Democracy At Risk: Rescuing Main Street From Wall Street

Democracy At Risk: Rescuing Main Street From Wall Street

by Jeff Gates

Paperback(Revised ed.)

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Overview

"A bible for a powerful populism that will arise after the latest Gilded Age is over. Read it and run, or read it and recover your sense of what it could mean to actually live in a democratic society." — Paul Hawken, author, Natural Capitalism and The Ecology of Commerce

"[Gates] offers an ambitious "populist vision." You may not like its answers, but you can't ignore the questions." — Cheryl Dahle, Fast Company

"A political-economic manifesto for the new millennium. This persuasive and well-documented work will generate thoughtful discussion." — Library Journal

Citing alarming statistics, Jeff Gates convincingly argues that the current economic boom is largely a mirage, buoyed by policies that continue to reward the wealthy and punish the poor. With equal measures of passion and incisive reasoning, he proposes an ambitious yet practical program of financial, political, and economic reform.

Product Details

ISBN-13: 9780738204833
Publisher: Basic Books
Publication date: 04/20/2001
Edition description: Revised ed.
Pages: 464
Product dimensions: 6.12(w) x 9.25(h) x (d)
Lexile: 1410L (what's this?)

About the Author

Jeff Gates is a lawyer, investment banker, political advisor, and consultant to government, union, and industry leaders worldwide. As counsel to the U.S. Senate Committee on Finance during the 1980s he was a leading fiture of the federal legislation encouraging employee stock ownership plans (ESOPs).

Read an Excerpt

Democracy at Risk

Rescuing Main Street from Wall Street
By Jeff Gates

Perseus Books Group

Copyright ©2001 Jeff Gates
All right reserved.

ISBN: 0738204838


Chapter One


The Populist Moment


I believe there are more instances of the abridgement of the freedom of the people by gradual and silent encroachment of those in power than by violent and sudden usurpations.

—JAMES MADISON


While self-interest is certain to remain a driving force in the success of free enterprise, democracy has long been animated by a latent generosity that longs to be unlocked. Humankind is predisposed to generosity. For the bulk of human evolution, we relied on cooperation and sharing to survive as hunter-gatherers, for whom survival depends on key psychological qualities—openness, attunement, solidarity, mutuality, appreciation. People still want to give of themselves to one another—to family, to friends, to their community—and thereby to live on in others. If democracy is to live on in the lives of our descendants, we must ensure that free enterprise, democracy's commercial component, is guided by rules that put some limits on greed so that more of us can afford to give expression to that innate yearning for connectedness.

Yet so long as we give such free rein to theunbridled forces of finance, we will be besieged by avarice and by the peculiar dictates of financial values. Finance has no way to calibrate what our relations should be with our fellow citizens or with the environment. Or what sort of society we should leave for the next generation. In the financial domain, those matters are of no concern. The answer lies not just in corralling greed, though that's a good start. Nor does the solution lie solely in encouraging broad-based ownership, though that's essential. The remedy—necessarily wide-ranging—can only emerge from a long-overdue national dialogue about the democratic values we share and how they can be reflected throughout our policy environment. In this chapter I provide an overview of suggested remedies meant to catalyze that dialogue.

It's helpful if we first "unpack" the sentiment (versus the feedback mechanism) that animates democracy and reflect on how far we've strayed from the inspiration that informed this nation's founding. At its core, democracy has to do with dignity, confidence, and respect. Genuine populists are easy to spot. They speak to you as an equal and in a straightforward way. Though compassionate in their dealings with others, they recognize that people are doubly victimized in a system that grants them the degradation of pity without the dignity of helping them earn genuine respect. Populists understand that if we put too much faith in compassion, we are stuck with a "Have Mercy" argument—have mercy on others and give them what they did not produce. Not only does that degrade people, it also undermines market mechanisms and leaves people no better off. Populism suggests instead that government's role is to boost the capacity of people to produce so they can be confidently self-sufficient.

In announcing his candidacy in June 1999, George W. ("Dubya") Bush hid behind a rhetorical hybrid he labeled "compassionate conservatism," recalling his father's equally vacuous phrase from a decade earlier extolling "a kinder, gentler nation." Pundits were quick to skewer the phrase, labeling it "Right Lite"—particularly after Dubya clarified his position: "It is conservative to cut taxes and compassionate to give people more money to spend."

In announcing his candidacy two weeks later, Al Gore attacked Bush for suggesting that people be left to fend for "crumbs of compassion," hinting that Bush's elitist attitude, like that of his father's, is akin to noblesse oblige. Yet what did Gore's "progressive" platform offer? Education and training—key ingredients in what he called practical idealism. Pundits quickly lampooned his position as "Limp Left," particularly after it was revealed that he was taking $15,000-per-month "masculinity lessons" from author Naomi Wolf.

Conspicuous by its absence was any mention of ownership. Neither candidate brought it up. Like two bald men fighting over a comb, neither offered an economic program with any hope of escape from today's plutocracy-prone trends. Instead they served up four largely interchangeable words akin to political pablum. Like preschoolers who learned only one way to draw a house, both imply there's no better way to organize free enterprise. Or to reinvigorate democracy. Or to address environmental concerns. We face a critical juncture in our approach to social progress. Yet rather than vision, ideas, inspiration, and leadership, we're offered political posturing and flashy presentation. A very new world requires very new solutions. Today's disturbing trends suggest there's much in our policy mix that should be tossed out. Yet rather than hint at the need for reform, we're assured they only plan to tweak the current model. New ideas are received with the same enthusiasm that the Flat Earth Society would show for a satellite photo.


The Politics of Respect


Populist arguments for sharing our wealth are multifold, but they cluster around two key beliefs. The first is that current wealth holders came by their riches unfairly or were granted an unfair advantage. That's why I include an explanation of today's rich-get-richer closed system of finance along with an insider's assessment of the role played by wealth-concentrating supply-side economics. I also explain the impact of corporate welfare on wealth patterns and document multiple deficits that endanger us all.

Second is the belief that although compassion is not to be dismissed as a safety net, it should be viewed as a profoundly weak foundation for a nation based on the principles of political equality and human dignity. That's where populists part ways with Clinton-Gore progressives in identifying the building blocks for a democracy. Democracy is not about marginally improving the plight of those adversely affected by capitalism. That's the progressive approach. Populism proposes instead to transform capitalism by "peoplizing" it so that Americans gain a personal stake in a system from which they've routinely been excluded. Its goal is to reconfigure free enterprise so that it becomes connected to people and their communities in a direct and authentic fashion. At its core, populism is about evoking a commercial environment, including a global economy, that exists to serve people and their communities rather than the other way around. Populists know that if we did a better job of sharing our wealth, we could get by with a lot less of today's so-called compassion—most of which is taxpayer-funded.

Populism proposes to restore authenticity and dignity to a democracy now bordering on crisis—as evidenced by the strains on civil cohesion, the breakdown of community, a prevalent sense of isolation, a corrosive addiction to consumption and endless economic growth, and a remarkable deference granted those whose devotion to Adam Smith depends on not reading him. Populists remind us that free-enterprise democracy is not just about free markets, but also about how to live free and how to create more possibilities for personal autonomy. That hunger lies at the heart of all democratic aspirations.


Autonomy Within Community


Autonomy is the pathway to genuine democracy. Paradoxical though it may seem, autonomy requires community. As Carl Jung put it, to be genuinely "I" requires "We." You cannot become fully human in isolation. Adam Smith agreed, advising that it is sensible to talk about the well-being of the self only within society. Healthy societies encourage close social ties and mutual interdependence. Only within such a nurturing framework do individuals feel sufficiently confident and secure that they become genuinely free.

We're just now realizing how badly we've depleted our inventory of social capital, that unseen web of human relationships in which our personal liberty, and hence democracy, is embedded. That intangible element establishes the reach of societal connectedness and the boundaries of human trust. The outer limits of democracy are set not by geography, nor even by national boundaries, but by the level of one's confidence in the presence of those shared values (just imagine flying to London versus, say, Teheran).

A broadly shared capitalism itself has value because it helps combat today's radical individualism and its strident emphasis on personal fights with little regard for social responsibilities. Or for the needs of democracy. As we're belatedly discovering, that's a stance destined to breed distrust, disharmony, and lawsuits (the United States is now home to 70 percent of the world's lawyers). Populism rejects both the seductive politics of pity and the blind deference granted finance. The confidence essential to free and equal citizenship is found neither in the status of needy recipient nor in becoming an unwitting pawn in global capital markets. Populism embraces instead the politics of self-reliance wed to interdependence, secure in the knowledge that humankind is meant to be free and to live a life of dignity, security, and leisure. From that condition, we can explore the generosity that resides in the human heart. Rather than continue today's retreat from the promised vistas of democratic potential, contemporary populism insists that we pledge ourselves anew to their attainment. And that we do so within the confines of ecological limits.

It's essential to this goal that we assume an activist role in world affairs by demonstrating how the rules of free enterprise can be rewritten so that fast-widening prosperity becomes the global norm. We must show how modern living standards can be achieved in an environmentally sound fashion. That presents a daunting challenge in a world where physical and intellectual resources are unevenly distributed and where development has long been linked to harm to the natural world. Let me suggest only this: absent such a stance, we will prove ourselves unworthy of the demands of this age. If, in this post-Cold War era, we fail to seize opportunities for change that were won at such a high price, our indictment by history is richly deserved.

On these crucial issues, the recent legislative and diplomatic record has been profoundly poor. If we are to lead the global quest for a higher order of economic well-being, we must address not only the inequities in the U.S. system but also the cauldron of human misery that afflicts fully two-thirds of humankind. The stakes are huge and the window of opportunity perilously small. The continued spread of free enterprise may itself now be endangered by our failure to make it sufficiently inclusive that it meets commonly accepted standards of civilized behavior.


Peoplizing Capitalism


At the outset, let me assure readers that there is yet time to design a peaceful path out of this predicament, provided we turn quickly to crafting a practical cure. Conventional remedies won't work. For instance, the idea of people accumulating significant capital through personal saving is a particularly vigorous exercise in futility. Not only is our national savings rate negative, it's poised to worsen as we open up to the wage-dampening impact of foreign labor. The encouragement of dramatically inclusive financing techniques could help. That was a key recommendation in my 1998 book, The Ownership Solution. However, the remedy falls well short for a very simple reason: The proceeds from any sale are destined to make the already-rich even richer—both by purchasing assets from them and by borrowing funds from them for the privilege.

These unconventional times call for highly unconventional remedies. There's no single answer to this multifaceted challenge. No societal silver bullet will magically cure our many ills. We must pursue a broad range of remedies and pursue them quickly. Brief descriptions of the populist policies I propose include the following (explained in more detail in later chapters):


Full-ownership policy. Today's full-employment economic policy needs a counterpart ownership policy. We need both widespread employment of our labor resources and widespread ownership of our capital resources.


Ownership impact reporting. Every policy pronouncement should be accompanied by an ownership impact report. We have a right to know when those we elect pass laws that make the rich richer. An international effort should compile and maintain a detailed global ownership registry.


Fiscally foresighted investment practices. Today's $8 trillion-plus in retirement-plan assets must be invested in a way that fosters broad-based ownership. Pensioners need to retire into a fiscal environment characterized by widespread financial self-reliance. Anything less endangers their retirement benefits.


Private wealth from public assets. Government contracting should favor broadly owned companies. The same should hold true for government-granted licenses (broadcasting, etc.) or anywhere private access is granted to public assets, such as commercial access to minerals, timber, and oil on public lands.


New ownership possibilities. Ongoing commercial relationships (supplier, distributor, customer, contractor, bank depositor, service provider) should be the priority focus for an array of policies designed to broaden wealth while improving enterprise performance by "ownerizing" those relationships.


Customer-owned utilities. Investor-owned utilities should become partially owned by their customers, gradually transforming bill payments into customer-owned equity.


Corporate localization. Today's megamergers should be restructured to ensure broad-based ownership, particularly within those communities where corporate operations are located.


Ownership-pattern-attuned tax policy. Fiscal foresight requires a tax policy ensuring that more of the nation's income-producing capital finds its way into the accounts of those now undercapitalized.


Monetary policy. The Federal Reserve's indifference to fast-widening economic disparities is destined to undermine long-term price stability as more people become dependent on the government. Both monetary and fiscal policy must be made more sensitive to ownership patterns.


Antitrust policy. Ownership patterns should be considered a key factor in assessing both the structure and the conduct of monopolistic firms.


Populist foreign policy. U.S. foreign policy should set as its top priority the worldwide alleviation of poverty. Plutocratic ownership patterns, now the global norm, pose a clear danger to global stability, to the environment, and to the continued advance of democracy.


Foreign assistance. Foreign aid, including assistance provided by the World Bank and the International Monetary Fund (IMF), should adopt ownership-pattern-sensitive development techniques.


Capital commons user fee. Global capital markets are a commons. An international effort should impose a capital commons user fee, directing the proceeds to fund human needs in the developing world. International law should extract a "freeloader's levy" from those who've hidden $8 trillion in the world's tax havens.


Resource productivity policies. All public policies should be designed to multiply the productivity of natural resources.


New assets for new owners. Limits should be placed on hydrocarbon emissions, property rights created in emission permits, and those permits used to capitalize households nationwide, linking energy conservation to income generation.


Socially responsible investing. As with the antiapartheid screening of investments a decade ago, the investor community should screen for equity and sustainability.


Prosperity corps. A prosperity corps should be established to train Americans for missions abroad that implement best-practice development programs.


Culture corps. Americans should be sent abroad to share our diverse cultures with others while showcasing the world's cultures here.


Just say no to values-free free trade. Free trade, yes, but no more values-free free trade. Democracies must oppose injustice and unsustainability, whether here or abroad.


The rewiring of free enterprise for inclusion requires an extraordinary degree of political consensus, more than we've seen except during wartime. Yet even the strategies I propose may be insufficient if we hope to rely on personal capital as the route to broad-based economic autonomy. Given the extraordinary concentrations of wealth that policymakers embraced over the past two decades, an element of wealth reallocation has become not only advisable but essential, a subject to which we turn in Section 4.


A Glimpse of the Future


Is change possible? Yes, absolutely. We need only choose a different set of rules. Once we realize that the rules can be changed, then whether we do so becomes a question of ethics. How we answer that question cuts to the core of what it means to be a responsible member of the human community. We don't yet have leaders either with the gumption to propose needed changes or the grit to see them through. As those leaders emerge—as I'm confident they soon will—we'll at long last have an opportunity to choose inclusion and sustainability over a system that's now brutishly exclusive and alarmingly unsustainable.

A few examples show how "up-close capitalism" would differ from today's remote and disconnected capitalism. Up-close capitalism is more participatory, more personal, and more equitable and shares both the risks and the rewards far more broadly.


• In 1994, 55,000 employees of United Airlines purchased 55 percent of their employer for $4.9 billion. Tired of seeing their livelihoods subject to the whims of Wall Street, they decided to work for themselves. Peace of mind, they found, lies in using financial markets rather than being abused by them. The typical employee now has $40,000 in United Airlines stock plus competitive union wages and a diversified pension.

• When the North American Free Trade Agreement (NAFTA) was announced, the Canadian province of Manitoba rightly reckoned that local savings would flee to the major money centers, stripping the province of the means to create or maintain employment. The provincial government responded with incentives that encouraged local savings to stick around. The Winnipeg-based Crocus Investment Fund now has more than US$100 million invested in local businesses.

• Independent truckers at the Port of Savannah, Georgia, fed up with being pitted against one another by steamship and trucking companies, are organizing to form their own company to haul freight from the bustling port. Urged on by the International Longshoremen's Association, the strategy could mark the beginning of a new approach to labor organizing in the South, where only 7 percent of employed adults are unionized, versus a nationwide rate twice that.

• In response to 1998 legislation mandating the privatization of Ontario's electric power industry, a group called the Democratic Capitalism Study Group proposes the use of a customer stock ownership plan (CSOP) to purchase Ontario Hydro. for Ontario's 11 million citizens, relying largely on the firm's future revenues to finance the purchase.

• Several Internet companies (OWNERShop.com, MyOwnEmpire.com, and others) are beginning to sell a broad range of products with a unique twist: Rather than a cents-off discount coupon or a product rebate, customers will receive equity.

• In 1991, Real Goods Trading Corporation, a mail-order catalog firm, targeted a direct public offering (DPO) to its repeat customers. A second offering was completed two years later. Both were oversubscribed. Stakeholder-owners purchase twice the dollar amount of products as nonowner customers.

• The Super Bowl champion Green Bay Packers football team has been anchored in a small Wisconsin town for eight decades with an ownership design that links the team to its natural owners: local residents and fans. Contrary to other pro football franchises, collected like so many expensive doodads by the well-to-do, the Packers' ownership resides in a not-for-profit corporation first established in 1919. Shares can be left to relatives but can only be sold to outsiders after first being offered to the team. No one can own more than two hundred shares. If the team were sold (NFL franchises routinely fetch upward of $250 million), the proceeds must be used to construct a war memorial at the local post of the American Legion.



Continues...


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