Investing in Inequality

I’m Bill Stant and I’m ready to rant.

All private investing, including Socially Responsible Investing, involves investing in inequality. This is because inequality is ubiquitous and inescapable in market economies. Remove inequality and you remove all rational reasons for competitive economic activity. To abolish inequality you must abolish poverty. In a society without these burdens there is no possibility of gains to be had through investing. Sounds great to me! But, well, here we are, living in a class hierarchy that requires competitive markets which are premised on class inequality and it’s enforcement through poverty and fear.

I know this is bleak. But what if there were ways to invest in inequality that fight inequality? Can we invest to fight poverty? The answer to both questions is yes, but only because capitalism create it’s own gravediggers and equips them with shovels. Or perhaps, for present purposes, we should confine ourselves to garden trowels.

It might seem counter-intuitive, but poverty is profitable because it is so bad in so many ways. It can cause despair, which can lead to crime. And poverty frightens many who are not yet poor. This fear can also lead to crime. Sometimes I wonder which came first: Crime? Or the law that it violates? If it’s true that all wealth originates in labor and that therefore all private property originates in theft, it surely follows that crime came before the law that protects it.

Private for-profit prisons are evidence enough that poverty is profitable. We’re taught that crime doesn’t pay. But we’re never taught for whom crime doesn’t pay. Presumably criminals who get caught and are punished do not profit from their crimes. But there are corporations who’s shares trade on the stock market who profit from the government contracts through which we outsource justice. Indeed there are many people and institutions who might not get paid if crime stopped paying.

Prisons, private or public, generate demand for food service, healthcare, engineering and maintenance services, uniforms for the inmates and the jailors, surveillance systems, training services, tear gas, lethal injectables, batons, truncheons, guns and ammunition. So crime does pay, after all. The question is who gets paid? We can be sure that the rank-and-file employees of the prison-industrial complex each, as individuals, get paid the least of all, especially if they are part of the prison labor force. Many non-incarcerated prison employees would surely work elsewhere if a good enough job could be found.

It is true that there are workers employed in this complex by choice because they are on a mission, or they are engaged in ministry, in service to the needs of the prisoners. But for most of the employees, perhaps we should think of them also as prisoners of poverty in their communities. Prisons seem to follow poverty just as they follow from poverty. Local political leaders and community boosters desperate to “create jobs†compete with one another to have a prison built in their community. If they succeed they add a new line to the school-to-prison pipeline, a line of employment for workers to assist in the incarceration of other workers.

There is an even more fundamental way in which poverty is profitable. Poverty, and the fear and desperation that it inspires, are profitable also because, as a rule, they tilt the balance of power in the labor market in favor of demand. This means that poverty is a foundation of our economic system. It is as indispensable to profits today as chattel slavery was to the accumulation of capital that made this industrial revolution possible. Poverty therefore requires regulation. Occasionally we have to shore up the foundations.

Occasionally governments intervene in ways that favor workers who are the suppliers of labor. Recent distributions by the federal government of cash to tide households and businesses through unemployment caused by the covid crisis are the most recent exception to the rule. What is telling is that it took a life-threatening crisis and a shut-down of nonessential economic activity to prompt the government to send out checks.

Equally telling was the official reinstatement of fear and desperation by state governments which opted to prematurely end enhanced unemployment benefits. Entitlement, a concept so often used to cast aspersions on the alleged lassitude of the poor, takes on a whole new meaning here. Employers complained to their hirelings in state legislatures and governor™s mansions that federal government relief was inimical to their entitlement to their other more numerous employees™ labor.

Crises, like the seemingly endless covid pandemic, throw these essential truths of our social system into stark relief. The systemic and persistent nature of crisis after crisis wakes people up to the need to do things differently. This includes people who are fortunate enough to have money to invest.

We are a social species. We exist at a collective level of reality simultaneously with our existence as individuals. This is why, aside from the sociopaths among us, systemic poverty and inequality trouble us. We might not fully comprehend or find acceptable, at the collective level of our existence, all of their implications. But we know we’d rather not, as individuals, be implicated. This is what drives Socially Responsible Investing.

One of the three pillars of Socially Responsible Investing is Community Investing. It is good and commendable to invest in stocks, bonds, or mutual funds that exclude private prisons or that take a dim view of excessive CEO compensation. Such portfolio screening is one of the other two pillars of Socially Responsible Investing. But true Socially Responsible Investing must include Community Investing.

Community Investing directs capital to communities starved by mainstream finance of desperately needed resources. It is not difficult to add Community Investing to a portfolio. Managers of some socially responsible mutual funds may seek out Community Development Financial Institutions (CDFIs) to hold the cash positions in their portfolios. At least one bond mutual fund specializes in bonds backed by loans issued under the Community Redevelopment Act, a law that requires banks to make loans in underserved communities where they would not otherwise invest.

A more activist and direct form of Community Investing can be found in the Community Investment Note. These are issued by institutions founded for the purpose of directing capital to underserved communities. Such institutions underwrite the risks of loaning to community organizations and CDFIs involved in the fight against poverty. You, the investor, agree to commit a modest part of your portfolio to the Community Investment Note until it matures. And you do so fully aware that the Note is paying you less in interest than you might earn in a more mainstream bond investment.

Community Investment Notes carry risks similar to investing in bonds. They are not covered against loss by FDIC the way bank deposits are. Like all investments Community Investment Notes involve the risk of loss. They are illiquid investments with a maturity date. Borrowers whose loans back the notes could default. Interest rate increases could cost the investor the opportunity to invest elsewhere for a higher interest rate. While the market for these notes is small and not highly correlated to the mainstream bond market or the stock market, they are not immune to volatility in those markets. Their value could fall below what an investor paid for them.

For the investor willing and able to accept these risks in a small part of their portfolio, for whom a Community Investment Note is suitable, it offers the opportunity for meaningful participation as a financial supporter of social progress in a variety of areas. Funds invested through Community Investment Notes support, among other things, affordable childcare, affordable housing, access to healthcare, environmental remediation, energy efficiency, job creation and training, and small business incubation. They are especially effective in their focus on opportunities for the empowerment of women and people of color, assisting them in charting new directions for their communities.

Community Investing will not bring capitalism to an end. Indeed, it may encourage participation in the mainstream economic arenas of capitalism. But this participation, thanks to Community Investing, will be on terms of greater equality with other competitors. And capitalism is strange in it’s many contradictions. Community Investing strengthens working class communities, making their residents more effective participants, if they choose to participate, in the movement to replace capitalism with a more just society. And in the meantime, redirecting capital in a way that empowers those living in poverty to shake off despair and improve their lives on their own terms makes society a safer and more nurturing place for all of us.