Number 557 July 11, 2014

This Week: Thinking Systems, Part II

"Quote" of the Week: "Certain Orthodox Ideas Are Encouraged"
"Pushing the Progressive Envelope" on Social Security
"Acting in Their Customers' Best Interest"


This week is a followup on last week's article on systems. There will be more articles on systems in the coming weeks as I sort out my thoughts on the best way to explain how important it is to work on our understanding of how things work. So stick with me, I think we'll all benefit enormously if we can just focus a bit more on how we think.

I feel compelled to say something about Facebook. I seem to have a Facebook page, but I don't know how it works, really, so I haven't posted anything. Also, many people apparently have asked to be "Friends" with me. I haven't responded to any of them, so if you're someone who has attempted to be my Facebook Friend, don't take it personally if you haven't heard from me. I'm still trying to figure out how it works, and if I want to bother with it. I've even had an expert try to help me! (Thank you, Gloria!) Yet, so far, I'm hopeless. Maybe that will change.

In the meantime, if you write to me you will be my friend, whatever Facebook says.

I'll be on vacation next week, so if you write to me—and I hope you do!—you won't get a reply until after July 19.



"Quote" of the Week: "Certain Orthodox Ideas Are Encouraged"

Here is Howard Zinn, writing in his book "Declarations of Independence"

Thus we grow up in a society where our choice of ideas is limited and where certain ideas dominate: We hear them from our parents, in the schools, in the churches, in the newspapers, and on radio and television. They have been in the air ever since we learned to walk and talk They constitute an American ideology—that is, a dominant pattern of ideas. Most people accept them, and if we do, too, we are less likely to get into trouble.

The dominance of these ideas is not the product of a conspiratorial group that has devilishly plotted to implant on society a particular point of view. Nor is it an accident, an innocent result of people thinking freely. There is a process of natural (or, rather unnatural) selection, in which certain orthodox ideas are encouraged, financed, and pushed forward by the most powerful mechanisms of our culture. These ideas are preferred because they are safe; they don't threaten established wealth or power."

A longer excerpt can be found on the excellent website "Third World Traveler."


"Pushing the Progressive Envelope" on Social Security

Senators Mark Begich (D-AK) and Patty Murray (D-WA) took to the Senate floor on June 10th to announce new legislation that would expand Social Security. It's called the RAISE Act, The Retirement and Income Security Enhancement Act of 2014. Here's a quick summary:

* Under current law, a divorced spouse is only entitled to receive benefits under the former spouse's earnings if she or he was married for ten years. Beginning in 2016, the RAISE Act would allow those with less than ten years of marriage to be eligible for benefits under the former spouse's earnings.

* The RAISE Act would establish an alternative benefit for a surviving spouse where both husband and wife established insured status as retired workers. For the surviving spouse, the alternative benefit would equal 75 percent of the sum of the survivor's own worker benefit and the Primary Insurance Amount (PIA) of the deceased spouse.

* Under current law, minor children under the age of 18, and high school students under age 19 are entitled to benefits if they are the child of a retired, disabled, or deceased worker. Beginning in 2016, this provision extends benefits for full-time students until the age of 23 if they are a child of a retired, disabled or deceased worker.

* Beginning in 2015, the RAISE Act would apply a two percent payroll tax rate on earnings over $400,000, with the threshold wage-indexed after 2015.

There's already legislation before the Senate that would remove the cap on taxable earnings subject to Social Security tax, so these proposed pieces of legislation together would not only expand Social Security benefits, but also stabilize the financing of the program. Which is, after all, the most popular government program in the history of government programs. Thanks to all of the socialists in the 1930s who forced Roosevelt to create such a program!

I don't know if the RAISE Act will pass or not, but the fact that Patty Murray co-sponsored it tells us a lot. Murray is chair of the Senate Budget Committee, which means that the leadership of the Democratic Party might be feeling enough heat from the grassroots that they might actually do something to serve their constituents. An odd idea, I know...

But listen to what the newspaper The Fiscal Times (the only newspaper to report on RAISE, as far as I know) had to say about it:

"Democrats, so beaten down by concern about the budget deficit and the national debt have spent much of the last decade back on their heels when it came to the issue of Social Security. The idea of doing anything with entitlements except reducing them has been anathema for so long that it has carried over into discussions about the retirement program, even though it is actually funded by a dedicated revenue source and doesn't affect the deficit.

"So until recently, it would have been unthinkable for a Democrat in a tight reelection campaign—as Begich is—to propose anything beyond preserving the status quo on Social Security. But an increasingly populist tone, particularly in the U.S. Senate, with the rise of voices such as Sens. Elizabeth Warren (D-MA) and Sherrod Brown (D-OH), has meant that when a Democrat decides to push the progressive envelope, he or she won't suddenly find all their colleagues deserting them."

The Fiscal Times is a Pete Peterson project. I've mentioned the Pete Peterson empire before. The Los Angeles Times called him "the most influential billionaire in America." He's best known for promoting the deficit mania that has done so terribly much damage to everything, and the Times notes that "His particular targets are Social Security, Medicare and Medicaid, which he calls 'entitlement' programs and which he wants to cut back in a manner that would strike deeply at the middle class."

We see tons of articles about the Tea Party and the power of the Koch Brothers and so forth. But this story tells us, however indirectly, that lots of people are doing lots of grassroots organizing. After all, politicians in our system won't "push the progressive envelope" without being pushed themselves. So, if we read between the lines, it looks like momentum may be shifting, ever so slightly, away from the neoliberal agenda and toward a more human-friendly agenda. Social Security was created in the midst of the Great Depression. Can it be strengthened, nearly 80 years later, in the wake of the Great Recession? That's up to us.


"Acting in Their Customers' Best Interest"

A June 12th article in the New York Times very clearly illuminates how systems work, and how NOT to get them to change. The article appeared in the Business Section under the headline, "Brokers Fight Rule to Favor Best Interests of Customers." The article had to do with what is apparently a growing problem of financial brokers misleading, and then profiting from the confusion of, people who are about to retire. In other words, scamming. The scam is to sell them retirement "products" that have all sorts of hidden fees, resulting in higher profits for the brokers and lower standards of living for their customers.

The Labor Department is considering issuing new regulations to limit the scams. But, according to Karen Friedman of the consumer group the Pension Rights Center "They have really been stymied by the financial industry, which is spending millions of dollars to fight this rule." What a surprise.

The basic issue here was spelled out in the third paragraph of the Times article, which would be hilarious if it weren't so tragic. Here it is:

"Brokers are not necessarily required to act in their customers' best interest, even if they are advising on their retirement money. While that would seem to be a basic consumer protection, in Washington and on Wall Street it has proved to be wildly contentious."

That line about "basic consumer protection" is the one that hints at the real problem. And that problem is the idea of regulation. Many progressives and liberals spend a good deal of their energy pushing for "more regulation" of the financial industry. It's a losing battle, which we can see if we understand the nature of the system being regulated, in this case the retirement system.

What we have in the United States—Social Security being the exception—is a system in which individuals are forced to manage their retirements in the competitive marketplace. IRAs, 401(k) accounts, personal savings, that sort of thing. And the marketplace, as we know, is fundamentally based on the principle of the "rational actor," which means that everyone in the market is assumed to be trying to get the most for themselves. The retiree thus hires a broker, and both of them are trying to get the most out of the transaction. But more for one of them means less for the other. So somebody is going to lose.

The Times article highlights the dynamic, pointing to one retiree who "didn't realize she had been sold a variable annuity" with "incomprehensible" fees, and another who was no doubt surprised to find that she had bought something where the fees "cost 1.5 percent annually." Those fees come out of the retirees' pockets, and they go into someone else's pockets.

One of the popular tricks of the trade, not mentioned in the Times article, is to convince retirees who have employer-sponsored 401(k) plans to roll them over into riskier IRA accounts. The business-oriented wire service Bloomberg News explained it in an article that ran just a few days after the Times article. Under the headline "Retirees Suffer as $300 Billion 401(k) Rollover Boom Enriches Brokers," Bloomberg noted that "financial firms entice [retirees] with cold calls, Internet ads, storefront signs and cash incentives to switch to IRAs. They tout the advantage of the IRA's wide variety of investment choices over the typical 401(k) plan's limited menu."

The fact that the "more choice" idea is a selling point is itself a product of many years of propaganda. Go back and read Nygaard Notes #119: "Is More Choice Always Better?" to see why I say that, but for now just notice that "choice", from the broker's point of view, has little to do with it. The real reason for the "enticements" is spelled out by Bloomberg: "IRAs often charge higher fees than those associated with 401(k) plans, giving brokers an incentive to promote rollovers." In other words, brokers know that they profit if retirees switch to fee-laden IRAs, regardless of the effect on the clients. And what if an ethical broker decides not to play by these rules? Well, any broker who doesn't earn a sufficiently high profit will soon be out of a job. The market is set up to produce profit, and everyone has to play the game.

This is not really a big secret, as we see when we look at the headline of an article in the June 2nd New York Times "Dealbook" column, which took the form of a question: "Do Drug Companies Make Drugs, or Money?" Money, as it turns out.

Once we understand that basic rule—that brokers who don't generate sufficient profit will not survive—then we can see how tragically misguided is the comment of Barbara Roper, director of investor protection at the Consumer Federation of America, who spoke to the New York Times. As the Times reported it, Ms. Roper concluded that a rule requiring brokers to act in their clients' best interests won't necessarily stop "bad people from doing bad things. But it may provide something of a deterrent and it may increase the likelihood that investors will be able to recover damages."

Ms. Roper's comment highlights the illogic of the regulation-based system of which she speaks: We set up a system that rewards profit—in fact, demands profit—then we impose rules intended to "deter" people from doing what that system demands. While we can't know the intention of setting up such a regulation-based system, we can see some of the effects. And one of the effects of a regulation-based system is to limit the damage that might be done in the absence of rules. Another effect is to give would-be victims the impression that they are "protected" by those rules (as they often are, to a limited extent). And such speed bumps on the profit highway may well work to tamp down the popular outrage that would be generated by the standard excesses of the selectively-regulated market that is favored by conservatives. A truly unfettered market would likely go so far that it would lose popular support and thus destroy itself. So it could be argued that one of the results of moving towards more regulation is to maintain and strengthen the profit-based system as a whole.

So let's get back to the paragraph that prompted me to write this article in the first place:

"Brokers are not necessarily required to act in their customers' best interest, even if they are advising on their retirement money. While that would seem to be a basic consumer protection, in Washington and on Wall Street it has proved to be wildly contentious."

What I'm suggesting here is that you consider the possibility that "their customers' best interest" may be... to not be "customers" at all! And we might also consider that the problem with "basic consumer protection" may be that the very thing that it is protecting is a system that reduces human beings to "consumers". Consider, also, the possibility that the dynamic that makes this argument "wildly contentious . . . in Washington and on Wall Street" is the dynamic that merges Washington and Wall Street into a single system, a system united by a need to banish from the halls of power any voices that might call for real change.

Outside of Washington and Wall Street there are lots of people who, if presented with a real program and a real vision, might think bigger than "more regulation." They might even go so far as to support the long-term transformation of our competitive, profit-based system into a different one, one based on solidarity instead of greed. Now THAT would be wildly contentious! The job of freeing the collective imagination to consider such a possibility—and to consider what would be involved in creating it—is the job before us.