Mike MacMillan, founder of MacMillan Communications, now Craft & Capital, and the author of Radical Problems, Simple Solutions: How Markets can Help Fix the Retirement Crisis and Solve Wealth Inequality, writes that technological innovation and the ongoing democratisation of the markets hold out promise for addressing one of the major social issues facing the US today: wealth inequality.
Low cost, broad-market ETFs, fractional shares, and the advent of low- or no-cost trading are opening the door for the economically disadvantaged to invest in the markets, build long-term wealth, and better prepare for retirement.
While roughly 60 per cent of Americans have some exposure to the stock market, ownership is clustered at the high end of the income scale, with the top 1.0 per cent accounting for 54 per cent of the total, according to Gallup. More to the point, 40 per cent own no stocks at all; they are effectively excluded from one of the two primary paths for building wealth in this country (the other is home ownership). The disadvantages of this compound over time, and over generations, and it is corrosive.
Don’t eat the rich
We were always kidding ourselves to think that this level of wealth inequality could go on forever without consequences, but eating the rich is not the answer. In the US and elsewhere all manner of redistributionist schemes have been tried. Those that work tend to cripple economic growth; those that don’t, well why bother?
But there are other ideas out there that leverage free market principles and the technological advances that have made stock ownership cheaper and more accessible. One is a nonprofit started by three undergraduate students at the University of Pennsylvania called First Generation Investors (FGI). With support from investment firms, financial advisers, and ETF sponsors, among others, FGI is bringing the market to classrooms in Title 1 high schools, using local college students as instructors. (A Title 1 high school is one in which at least a third of the students are designated as low income.)
The FGI program provides an introduction to market basics, with a focus on the value of compounding, particularly relevant given these are mostly 17- and 18-year old kids with decades of investing ahead of them. Launched in 2018 in a single Philadelphia high school, the organisation has grown to include multiple colleges from around the country and seen more than 1,500 students participate in its programs to date.
As Dylan Ingerman, one of FGI’s three founders, has put it: “The idea of First Generation Investors is to expand investment education to lower the barrier of entry so everyone can feel empowered to participate in the stock markets, and therefore benefit from compound interest.” The rapid growth of FGI should put paid to the idea that economically disadvantaged don’t care about investing. Given the opportunity to learn they’re at least as interested in anyone else.
There’s a further benefit to bringing more people into the markets: civic engagement. Those with no stake in capitalism have no reason to defend it. In fact, quite the opposite; they are likely to feel alienated, even hostile, to a system from which they believe themselves to be excluded. Given a chance to participate, those attitudes are likely to shift.
To make this work we have to start thinking about money differently, not just as a medium of exchange but as a vehicle that encourages intellectual and civic engagement through saving and investing. Ownership of ETFs, and through them the underlying enterprises, gives even the smallest shareholder a rooting interest in the economy. Though the markets are about money, they aren’t just about money; they open a window on the human experience: greed, despair, joy. For those who grow up around Wall Street, this is obvious; for those who don’t, it isn’t.
Free market solution
Altruism can be in short supply on Wall Street. But as Adam Smith noted, altruism or “benevolence,” (his word) is not required. Self-interest, appropriately channeled, is what is needed. For too many the belief in the ability to achieve a better life is slipping away. This dissipation of hope should worry all of us, rich and poor.
To put it in financial terms, the failure to engage many of our citizens in process of wealth creation has exposed society to a multitude of risks with little in the way of expected excess returns. Bringing new investors into the market will benefit everyone, not least financial advisors and ETF sponsors. It’s a question of education and access.
There’s a story that made the rounds during the 1980s. Deng Xiaoping, the then-chairman of the Chinese communist party, is having dinner with Lee Kuan Yew, the prime minister of Singapore, a nation-state with a population of around five million. Lee is lecturing Deng on how to run a country. Deng, who oversees a population of more than one billion, listens politely for a time and then says, “Thank you for your advice. That will come in handy if I ever become mayor of Shanghai.”
Something similar holds for the US. We can’t be Finland (apparently the happiest country in the world, population 5.4 million) and we are definitely not Singapore. We’re too big, too complicated, too unruly. We have to find our own way to address the crisis of wealth inequality, preferably one aligned with our historical values and a free market economy. While no single solution will work for everyone, the continued democratization of the financial world holds the promise of helping the economically disadvantaged build long-term wealth and prepare for retirement.
It’s a revolution hiding in plain sight.