THE GREAT 401(k) HOAX Also by William Wolman and Anne Colamosca The Judas Economy THE GREAT 401(k) HOAX Why Your Family's Financial Security Is at Risk, and What You Can Do About It WILLIAM WOLMAN AND ANNE GOLAMOSCA PERSEUS PUBLISHING A Member of the Perseus Books Group Many of the designations used by manufacturers and sellers to distinguish their products are claimed as trademarks Where those designations appear in this book, and where Perseus Publishing was aware of a trademark claim, the designations have been printed in initial capital letters Copyright © 2002, 2003 by William Wolman and Anne Colamosca All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher Printed in the United States of America Library of Congress Control Number: 2003101560 ISBN 0-7382-0852-3 Perseus Publishing is a member of the Perseus Books Group Find us on the World Wide Web at http://www.perseuspublishing.com Perseus Publishing books are available at special discounts for bulk purchases in the U.S by corporations, institutions, and other organizations For more information, please contact the Special Markets Department at the Perseus Books Group, 11 Cambridge Center, Cambridge, MA 02142, or call (800) 255-1514 or (617) 252-5298, or e-mailj.mccrary@perseusbooks.com Text design by Janice Tapia Set in 11-point Berkeley Book by the Perseus Books Group First paperback printing, April 2003 10—06 05 04 03 Dedicated to Paul Chapman Co-director of the Employment Project, who has happily spent many years helping American families because he understood the issues way ahead of everybody else This page intentionally left blank Contents Acknowledgments ix PART ONE: Straddling Two Eras Chapter 1: Introduction Chapter 2: The Anatomy of a Hoax 17 Chapter 3: "Family Values": How the Hoax Was Perpetrated 37 PART TWO: The Lessons of History 57 Chapter 4: Rhyming the 1990s with the 1920s: Politics and Culture 61 Chapter 5: Rhyming the 1990s with the 1920s: Economic Comparisons 81 Chapter 6: The Postmillennial "Hangover": Why the 2000s Will Feel Like the Brave New World's Version of the 1930s PART THREE: The Elusive Search for Family Security 103 129 Chapter 7: Power Play: The Attack on Social Security 131 Chapter 8: Pension Power: Who Has It, How They Got It, and How It's Used Against the Family 151 PART FOUR: Beating Wall Street at Its Own Game 165 Chapter 9: Stillwater Investing: Drowning Out the Noise 167 Chapter 10: Stillwater Investing: The Positive Program 189 Chapter 11: The Political Agenda: De-Hoaxing the 401(k) 215 Afterword 223 Notes 241 Index 249 Acknowledgments OVER THE YEARS we have benefited mightily by our interaction with the finance and economic staff of BusinessWeek magazine Seymour Zucker, John Templeman, Michael J Mandel, Jeffrey M Laderman, Gary Weiss, and Bruce Nussbaum have been especially stimulating We are grateful to Joan Danaher of BusinessWeek for help with our charts, and to Steve McCarthy for helping us with technical support We would like to thank the many people we have met through our contacts with the Employment Project It wasn't just Paul Chapman who helped us to understand the real financial issues facing the American family They saw the 1990s in a different way from most people, and we learned a lot from their unique perspective The work of two academicians, Robert J Shiller of Yale University, and Jeremy Siegel of the University of Pennsylvania, has been invaluable to our understanding of the stock market We are especially grateful to Professor Shiller for updating his critical data on the longterm performance of the stock market The work of University of Notre Dame economist, Teresa Ghilarducci, helped us immeasurably in understanding how the private pension system in the United States came to be what it is Joe Spieler, our agent, did what an agent is supposed to do, and we thank him We are especially grateful to our editors at Perseus Nick Philipson and Arlinda Shtuni both took great care with our manuscript and gave us their best critical judgment They both spent many long hours helping us to shape the manuscript Above all, Perseus allowed us to write the book that we wanted to write For that, Elizabeth Carduff, executive 248 NOTES PAGE 175 "The original and most famous ," The early history of "random walk" theory is described in Burton G Malkiel, A Random Walk down Wall Street (New York: W W Norton, 1996) It accurately summarized the work of Fisher Black and Eugene Fama PAGE 175 "Random walks have ," Anthony Lo and A Craig Mackinlay, A NonRandom Walk down Wall Street (Princeton, N.J.: Princeton University Press, 1999) PAGE 176 "Its reasoning points ," Malkiel, Random Walk PAGE 177 "In early spring ," Anne Colamosca, "The Options Option," Columbia Journalism Review, May-June 2000 PAGE 177 "If you look ,'" ibid PAGE 177 "'A handful of editors ,'" ibid PAGE 179 "A real clue ," Jennifer Reingold, "Executive Pay," BusinessWeek, April 19, 1999 PAGE 179 "In a story for Forbes ," Gretchen Morgensen, "Stock Options Are Not a Free Lunch," Forbes, May 18, 1998 PAGE 180 "According to Hewitt Associates ," Hewitt Associates, "2001-2002 Salary Increase Survey Report," Fall 2001 PAGE 182 "These stock buybacks ," Charles Parlato, "The Profits Illusion Game," American Outlook (Summer 1999) PAGE 185 "Dow 36,000 ," James K Glassman and Kevin A Hassett, Dow 36,000 (New York: Crown Publishing, 1999) PAGE 186 "It was, instead, ," Jeremy Siegel, Letter to the Editor, Wall Street Journal, A23, April 14, 1998 PAGE 187 "Some of the m o s t ," Galbraith, Great Crash PAGE 188 "Leader after leader ," ibid Chapter 10: Stillwater Investing: The Positive Program PAGE 189 "Emboldened by his ," Bill Wolman, "Stocks Near Their Own Millennium," BusinessWeek, January 26, 1966 PAGE 199 "Economist Dean Baker ," Dean Baker, "Saving Social Security with Stocks: The Promises Don't Add Up," Twentieth Century Fund/Economic Policy Institute Report, 1997 PAGE 201 "Keynes once wrote ," Edward Chancellor, Devil Take the Hindmost (New York: Farrar, Straus and Giroux, 1999), p 155 PAGE 202 "Gerald M Loeb ," Gerald M Loeb, The Battle for Investment Survival (New York: John Wiley & Sons, 1995) Chapter 11: The Political Agenda: De-Hoaxing the 401(k) PAGE 218 "According to Hewitt Associates ," Steven Greenhouse, "Response to 401(k) Proposals Follows Party Lines," New York Times, February 2, 2002 Index 1930s company pension plans in, 158 economic stagnation during, 111 movement of gold into U.S during, 100-101 parallels with postmillennial era, 69-70, 113-114,190 1984 (Orwell), 171 1990s vs 1920s, 81-100 academics, role of, 85 American hubris, 67-68 amplification mechanisms, 83–84 boom-bust cycles, 87-88 cultural spirit, 70-75 debt, 94-95, 114-115, 119 dual economies, 110 free market extremism, 63 globalization, 99-100 historical overview of, 57-59 international financial imbalances, 100–101 low inflation and rapid growth, 82-83 margin investing, 118-119 new economy vs new era, 86 political and cultural factors, 61 technological changes, 93-94 "trickle-down" economics, 90 unequal distribution of wealth, 89-90 workplace culture, 75–80 401(k) plans bonds and, 213 corporate advantages of, 155 employee interests and, 201 historical frauds compared with, 10 inflation hedges and, 213-214 matching funds and, 151-152 mirroring investment strategies of wealthy, 212 origin of, 46-47 salary replacement and, 213 weaknesses of, 6, 132-134, 164 401(k) plans, reforms, 215-221 10% limit on investments in company stock, 219-220 cash contributions preferred over stock options, 218-219 ending bias against working women, 217 ending restrictions on employees ability to buy/sell securities, 217-218 ending restrictions on investment alternatives, 217 national mediation service, 220 pension counselors, 220 transaction fees, maintaining low level of, 218 403(b) plans, 12 529 plan, 210-212 academic influence as "amplification mechanism," 85-86 investment success entails suppression of, 169 random-walk theory, of stock prices, 175-177 role in discrediting Social Security, 148 role in promoting market participation, 49-53 Acampora, Ralph, 45, 84 249 250 INDEX accounting practices 401(k) stock options improve corporate profit picture, 218 "creative accounting" of U.S corporations, 3, 122,178 Enron and, IBM and, 181-183 postmillennial era and, 105, 193-194 activism, pension reform and, 216 advertising consumer spending and, 94 promotion of stock market, 45 AFDC (Aid for Dependent Children), 138 AFL (American Federation of Labor), 140 age of population economic growth and, 33-34, 58, 193 elderly benefits and, 142, 155-156 Aid for Dependent Children (AFDC), 138 Amazon.com, 202 American Express, 154 American family, see family, American American Federation of Labor (AFL), 140 American hubris 1990s compared with 1920s, 67-68 glossing over long-term implications of terrorist assault, 170 as psychological trap in postmillennial era, 126–127 American Medical Association as beneficiary of Medicare and Medicaid programs, 143 opposition to health insurance, 141 An American Tragedy (Dreiser), 74 "amplification mechanisms," 83–88 academics as, 85–86 Clinton's role as, 83-84 Federal Reserve as, 86–87 Wall Street as, 84-85 Anti-Poverty Program (President Lyndon Johnson), 138 Arthur Andersen, accounting firm, Asia as competitor for economic leadership, 128 U.S exports to, 124 Asian crisis (1998) IMF's response to, 97-98 impact on globalization, 123–124 asset allocation theories, 191 AT&T (American Telephone and Telegraph), 48 auto industry, 1920s, 83 baby-boomer generation as demographic basis of rising stock prices, 32-33 retirement and, 14 Bagehot, Walter, 56, 101 Baker, Dean, 199 Ball, Robert, 144 Banca d'ltalia, 55 banks separating investment banking from commercial banking and insurance, 38–39 separating investment banks from stock brokerages, 173 bear markets, 197 Beardstown ladies, 45 Bentsen, Lloyd, 63 Bernstein, Carl, 122 Bernstein, Michael A., 111–112 Bezos, Jeff, 202 bin Laden, Osama, 2, 124-126 Black, Fisher, 175, 177 Blodget, Henry, 173 Bobos in Paradise: The New Upper Class and How They Got There (Brooks), 71 Boesky Ivan, 44–45, 163 Bogle, John, 199 bond mutual funds, 209-210 bonds, 204-209 comparing safety with stocks, 185-186 comparing yields with stocks, 51 corporate, state, and municipal bonds, 208 fees associated with, 209 impact of interest rates on, 206 meeting financial goals with, 206-207 pros/cons of, 205 Treasury bonds, 206 bonuses, 180-181 boom-bust cycles, 87–88 Brandeis, Supreme Court justice Louis D., 14-15, 57,136 broadband services, as public utility, 113 Brooks, David, 71-72 Bush, President George Herbert Walker erosion of pension plans during administration of, 23, 163 INDEX unpopularity due to economic slowdown, 40 Bush, President George W assault on Social Security, 147 attempts to reassure American public, Enron bankruptcy and, erosion of pension plans during administration of, 23, 163-164 moral reform and high-mindedness in campaign of, 75 "no business meeting" ploy of, 188 privatization plan for Social Security, 130 tax cuts, 38 The Business Roundtable, 147 Calvinism, 52 campaign finance reform bill, 219 Canadian pension plans, 136, 157 capital impact of Enron scandal on, movement into U.S., 100–101 capital gains, as retirement income, 14 capitalism 1920s faith in, 68 globalization and, 123 Protestant ethic and, 52 semantics and, 96 See also free market capitulation, Wall Street euphemisms, 172-173 Cather, Willa, 72 celebrity cults, 70 Cezair-Thompson, Margaret, 73 Chambers, John, 202 Cheney, Vice President Dick, 10, 76 children, Clinton's failure to help, 41 Chile, free market lessons, 123 China, as competitor for economic leadership, 128 Cisco Systems corporate profits of, 30 stock picking and, 202 Citibank, merger with Travelers Insurance, 39 civil rights movement, 142-143 Clinton, Hillary, 64 Clinton, President William Jefferson collaboration with Wall Street, 42-43 compared with Calvin Coolidge, 64-66 251 compared with Warren Harding, 64 declaring end of big government, elected on basis of economy, 40 erosion of pension plans during administration of, 23, 163 failure to deal with problems of Medicare and Social Security, 78 failure to support old economies, 112 on family values, 41 turns away from progressive wing of Democratic Party, 63-64 unequal distribution of wealth during administration of, 89-90 uses prosperity to prevent impeachment, 58, 83-84 Cloward, Richard, 136 Coca-Cola, 202 Cohen, Abby Joseph influence of, 84 media glitter of, 167 popularity decline, 187 as Wall Street icon, 45 Colamosca, Anne, 177 COLAs (cost-of-living allowances), 129, 144 Cold New World: Growing Up in a Harder Country (Finnegan), 74 Cold War American hubris following victory, 67-68 American victory gives impetus to free market ideologies, 62-63 peace dividend following, 170 collective bargaining, 58 college education 529 plan, 210-212 other plans, 211 company unions, 95 compound interest, 50–51 conservatism, Republican, 40, 76 See also Republican Party consolidations, Wall Street euphemisms, 172-173 consumer debt, 90-95 1990s compared with 1920s, 94-95 American consumerism, 91-93 media reporting of, 93 savings and, 90 See also debt Continental Can Company, 157 Coolidge, President Calvin, 64-66 252 INDEX corporate bonds, 208 corporations benefit of stock options to, 178 controlling the rules of the game, 179-180 creative accounting, 183 disregard for employees, 131-132 executives benefits, 179 level of debt in, 115 opinion surveys regarding power of, 79 protection of interests by, 76–77 resistance to defined benefit plans, 216 scaling back or abandoning 401(k) plans, 219 corrections, Wall Street euphemisms, 171-172 corruption, 119-122 comparing 1920s with 1990s, 122 indifference of public to, 120–121 mob involvement in Wall Street, 121 The Corruption of Politics (Drew), 78 cost-of-living allowances (COLAs), 129, 144 Coulter, David, 39 Cowles Foundation, 175 Cox, James D., 62 creative destruction paradigm (Schumpeter), 111 credit card debt, 92 culture, 1990s vs 1920s celebrity cults, 70 literature, 70, 71-75 shallowness of life, 70–71 debt, 114-119 1990s compared with 1920s, 114-115 interest rates and, 105 relationship to GDP, 116 trade deficit and, 114–116 underlying stock market investments, 117-119 See also consumer debt defined benefit plans AT&T's introduction of, 48 commitment of companies to workers, 48 corporate management of, 155 corporate resistance to, 216 erosion of, 53-54 as long term liability on corporate balance sheets, 47 replaced by defined contribution pension plans, 23 termination of employees by Continental Can Company, 157 types of pension plans, 11 defined contribution pension plans advantages to corporations, 155 stock market dependence of, 23 types of pension plans, 11 delusions, stock market always a good time to buy stocks, 18–24 baby-boomers guarantee rising stock prices, 32-34 mass participation guarantees rising stock prices, 24-32 stock market perks will compensate for damped-down wages, 34-36 Democratic Party Clinton turns away from progressive wing, 63-64 family values and, 41 demographics baby-boomer generation and, 14 fallacy of basing rising stock prices on, 32-33 relationship of age to economic growth, 33-34 Denby David, 61-62 Depression Economics (Krugman), 97 depression, market bubbles and, 19-20 deregulation Enron bankruptcy and, mergers resulting from, 58 developing nations competitive advantage in postmillennial era, 128 Wall Street's embrace of globalization, 123 dividends disdain for, 185 inadequacy as basis of retirement income, 12-13 reemergence of, 200 unequal distribution of, 28 Dobbs, Lou, 45 dollar prolonged decline in value predicted, 117 U.S trade deficit and, 114 Dow 36,000 (Glassman and Hassett), 185-186 INDEX Dow 40,000 (Elias), 51 Dow Jones Industrial Average price-earnings ratio and, 23 tying family security to, 47–48 Dreiser, Theodore, 73-74, 96 Drew, Elizabeth, 62, 78, 122 dual economies 1990s compared with 1920s, 110 as cause of economic stagnation, 111 role in 1930s, 111-112 Dumenil, Lynn, 90 economic growth inflation and, 82-83 population age and, 33-34 economic nationalism, 125-126 economic stagnation historical periods of, 111 investment principles for periods of, 190-191 postmillennial era and, 165 prolonged slowdown predicted, 58 economic triumphalism, 127 Economics (Samuelson), 25 Edsall, Thomas Byrne, 147 education 529 plan for, 210-212 delusions regarding funding of, 18 Wall Street's advocacy of corporate profits as basis of support for, 27-28 Ehrenreich, Barbara, 53, 75, 138 elderly, see age of population electric motor, role in freeing women to enter workforce, 94 electric utilities, economic growth of 1920s and, 83 Elias, David, 51 employee Keogh plans, 12 employee stock ownership plans (ESOPs), 12 employment attack on security of, 77 impact of global economy on, 69 impact of Internet on, 112 replacing high-tech labor with equipment and computer programs, 105 See also workers Employment Retirement Income Security Act (ERISA), 157, 158, 220 253 The End of History (Fukuyama), 62 England, see Great Britain Enron scandal conflict of interests on part of investigating committees, 62 forcing employees to hold company stock, 10 impact on profit reporting, 194-195 negative political and economic effects of, 3-4, 120 reveals weaknesses of 401(k) plans, 2, 132 environmental standards, 77, 125 ERISA (Employment Retirement Income Security Act), 157, 158, 220 ESOPs (employee stock ownership plans), 12 Europe competition with U.S following WWI, 69 pension plans in, 157 exchange rates, flexible system of, 99-100 fallacy of composition applied to mass participation in investing, 25-26 baby boomers and, 33 distribution of income and, 88 Fama, Eugene, 175, 177 family, American Clinton's policies and, 41 corporate manipulation of pension funds at expense of, 157-159, 219 financial security of, 217 pension plans and, 129 tying security to Dow Jones Industrial Average, 47–48 unreliability of employer benefits to, 132 Wall Street pushes stocks as basis of financial stability, 37 family values Clinton hijacks Republican positions, 41 as prop for corporate "free market" interests, 134 Wall Street's appeal to, 35, 41-45 FASBE (Financial Accounting Standards Board), 182 federal deficit factors in reduction of, 115 impact of attack on WTC, 116 254 INDEX Federal Reserve as "amplification mechanism," 86–87 comparing influence in 1990s with 1920s, 86 regulation of margin investing by, 117-118 See also Greenspan, Alan Feldstein, Martin, 148 fiction, 1990s compared with 1920s, 70 See also literature Fidelity Magellan, 174 Financial Accounting Standards Board (FASBE), 182 financial disclosure rules, SEC, 176 financial madness, 1990s vs 1920s, 17 Finnegan, William, 74 fiscal policy, see monetary and fiscal policy Fitzgerald, F Scott, 70 flexible exchange rate system, 99-100 Ford, Henry, 95 Frank, Thomas, 76 free market dangers of blind allegiance to, 106 end of Cold War and, 62-63 extremism of 1990s and 1920s, 63, 76 faith in, globalization and, 58, 123 ideology of, 96–98 See also capitalism Friedman, Milton, 192 Fukuyama, Francis, 62 Galbraith, John Kenneth "bezzle" theory of, 119–121 on market corrections in 1930–31, 171 on the "no business" meeting, 187 on role of "speculative make-believe" in market excesses, 82 gambling, stock picking as form of, 203-204 Gates, Bill avoidance of dividends by, 185 disproportionate wealth of, 31 GDP relationship to debt, 116 relationship to profits, 26–27 Germany economic consequences of Versailles Peace Conference, 87 as economic leader in 1960s, 127 left wing opposition to capitalism in 1920s, 68 pension plans in, 129, 136, 157 Ghilarducci, Teresa on company paternalism, 152 on company pension plans in 1930s, 158 on decline of pension plans in 1990s, 154-155 on use of pension funds by corporate pension managers, 156–157 Gingrich, Newt Private Securities Litigation Reform Act of 1995, 62 on Social Security and Medicare, 41 Ginnie Maes, 207-208 Glass-Steagall Banking Act, 38–39 Glassman, James K., 185–186 globalization 1920s vs 1990s, 99 Asian crisis (1998) and, 123-124 expansion of American-style capitalism, 123 impact on unions, 161 impact on workers, 69-70, 105-106, 156 labor and environment issues and, 125 literature and, 73 political implications of the bin Laden movement to, 124-126 weaknesses in international financial system and, 124 gold compared with stocks, 49, 51 gold standard, 99 movement of gold into U.S in 1930s, 100-101 Goldman Sachs, 63, 84 Goldwater, Barry, 143 Gompers, Samuel, 140 Gordon, Robert, 109 government federal deficit of, 115 inability to sustain cuts in spending, 116 reaction to corruption in, 120 government securities, 207 Grasso, Richard, 120 Great Britain left wing opposition to capitalism in 1920s, 68 pension plans in, 136, 157 INDEX The Great Crash (Galbraith), 82, 171 The Great Gatsby (Fitzgerald), 70 Great Society programs, 143 Greenspan, Alan Clinton's cooperation with, 64 conversion to new economy, 86 on Dow 36,000 argument, 185 as god of finance, 39 reaction to Asian crisis, 123-124 warning regarding irrational exuberance, 23 Greider, William, 123 Grow Rich Slowly: The Merrill Lynch Guide to Retirement Planning, 51 Ha Jin, 73 Halberstam, David, 63-64 Harding, President Warren, 64 Hassett, Kevin A., 185-186 health care AMAs opposition to health insurance, 141 Medicare and Medicaid programs, 143 privatization of, 108 shrinking benefits for retirees, 132 Hewlett, Sylvia Ann, 41 high tech, see new economy Hoffa, James, 161-162 Hoffman, Frederick J., 139-140 home equity loans, using for stock investments, 118–119 Hoover, President Herbert, 75-76 hub reporters, 93 human resource departments, 152-153 Hymanjr., Edward, 119, 170 IBM, accounting practices of, 181-183 IMF (International Monetary Fund) free market policies of, 97-98 reaction to Asian crisis, 123-124 imports, U.S Asia crisis (1998) and, 98 consumer spending and, 91 impact of cheap imports on U.S economy, 124 income funds, 200 index funds, 198–200 India, 128 individualism, 52 255 inflation 40l(k) plans and, 213-214 economic growth and, 82-83 inflation-adjusted returns in postmillennial era, 196-197 information technology economic growth of 1990s and, 82 prolonged slowdown predicted in postmillennial era, 104-105 installment buying, 94 insurance AMA's opposition to health insurance, 141 holes in Social Security system leads to boom in, 142 self help doctrine and, 137-138 separating investment and commercial banking from, 38-39 Social Security seen as insurance instead of welfare, 138-139 U.S social insurance system, 136, 158 interest rates impact on bonds, 206 increases expected in post-millennial era, 105, 193 Internal Revenue Service (IRS), antidiscrimination rules regarding pensions, 158 international financial imbalances reflected by movement of capital into U.S., 100-101 U.S trade deficit and, 114–116 International Monetary Fund (IMF) free market policies of, 97-98 reaction to Asian crisis, 123-124 Internet, impact on jobs and wages, 112-113 Interpreter of Maladies (Lahiri), 73 investment banks tradition of separating from commercial banking and insurance, 38-39 tradition of separating from stock brokerages, 173 investments 401(k) plans as primary mechanism for long term, 12 capital gains and, 14 comparative yields of, 49 dangers of listening to Wall Street, 167-168, 174 256 INDEX delusions regarding stock investments, 18 dividends and, 12–13 impact of Enron scandal on, 3-4 inflation-adjusted returns in postmillennial era, 196-197 margin investing and, 117–119 movement from U.S to faster growing economies, 116 reducing administrative costs of, 198-199 safe investing in postmillennial era, 190 technological innovation and, 110 unrestricted choices of investment alternatives for holders of 401(k) plans, 217 investor confidence, price-earnings ratio and, 23 iron law of profits, 26-27 IRS (Internal Revenue Service), antidiscrimination rules regarding pensions, 158 Italy, standard of living in, 55 Janus Fund, 174 Japan as economic leader in 1970s and 1980s, 127 insufficiency of savings and hard work demonstrated by, 54-56 stock market decline (1989), 24 jobs, see employment; workers Johnson, President Lyndon, 143, 189 junk bond era, 163 Kaufman, Henry, 187 Kennedy, Joseph, 31, 44 Kennedy, President John F assasination of, 142 leadership role contrasted with that of Clinton and Coolidge, 65 "new economics" of, 189 Kennedy, Robert, 162 Keogh plans, 12 Keynes, John Maynard on the case against stock picking, 201 on impact of Versailles Peace Conference on German economy, 87 on long term investing, 25 role in improving economic policy, 192 King Jr., Martin Luther, 142-143 Krugman, Paul on Asian crisis (1998), 97 on depression economics, 98–99 warning on evaporation of retirement savings, 108 La Follette, Robert, 136 labor, see union movement labor-management relations, 77 labor standards, 77 Lahiri, Jhumpa, 73 layoffs, recession and, 2, left wing politics, undermined by "Red scare" in 1920s, 139 Levy Institute of Economics, 116 Lewis, John L, 140 Lewis, Sinclair, 71-72 Link, Arthur S., 63 literature 1990s vs 1920s, 70, 71-75 globalization and, 73 Livermore, Jessie, 44 long term investing, pros/cons, 25 Loo, Anthony, 175 Lucent, 10 Lynch, Peter, 174 Major Barbara (Shaw), 131 Malkiel, Burton G., 176 Malthus, Thomas Robert, 32, 111 management fees 401(k) plans and, 218 bonds and, 209 investments and, 198-200 margin investing, 117–119 Marshall, Ray 162 matching funds corporations scaling back, 10, 151-152 erosion of, 216 voluntary nature of, 7, McCoy, Donald R., 65 media companies, conventional thinking of, 93 Medicaid, 143 medical savings accounts, 76 Medicare attack on, 135-136 Clintons failure to deal with problems of, 78 INDEX Gingrich on, 41 medical savings accounts as substitute for, 76 social pressures of 1960s lead to, 143 Meeker, Mary, 173 Mencken, H L criticism of middle class by, 71 on Samuel Gompers, 140 view of America compared with that of Dreiser, 74 mergers deregulation and, 58 repeal of Glass-Steagall Act and, 38-39 valuation games and, 183 wave of (1990s), Merrill Lynch, 43-44 Microsoft corporate profits, 30 middle class Mencken's criticism of, 146 Social Security's bias towards, 138-139, 146 Milken, Michael, 44-45, 163 The Millionaire Next Door, 53 Mills, Wilbur C., 129 "Missing Middle" (Skocpol), 133 Mitchell, Charles E ("Sunny Jim"), 3, 122 mob, involvement in Wall Street, 121 Mobius, Mark, 67, 123 monetary and fiscal policy historical improvements in, 192 inability to prevent downswing in new economy, 107-108 risk of relying on as means of ending recession, 106 money, dominant role in politics, 62 Montgomery Ward, 48 Morgensen, Gretchen, 179 mortgage-backed securities, 207 municipal bonds, 208 mutual funds as basis of long-term financial security, 47 bond mutual funds, 209-210 income funds, 200 lack of consistency in performance of, 174-175 Myles, John catalogs attacks by business on Social Security, 148 257 on erosion of economic status of elderly, 142 on role of Nixon administration in development of modern welfare state, 144 on "Social Security wealth", 145 NAFTA (North American Free Trade Agreement), 97 Naidu, Chandrabubu, 72-73 Nasdaq 60% decline in value of, 61 declines in 2001,84-85 tech wreck and, 24 National Bureau of Economic Research, 148 national mediation service, 401(k) plans, 220 nationalism, economic, 125-126 New Deal, erosion of safety net created by, 58 "new economics" (Kennedy and Johnson), 189 new economy, 106–114 compared with old economy, 108–110 distribution of income and, 88 dual economies in, 111–112 historical record of new technologies and, 107, 110 information processing and, 82 job trade-offs and, 34 level of investment in, 106-107 monetary policies and, 107-108 "the new metrics" replaces p/e ratios, 185 reasons for growth of, 33 slowdown in growth paralleling 1930s, 113-114 Wall Street and, 86 "the new metrics", 184-185 Nickel and Dimed: On (Not) Getting By in America (Ehrenreich), 53, 75, 138 Nixon, President Richard M., 129, 144-145 "no business meeting" ploy, 188 no-load funds, 198 North American Free Trade Agreement (NAFTA), 97 old-line economies compared with new economy, 108–110 creative accounting practices of, 183-184 failure of Clinton-Gore to support, 112 globalization and, 105-106 258 INDEX One Market Under God (Frank), 76 One World, Ready or Not (Greider), 123 O'Neill, Paul, 77 options investing, as form of gambling, 203-204 "The Options Option" (Colamosca), 177 Oracle, corporate profits of, 30 Orloff, Ann Shola, 137 Orwell, George, 171 Other People's Money (Brandeis), 15, 136 p/e ratios, see price-earnings (p/e) ratio Parlato, Charles, 182-183 peace dividends, post Cold War, 170 pension counselors, 401(k) plans, 220 pension plans, see also defined benefit plans; denned contribution pension plans American family security and, 129 corporate manipulation of, 155-156 corruption of post-Civil War plan, 137 deterioration during 1990s, 154-155 discrimination against women in, 159-161 elder security and, 155–156 failure of private pension plans, 16, 152-153, 221 as long term liability on corporate balance sheets, 46-47 origin of 401(k) plans, 46–47 reforms needed, 215 traditional (denned benefit) vs 401(k) (defined contribution), 11 undermined by free market presidents, 162-164 union management of, 161-162 pension policies British, 136, 157 Canadian, 136, 157 European, 157 German, 6, 129, 136, 157 U.S., 6, pension reserves, 48-49 Piven, Frances Fox, 136 political mobilization, bin Laden movement and,125-126 Ponzi, Charles, 14 Ponzi schemes, 14 portability, of 401(k) plans between jobs, 10 postmillennial era accounting reforms, 193-195 American hubris and, 126-127 compared with 1930s, 69-70, 113-114, 190 competitive advantage of developing nations in, 128 economic difficulties facing U.S., 69 economic stagnation, 165 forces undermining stock market, 103-105 investment strategies for, 198-201 price-earnings ratio in, 196-197 See also stock market; postmillennial era price-earnings (p/e) ratio explanation and variations of, 22 Glassman/Hassett arguments for radical increases in, 185-186 historical chart of, 21 investor confidence and, 23 in postmillennial era, 196-197 stock valuation and, 20, 183 Private Securities Litigation Reform Act of 1995, 62 privatization free market and, health care and, 108 pension plans and, 129-130 Social Security and, 16, 149, 216 productivity increases in output per man-hour (1995-1999), 82 new economy gains, 109 relationship to wages in 1960s, 144 profits comparing executive share with family share, 179 inadequate to support education and retirement, 27-28 new economy vs old economy, 108-109 relationship to GDP, 26-27 relationship to wages, 144 "trickle-down" economics and, 89 unequal distribution of, 28-29 Protestant ethic, 52 The Protestant Ethic and the Spirit of Capitalism (Weber), 52 Protestant Reformation, 52 Putin, Vladimir, race, see civil rights movement random-walk theory, of stock prices, 175-176 INDEX REACT (Retirement Equity Act), 158-159 Reagan, President Ronald erosion of pension plans during administration of, 23, 162-163 family values of, 40 labor unions during administration of, 63 wants to cut Social Security in order to save it, 146-147 real estate, compared with stocks, 49 recession, March 2001, 2, "Red scare", impact of left wing politics, 139 Regulating the Poor (Cloward and Piven), 136 Reich, Robert, 63-64 Religion and the Rise of Capitalism (Tawney), 52 Republican Party economic conservatism of, 40 George W Bush's conservative policies, 76 rejecting progressive wing of Bull Moose era, 63 right wing advocacy of global free market economy, 58 right wing attack on Social Security, 13 retirement denned contribution pension plans and, 11-12 inadequacy of corporate profits as basis for, 26 risks of depending on 401(k) plans, 6-7 Social Security as main source of retirement income, 145–146 stock investments and, 18 Wall Street advocates corporate profits as basis of support for, 27-28 Retirement Equity Act (REACT), 158-159 Reuther, Walter, 48, 152 ring wing, Republican Party advocacy of global free market economy, 58 attack on Social Security, 13 risks, 401(k) plans, 10 Roberts, Gene, 177-178 Rogers, Jimmy, 67 Roosevelt, Eleanor, Roosevelt, President Franklin Delano, 140-142 Roosevelt, President Theodore, 63 Roseman, Herman, 43 259 Rowen, Wingham, 113 Rubin, Robert as Clintons Treasury Secretary, 63, 66 as god of finance, 39 Wall Street orientation of, 78 Rukeyser, Louis, 45 S&P (Standard & Poors), declines in 2001, 84 salaries, see wages Samuelson, Paul A., 25 savings declining levels in 1990s, 90 medical savings accounts, 76 negative level in 1998, 92 Siegel's emphasis on, 51–53 Schor, Juliet B., 91 Schumpeter, Joseph A., 111 Schwarz, John E., 89 Securities and Exchange Commission (SEC), 176 SEEPs (simplified employee pensions), 12 self help doctrine, 135-139 bias reflected in Roosevelt's Social Security plan, 141-142 as obstacle to social insurance plans in U.S., 137-138 roots in 19th century capitalism, 136 semantics, Wall Street's, 171-173 September 11 attack, see World Trade Center, attack on Shaw, George Bernard, 131, 134-135 Shiller, Robert J on 401(k) plan as a "Ponzi" scheme, 14 on 401(k) plan as means of mimicking economic strategies of the wealthy 66-67 on "amplification mechanisms", 83 on Greenspan's influence on acceptance of new economy, 86 Siegel, Jeremy criticism of Glassman/Hassett argument, 186 role in promoting participation in stock market, 25, 49-53 simplified employee pensions (SEEPs), 12 Skocpol, Theda, 133 Slessarev, Helene, 143 Smith, Ladie, 73 Smithers, Andrew, 12, 171 260 INDEX Social Darwinism, 136 Social Security attacks by corporations, 132-133 attacks by Republican right, 13 attacks on, 135-136 benefits extended to agriculture and domestic services, 142 birth of (Roosevelt Phase), 139-142 business perception of "crisis" in, 146–149 challenges facing, Clinton's failure to deal with problems of, 78 compared with private pension plans, 156 cost-of-living allowances (COLAs) and, 129 discrimination against women, 146, 160 expansion of programs under President Lyndon Johnson, 143 Gingrich on, 41 as insurance instead of welfare, 138-139 limitations of, 35 middle classes supported by, 139 need to increase payments from, 221 Nixon's reforms to, 144–145 privatization pressures on, 16, 76 socialist taint in post-Cold War era, 62 Social Security Act of 1935 compared with plans in Europe and Canada, 157 depression of 1930s overcomes resistance to, 129 evolution of, 145 privatization and, 216 Roosevelt's role in passage of, 140 Social Security Commission (2001), 147, 149, 163 Solow, Robert, 85–86 The Sopranos, 121 Standard & Poors (S&P), declines in 2001, 84 state bonds, 208 Steere Jr., William C., 42 stillwater market factors effecting, 193-195 investment principles for, 190-191 investment recommendations, 198–201, 215 lessons of history, 191-193 See also postmillennial era stock market 1920s boom, 17 1990s boom, academics promote participation in, 49-53 bubbles and depressions, 19-20, 22 debt underlying investments in, 117–119 financial disclosure rules governing, 176 gambling and, 203-204 mass participation in, 24 money managers performance and, 174 peace dividends of post-Cold War era, 170 postmillennial era, forces undermining growth, 103-105 random-walk theory, 175-177 retirement investing and, 12, 15, 214 as rich man's game, 31 stacked against average investor, 180 volatility of bear markets, 197 stock market bubbles caused by flight from reality, 22 stagnation following, 191-192 stock market, postmillennial era, 191-201 accounting reforms, 193-195 authors' forecasts compared with Wall Street's, 195-197 effectiveness of economic policies, 192 impact of aging population on economic growth, 193 impact of interest rates on, 193 investment strategies for, 198-201 stagnation following market bubble of 1990s, 191-192 Wall Street's hype compared with historical facts, 192 stock options corporate tax breaks and diluted share value from, 178 creative accounting and, 178 unequal distribution of, 180–181 regulating stock contributions to 401(k) plans, 218-220 stocks case against stock picking, 201-203 concentrated ownership of, 29 delusions regarding investing in, 18 historical performance of, 15-16, 19-22 price-earnings ratio and, 23 INDEX promoted as ideal investment, 45 stock prices compared with wages, 34 Stocks for the Long Run (Siegel), 25, 49, 186 Taft-Hartley Law of 1947 blocking worker control of pension plans, 221 reforms needed to, 217 restrictions on unions, 156, 161 Taiwan, economic strength of, 128 Tawney, R H., 52 taxes Bush's use of tax cuts to avoid economic slowdown, 38 declining receipts from, 105 inability of tax policy to prevent downswing in new economy, 108 tax breaks in 401(k) plans, 11 tax breaks in 529 plan, 211 Teamsters' union, 162 techno-optimism, 81 technological innovation, cycles of instability following, 107, 110 telephone, economic growth of 1920s and, 83 Temin, Peter, 99 The Theory of Probability (Keynes), 201 TIAA-CREF, 199-200, 212 trade deficits, U.S debt and, 114–116 Travelers Insurance, merger with Citibank, 39 Treasury bills comparing yields with stocks, 51 denominations and purchasing, 207 do-it-yourself investing, 208 safety of, 206 "trickle-down" economics, 88-90 triumphalism, 127 see also American hubris Truman, President Harry S., 142 trusts, 209-210 The Twenties (Hoffman), 139-140 UAW (United Auto Workers), 152 UMW (United Mine Workers), 140 Undershaft, Andrew (from Major Barbara), 131-132, 134-135 union movement company unions and, 95 Hoover stifles resurgence of, 76 levels of participation in 1990s, 78-79 261 pension fund management by, 161-162 role in spread of defined pension plans, 48 undermined by "Red scare" in 1920s, 139-140 weakened by Reagan policies, 63, 77 unit trusts, 209-210 United Auto Workers (UAW), 152 United Mine Workers (UMW), 140 United States consumerism in, 91-93 economic difficulties of postmillennial era, 69 economic hubris of, 67-68 exports to Asia, 124 imports, 91, 98, 124 movement of capital and gold into U.S during 1930s, 100-101 pension policy of, 6, social insurance in, 136, 158 trade deficits, 114 as world power following WWI, 68 U.S savings bonds, 207 valuation, stocks creative accounting and, 184 market bubbles and, 20 "the new metrics", 184-185 p/e ratios, 22 Vinik, Jeffrey, 174 wages compensating for low wages with stock options, 18, 34-36 decline in real wages, 1920s and 1990s, 95 globalization and, 69 inequality of women's, 146, 160 new economy vs old economy, 108-109 relationship to productivity in 1960s, 144 "trickle-down" economics and, 89 Wall Street analysts role in amplifying success of 1990s, 84 baby boomers and, 32 Clinton administration's collaboration with, 42-43, 63, 78 education and retirement and, 27-28 262 INDEX Wall Street continued family financial security and, 37 family values appeal of, 41–45, 47 globalization and, 123 investors, freeing from influence of, 165-168, 186–187 mob connection to, 121 promises vs history, 20 return to normalcy following attack on WTC, semantics of, 171–173 similarity of relationship with Clinton and Coolidge, 65 The War Against Parents (Hewlett and West), 41 war on terrorism costs of, 105 political mobilization and, 125–126 wealth compound interest and, 50–51 concentration of, 29, 31 decline of wealth in Japan, 55 distribution of, 53, 89-90 Weber, Max, 52 Weiss, Gary, 120 welfare capitalism, 76, 95 welfare programs, self-help bias against, 138-139 West, Cornel, 41 What Workers Want (Freeman and Rogers), 78-79 Whirlpool, 30 white collar workers, see workers Wolff, Edward N on distribution of stock ownership, 13 on distribution of wealth, 31, 53 on numbers of households holding stocks, 25 Wolman, Bill, 107-108, 189-190 women entering labor force, 94 pension plans and, 159–161 reforming discriminative biases against, 217 Social Security benefits and, 146, 160 Worker Representation and Participation Survey of 1998, 78 workers denned benefit plans and, 48 employment security of, 77 forces arrayed against interests of, 153-154 globalization, impact on jobs and wages, 105-106, 156 globalization threats to, 69-70 opinion surveys of, 78-79 pension plans, control of, 217 profit share declines in 1990s, 179 replacing high-tech labor with equipment and computer programs, 105 risks of 401 (k) plans borne by, 10 workplace culture, 1990s vs 1920s, 75-80 attacks on employment security, 77 comparing Bush (George W.) with Hoover, 75-76 protection of corporate interests, 76–77 World Trade Center, attack on economic weakness predating, 169 impact on federal deficits, 116 patriotic response to attack on, World Trade Organization (WTO), 125 .. .THE GREAT 401(k) HOAX Also by William Wolman and Anne Colamosca The Judas Economy THE GREAT 401(k) HOAX Why Your Family's Financial Security Is at Risk, and What You Can Do About It WILLIAM WOLMAN. .. middle-class Americans that they can live off the income that they receive from stock ownership, just like the rich It is a promise that is impossible to fulfill: It is the great 401(k) hoax Income... debated The danger in the post–WTC crisis is that this entire debate will virtually disappear, leaving the United States exposed to an intergenerational crisis of unprecedented severity But the post–WTC,