Are We “Us” or Are We “Them?”

by | Feb 1, 2008 | Cash Flow, Weekly Column | 1 comment

floating-gas-tank.jpgOver the past few months, news reports have featured high oil prices, the subprime mortgage mess, and concerns about the health of the U.S. economy. And certainly, these are legitimate and newsworthy issues. Consumers are concerned about the costs of driving their cars, heating their houses, or being able to afford the American dream of home ownership.

One outcome of bad economic news is a need to blame somebody or something for the problem. High on almost every “blame list” is the government or “big, greedy corporations.” In the past year, almost everyone who has turned on any news program has heard high fuel prices blamed on the “obscene profits” of oil companies. High medical costs are blamed on the “greed” of the pharmaceutical industry. It’s easy to see large companies or industries as the problem, or to regard them as huge, malicious entities out to prey on unsuspecting consumers.

Yet the reality isn’t quite that simple.walmart.jpg

True, big corporations exist primarily to make money. So do small corporations and individually owned businesses. That is the foundation of a capitalistic system, and it’s nothing to apologize for. Shareholders expect companies they own to be profitable.

An inconvenient reality that tends to be overlooked, however, is just who profits when those big corporations make money. Most people who criticize “big business” don’t stop to think that, by and large, the shareholders of those corporations are not only the ultra rich and wealthy, but ordinary consumers like you and me.

Anyone who has an IRA, a 401(k), an investment in mutual funds, or who is a participant in a state retirement pension plan is a shareholder in one or more “big, greedy corporations.” Over 50% of all U.S. households own stocks, either directly or in a mutual fund or retirement plan, according to a 2005 study done by the Securities Industry Association and the Investment Company Institute. That equates to 56.9 million households.

Certainly, there are corporate abuses and cases of outrageous fraud. Enron is the obvious example. And it makes no sense that a highly-compensated CEO who mismanages a company into huge losses for its stockholders should be rewarded with a multi-million-dollar termination package. It is important that publicly traded companies be held accountable and regulated sufficiently to insure honesty and legitimate business practices.

Yet passing even more burdensome laws that will lower the profitability of those companies, with the grand intention of protecting the “little people” against any losses, can actually do just the opposite. It ultimately could result in significantly reducing the value of the very investments those people count on for a sufficient income in retirement.

When a major industry—whether it is banking, manufacturing, oil, or pharmaceuticals—is hit with new regulations or penalties that result in losses, rather than profits, those losses aren’t suffered by “big, greedy corporations.” The losses are suffered by the company’s shareholders. This includes a great many individual, ordinary investors, whose IRA’s, 401(k)’s, and other retirement nest eggs could lose significant value, perhaps for several years.

Some of the suggested solutions for the subprime mortgage losses, for example, would have the unintended consequence of drying up credit for all except the most credit-worthy borrowers. This would make it harder for small companies, large companies, and individuals to obtain loans to buy property or us-vs-them.jpgexpand businesses. It could take us back to the days when the only ones who could borrow money were those who didn’t need it.

As a consumer and a small investor, being skeptical is a good idea. Yet seeing big business as a simple matter of “us vs. them” is taking skepticism much too far.

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