On September 21, 2012, the Los Angeles Times published an editorial saying that it was time the Treasure sell its shares in GM and leave the auto industry to private investors.
The taxpayer bailouts of General Motors and Chrysler kept the companies afloat while they went through bankruptcy, averting liquidations that would have caused catastrophic job losses across the U.S. auto industry at the height of the recession. One consequence of the intervention, however, is that the government is still holding on to more than a fourth of GM’s stock. The Treasury Department argues that the time isn’t right to sell and that GM’s shares are undervalued by the market. Maybe so, and maybe the ultimate cost to the taxpayers would be lower if Washington held on to the shares longer. But there’s a more important principle at stake, namely that the government shouldn’t have an ownership interest in private companies.
That said, I advocate that the employees of General Motors and Chrysler purchase the stock now held by the federal government (taxpayers) using an Employee Stock Ownership Plan (ESOP) trust.
We need to arrive at a new market economy structure in which on one level the employees of a corporation could walk into management and demand, in collective bargaining, the use of an ESOP—not just to trade a single block of stock for wage concessions, but to redesign the future of the company and its employees. We need, as a society, the assurance that as a corporate employer grows, it builds ownership into its employees. All of them! When people are in a position to earn the wages of their capital as well as the wages of their labor, their company is in a position to be more competitive through lower labor costs and increased technological innovation, while achieving higher employee incomes through the employee’ capital.
Binary economist Louis Kelso was the architect and pioneer of the Employee Stock Ownership Plan (ESOP), which Kelso invented to enable working people without savings to buy stock in their employer company and pay for it out of its future dividend yield––on the promise of the capital investment’s future income.
The ESOP provides access by employees to capital credit to buy company stock and pay for it in pre-tax dollars out of what the assets underneath that stock yield. Bank loans are made to the ESOP trust that represents employees, instead of to the company (current owners). The trust gives the lender a note and with the borrowed monies makes the investment in the company stock. The company then issues stock to the ESOP trust. The company now has the money, which otherwise could have been borrowed directly without the ESOP (benefiting current owners), to make the planned investment and repay the loan from pre-tax forecasted future capital earnings. The company promises the bank to make pre-tax full-dividend payments to the ESOP trust to enable the trust to replay the lender. Assuming that it would take five years for that capital investment to pay for itself, at the end of five years the employees now own the full stock value in the expanded company.
Companies can use the ESOP as the credit mechanism to create employee ownership in ratios up to a 100 percent leverage buyout. Nothing has been taken away from the existing owners. However, using the ESOP, the existing owners will surrender the exclusive right to acquire more ownership in the company and have a smaller percentage of ownership in the total company, but they have not been prevented from making a fair rate of return on their thus-far accumulated ownership shares because the company earns a rate of return throughout the process. After the loan has been paid off with pre-tax earnings, the employees will have more earnings from capital and they will have more consumer power to purchase products and services. Multiply this by tens of thousands of employee-owned companies and the economy revs up to grow dramatically.
There are now over 11,000 profitable ESOP companies, of which 1,500 of those companies are worker majority owned, with workers paying for their stock shares out of future corporate profits, not by reducing their take-home labor worker incomes.
ESOPs work as designed when the workers receive the full property rights as owners, including full voting rights, not simply treated as beneficial owners with power concentrated at the top of the company, without any accountability or transparency. Unfortunately, some ESOPs have been structured so that the rights, powers, and benefits of ownership remain concentrated in a small non-accountable elite controlling corporate and financial governance. When the employees are owners, dependent on their income from the company’s bottom line rather than through ordinary labor wages and benefits, the workers’ economic interests are more invested to see that their company succeeds. In this way, each person in the company is empowered as a labor worker and as a capital worker (owner) and inspired to work together as a team to make better operational decisions to serve and maximize value to their customers.
Under our current financial system, the security (collateral) necessary to secure an ESOP loan must come from the company, and therein the current owners are providing the security to broaden employee capital ownership with the benefit that expanded capital ownership drives expanded consumer power to purchase products and services.
Under this scenario the company owners are “insuring” the risk without a benefit, which can be recompensated by paying the employees less labor wages, reduced pension benefits, and receiving government tax forgiveness benefits, which are written into the Internal Revenue Code.
With the ESOP, employees can acquire capital ownership with the earnings of capital. ESOPs have thus far only provided part of the solution, and the stock acquisition is limited to the employer company.
Robert Ashford, Professor of Law at the Syracuse University College of Law (New York) and a former lawyer in Kelso’s San Francisco law firm, specializes in the teaching of binary economics. He has expanded the ESOP trust into what he terms the “Super ESOP,” which includes multiple company diversification facilitated with private capital credit insurance or a government reinsurance agency (ala the Federal Housing Administration concept). Under Ashford’s plan, the promissory note can be offset to the government’s central Federal Reserve Bank in return for the cash equivalent of the amount of the loan, less an administrative fee. The only cost to the direct lending bank in making a loan to the corporation would be the administrative fee, or about 2 percent of the loan’s principal and then another 2 percent for capital credit insurance, with an additional quarter of a percent paid to the Federal Reserve Bank to monetize the loan and give the lender the same cash as it would have had if it had actually loaned money to the corporation. The lender’s cash loaned to the ESOP trust is replenished with the Federal Reserve Bank cash. When the company pays the ESOP trust enough money to enable the trust to repay the lender, the lender has to retrieve the note and pay back the Federal Reserve Bank. Thus, the loan cost would be essentially not more than 5 percent to allow ownership broadening financial capital to be invested in ownership broadening ESOP trusts to create new capitalists. Thus, national capital credit insurance replaces the requirement for the current corporate owners to pledge security.
ESOPs and other Kelsonian plans avoid the gambling trade and Wall Street firms that play with your money. The ESOP circumvents that. According to Kelso: “In a single transaction, you finance tools for the employer and ownership for the employees. The pre-tax yield of corporate assets of prosperous companies varies from 25 to 60 percent. The yield on secondhand securities is around five or six percent. Sure, with capital gains, you can get a little more, but don’t forget, that’s a zero-sum game; for every gainer, there’s a loser. Wall Street doesn’t fly any airplanes or raise any corn or do anything else in the way of producing products and services. It just plays games with your dough. And when you take it out in pensions, you’re going to get less than the company put in for you. You have to; that’s the dynamics of it.”
Other Kelsonian innovations include the Consumer Stock Ownership Plan (CSOP) and the General Stock Ownership Plan (GTOP), a plan designed to build capital ownership into politically designated classes of consumers within the jurisdiction of the authorizing government––state, local or federal. The ESOP, CSOP and GSOP are credit mechanisms that give corporate employees and others (non-corporate employees) access to stock ownership in future capital formation growth.
Capital credit is restricted to the purchase of assets that are expected to pay for themselves out of the revenue generated from the capital investment, which it financed, and therefore these assets are expected to earn a continuing flow of profit for whoever owns the assets. Consumer credit, on the other hand, does not generate its own repayment, and in order for the user to repay they must rely on other resources––for most Americans that means their labor worker earnings and personal savings.
Capital formation investments are made by companies annually based on projections a number of years out (at least 5 to 10 years) with the expectation that the investment will pay for itself as a result of sustainable growth and consumer demand. Thus, the concept embraces the idea that capital formation is self-financing. The question is who pledges the security and takes the risk of failure to return the expected yield from which to repay the loan.
Conventionally, most people do not have the right to acquire productive capital with the self-financing earnings of capital; they are left to acquire, as best as they can, with their earnings as labor workers. This is fundamentally hard to do and limiting. Thus, the most important economic right Americans need and should demand is the effective right to acquire capital with the earnings of capital. Note, though, millions of Americans own diluted stock value through the “stock market exchanges,” purchased with their earnings as labor workers, their stock holdings are relatively miniscule, as are their dividend payments compared to the top 10 percent of capital owners.
What historically empowered America’s original capitalists was conventional savings-based finance and the pledging or mortgaging of assets, with access to further ownership of new productive capital available only to those who were already well capitalized. As has been the case, credit to purchase capital is made available by financial institutions ONLY to people who already own capital and other forms of equity, such as the equity in their home that can be pledged as loan security––those who meet the universal requirement for collateral. Lenders will only extend credit to people who already have assets. Thus, the rich are made ever richer, while the poor (people without a viable capital estate) remain poor and dependent on their labor to produce income. Thus, the system is restrictive and capital ownership is clinically denied to those who need it.
Thus, as Kelso asserted: “The problem with conventional financing techniques is that they address only the productive power of enterprise and the enhancement of the earning power of the rich minority. Sustaining or increasing the earning power of the majority of consumers who are dependent entirely upon the earnings of their labor, or upon welfare, is left to government or governmentally assisted redistribution of income and to chance.”
Kelso created the ESOP as a credit mechanism, which, with the support of Senator Russell Long (Democrat, Louisiana), was included in the employee benefits sections of the Internal Revenue Code (Employee Retirement Income Security Act of 1974 [ERISA], also known as the Pension Reform Act) as legislation not to look like something new and different.