An Interview with James Glassman
Jim Glassman is among the most prescient observers of political and economic trends in America today, with an understanding of first economic principles that brings to mind the work of the late Henry Hazlitt. Mr. Glassman sat down recently with CEI UpDate editor Max Schulz and his brother Nick, a television producer with New River Media, to discuss his thoughts on the changing nature of the economy and the emerging investor class. Portions of the interview can be seen in The Stockholder’s Society, a special documentary broadcast on PBS. Mr. Glassman, a fellow at the American Enterprise Institute, has been a syndicated columnist for the Washington Post and host of the PBS show TechnoPolitics. He is currently financial columnist for Reader’s Digest, and the co-author (with Kevin Hassett) of the recently published Dow 36,000.
QUESTION: We hear a lot today about the so-called "new economy." Are we in a new economy, and if so what does that mean?
MR. GLASSMAN: I think we are in a new economy, although I’m not one to rush to judgment on that. The reasons we might be are that we have global free trade, or something close to it, which means that there are more participants. There are more people who are building things, who are trying to find the best way to produce things, trying to find new inventions, just more participation. And there are more markets into which to sell things. The second reason is technology, there’s no doubt about that. Technology is making Americans, and much more the rest of the world, more productive. But it’s good to be skeptical about that because globalization and technology can also force prices down, which is good for consumers but can be quite difficult on businesses, and we may see a lot of bankruptcies as a result.
QUESTION: You’ve talked about and written–along with others like Larry Kudlow–about the emergence of an "investor class." What is meant by that?
MR. GLASSMAN: An investor class is shorthand for the group of people who have investments in the stock market. This is not a group that has a self-identification. I don’t think the people who are in it say, "Oh, I am a member of the investor class." But more and more, it is a group of people who have similar kinds of political interests, and maybe cultural and social interests as well. It’s just beginning to form as a cohesive whole, but there’s no organization, I think it’s important to say. So, it’s basically just people who own stock.
That said, I think the emergence of the investor class is probably the most significant political event in the last 10 years and I think it will help shape politics for the next 20 years, maybe for the next half-century. It’s enormously important, and very much unrecognized. If you talk to people in Washington, they don’t quite get it. But, as more and more people own stocks, it changes their political perspective. It changes their attitude toward corporations, toward taxes, and in fact, I think it changes their attitudes toward lots of cultural things, and social things, as well. It helps them to buy into the economy. It helps to remove the "labor versus management" dichotomy. It’s a transforming event, and we are kind of in the middle of it. But, we’re much farther along than most people think.
QUESTION: What are some of the ramifications of a developing investor class?
MR. GLASSMAN: We’re just beginning to see the political ramifications of broad stock ownership, of the power of the investor class. In 1997, for example, the president did not stand in the way of a capital gains tax cut, nor in the way of the Roth IRA changes in individual retirement accounts. And I think one of the reasons was that it becomes very difficult to argue that stock ownership is just for the rich, capital gains benefits are just for the rich, when half of Americans own stock.
In that sense, tax and regulatory policies that seem beneficial to stock ownership are more likely with the advent of the investor class. And if we get any kind of privatized Social Security or something similar to President Clinton’s idea of USA accounts, we could have 80 or 90 percent of Americans owning stock. At the margin, Americans will be much more likely to be in favor of policies that are beneficial to businesses, because they will own them.
QUESTION: What about social and cultural ramifications?
MR. GLASSMAN: In culture and society, I would say there are two kinds of changes. One is more of a buy-in to the system. I think there will be less of the sort of "labor versus management" tension, and more of a feeling that we’re all in favor of a booming economy. It’s not just you, the rich people, or you, the managers, who are benefiting.
Second is something much broader, and that is an explosion in wealth. It’s very important that as broad a segment of the population benefit from that as possible. That explosion of wealth is going to change American lives in many ways. It will mean a different kind of work, it will mean more leisure to go back to school. It will mean people will not retire the way they have in the past. It will perhaps mean even different kinds of family arrangements. So, I think the implications are profound from a wealth explosion that’s broad-based.
QUESTION: Talk a little bit more about the erosion of the tension between labor and capital, between workers and managers.
MR. GLASSMAN: As more Americans own stock, the traditional dichotomy, the traditional friction between managers and workers–which is, by the way, a distinction that really bothers me, but those terms exist–or between labor and capital is breaking down, and I think it will break down even more. People will feel they have a much greater stake, not just in the company for which they work, because I think that’s also going to change, but, in the economy as a whole. More and more people are not going to work for just one company, but will essentially sell their labor, their ideas, to more than one buyer. These things are going to change profoundly in the next 10 years, maybe even sooner than that. So, this workers vs. management model is a very old one that I think we ought to just toss out.
QUESTION: What, in your judgment, are currently the greatest obstacles to investing for middle-income and low-income people?
MR. GLASSMAN: There are two great obstacles for low-income and middle-income people investing. One is a lack of understanding about what the stock market is all about, that it is a wonderful and safe place to put money for the long-term. But I think they’re learning more and more about that. Now, a lot of Americans have the problem of just having a longer-term orientation, and that may be more of a problem for low-income people than for high-income people. But that’s almost confusing the issue. However, I think a lot of people still don’t understand that much about stocks.
Second, and probably more important, they just don’t have the cash. If you were somebody who is just starting off in life as a worker, just entering the labor market, taking your first job or your second job in your mid-20s or your late 20s, or even your early 30s, you’re getting whacked with big payroll taxes. And this is the time of your life when you should be doing actually the most investing, because time is the single most important element in building a big nest egg. It’s more important to invest money between the ages of 25 and 35 than it is between the ages of, say, 45 and 65, far more important, and yet people don’t have the money. And I completely sympathize with that, because it’s being taken away with taxes. You’re not making that much money anyway because you’re just starting off. But really, I think the culprit is the payroll tax combined with the fact that we have a tax code that really discriminates against savings, and we tax savings two, three, four times if you include the inheritance tax. So, it’s not a very good system. And those are really the main elements.
QUESTION: What is "day trading," this phenomenon that everyone hears about, and is it a good thing or a bad thing?
MR. GLASSMAN: "Day trading" is a term people are confused about. There is technical day trading, where people sign up with a firm and basically sit at a rented terminal all day, buying and selling stocks. There are very few people doing this, maybe a few thousand, maybe it’s 20,000. It’s an extremely risky thing to do. Without accusing everyone who does it, I think in most cases it’s a scam.
A lot of people also use the term "day trading" simply to mean very short-term trading, which you can do over the Internet, on your own, through an account at Schwab or Ameritrade or many of the other ones. That’s not really day trading, though some refer to it as such. In my opinion it’s not a very good practice; you can’t make much money by jumping in and out of stocks. Even if the transaction costs seem to be low, even if you’re only paying $10 a trade, they’ll eat you up in the end. And there’s lots of evidence and research on this. I’m not really alarmed by day trading, however. In fact, either of these kinds of day trading add liquidity, meaning that there is more likely to be a buyer if you, as a long-term investor, want to sell a stock, or a seller if you want to buy it. So that’s good, actually.
As for these people who are doing it, a lot of them, if they’re excessive, they’re going to get burned, we know that. And they’ll be out of the market, and we don’t have to worry about them. It’s their own personal decision. I wouldn’t deny them that decision. But it’s not one that I would make. It’s akin to going to Las Vegas or Atlantic City and betting at blackjack. The main difference is that in blackjack the house has the advantage, in the stock market the house does not. But if you do enough trading, the transaction costs–that is to say the commissions and what’s called the spread between the buy and sell price–will eventually have the same effect as the house advantage in gambling.
QUESTION: Should a portion of Social Security be privatized, and if so how much?
MR. GLASSMAN: All of Social Security should be privatized. By privatized I mean people should have that choice. They can stay in the old system if they want, but they should be given the choice of taking money which now goes in payroll taxes into the Social Security system, and use that same amount of money to go into long-term investments. I think most of that investment should be in the stock market, a private account system, if you want to call it that.
Now, I’d be quite happy to see half of the money that people currently put into payroll taxes [be privatized]. But I think eventually it will all go into it, because that’s the most beneficial use of that money.
QUESTION: America has been trending away from defined benefit plans, which were so popular especially in the wake of World War II, in favor of defined contribution plans. If Social Security were privatized, would that remove all the cushions that workers have against fluctuations in the market?
MR. GLASSMAN: There’s a place for a defined benefit kind of retirement investment, as well as the defined contribution kind. To make the distinction simply, a defined benefit retirement plan gives you a consistent amount of money throughout your retirement. With a defined contribution plan you are more dependent on what happens with the ups and downs of the market. However, you can have a defined contribution plan where you are making the investments yourself rather than your employer or the government guaranteeing you something.
I really don’t see any reason for Social Security to be the provider of the consistent portion of someone’s retirement income or benefits. But I do believe everyone needs a sensible kind of retirement plan. You should not be retiring with vehicles that can bounce up and down all the time. That’s not a good idea. There are lots of ways to do it without having the current system, which returns very little and which forces people into a kind of a collectivized system in which many people don’t want to participate and shouldn’t have to participate.
QUESTION: There are those who argue that people can’t be trusted with their own money, they’re not smart enough to make investments. What do you make of that?
MR. GLASSMAN: I believe people are smart enough and prudent enough to be trusted to make their own retirement decisions. If they are not right now it’s only because they don’t have that responsibility. Unless people are given the responsibility, they are not going to display an aptitude for it, almost certainly. People today buy their own homes; 60 percent of Americans own their own house. The government doesn’t buy them a house, saying, "This is a good house for you, we’ve decided this is the kind of house you’re going to have, just like we’re going to decide what kind of retirement plan you’re going to have." They buy their own food. They bring up their own children. I think they’re pretty good at those kinds of things. Now, not all of them. There may be 2, 3, 5 percent of Americans who can’t do it. But I don’t think we should force everyone into a system just because we have some people who can’t do it. We can make a provision for them.
This may sound contradictory, but I also believe that people need help and they need advice. People can do pretty well without it. They can certainly do as well as the Social Security system is doing for, let’s say, people who are now in their 30s and 40s. I mean, those people are going to get, if they’re lucky, a 1 or 2 percent return on Social Security, whereas they can be getting roughly three times that return with a mixed portfolio of stocks and bonds. So you definitely can beat Social Security, that’s easy. But to do the best, to really do well, you do need advice, and that’s mostly hand holding and planning, not stock picking.
The argument that Americans are not smart enough or prudent enough to handle their own investments is belied by the fact that more and more Americans have done extremely well in the stock market, and have invested in a very smart way, better than the experts in the last five years.
QUESTION: You make some compelling arguments in your new book that the stock market is tremendously undervalued. Would you touch on that a moment?
MR. GLASSMAN: Kevin Hasset–who is an economist at the American Enterprise Institute, used to be at the Federal Reserve Board, used to teach at Columbia–and I, a humble journalist, have written a book called Dow 36,000, which makes the case that stocks are extremely undervalued, probably by about two-thirds to three-quarters. We argue that if the Dow is 10,000 or 12,000, it really ought to be about 36,000 to 40,000 right now. We argue that we are underpricing stocks. I won’t go into all the details of our argument. The main thing we’re saying is that people have thought for way too long that there is a lot more risk in stocks than there really is. We’re not saying that stocks aren’t risky, they are. But they are nowhere near as risky as people think they are, and act as though they are. And as people begin to catch on to this–and they already have begun to do this–they will be bidding up the prices of stocks higher and higher.
QUESTION: Any concluding thoughts?
MR. GLASSMAN: I think we are on the brink of an enormous explosion in wealth. Kevin Hassett and I talked about this in the last chapter of our book. We just begin to speculate on it. You know, Lord Keynes said in 1931 that the economic problem will be solved in 100 years. And I think he had the timetable just about right. It’s hard for us to believe now, but really certainly in this country, and I think in most of Europe and probably a lot of Asia, you will have the vast majority of the population comfortable in the sense that they could probably cut down on their earning hours by half and still lead a very good life.
We’re going to have a lot more leisure, and we’re going to have to think about what we want to do with our lives. And we’d better start doing that thinking right now. I generally take an optimistic view, and I think we will see a blooming of spirituality, of education, of the arts. John Adams said 200 years ago something along the lines of, "I must study politics and war so that my children can study economics and animal husbandry," or whatever it was, so their children can study what he called "poetry and porcelain." I think we are getting to that stage, and the investor class phenomenon is part of it. We ought to begin to think about what life is going to be like with a lot of money floating around.
Just one example: as a result of what’s happened in Silicon Valley, there are a lot of people who have hundreds of millions of dollars, and are beginning to give it away. The actual giving away of money is not as easy as it sounds, and a lot of people are not making very good choices, because they’ve suddenly had this money thrust on them. That’s a big change, philanthropy as an important industry, that thousands and tens of thousands, or hundreds of thousands and millions, of Americans are going to be making. I think that’s where the future is going.