Human Capital Today Finds It Must Reap Its Own Rewards


On Labor Day, 1995, the reward for being human capital in America--a typical worker--is undeniably on the decline.

Pay raises are minimal or nonexistent, despite the relatively low unemployment rate. Unions’ power continues to erode. The frenzy of corporate mergers and outsourcing of work is intensifying the threat to job security.

Now contrast the average worker’s plight with the status of American financial capital--that is, invested dollars.

U.S. stock prices are at or near record levels, with the average domestic growth-stock mutual fund up a hefty 26% this year. The profitability of major American companies has rarely if ever been higher. And inflation remains low, providing great real returns on both stocks and bonds.


It’s probably not a coincidence that what is bad for many workers is good for many investors. If Lenin were alive, he’d sigh and say nothing has changed--the rich get richer on the straining backs of the proletariat.

But something else probably is non-coincidental as well: that at a time when you don’t get much of an additional return for being human capital, the members of the proletariat are much more willing to turn what savings they have into the kind of capital--mainly stocks--that actually provides a meaningful return.

Hence, in a sluggish economy and with the overall U.S. savings rate depressed, money is still pouring into stock mutual funds at a tremendous pace, underpinning this year’s hot bull market on Wall Street.

The Investment Company Institute, the fund industry’s chief trade group, reported last week that net new cash flow into stock funds reached $13.9 billion in July, up sharply from $8.2 billion in June and the biggest monthly inflow since August, 1994.

What is truly impressive, however, is not any particular month’s cash take for the funds, but rather the consistency with which average Americans have continued to invest in the stock market since 1992.

Stock funds’ net new cash flow totaled $130 billion in 1993, $119 billion last year and is on track to reach $110 billion this year. Despite the stock market’s slump last year as interest rates doubled, stock funds never had net outflows.



Somehow, even facing stagnant incomes, many American workers are finding the wherewithal to invest significant sums in stock funds, often through 401(k) savings plans or other retirement vehicles.

Look around at your own family, neighbors or co-workers and you know that stock funds aren’t just the province of the wealthy. The ICI counted 59 million separate stock fund accounts at the end of 1994. Even allowing for those well-off investors who own multiple funds, we’re still talking about many millions of individuals with a stake in the market via funds.

Wall Street’s bears, of course, don’t find this comforting at all. The masses merely chase hot markets, the bears say--an argument that leaks badly when one considers that people continued to buy even as the market stumbled in 1994.

Nor are the bears impressed by studies that consistently show that individual investors have very long-term time horizons. People will panic and sell when disaster strikes, the market’s naysayers insist. Yet the vast majority of fund investors held on after the 1987 stock market crash.

What the most severe bearish arguments seemingly boil down to is a declaration that the average worker has no business being in the market, and that as long as these supposed amateurs are buying stocks, it must be time for the “true professionals” to sell.

The average worker, however, might reply to that snobbish line like so: As long as I can’t count on my own capital contribution to the economy (i.e., labor) to command a decent real return, I’m going to push what I can into financial markets, where capital still gets some respect.



Purely from an Economics 101 point of view, that’s exactly what should be happening, says Gordon Richards, economist at the National Assn. of Manufacturers in Washington. “Rational workers ought to be putting more of their money into the stock market” to reap a share of the returns flowing back to businesses, he says.

Of course, without substantial pay raises, many workers will say they have no more money to invest. And corporate critics charge, quite convincingly, that companies’ focus on profit at the expense of worker pay gains could ultimately be ruinous for business by pauperizing its very customer base.

But for the foreseeable future, there is a strong case to be made that what is distressing for worker paychecks will continue to be bullish for stock and bond markets, rewarding those who find a way to invest.

You think stock prices are already too high, with the Dow Jones industrial average at 4,647.54? Maybe. But with American companies focused as never before on boosting shareholder returns, imagine what would happen if stocks took a sharp drop, or languished for very long.

Stock buybacks would simply accelerate. More important, corporate cost-cutting efforts would be redoubled. Production, if necessary, would move to lower-cost locales worldwide. Anything to drive earnings, and stock prices, higher again--probably at the expense of many workers.

Indeed, “the historical record shows that periods of strong [corporate] profitability tend to persist,” says Richard Rippe, economist at Prudential Securities.


Business’ slavishness to the bottom line may be viewed as inhumane, but the cold reality is that the current global environment, with labor in great surplus and everybody welcoming capitalists, completely favors those who own the means of production.


It also favors low inflation and relatively low interest rates--an excellent environment for bonds--says William H. Gross, managing director at Pacific Investment Management Co. in Newport Beach.

“Three powerful economic stars--low wage growth, high consumer debt and favorable demographics [for higher saving by aging workers] have rarely if ever been in alignment as they are today,” Gross argues.

“Because they are, consumption and retail sales growth in the U.S. will be anemic at best over the next several years,” he says. “And because they are, 2% inflation will soon become the norm.”

Gross, one of the most respected deep-thinkers in his field, doesn’t minimize average workers’ pain in all this.

“History books may record that these economic trends favored the rich over the poor [and] fostered an ever-widening gap in the standard of living amongst Americans,” he allows.


But just as the millions of workers who also invest must sense, Gross knows that if he doesn’t cash in, someone else will be happy to have his share.

“Those with the capacity to save and invest must still be encouraged to take advantage of these glacial, inexorable trends,” he says.


* LABORING HARDER: From the factory line to gleaming office towers, many people say they are working more hours than ever. A1