The right wing political campaign to privatize Social Security is now in temporary remission. The loss of $7 trillion^[1] (that is $7,000 billion!) in stock value since the equity market peaked in March 2000 has put a severe break on this otherwise relentless drive. After all, at moments such as the present one (a brief pause, we are told, that is now in its third year), it is hard for even seasoned con men to keep straight faces as they tell unwary marks that the speculators and manipulators who make the daily stock market deals are a safer guarantee for old age security than the government. The cynical among us might view both alternatives as dismal but at least with government we can (still) turn the rascals out every once in a while.

In all of the discussion about the pluses (few) and minuses (many) of social security privatization, there is an important overlooked contradiction between the nature of capital markets and the purpose of social security. For openers, it is important to remember that the social policy purpose behind Social Security was to grant us all old age income as a legal right.[2] Social Security retirement benefits at present are in part based on our individual earnings histories, but they are also, and more importantly, based on measures intended to assure a floor of social adequacy under everyone. Recipients receive their benefits as rights granted to them by either an earnings history or a familial relationship to a deceased or disabled breadwinner.

A privatized system by definition rejects this notion of a rights-based approach to a share in society and instead substitutes a return on investment determined almost entirely by the vagaries of capital markets. Under the various schemes proposed for privatizing social security, the principal basis for any income payouts would be governed by returns on privately held retirement accounts. In simplest turns all of the proposals to date are variations on the approach taken via existing 401(k) retirement accounts. Anyone nearing retirement age who was dependent on these accounts is now calculating the added number of years they must work to make up for the fact that along with the $7 trillion that evaporated, so too did their futures. Social Security privatization substitutes the whims of capital markets for a guaranteed right to adequate old age income.

Why is this important? Speculation and manipulation are not the accidental and unintended side effect of capital markets; they are the engine that propels them along. The daily market ups and downs reported on the evening news shows are fueled by people openly speculating on future economic and political events, and less visibly, but of equal import, busily undertaking dealmaking and political influence pedaling to manipulate these events to their advantage. While I have serious concerns about the role of politics and political campaign contributions in shaping our democracy, I have no problem with speculators risking their own money on the vagaries of the future economy. In fact a strong case can be made for the importance of this speculation to creating a market economy that meets the demands of consumers. On the other hand I believe strongly that it would be both immoral and a fatal political mistake to ever allow something as important as the social right to an adequate old age income to be tied into the machinations of the speculators and manipulators who make their fortunes by running capital markets.

To understand why, let us begin by understanding something about how the stock market managed to incinerate $7 trillion in three years? The easy answer is that more people sold stocks than bought them. In the 1990s more people bought stocks than sold them. What changed attitudes? It was the sudden, painful and widespread realization that it is not possible to take at face value whatever corporate CEOs say. Much media attention has focused on the sensational and apparently fraud-filled bankruptcies at Enron, World Com, Tyco, etc which triggered the realization. But the larger problem was that these incidents were quickly revealed to be not isolated incidents, but rather as the most extreme examples of a more serious underlying and pervasive culture of corporate dishonesty. Cumulatively, between 1997 and 2002, approximately one of every ten publicly owned corporations has had to “restate” its earnings. According to a General Accounting Office study, accounting “irregularities” rose 145 percent between 1997 and June 2002.[3]

Such a widespread lapse and the attendant loss of popular faith in capital markets threaten the very foundations of American capitalism. Thus the strategy taken by corporate leaders and the faith-based Bush Administration, who all actively promote social security privatization, was initially to circle the wagons and resist or undermine any attempts at systemic regulation of capital markets. Their official party line was that the system is fine. What we witnessed was the result of isolated individual misbehavior by a few morally flawed executives. There is simply too much at stake for too many powerful and vested interest groups to risk facing the consequences of meaningful reform.

However when “spin control” alone proved inadequate to quell the rage of burned 401(K) investors, the corporate community and the White House reluctantly signed on to the passage of legislation sponsored by Senator Paul Sarbanes to wrest control of accounting standards from the accounting industry with its cozy consulting ties to corporate America. The new law now known as the Sarbanes-Oxley Act in honor of the Democratic Senator from Maryland who championed the approach and the Republican Congressman from Ohio, who opposed it on behalf of the White House, required the creation of a five member “Public Company Accounting Oversight Board.” Three of the members must be from outside the accounting industry and two from within. All members serve full time and derive their compensation from fees charged to accounting firms to register as public accountants. The Board itself is governed by the Securities and Exchange Commission.

While aggressive implementation of the Sarbanes-Oxley Act would be an important reform and helpful to outside shareholders, I also believe that capital market reform is always at best a short term and stop gap measure. It is the nature of speculation that drives capital markets to continually seek ways around legal constraints. Thus while costly and constant regulation is always necessary, it is only sporadically sufficient. It is important to remember that it is the nature of speculation to push itself into excess. By this I mean that markets pick up momentum in any direction in which they are heading because it is the nature of human understanding to presume that tomorrow is a continuation of today. While this is a useful and efficient belief for most things we do, it becomes problematic whenever it becomes a massive conventional wisdom. That is especially the case in capital markets where speculators are continually seeking every way possible to leverage their investments into larger and larger returns. Legal constraints become minor barriers at those times when the rewards so clearly outstrip the risks. As a result, American history is replete with cycles of excessive and destructive speculation followed by regulation and the regulation is typically resisted and undermined (campaigns for deregulation) by the market players.

From the inception of Social Security in the 1930s down to the 1980s the market players who cause the problems as well as earned the large rewards of market instability and volatility have kept the risks and costs mainly to themselves. From my vantage point that was just fine; speculation is the name of the game in the process of capital formation. But what it acceptable for those with capital to play with is not acceptable as the basis for a social insurance system to provide adequate and guaranteed retirement income for a population that spends its life dependent on wages. That is the central moral and political problem to me. The big boys and girls in the Wall Street sandbox have now managed to break their own toys so badly that they now they want to take the working toys away from rest of us who never asked to be part of their world.

Not surprisingly the political reactionaries and religious fundamentalists now running the country—Bush, Chaney, Ashcroft, et. al—have been trying to help in this campaign by attempting to stage the whole crisis as a Sunday school morality play. It is being played out as just one more variation on the ongoing Washington story line of good guys bringing evildoers to justice. The “spin” here is that the larger corporate apple barrel is fine; it is just a problem of pulling out the few rotten apples. In the current “script” John Ashcroft’s Justice Department is cast as the “good guys” riding into the lawless “village” of Wall Street to subdue the “evil doers” who have stained the virtue of capitalism.

In each act of the play a different evil corporation takes center stage: Enron, World Com, Tyco, Global Crossing, and so on. In each act the story line never varies. The dots are never connected. In fact they are deliberately ignored. Instead we are given a villain du jour to hiss at. One day it is Enron’s Kenneth (aka “Kenny Boy”) Lay the next it is his slicked back sidekick Jeffery Skilling. At other times the media puts up Dennis Kozlowski of Tyco or Gary Winnick of Global Crossing or Bernard Ebbers of World Com. At this moment Martha Stewart, because of her iconic status as a tabloid goddess is singled out as a special guest star “fall gal.” It is worth remembering that the approximately $250,000 she is alleged to have gained via insider trading pales in comparison to the hundreds of millions these guys are accused of looting from outside shareholders.  She is an especially tempting target because a successful prosecution of her sends the clearest message to the masses at America’s check out registers that justice has been done. It is now safe to return to Wall Street. Social Security privatization can be moved back to the front burner.

While a less reactionary government, such as the preceding Clinton Administration, might have proposed at least some systemic reforms, it is important to note that the tendency to resist regulation would have still been at work. At best a Clinton or Gore Administration would not have been terribly different in terms of the basic approach. Complicating and hamstringing any reforms is the fact that we are now living in an era in which the ideological belief that private markets are superior to government action as social regulators runs so deeply and widely through the mainstream political spectrum in both political parties that it is practically invisible. It does not matter whether one reads the financial columnists in the liberal New Yorker or the conservative Wall Street Journal; this anti regulatory anti public service bias is everywhere.

As a case in point, consider electricity deregulation—the starting point for Enron’s many ventures. The original pitch for electricity deregulation was that it would lead to market-based competition and competition would lead to lower electricity rates for residential customers. Both Republicans and Democrats embraced the concept. Well, deregulation failed to deliver on its promises and it is not likely that it ever will. The problems are systemic but the analytic focus in the contemporary media is incident based. In all the press accounts about the California debacle (Paul Krugman at the New York Times being a notable exception) the story line was that the problem was the result of government incompetence and not market-based greed. Government is incompetent to regulate and government is incompetent to deregulate! Where do we go from here?

Without getting into a debate about the fine points of regulation and deregulation, it is important to remember that on average across the entire nation, the big winners to date are not consumers for whom rates increased or at best remained about the same, but for the new class of nonutility generators who have been able to raise wholesale rates at will. Despite this reality the general media approach is to say that deregulation is fundamentally a good idea it just needs to be done more honestly. So, they argue, let’s separate out Enron as a bad company, and “Kenny Boy” as, well, a bad boy from the larger “good” idea of trusting markets rather than government to set our utility rates. Lost in this media blitz is the starting point. The creation of the privatized and deregulated energy markets did not just happen. They were in fact the invention of Kenny Boy and his colleagues. They then had to set about influencing (bribing?) politicians and regulators to appreciate the wisdom of dispensing with regulation and forcing the fragmentation of the power industry into separate pieces—generators, transmission companies and final “retailers.” Unfortunately none of this structural political analysis is part of the popular conversation about deregulation.

It is time that we clearly understand that economic markets do not exist apart from political ones. We should have no tolerance for the politicians in both political parties that took Enron money and pompously thumped for the deregulation and privatization that allowed Enron to raid both our monthly paychecks via rising electric rates and our old age incomes via the loss of our retirement portfolios. As they run for cover some of the better funded politicians like Senator Schumer of New York have engaged in grand gestures such as giving their Enron campaign contributions to charity for Enron employees. Oh please! Give us a break. Who cares how you spend your money? How you hauled it in the first places tells us much more about where you stand than what you do when you are embarrassed.

The problems in capital markets are continually narrowed from systemic inquiries into the incentive structures and power relationships hardwired into the markets down to whether or not a very specific criminal act occurred. But the real threat to our economic well-being is not understandable as a simple tale of law breaking. The threat emanates from our inability to regulate the large in-between murky decision making area where the interests of corporate executives and the interests of ordinary outside shareholders and electric rate payers diverge. President Bush inadvertently highlighted this last summer when he defended his own behavior as a Harken Energy insider. He insisted that he did nothing illegal when he exercised his insider prerogatives and sold millions of dollars worth of stock before the share price tanked. As far as any one knows right now, that could be the truth. But the larger issue is not whether or not the letter of the law was violated, but the way in which the laws and regulations themselves were constructed to favor insider deal making in the first place. The real threat to outside shareholders and to pensioners if Social Security is privatized is not the illegal manipulation of the securities market, but rather its legal manipulation. By that I mean the ability granted to insiders to exercise “business” judgments that favor their interests over those of outside shareholders and by extension any privatized social security account holders.

Given the current loss of faith in the stock market, Social Security privatization would be particularly valuable to the corporations and investment bankers who desperately need a new source of large cash inflows to sustain their fees and bonuses. Therefore it is not surprising to discover that although the ostensible leading role in promoting privatization is taken by the ideological assault troopers of the Washington DC-based right-wing think tanks such as the Cato Institute, the real driving force behind the scenes is corporate America. Cato’s “Project on Social Security Privatization” is funded by American Express, the brokerage house of Alex Brown and Company, and the giant American International Group. One of the co-chairs of the project is William Shipman, a senior officer at the Boston’s State Street Bank.[4]  In general the list of corporate supporters for social security privatization reads like a Who’s Who of corporate America. The list includes Merrill Lynch, T. Rowe Price, Aetna, American Express, Morgan Stanley, Oppenheimer Funds, Quick and Reilly, Watson Wyatt Worldwide, State Street Bank and Trust, Investment Company Institute, DuPont, Motorola, Securities Industries Association, American International Group, National Association of Manufacturers, Fidelity Investments, Blackstone Group, AIG Life, American Council of Life Insurance, Teleos Asset Management, Digital Equipment, I.B.M., Alex Brown and Sons, and Rockport Financial.[5]

The linkage between corporate America and the campaign to privatize Social Security was most recently front and center in 2001 when George W. Bush established an Orwellian-named “President’s Commission to Strengthen Social Security.” If there had been a law requiring truth in presidential labeling the Commission would have been called the “President’s Commission to Figure Out How to Privatize Social Security.” Its two co-chairs were Richard Parsons, then chief operating officer of AOL Time Warner and now its CEO and retired New York State Senator Daniel Patrick Moynihan. One of Co-Chair Parsons’ first public moves was to discredit Social Security. On the PBS News Hour Program when the Commission was just getting underway he said, “I am a baby boomer. I was born in 1948, and I've been contributing to the Social Security system since 1964. And until this point in time I've never believed that I was going to get anything out of Social Security when I retired.” (Laughter) Never. (Applause)[6]

Remarks of this type are the stock in trade of privatizers. The idea is to undermine public faith in Social Security.  Of course it is difficult to be a faith-based investor in AOL Time Warner. In the last three years (February 2000 and February 2003) when the S&P 500 lost about 40 percent of its value, Mr. Parsons’ corporate leadership team has managed to lose 80 percent of its value. Clearly an inflow of new sucker money into the market via social security privatization would go along way in bailing out AOL Time Warner and Mr. Parsons’ retirement portfolio. With a little bit of luck and some good political timing, Parsons might never need that Social Security check he does not think he will ever get.

The problem is that despite all the bad news from Wall Street, the Administration is seeking to dilute even the limited reforms of the Sarbanes-Oxley Act. Last summer when John Biggs, the head of TIAA-CREF, one of the nation’s largest pension funds and a well-known advocate of strict accounting standards for public accounting, was proposed as chair of the new oversight Board, the accounting industry called in their political chips with Congressman Oxley, SEC head Harvey Pitt and the Bush Administration, and scuttled the nomination. In place of Mr. Biggs they put forward William Webster, former FBI Director and former Federal Judge. Unfortunately that was a short-lived appointment, as it turned out Mr. Webster had his own corporate accounting scandal. It turned out that in August 2001, Webster headed the audit committee of U.S. Technologies when it fired its auditor, BDO Seidman, whose audit revealed that the company's financial records were disorganized and possibly illegal. Webster’s rationale for the firing was that BDO Seidman was too expensive.[7] Mr. Webster resigned from his post a few days after Mr. Pitt was forced to step down because of his political ineptitude and pro-industry biases. At present a new head for the board is still not in place. But if I were to place a bet, I would bet that the new head will more likely be an industry insider and not an outside reformer.

Capital markets even when exercising their very best Sunday School behavior are rough and tumble speculative affairs in which insider knowledge and political connections count for a great deal. The Bush Administration and the corporate powers behind the privatization drive can’t have it both ways. They can’t promote a light regulatory hand and also advocate that capital markets are a substitute for genuine social insurance. While more strenuous regulation is needed and would be helpful, especially right now, that is an entirely separate issue from the vast philosophical change involved in taking away an important social right. It is an enormous stretch to argue that speculative capital markets can ever be an equivalent substitute for the guarantee of old age income adequacy that we now grant as a right to the American people. There are many good reasons why social security privatization is a bad idea. However it is important to understand that the speculative forces that drive capital markets and make them chronic candidates for endemic cycles of greed and corruption should be considered as one of the best reasons to keep the two apart.