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September 07, 2004

The Ownership Society

I just gave a skeptical once-over to David Boaz' essay on 'The Ownership Society'. I don't buy it. (heh)

I think everyone was being more realistic when they were talking about 'The Investor Class'. In fact, I think this is fairly weak logic of the investor class trying to persuade more people to get in the game, and having done that proclaiming an ownership society. I can't guess the ulterior motives of the proponents of the this new idea, but there were two other terms that set me in my direction on this. They are 'consumers' and 'wage-earners'. That's what most of us are and that our economy works primarily to our benefit as such is what we ought to focus on - and keep it that way.

There are many hundreds of thousands if not millions of Americans in the investor class. A good portion of them make money simply through being smart about money. The best of them are pillars of our society - they are the wealthy that can make some of us rich. But there's only so much of that talent and money going around. The essence of free market capitalism is that it punishes mistakes by the wealthy as well as the poor. There will always only be a transitory few at the top of the pile. The answer to the question "If you're so smart, how come you're not rich?" is that markets are fickle and timing is everything. You've got to make the right move at the right time for investments to payoff, and then you start all over again. The only truly safe place to hide money away from the angels and demons of the market is in government securities. Keep that in mind.

When I was a kid, my parents didn't have credit cards. In fact, most Americans didn't have any line of credit with their banks. Only the rich had those kinds of instruments, and they weren't even done with cards, but with personal contact with bankers. That was stuff that the Beverly Hillbillies did. They called up Mr. Drysdale and make him do something clever with their money. The rest of us just saved and waited. That changed around the time Hank Aaron hit #715. Do you remember the famous video clip? There was a big Bankamericard billboard on the back fence of the Fulton County Stadium. Today, lots of consumers and wage-earners have lines of credit, most of us have done well playing rich with all these financial instruments, 401Ks, Roth IRAs, Term Life Insurance, Flex Benefit Health Plans, Mutual Funds, Second Trust Deeds. Every few years there are more of these tricky instruments afforded to the public. Do you have an accountant and a tax attorney? I do. This stuff ain't easy, it's damned difficult. Keep that in mind.

No matter how many copies of Microsoft Money and Quicken are sold, we are never going to turn our consumers and wage-owners into miniature capitalists. Nor should we try. I'm in a business where a significant percentage of the workers are independent contractors and small business owners. We're sorta like tradesmen and sorta like professionals. That's difficult too - we sink or swim not only for knowing the trade but running the business. Gnarly buggers like me enjoy the challenge, but it's not for everyone. These days I have to think about how to pay mortgages, payoff tax debt, put kids through school, plan for retirement, value the business, pay employees, get investors, all kinds of crap. Some days I'd rather be a ski instructor.

But there is an attraction to living la vida rica. We'd all like to retire early and have mojitos brought to our cabana. We'd all like our investments to remain safe and lucrative, flash our cards and make jokes about how much everything costs and what's priceless. It ain't gonna happen. Don't forget the dark side. Layoffs are just the tip of the iceberg of financial disasters that await capitalists. Consumers and wage-earners have it cushy, relatively speaking. The grandmother who loses her pension has our sympathy. The businessman who loses his bond rating drinks alone. Playing rich may be attractive, but holding on to your money is no joke. There are only a few ways to lose fifty cents, there are a million ways to lose a million dollars. Just ask anyone what they'd do with a million dollars.

There is a fundamental capitalist slant in angling towards an ownership society. But how it actually would play out in terms of class is what I'd be more interested to know. Sure owners are going to be a lot more fussy over their money than those who have it taken care of. Sure things will be more efficient when more people maximize. When you're a wage-earner, you worry about whether you're going to get a 3% or a 5% raise. But you don't worry about whether the next paycheck is going to be there. What would it do to our society if we converted all of the union employees into independent contractors? It would be like that Lending Tree commercial where all the bankers fill up your living room - suddenly a lot of self-important people like middle managers would become commodified headhunters. Not only that we'd start dealing with business cycles and volatility that we don't have now because of the stability inherent in the premises of wages and salaries. The ravages of capitalism will destroy pikers trying to keep up, just like seconds on the house, 28% credit cards and internet stocks. Everybody can't do this, and the more who try, the more it sucks the profit away from those who can. That's what commodification does.

We can invent new classes of 'investors' and 'owners' from now until doomsday. And we will. But we're not going to transform a society of people who can barely manage a 1040 form into junior capitalists. The door should be open and remain open. Let's hear it for the woman who jumps ship mid-career and for the love of sewing opens her own dress shop. Keep those SBA loans coming. But let's not pretend that many more millions of Americans who want to play rich can manage their own investment portfolios out among the expert investor class. Who do you take us for Motley Fools?

When I used to watch Louis Rukeyeser every week and Squawk Box every morning I watched lifetime investors scratch their heads in wonder about which way certain stocks would go. I've day-traded, channeled, optioned and hedged. I've won and lost big time. Government securities (and Inktomi) saved my bacon. Like a lot of relatively new investors I thought I knew more than I knew. In the end I wound up losing because even though our broker was a personal friend, he didn't have time for us little people. When it comes to investment brokerage, if you're not humping 6 figures, you're insignificant. Even then, you're small fry. Try to get in the first class of any mutual fund - if they didn't call you, you're too late, and beware of the ones they do call you for. Now I exaggerate because I lost somewhere around six figures all told between 94 and 2000. I'm over it, but lucky to still be married (she's a long term investor).

If Social Security is destined to tank, the best thing to do is stop new investment now. We cannot let it fail just like any other security. This ownership society rhetoric hides the fact that capitalists lose huge amounts of money, but depend on the government bedrock as a hedge. If that government hedge of Social Security fails, it will be no comfort to those sorry investors that they are now part of an 'ownership society'. They are consumers and wage-earners and cannot be instantly converted into capitalists.

Somewhere, somehow the full faith and credit of the United States, the most powerful nation on the planet, needs to mean something real to American consumers and wage-earners. We don't owe anyone any right to retire with ease. Investment is a tricky business. But we do need to convert those pensions into as safe an investment as possible as was promised in the prospectus. And if we must, we can say that's just not available any longer and new kids have to swim with the sharks. But let's not think that the virtues of capitalism are going to accrue to Joe Average when it comes to some arbitrary privatization of Social Security.

I have a tough time believing that the heavy hitters of the investment class will be denied the hedge of government backed securities. In fact, I believe they have first shot and that the pool is too small for them and Social Security. Somebody needs to tell Social Security pensioners just what class they belong to.

Posted by mbowen at September 7, 2004 08:52 AM

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COBB COMMENTARY: The Ownership Society from Booker Rising
“This ownership society rhetoric hides the fact that capitalists lose huge amounts of money, but depend on the government bedrock as a hedge. If that government hedge of Social Security fails, it will be no comfort to those sorry investors that... [Read More]

Tracked on September 9, 2004 08:35 AM


I think you're right about the fact that most people aren't going to make it into the Warren Buffett/Bill Gates class of investors, beacuse yeah, most of us aren't that smart. I think you're wrong about the wider meaning of that fact, though - the possibility exists in this expanding economy (and it has always been expanding in the long term) for most people in the middle class to stay there through investing in the stock market, Savings Bonds, houses or condos and standing pat for 30-50 years. Yes, it means they're not going to be blowing all their money on flash and spreading around the cash if they want that comfortable retirement, but that's the way the game is played if you want to stay in it.

Posted by: kevin at September 8, 2004 07:12 AM

I'd personally love to cash out of Social Security, and I think people should have a choice about which instruments they use for Social Security. I also think it makes sense that if there's to be a government run retirement savings plan that its investments be diversified which I'm not convinced SocSec is. BUT, what people are investing in Social Security is not so significant that this 'ownership society' is created.

Buffett/Gates are five orders of magnitude bigger investors than social security pensioners, and they're just pikers compared to the institutional investors with whom they compete. It goes up 3 or 4 classes from those guys.

Posted by: Cobb at September 8, 2004 07:37 AM

I think you are missing the point. The idea isn't to make them pick stocks, the idea is to give equity in America. One way to do that is throught the stock market. So instead of having a pension with your company that might go out of business and or raid the pension your pension is in a mutual fund or index fund that is safer because it more diverified.

For an index fund to go out the entire stock market not just one company would have to tank.

Posted by: Scott at September 8, 2004 09:51 AM

I'm at the point at which I need to go to the numbers. What kind of instrument exactly is the SS fund? How does it compare with other instruments? What kind of money does average Joe put in, get out?

Posted by: Cobb at September 8, 2004 10:26 AM

It takes some effort, but since you are self employed it is much easier for you, but you can opt out of Social Security.

Once you do it, you are not allowed back into the system, nor are your

Posted by: DarkStar at September 8, 2004 02:43 PM

If I opt out, do I get a cash payout of my accrued benefits?

Posted by: Cobb at September 8, 2004 03:35 PM

If I opt out, do I get a cash payout of my accrued benefits?

If I remember correctly you get a portion of it.

Posted by: DarkStar at September 8, 2004 05:20 PM

How does the Social Security system work?

n almost every financial situation that we deal with on a regular basis, there is the idea of an "account". For example, when you put money into a bank, it is understood to be "your money" and it goes into an account with your name on it. The same thing happens when you contribute to your 401(k) plan at work -- you have an account with your money in it, etc ............

The Social Security system is nothing like that. In the Social Security system, the money you pay into the system gets immediately paid back out to the people who are currently getting Social Security checks.

You might have heard that the Social Security system currently takes in more money than it pays out in order to try to handle the baby boomer problem. What happens with the excess money the system collects? The Social Security system buys U.S. Treasury bonds with the surplus. Essentially, the government (in the form of the Social Security Administration) loans the surplus to itself.

In future decades, when it comes time to start drawing on the collected surplus, the government will pay itself back through tax revenue (or additional borrowing). The Social Security system will start cashing in the bonds, and the government will have to make good on them with tax revenue.

Posted by: scott at September 8, 2004 07:05 PM