Forced to Save

This post is a set of ideas spawned from reading a post on twitter

The New York Times reports on a new initiative by the Obama administration to increase savings. The plan is essentially a fiat order that small businesses auto-enroll their workers in 401K plans. Apparently, many big businesses auto-enroll workers in 401Ks.

This order sunk my heart as I've gradually come to the realization that the small business world isn't just a small version of big business. It is a unique thing unto itself.

Big business is driven by big capital in big money markets. Many small businesses have a more direct connections to physical equities in the local community. For example, an antique shop, traditional farm, construction company or design firm tend to directly invest capital into their doings.

Many of the workers in small firms end up investing in the same way ... often with the aspiration of starting their own small business.

People who are authentically engaged in this traditional type of small business are invested in the free market described by Adam Smith. Big business is more involved in capitalist world described by Marx.

I've come to realize that it is because small businesses are more directly connected with the equity of the company that small business tends to be the engine of economic growth.

Big businesses, which are the product of the big capital markets, tend to be engines of power politics and intrigue.

Obama's fiat that small businesses establish 401K programs for employees pulls a great deal of capital out of the small local business world and places it directly into the big capital market dominated by big business.

Obama's decision to force large amounts of equity out of the small local businesses and into big business is especially troubling in that the capital markets appear to be caught in a boom and bust cycle. Notice how our economy is being wracked by crisis after crisis including the DotCom Bust and the economic collapse of 2008.

Sadly, I don't think the dictate will stop the drain on American savings as the biggest challenge to savings isn't access to a bank account, but access to easy credit which lure people into spending more than they can afford.

Part of the reason the current downturn is so severe is that many workers made borrowing decisions based on the amount of money that they had in their 401K. Let's say a worker had $200K in their 401K. This person, incented by the mortgage deduction, would have been prone take out a higher mortgage and buy a bigger house than needed.

The economic meltdown in the financial sector wiped out much of the value of the 401K then put the highly leveraged house underwater financially.

The perverse economic incentives encouraged the worker to take on huge financial risks that the worker simply did not understand. Without the mortgage deduction and without the tax incentives for the investment, the worker is likely to have purchased a smaller house with less of a direct financial exposure to the mortgage.

On this new savings initiative. I give Obama an "A" for effort. Anything less would risk harming his self esteem.

As for the economics of the program, I dislike it because it is forcing all small businesses into an economic system that seems to be ruled by uncontrollable systematic risk. I would rather see diversity in the economy with small businesses investing directly in building equity and big business playing the capital game.