The Bush Administration’s plan to privatize Social Security has been met with a groundswell of opposition but, in spite of the many worthy criticisms that have been made, one important fact has been largely overlooked. Critics correctly point out that the privatization plan would be bad for future retirees, but few make note of how it could be detrimental to the economy as a whole.

 

          Slightly more than half of the nation’s GDP and most of its job growth is generated by small businesses, the vast majority of which are not owned through publicly held stocks. Any plan to invest large amounts of money in the stock market supports one sector of the economy while neglecting the other. And the other may be more important to overall economic strength.

 

          Even now, institutional investors take money from all sectors but only invest it in half the economy — the half represented by publicly held stocks. New Jersey, for example, invested state pension funds in AOL Time Warner, General Electric, Enron and other large corporations. Often the reason given is that such investments are safe but that’s not necessarily the case. AOL Time Warner lost 70 percent of its value from July 2001 to June 2002, and GE lost nearly 40 percent.[1]  Enron’s stock became nearly worthless after the company was wracked with scandal. Nationally, 64 percent of Enron’s stock was held by institutional investors. Enron, of course, filed for bankruptcy and the estimated cost to ordinary Americans was $20 to $50 billion.[2]

 

          Americans between ages 35 and 54 are the biggest savers and their savings, especially in mutual funds and pensions, help drive the price of stocks upward. As the baby boom population bulge continues to move up out of this age category they are cashing out their savings and stock prices are dropping. Privatizing Social Security would be a way to help increase the demand for stocks and artificially drive stock prices higher. In addition, investing in public sector stocks subsidizes major corporations and takes money away from half the U.S. economy. The extension of credit to small borrowers is one of the keys to economic growth and truly diverse investing would not limit itself to investing in large companies that do little to spur economic growth and, in many cases, already receive large government subsidies.

 

          Investment spending by business is regarded as the most important factor in producing economic growth, innovation and jobs. Historically, capitalist enterprises made money by selling goods and they increased their profit rates by increasing productivity. However, in the economy of the last few decades financial markets have grown significantly and (misnamed) laws such as the Litigation Reform Act of 1995 helped slacken regulations. For investors today, what often matters is not the genuine productivity and profitability of the company but simply the price of the stock. And stock prices are influenced by the amount of savings held by potential investors (the more money available, the more the stock price tends to rise) and by investor psychology. If investors can be persuaded that the stock will rise then they are more likely to buy the stock. So for a speculative investor the company’s actual prospects matter less than what they think other investors are thinking. Consequently, many corporations put more effort into presenting an enticing image to investors rather than enhancing the substance of the company by increasing productivity or improving product quality. Enron rose to become the sixth largest company in the world not because it provided jobs or developed products and services but because it cooked its books to make it look more profitable than it really was. Ditto for World Com and many others.

 

          Currently the richest 1 percent of American households own 33.5 percent of all stocks, the next 9 percent own 43.4 percent.[3] Privatizing Social Security could add over a trillion dollars to the stock market and thus inflate the price of stocks. This would invariably benefit investment firms who make a commission from trading stocks but also wealthy stock holders who own most of the nation’s stocks and CEOs who often receive stock options worth many times more than their contracted salary. But the boost would be an artificial one, not the result of a real increase in economic performance and not a great deal different from the shell-game bookkeeping that created financial and legal disasters for Enron, WorldCom, Time Warner and others.

 

          The privatization schemes of the investment class currently threaten the income security of millions of Americans but the bigger possibility is continued economic restructuring built like a house of cards. As many Z Net readers know, this is about much more than Social Security.

 

Notes

 

1. “Warning: Bush Social Security Reform Proposal Demands Fundamental Decision for or against Artificial Support of Stock Market,” Public Budgeting & Finance, Summer 2003, by Herb Whitehouse.

 

2. William Greider, cited in Kloby, Inequality, Power and Development, 2004.

 

3. Edward N. Wolff. Changes in Household Wealth in the 1980s and 1990s in the U.S. May 2004, p. 34. The Levy Economics Institute.

 

 

(Jerry Kloby is Professor of Sociology at William Paterson University and author of Inequality Power and Development: Issues in Political Sociology, Humanity Books, 2004. E-mail: [email protected].)

 

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