Getting Whole Again

Today, it is virtually impossible for most people who have been laid off from a high-paying job to find another high-paying job. The choice seems to be either to accept unemployment or underemployment.

But, if we unite, we can create a new economy with full employment and a rising standard of living for all. Then, we can all have high-paying jobs. This is possible because middle class, as a whole, has both the skill sets and the money needed to create a full-employment economy with a rising standard of living for all.

The problem is that the Congress of 1933 passed a pair of laws that prevent the middle class from pooling its money and investing that money in entrepreneurial corporations.

The middle class economy is based on entrepreneurship. Entrepreneurs create the jobs that sustain the middle class economy. But, the kind of entrepreneurship that creates net jobs and net economic growth requires non-debt funding, which is also known as equity funding, venture capital funding or simply investment.

Through its “sophisticated investor” requirement, the Securities Act of 1933 prohibits the middle class from investing its money in early stage entrepreneurial corporations. Instead, brokers direct members of the middle class who would otherwise invest in entrepreneurship into the secondary market.

The secondary market does nothing to foster entrepreneurship. “Investors” merely buy stock from its current owners instead of supporting entrepreneurship.

The secondary market is huge. The aggregate combined market capitalization of all of the NYSE and NASDAQ listed corporations is around $37 trillion. The middle class owns much of this stock. If the middle class had been free to do so, surely they would have used some of this money to fund entrepreneurship.

Hard scientific evidence proves that the middle class would only have had to invest a few tenths of a percent of their savings annually in entrepreneurship to create a full employment economy with a rising standard of living for all.

Venture capital amounts to about 0.2% of GDP, about $26 billion annually, nonetheless venture capital funded companies create 10% of US jobs and 18% of US revenue. Obviously, if venture capital had been 0.4% of GDP, revenue would be 18% higher, there would be no unemployment, no trade deficit and almost no national debt. Venture capital would have been at least this high but for the “sophisticate investor” requirement.

The “sophisticated investor” requirement is one of two laws passed in 1933 that, together, reduced venture capital levels to the point where the middle class became unsustainable. The other is 12 USC § 24 (7). This law prohibits banks from buying stock in any corporation for their own account, thus preventing banks from investing in entrepreneurial corporations.

Corporations need to be capitalized before banks can loan money to them, but banks cannot capitalize corporations. This creates a “Catch-22” situation that, ultimately, prevents the money that the middle class deposits into their bank accounts from being used to capitalize entrepreneurial corporations. This, in turn, prevents corporations from being born. This, in turn, prevents them from creating middle-class jobs and new economic growth.

The law, 12 USC § 24 (7), substantially, forces banks to put their money into loans and securitized debt instruments instead of venture capital. United States banks hold $52 trillion in debt plus another $20 trillion in securitized debt instruments.

Again, the banks would only have needed to convert around a tenth of one percent of their debt outstanding to venture capital investments to have created a full employment economy with a rising standard of living for all, no trade deficit and little or no federal deficit.

A sizeable portion of this money is based on middle-class deposits. If even a small amount of this money, money that belongs to the middle-class, had been used as venture capital, it would have been able to create this sort of full-employment economy.

The banks and Wall Street just lost $1.75 trillion on subprime mortgages. This is equivalent to about 67 years of venture capital at the 2004-2008 average rate of $26 billion per annum. This would have been more than enough money to create a full employment economy with a rising standard of living for all.

Although the banks were prohibited from investing in venture capital, Wall Street could, of course, have directed this money into venture capital and, if they wanted to, Wall Street could have created a full employment economy with a rising standard of living for all. But, there is a great deal of class animus in the United States and Wall Street simply won’t put investor money into venture capital.

Likewise, probably because of class animus, rich investors, including sovereign wealth funds, tend to put their money into Wall Street instead of putting their venture capital funds.

Probably as a result of class affiliation, most of the money that goes into venture capital funds comes from pension funds and retirement plans. In other words, since the pension funds and retirement plans are run by members of the middle class and manage middle class money, they are willing to invest in venture capital, but the rich are not. This demonstrates a strong class bias among investors, suggesting that the only ones who are going to invest in the venture capital needed to revitalize the middle class are other members of the middle class.

Regrettably, one would expect the same thing to be true of ethnic minorities. Blacks are the only ones likely to invest in the black economy. So, the “sophisticated investor” requirement that prohibits members of the middle class from investing in the venture capital required to support the middle class economy also prevents blacks from investing in the venture capital needed to support the black economy. This would apply to other minorities as well.

Furthermore, the class bias is getting worse. While Wall Street used to do 140 IPOs a year, they now only do a couple IPOs a year. They make so much money selling derivatives and government securities that they don’t want to bother with IPOs any more. IPOs, however, are a critical part of the process of raising venture capital and, hence, critical to the middle class economy and the minority economies as well.

Venture capitalists make their money by investing in early stage, high-potential growth corporations. They have the entrepreneurs issue new stock in their corporation and sell this stock to them. Later, they expect the entrepreneurs to either take their corporations public or sell out to another firm so that they can liquidate their position at a profit.

Now that Wall Street seldom does IPOs, the future of venture capital is in doubt. The only answer would be for the middle class to set up a middle investment banking community to serve the needs of the middle class.

Today, there are some minority venture capitalists, but there are no minority investment banking firms. We need to create minority investment banking firms to go with the minority venture capital firms. We also need to create more regional venture capital firms and more minority venture capital firms.

These new middle class and minority investment banking firms could do the IPOs that Wall Street is no longer willing to do. It would be better for both minorities and the middle class if these IPOs were sold via a “Dutch Auction” so that members of minorities and the middle class could have an equal opportunity to get in on the IPO.

During the late 1990s, when they still did IPOs, Wall Street firms gave favored clients access to IPOs in exchange for quid pro quos. For example, Wall Street firms would allow venture capitalists to get in on a hot IPO in exchange for the venture capitalists sending some hot IPOs their way. This cut out middle-class investors and minorities. This allowed venture capitalists and other favored clients to do stock flips. They could buy stock from the IPO and sell it for an enormous profit the same day.

These two laws, the “sophisticated investor” requirement of the Securities Act of 1933 and 12 USC § 24 (7) were a coordinated attack on the middle class. The goal was to eliminate the funding of entrepreneurship that was critical to maintaining the economic stability of the middle class. The same laws devastate the black economy and other minority economies as well.

There had been a similar attack on black America that started in 1896 with the Supreme Court ruling in Plessy v. Ferguson, 163 U.S. 537 which opened the door to “Jim Crow” laws. As soon as the Supreme Court gave them the go ahead, legislatures in the Deep South quickly passed “Jim Crow” laws and set up separate black schools to segregate the Deep South and undermine the social and economic opportunities afforded to the black people living in the Deep South.

The 1933 attack on the middle class was just an extension of the sort of thinking that led to the Ku Klux Klan, the “Jim Crow” laws, the public lynchings and the segregation. In this case, instead of the whites attacking the blacks, it was the rich attacking the middle class.

Since these laws are, substantially, “Jim Crow” targeting the middle class instead of black Americans, it is fair to call them “Jim Beaver” laws where the beaver represents the industrious middle class and well as the industrious minority populations that make up the middle class.

The “Jim Beaver” laws were modeled after the “Jim Crow” laws of the Deep South, but while the Jim Crow laws were written to increase the economic advantage of white people over black people, the Jim Beaver laws were written to increase the economic advantage of the rich over the middle class.

The congressional representatives and senators who wrote the Jim Beaver laws came up with disingenuous gobbledygook to sell the laws to the middle class.

The Jim Beaver laws take advantage of the fact that the middle class is dependent, either directly or indirectly, on entrepreneurship for their economic prosperity, but the rich are not. Entrepreneurs create jobs for themselves and for the middle class as a whole.

The rich depend on family money and social status for their income. So, even though their family money may have originally come from entrepreneurship, their current income is not dependent on entrepreneurship.

While the “Jim Crow” laws were enacted to “keep [black people] in their place,” the “Jim Beaver” laws were enacted to “keep the middle class in their place.”

The middle class and the ethnic minorities must unite to tear down the legal barriers that Congress has enacted to keep us in our place. Unless we succeed in this, few of us will ever get whole again. But, if we unite, we can tear down these legal barriers, then all of us can succeed.

The middle class economy is, ultimately, based on entrepreneurship. Members of the middle class start companies. Then, these companies provide jobs for the rest of the middle class. As a result, members of the middle class are, ultimately, dependent upon entrepreneurship for their livelihood.

The upper class derives their income from social status. Members of the upper class are not dependent on entrepreneurship for their income. This is why the upper class continues to get richer as everybody else gets poorer.

The Jim Crow and Jim Beaver laws were the outcome of invidious animus, or class hatred. The Jim Crow laws were written to make black people get poorer while white people got richer. The Jim Beaver laws were written to make the middle class get poorer while the upper class got richer.

The blacks in the Deep South became very poor. The American middle class has just suffered thirty-five straight years of decline.

We need to have a name for the legislation that we must get passed if the middle class or minority populations are ever going to get whole again. Since most legislation is named after its supporters, I have decided to call this the “Sieverding Plan.”

The “Sieverding Plan” will allow the United States to generate at least a trillion dollars per annum more funding for entrepreneurship simply by modifying Depression Era prohibitions to allow mainstream investors and banks to invest in new issue private stock. This would create a regulated free market for new issue private stock.

The “Sieverding Plan” will automatically create a full-employment economy with a with a rising standard of living for all, a growing middle class, upward mobility for all, opportunity for all, trade surpluses, budget surpluses, energy independence and a more green economy.

This full-employment economy will be created by using some of the $109 trillion that is now being tied up in low-economic-growth-impact activities such as debt funding, interbank loans and publicly traded stock to fund high-economic-impact entrepreneurship.

Today, venture capitalists represent the largest market for new issue private stock. Venture capitalists fund entrepreneurial corporations by buying new issue private stock from them.

According to venture capitalist Adam Grosser, a general partner with Menlo Park, Calif.-based venture capital firm Foundation Capital, “Although venture capital represents just 0.02% of U.S. GDP, it is responsible for an astounding 10% of all U.S. jobs and 18% of U.S. revenues… over the last 35 years, one job was created for every $25,000 worth of venture capital.”

It should be intuitively obvious that had venture capital levels had been 0.04% of U.S. GDP, instead of 0.02%, there would be full employment today, wages would be 18% higher, there would be no trade deficit and no budget deficit.

Entrepreneurship has such high economic impact because entrepreneurs create exciting new proprietary products. These products create new demand and satisfy old demand in new ways. This leads to net job creation, and contributes toward balance of trade and economic growth.

The creation of new demand positively impacts the balance of trade. New demand also impacts wages. More profitable companies tend to pay higher wages. This bids up overall wages and helps maintain a high standard of living.

In addition, each new job that entrepreneurs create tends to spawn several other jobs throughout the economy. So, entrepreneurship not only tends to creates a disproportionate number of new jobs, it also stimulates the creation of several times more jobs than it actually creates.

A New Regulatory Environment for Investors

The “Sieverding Plan” calls for allowing mainstream investors to buy into institutional venture capital funds and/or mutual funds based on institutional venture capital funds. This would enable mainstream investors to avoid some of the uncertainty associated with direct investments in newly issued private stock.

Statistically, professionally managed venture capital funds have the lowest risk and highest return of any category of investment. This would motivate investors to invest in venture capital.

Thus, given the opportunity, investors would provide enough venture capital to create a full employment economy, end trade deficits and end U.S. dependence on foreign oil.

A New Regulatory Environment for Banks

The Federal Reserve System should set up a program that will allow banks to invest in new issue preferred private stock without putting the banks at risk of failure. Perhaps, the Fed could allow banks to carry losses forward within the program. That way, banks would be punished for bad choices without putting the public at risk.

Ending U.S. Dependence on Foreign Oil

The “Sieverding Plan” will create the funding that entrepreneurs need to more rapidly develop algae-based biodiesel capacity. This will end U.S. dependence on foreign oil sooner.

Since the oil and gas industry already provides nine million jobs, it is entirely reasonable to think that the biodiesel industry could create over a million new jobs. This will spawn perhaps another five million new jobs throughout the economy bringing the total job creation to, perhaps, six million new jobs.

Most of these biodiesel jobs will be located in hardest-hit “rust belt” cities like Detroit, Michigan. These “rust belt” cities are mostly located along navigable inland waterways. This provides them with the water resources required for algae farming. In addition, the “rust belt” skill sets can easily be adapted to making the machinery required for algae farming, algae harvesting and biodiesel production.

Surprisingly perhaps, algae farming can clean up water polluted with fertilizer runoff, agricultural waste and municipal sewage. This will make it possible to restore 10,000 square miles of bountiful commercial fisheries in the Chesapeake Bay and Gulf of Mexico that have become dead zones. The restored fisheries will be as large as the state of Vermont. This will create tens of thousands of new jobs and reduce the need for imported fish.

But, cleaning up America’s streams, rivers, lakes, estuaries and oceans is not the only way that biodiesel will make the U.S. economy more green. Biodiesel has no net carbon footprint.

Since foreign oil makes up 46% of the United States trade deficit, it is entirely reasonable to think that ending oil imports and adding biodiesel technology exports would cut the trade deficit in half.

What Should Have Been Done

Since investment in entrepreneurship has the greatest positive economic impact of all investment categories, Congress should have regulated the financial service industry in a way that would maximize investment in entrepreneurship while preventing the sort of rampant abuses that contributed to the Great Depression. The Congress of 1933, however, failed to strike that balance when they passed a law, part of 12 USC § 24 (7), prohibiting banks from investing in any corporation. Congress should have made an exception for the purchase of newly issued, private stock, the economic activity that contributes the most to the economy.

The ban on banks purchasing previously issued stock was, however, a good idea because purchasing previously issued stock contributes little to the economy yet would subject the banking industry to the systemic risk associated with asset bubbles. Furthermore, continuing the ban on banks buying publicly traded stock for their own account would force banks to put more money into newly issued private stock where it would create the most economic benefit.

Resale of new issue private stock is restricted. Consequently, asset bubbles are less of a problem with new issue private stock than they are with publicly traded stock.

The uncertainty associated with newly issued, private stock has to do with varying performance of the individual investments. As the institutional venture capital industry has demonstrated, this uncertainty can be managed by following Ben Franklin’s advice; “Don’t put all your eggs in one basket.”

Congress also overreacted when they inserted a sophisticated investor requirement in the Securities Act of 1933 that prevents mainstream investors from purchasing newly issued, private stock.

Because entrepreneurs create new demand, entrepreneurship became so critical to the growth and stability of the United States economy that these laws actually caused the current economic situation by reducing funding for entrepreneurship to levels that were too low to sustain the growth and stability of the U.S. economy.

The Dire Consequence of Congress’s Mistake

Banking and securities laws that undermined investment in entrepreneurship allowed the impact of global competition to dominate the United States economy beginning in the early 1970s. This, in turn, caused 34 years of middle class descent into poverty, 34 continuous years of annual trade deficits and ultimately precipitated the financial and economic crises of 2008-2009.

Trade deficits occurred when demand fell to the point where the United States economy could no longer produce as much as it consumes. Demand fell because there wasn’t enough entrepreneurship to create enough new demand to overcome the demand lost due to globalization. The banking and securities laws caused the insufficiency of entrepreneurship that allowed the negative impact of globalization to dominate the economy.

Annual trade deficits first appeared in 1971. They became a permanent fixture of the economy in 1976. The annual trade deficit peaked at $760 billion in 2006. From 1971-2009, the aggregate trade deficit was $7.516 trillion. Adjusted for inflation, this is ten times more than United States loaned to all of its allies during World War II. This $7.516 trillion is equal to more than 90% of the aggregate market capitalization of all 3,800 NASDAQ listed companies combined. For the last decade, the annual trade deficit has averaged $565 billion. For 2009, it was $381 billion.

The trade deficits substantiate the decline in production that has had such a large human cost in terms of lost jobs, particularly the loss of high-paying jobs, lost opportunity, uncertainty, falling wages, rising indebtedness, downward mobility, high and rising unemployment and the like.

Trade deficits put large amounts of U.S. currency in foreign hands. U.S. trading partners had little else that they could do with the money aside from investing it in U.S. capital markets. This created capital markets that were awash with money. This, in turn, drove the creation of the sub-prime lending market and simultaneously created stock market and housing bubbles that collapsed in 2008-2009 causing financial and economic crises a $10 trillion loss of asset value a major recession.

While the decades ending in 1999 and 1989 saw a 20% increase in jobs, the decade ending in 2009 saw a 0% increase in jobs and left the economy with 10% and growing unemployment. If this trend continues, unemployment could hit 30% by 2019. The “Sieverding Plan” will reverse this trend so that this doesn’t happen.

Current Funding Levels

By closing the market for newly issued private stock to banks and mainstream investors, the Depression Era banking and securities left wealthy investors, pension funds and retirement plans as the only significant sources of funding for entrepreneurship.

For 2008, institutional venture capital firms invested $28.1 billion and wealthy individuals, known as angel investors, invested another $19.2 billion for a total of $47.3 billion. Institutional venture capitalist firms manage investments in newly issued private stock for pension funds and retirement plans.

The NYSE and NASDAQ have a combined market capitalization of $37 trillion. The amount of bank loans outstanding is $52 trillion. The interbank lending market is $20 trillion. This adds up to $109 trillion.

The trading of NYSE and NASDAQ listed stocks usually involves buying and selling of previously issued. This activity doesn’t provide any funding for businesses. The money is merely being stored. Storing money has no positive economic impact.

Some of the NYSE and NASDAQ trading involves initial public offerings or IPOs. This provides liquidity for investors who purchased newly issued private stock. This motivates investors to purchase newly issued private stock, which is critical to maintaining economic growth and stability. So, it does have an indirect positive economic impact.

Banks provide about $11 trillion in loans to business. The prospective value of innovation and the commercialization thereof cannot be used to secure a loan. As a result, bank loans tend to go into servicing existing demand rather than creating new demand. As a result, bank loans to business, though necessary, have low economic impact.

The remaining $41 trillion worth of bank loans support some form of consumption, real estate being the largest form of consumption supported. Some of this consumption is necessary. Much of it is ostentatious. Consumption does little to increase aggregate demand for U.S. made products. Hence, it too has low economic impact.