Sunday, March 1, 2009

You and your 401(k) are the problem (and the solution)

I received an email today regarding the article found here. It's about the problems with capitalism and democracy. Here is the response I wrote to the person who sent me the article (edited for the general public):

I agree with a number of things in this article such as capitalism creating its own opportunities for fraud (Bernard Madoff and Ken Lay at Enron) and greed (bailout money for executive bonuses) and that a free market economy without limits and without sufficient regulation leads to problems such as these and others mentioned by Parenti. However, there are a number of points in which I don't share his logic.

The two wealthiest individuals in our country are Bill Gates and Warren Buffett. Bill Gates made his fortune providing products to individual consumers and businesses alike while Buffett made his buying existing, but simple, businesses that he could easily understand (and nearly always keeps existing management and employees in place). Now that they've made these enormous amounts of money and possibly run out of things to invest in (as the author suggests is happening to the super rich) they have created The Bill and Melinda Gates Foundation--a $40 billion organization dedicated to the idea that "all lives have equal value" and therefore endeavoring in charitable causes, research and investment projects that help humanity in all of its forms. If we didn't have a society, a market system and a form of government that inspired (some) people to reach for these levels of wealth there would be a fraction of the foundations (or they would exist as small non-profits instead) working to solve the issues we face around the world today. Foundations like these are not built on $25 and $100 donations from "regular" people. And while it's a little less directly related, I don't think we'd have as motivated a work force without the opportunity of living the American Dream. Seeing people who've "made it" is the only proof we have that it's possible.

I think it's easy for people to blame big business for our problems but it's also easy to forget about the ways in which they improve our lives (aside from the fact that they can sell goods cheaper and produce some goods that individuals or small businesses simply can't produce on their own--e.g. cars and airplanes). My wife is a student at Harvard University where they have a $30 billion endowment that provides for scholarships, and some of the highest level of academics in the world. I doubt that endowment was created without a lot of donations from individuals with inordinate amounts of wealth. During the course of her studies she has received funding for research from the Fund for Theological Education. FTE is funded by the Lilly Foundation which was funded by, yes, Eli Lilly & Co., the pharmaceutical company.

I have mixed feelings on the idea of laissez-faire. I suppose a good example for it is that if an individual consumer wants to reduce their expenses, they buy a fuel efficient car, which of course is good for the environment. Or, if they really want to save money, they take the bus. Unfortunately, as pointed out in this article positive results don't always come about from everyone looking out for themselves.

So, when someone like Parenti takes a couple of examples of failures from the corporate world and declares that our whole economic and/or governmental system is failing us I take it with a grain of salt. He's right the system isn't perfect and it needs some oversight, some transparency, some accountability but I don't think there's a better system out there. I'm not sure he does either, and maybe he's just saying we need to modify our existing system to address these issues, in which case I somewhat agree. But I think there is a more fundamental problem and neither business nor government can be blamed. I think the problem is our fault. I think that anyone who invests in the stock market, in their 401(k), in their
403(b), in any type of IRA and purchases mutual funds or stocks they are causing the problem. The number one reason someone buys stocks or funds is for the growth or dividends of the underlying companies. When investors (whether institutional or individual) buy stock based on quarterly earnings they are demanding that companies increase operating leverage quarter after quarter. It is simply unsustainable to continue to reduce costs (e.g. wages) and increase revenues (e.g. prices) on a continual basis, yet if businesses don't do this investors sell their stock looking for a "better" company and then the board of directors starts firing people and they hire new people who can "better serve the shareholders".

I think the answer is that we have to take socially responsible investing to a new level. It's not enough to simply steer clear of companies that sell cigarettes or drill in fragile ecosystems for oil. We have to invest in and support companies that aren't afraid to say they pay wages that are higher than the market rate because they value their employees, that their costs are higher because they use recycled materials and that they don't promise to increase earnings per share every single quarter because they are looking for long term sustainability and growth. I'm not sure yet how we as investors can collectively address all these points. So, for now we just have to support companies that we respect, and who incorporate some of these ideals into their business practices by buying their products and investing in their stock. But, it's hard to turn away from better investment returns when it's your retirement savings on the line.

No comments:

Post a Comment