by people on Main Street who are doing honest, productive work and making honest, productive investments. Wall Street calls the creation of ph
antom wealth financial innovation. I call it theft. It is legal only because Wall Street has the money to buy the votes of politicians to make it legal.
We now live with the devastating consequences of Wall Street’s ill-conceived social engineering experiment: a disappearing American middle class and a crumbling physical infrastructure; failing schools; millions without health care; dependence on imported goods, food, and energy, and even essential military hardware. At the same time, it has increased our burden on Earth’s living systems and created an often-violent competition between the world’s peoples and nations for Earth’s remaining resources.
Wall Street is so corrupt that its major players no longer trust one another. The result is a credit freeze that starves legitimate Main Street businesses of the money they need to pay their workers and suppliers. Pouring still more taxpayer money into corrupted institutions hasn’t, and won’t, fix the fundamental problem.
This is not a broken system in need of a fix. It is a failed system that must be replaced with a new system based on the lessons of our experience.
Corrective action begins with a recognition that our economic crisis is, at its core, a moral crisis. Our economic institutions and rules, even the indicators by which we measure economic performance, consistently place financial values ahead of life values. They are brilliantly effective at making money for rich people. We have tried our experiment in unrestrained greed and individualism. Our children, families, communities, and the natural systems of Earth are paying an intolerable price.
We have no more time or resources to devote to fixing a system based on false values and a discredited ideology devoted primarily to creating phantom wealth. We must now come together to create the institutions of a new economy based on a values-based pragmatism that recognizes a simple truth: if the world is to work for any of us, it must work for all of us.
Agenda for a New Economy Page 19