The Enron scandal seems like a heaven-sent opportunity to reform the
business excesses of our recent Gilded Age. But the fetish of markets retains a
powerful grip on the American political psyche. Already, corporate lobbyists,
elevating stock-market gambling to the level of a fundamental human right, are
undercutting modest efforts to prevent future abuses of 401(k) pension
plans--which for most Americans is the heart of the Enron matter.
These tax-subsidized "defined contribution plans," virtually the only
jobrelated retirement programs now being offered to workers, shift the risk from
employer to employee--a shift made possible by the weakened bargaining position
of labor in our new economy. Unlike traditional "defined benefit plans,"
401(k) accounts can be loaded up with a company's own stock. Among other things,
this gives management control over the supply of shares and, thus, influence over
their price. In Enron's case, it also allowed the top brass to cash out before
their phony profit numbers were exposed, while locked-in employees had to ride the
share price down from $80 to 80 cents.
One simple defense against this sort of thing is to ensure that 401(k)
portfolios are diversified by capping the percentage made up of company stock.
Senators Jon Corzine of New Jersey, Barbara Boxer of California, and Paul
Wellstone of Minnesota support a limit of 20 percent. It's no surprise that the
reforms proposed by the Enron-besotted Bush administration contain no caps. But
neither do the Democratic proposals being organized on key House and Senate
committees. The reason is that too many Democrats fear they will be accused of
limiting workers' freedom of choice--that is, the inalienable right to bet
tax-subsidized retirement savings on any investment horse that appeals to them.
In reality, this is the freedom of the worker-investor (after spending a day
on the job, making dinner, and putting the kids to bed), to sit down at night
with the computer and try to outsmart the Wall Street high rollers and crony
capitalists. The result is well known: In a bull market, small individual
investors get about one-third the average return on stock and about half the
average return on bonds. In a bear market, they get hosed.
The response of the White House is that they should get better advice. The
administration supports a bill by Republican Congressmen John Boehner of Ohio to
make it easier for companies to give employees financial advice by exempting them
from lawsuits that stem from conflicts of interest. This proposal--with its
obvious potential for fraud and abuse--actually passed the House last year in
response to the collapse of dot-com stocks.
The notion that individual worker-investors could buy and sell their way to
retirement prosperity if only they had better advice is bipartisan.
Connecticut's Senator Joe Lieberman, a former advocate of Social Security
privatization who now favors a company-stock cap on 401(k) plans, also proposes
tax incentives for companies to provide advice to their workers: "If you don't
choose wisely," Lieberman says, "you lose badly."
But those who lost money in Enron did not do so because it was, a priori, an
unwise investment. It was regularly touted by reputable financial analysts from
the major investment houses, given accolades by professors at Harvard and other
business schools, and lauded by Fortune magazine six years in a row as
America's most innovative company. Its books were certified by Arthur Andersen.
And the biggest, most sophisticated investment banks in the world--Citibank,
Morgan Stanley, Chase--were lending the company billions of dollars. Indeed, the
more a diligent worker-investor learned about the company, the more Enron seemed
a good buy.
As Senator Corzine tells his colleagues, "There is no real sense in which you
are going to be secure by investing in stock." Thus, Congress has a choice: It
can continue to indulge the popular delusion that the typical American
worker--with perhaps a little advice from a company-certified financial wizard--can
retire in style by outguessing the stock market. Or it can promote strong
regulation to protect workers' savings and get on with the larger business of
enhancing retirement programs and extending them to the 50 percent of American
workers who have no prospects of any retirement income beyond Social Security.
As the evidence of fraud and irresponsibility spreads beyond Enron's corporate
suite, it is time for Congress to tell the country the truth. If capitalism is to
work for all of us, it needs strong, effective, and independent government
regulation, which will also impinge on individuals' "freedom" to invest their
tax-subsidized savings. Otherwise, there will surely be more Enrons in our
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