• Mr. Steven J. Muehler

Steve Muehler's Plan to Reform the Stock Markets

Updated: Apr 23


We’re asking too much of the stock market, and despite the recent gains of the markets its failures are making hard working Americans poorer.


Specifically, it is failing at three primary functions our society has handed over to the stock market: allocating capital wisely, funding a secure retirement and creating jobs.


CAPITAL ALLOCATION: FAILING GRADE


Most of us believe, as economic theory teaches, that a stock market is an efficient way of transferring capital from those who have a little extra money (savers) to those who have good uses for it (entrepreneurs). When we put money into the market, we imagine that our pennies and dollars are funding productive investments in corporations.


That’s why we call ourselves “investors” when we open a 401(k) or a brokerage account. But in the vast majority of cases, we aren’t actually investing anything at all in the company that only happens when a company sells new shares in an initial or secondary public offering. For most of us, the money we supply to buy shares simply goes to earlier shareholders who sold us our shares. We aren’t really investors; we are speculators.


Most of the time, the flow of capital is exactly the opposite of what economic theory suggests. In every year since 1993, more capital has flown from nonfinancial corporations to shareholders than from shareholders to corporations.


In 2014, for instance, nonfinancial corporations in the aggregate returned $388 billion more to investors than they received in initial or secondary public offerings. Since 1993, the total amount of capital that the market has taken away from corporations is around $5 trillion.


Imagine if that $5 trillion had been spent on new factories, new equipment or the development of new intellectual property.


RETIREMENT SECURITY: FAILING GRADE


It used to be that the stock market was almost exclusively for the wealthy. Regular working folk didn’t own stocks, but the destruction of defined-benefit pensions and the advent of do-it-yourself retirement savings changed all that. Now, although the top 1% still owns more than a third of all shares, and the top 10% owns more than 80%, about half of Americans own at least a few shares. They own shares for one reason: to save for their retirement.


However, only a few have enough to guarantee a comfortable retirement. In 2013, the median value of a retirement account for a household headed by someone near retirement was just $24,000. For the poorest half of the population, the median holding was less than $4,000.


Inadequate savings is only one problem with relying on the stock market to fund our retirements. A far greater problem with relying on 401(k)s is that the stock market is extremely volatile. That makes it a risky way to save for long-term goals such as retirement. How much money you’ll have saved for your golden years depends too much on luck and timing.


JOB CREATION: FAILING GRADE


Ever since the Great Recession, policy makers have been searching for easy ways to accelerate job growth. One answer that both Republicans and Democrats agreed on was encouraging the formation of new businesses by giving them access to capital through the stock market, under the assumption that new companies create most of the new jobs. And so the JOBS Act was passed, which makes it easier for new corporations to go public by selling shares to the public.


Research by Jerry Davis of the University of Michigan’s Ross School of Business shows what an utter failure that policy has been. Davis shows that companies that go public create very few jobs. Between 2001 and 2014, 1,600 companies went public with an IPO, but the typical company only increased its employment by 51 jobs after going public.


According to Davis, the biggest IPO success story (in terms of organic job growth) since 2001 has been GameStop, the videogame retailer that has about 7,000 stores and 54,000 employees, most of them making less than $10 an hour.


”GameStop is the new face of job creation in America,” Davis said. Not exactly the model we’d like to replicate.


The largest employers in America used to be huge industrial conglomerates that offered secure, well-paid, lifetime careers. Now the largest employers are retailers such as Wal-Mart, Kroger, and Home Depot, which have high turnover and low wages.


The structure and governance of American corporations has utterly changed since the 1960s, when the largest companies by revenue were also among the largest employers and had large market capitalizations. For instance, in 1962, AT&T had the biggest market cap and employed 564,000, while General Motors had the second-largest market cap and had 605,000 workers.


The new paradigm of running corporations solely for the benefit of shareholders coincided with the development of the Internet and other information and communication technologies that dramatically lowered transaction costs. Instead of having vertically integrated companies that produced everything they sold, we saw more corporations that outsourced as much as they could.


The market richly rewarded companies that slashed costs, especially labor costs. And the trend is accelerating.


By 2012, employment at the largest companies had plunged. Apple had the biggest market cap, but had only 76,000 workers. So now it’s possible to have huge revenues and a large market capitalization without actually having many workers. Contrary to the idea that going public meant the creation of lots of new jobs, companies discovered that “if anything, listing on a stock market creates pressures against creating employment; market participants seem to reward the lean and mean, and punish the job creators.”


More recent popular companies that have recently gone public are even leaner: Facebook has fewer than 10,000 workers, and Uber has about 2,000 full-time employees (and hundreds of thousands of drivers who supposedly work for themselves).


Under my Administration, we will look for new and innovative ways to reward companies that create jobs here in the United States. We will also work hard to completely revamp the current markets, affording greater access to investors or all types, as well as increasing security to the shareholders.


Steve Muehler is the Founder & Managing Member of the Private Placement Markets:

About Mr. Steve Muehler, Founder & Senior Managing Member:

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© 2017 by Mr. Steven J. Muehler