[1] No doubt economics plays a role in our polarization and social fragmentation. Harvard Law School Deputy Dean John Coates has authored a cutting edge book on economic trends that Lutheran ethicists need to address and that we all need to master in order to educate the Lutherans we serve to the new realities of the market. Coates notes that “the problem of 12” arises when a small number of actors acquire the means to exert outsized influence over the politics and economy of a nation (p.12). The US has faced this challenge previously, but in its latest version two new institutions – index funds and private equity funds – are creating new problems.
[2] It is important to understand what these institutions are (it’s likely only the economists among us know) and how they influence our economy and political discourse. Index funds are a collection of stocks or bonds sold to a variety of individuals and institutions. Such funds are designed to track the performance of the market index. They are passively managed, meaning they don’t actively pick securities or try to time the market. Instead, they buy stocks of every company listed on the index (such as the S & P Index) in order to match its performance. They are low cost and high yield. Leaders in this group of financial institutions include BlackRock, Vanguard, State Street, and Fidelity. Our own Thrivent offers such index funds. A sizable portion of retirement funds, particularly in 401(k) plans, are invested in index funds due to their low costs, diversification, and passive management approach, making them a popular choice for long-term retirement savings; many retirement plans offer a variety of index funds as primary investment options.
[3] Private equity funds are institutions which sell shares in companies not publicly traded or listed on the stock exchange. The big names of these companies include Apollo, Blackstone, KRK, and Carlyle. Pension funds, endowments and other large institutions have long turned to private equity to help enhance returns and diversify their portfolios.
[3] These financial institutions have become more significant players in the American economy. The latest index funds now collectively control more than 20% of votes on the Boards of S & P 500 companies. And equity funds have amassed at least $27 trillion of assets. Besides the amount of assets, these institutions are especially formidable and difficult to keep in check because they are private.
[4] Coates contends that the American economy has been largely comprised of public companies. Characterized by dispersed ownership, they have basically been run by managers. But this has entailed until recently the need for transparency in business, and such public information makes government regulation possible. Transparency has also provided organized labor with the information needed to pressure businesses for concessions in collective bargaining efforts (p.14). New challenges were encountered by businesses in the late 20th century with globalization and later by the computer revolution, by hostile takeovers. This has led American businesses to think in “global” terms, to engage in offshoring (the practice of sending services or production overseas), and to rely more on contractors that offer no job security and health benefits. Coates manages to tell the story of the origins of the widening labor-management wage and life-style gap convincingly and adeptly. Even with these (largely unpopular changes in the view of most Americans), business remained vulnerable to hostile takeovers by index funds and private equity funds (p.98). And today these two new types of business institutions own significant shares in the public-businesses in operation.
[5] Coates subsequently notes that because index funds and private equity funds are private, their advisors or managers have increasingly coopted power over America’s public businesses. These funds have proceeded to acquire enough shares in major public companies to be able to force shareholder-based decisions on many of these companies, often favoring decisions good for short-term gain over long-term profits. Plus it is effectively the managers of the funds who are casting the deciding shareholder votes. Nothing now prevents several of the administrators of these funds from colluding to change not only a public company, but also impact entire sectors of the economy. If one or two private equity funds own several of the publicly held businesses producing the same products, then these private funds (especially if they are consulting and discern mutual interests) effectively have a monopoly on the product. It should be evident, then, that decisions by the administrators of index funds and especially private equity funds have a significant impact on the economy and its businesses as a whole.
[6] More troublesome for Coates is that index and private equity funds are influencing politics and do so in undisclosed, secretive ways. He notes that in the 2022 Mid-Term elections these funds donated $347.7 million to political candidates (p.118). (I would add that The Wall Street Journal reports that $231 million was spent by private equity funds in the 2024 elections on contributions to candidates, with most of the money going to Republican candidates. As a shareholder with different values, I lament not having a say where the money deposited in my retirement funds and invested in these private funds go.) Coates also notes that no company owned by private equity funds needs to report to its stockholders. This makes it difficult to learn who is making political contributions, and to whom. This allows many wealthy people, who have amassed their wealth from careers in private equity, to influence politics without leaving a paper trail (p.117).
[7] Coates himself is no enemy of the funds we have been discussing. Their benefits must be taken seriously, he argues. Indeed index funds have produced huge gains for middle-class investors (p.130). Although many positive claims about the great returns on private equity funds have been made because they are private, data is hard to obtain to validate these claims (p.131). Coates does, however, determinedly call for disclosure and greater transparency (pp.130,132). He notes that necessary disclosures should include more frequent index fund reporting of their portfolios to the SEC (p.136). The rationale for the votes of these fund managers in shareholder board meetings of public companies should be reported to investors prior to the board-meeting votes (p.137). Coates additionally proposes regular engagement between the fund managers and their investors (p.137). Of course, as an accomplished lawyer and economist Coates is not naïve. He recognizes how limited these policies would be in stopping abuses by index funds and private equity funds, but he does not want us to undermine the positive contributions these funds are making to the economy (p.140). Realistically he contends that these funds, like capitalism itself, are both good and bad (p.142). But he insists, and I would join him in this regard, that we need to more actively promote the public oversight of the huge wealth that is now largely hidden by many private equity funds.
[8] How should Lutheran theologians and the church we serve respond to the challenges Coates’ book puts before us? Maybe we all need to start reading reports on what index funds and private equity funds do to the economy and make our findings available to others. As ethicists we encourage our colleagues, in Economics Departments in our university and colleges, to investigate these matters with us. Consequently we can pressure our Chicago offices and our Washington lobbyists to apply more pressure on politicians to achieve the transparency that Coates suggests we need. Personally, I am ready to work with others on these matters and concerns. Naturally the Norwegian Democratic Socialist in me has another suggestion; with generous government safety-nets for all citizens like in Western Europe we erode some of the most damaging effects of the market on which these rapacious index funds and private equity funds feed. By establishing a smaller market demand for their services, we could thereby diminish the power of these finds. Unfortunately as long as the policies of this incoming administration and an unfettered free-market ideology is still dominant and left unchecked, Coates’ ideas will have to suffice (at least until my dreams are realized).
