Let's all make lots of money

How do we get everyone to acquire a stake in the wealth generated by market capitalism?
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The Independent Culture
SPREAD IT around, spread it around. The nicest feature of the floatation this week of Goldman Sachs, the US investment bank, is that the partners have not pocketed the entire proceeds from their share sale but set a aside a chunk for all 13,000 staff around the world.

So everyone gets shares worth half their salary plus an extra allowance based on the time they have worked there. Thus the stake of a senior partner like Gavyn Davies, the former adviser to Labour and friend of Gordon Brown (and incidentally economic columnist for this paper) works out at about pounds 125m (at yesterday's evaluation, anyway).

You may say that the partners have made so much that they can afford to pass a bit down the line. But the partners owned the business. They didn't have to share it with their employees, and they did. As for Gavyn's pounds 125m, my own reaction is it is great to have economists close to the Chancellor who have a stake in the system: you don't want him to be surrounded by second-rate academics glowering at people who have made a bob or two for themselves.

But of course there is a much bigger issue here: how do you get all employees - not just the fortunate ones who happen to work for Goldman - to be able to acquire a significant stake in the wealth being generated by market capitalism? This is surely the direction in which the market system has to mature in the first part of the new century if it is to build the political support needed to match its economic triumph. It is the genuine third way, not the mushy "little bit this way, and not too much in the other direction" stuff that gets trotted out.

But how? Start by looking at America, for two remarkable things have happened there during the long boom. The first is that the boom has itself transformed the pattern of American wealth. Yes, the rich have become richer, but so too has much of the middle class. Some 40 per cent of Americans now own shares. Tax concessions mean that many of them run their own retirement accounts, making decisions themselves where to put their savings for their old age, rather than having the money invested by some anonymous pension fund manager as we have to do here. As a result, the long boom has seen a democratisation of the stock market. Sure, it would be better were 60 or 80 per cent of Americans to own shares, not just the 40 per cent, but that is the challenge.

The second thing is the transformation in the way in which shares are traded. One quarter of all trades made by individuals in the US is now done on the Internet. Think of it. Instead of buying or selling a share by ringing up a broker (assuming you have one) or going into your bank, you walk to your computer and tap away for a minute or so. Online share dealing has done wonders for Internet penetration among older Americans: they may not want to surf the Net, or even e-mail their friends and relations, but they do want to control their own portfolios.

Naturally, both aspects of this revolution carry dangers. For example, if you give people the freedom to make investment decisions about their own pension, you are also giving them the freedom to make mistakes. Professional fund managers make mistakes too, but they are less likely to run unbalanced portfolios: they will not put all their eggs in one basket as a personal investor might.

As for online share dealing, it is hard not to feel that for many people, share-dealing has become little more than a form of on-screen gambling. The boom in Internet stocks has been driven in part at least by "day-traders", people sitting at home, buying and selling shares on the Internet. On Monday, the top US securities regulator expressed his concern about this phenomenon. When the boom ends, and all booms come to an end sooner or later, people are going to be hurt.

Nevertheless, the combination of a wider spread of share ownership and a new and more convenient technology for trading in shares has changed investment in America for ever. A break in share prices will not eliminate the new personal investors; and the Internet as a commercial entity will of course continue after the Internet stock bubble is pricked.

That is America; what about here? In one sense we have had an advantage over the US in that the extension of share ownership here has been propelled by the privatisation of state-owned industries and the demutualisation of building societies. The proportion of Britons holding shares has doubled in the last 20 years. But having a few shares in, say, British Gas (remember Sid?) and a few more in the Abbey National is not the same as having a balanced portfolio of assets to fund a pension for retirement.

As for Internet share-trading, it will surely come as the Internet catches on. (I reckon The Sun offering free Internet access is going to revolutionise the use of the Net in a way that Tony Blair rattling on about schools going online could never have done.)

But do not expect British attitudes to share-ownership to mimic those of Americans. We are not the same. Share ownership is partly a cultural thing and our commitment to it is clouded by class and history. If everyone is going to benefit from economic expansion in the way the Goldman employees have done, we need policies to push forward the idea that ordinary people - not just the professional middle class - should own shares. Here are some ideas that a government genuinely interested in spreading the wealth - genuinely interested in a third way - might ponder.

One: create individual retirement accounts so that people could put money free of tax into share portfolios which they could choose themselves, and then use to help pay for their retirement. That would be very simple, as simple as PEPs.

Two: dump the ISAs as soon as is decently possible and go back to PEPs. ISAs are unbelievably complicated and in a few months will have failed: expect the value of savings going into them to fall way below the amount that used to go into PEPs.

Three: speed up the drive to get employees of shareholder-owned companies to build up a stake in their employer. Yes, I know that there is a consultative document out now and that eventually something will happen. But there is a profound danger that there will be another ISA debacle. In particular, the cost of running employee share-ownership schemes has to come down. Lots of smaller companies want to start them but are stopped by the complexity of the regulations.

Four: public sector employees need shadow share-ownership schemes, otherwise they will be excluded from the benefits of economic growth in much the same way that council tenants are excluded from the rise in home values. There is no reason why public sector staff should not be able to put part of their salaries aside on a favourable tax basis in savings plans that mimicked the performance of shares in general.

Five: encourage investment clubs. This has been the unsung success story of the last couple of years with the number rising 10-fold to about 3,500. These are the ideal mechanism both for pooling investment risks and for teaching people how the market works.

The key thing is to realise that over the past 20 years we have moved into a period more like the last years of the last century than anything we have experienced during our lifetimes: the global dominance of a single economic ideology. That system, market capitalism, will race on for at least another generation, maybe two or three or four. National governments can try and resist it, seeking to curb its more disturbing effects by regulating and legislating - as tends to happen in continental Europe. But that is the negative approach. The positive approach is to ensure that as high a proportion of our societies benefits as is possible. Then the problems the market does create are easier to tackle. Spread the wealth.