Economic Democracy And Binary Economics: Solutions For A Troubled Nation And Economy
Gary Reber, Revision 3.0 May 1, 2017
I would like to reflect on the direction I advocate for the nation and the American economy.
I am going to use various blanket statements in order to get the points across developed below. My goal is to start a conversation about a JUST Third Way to economic prosperity for all American citizens. Hopefully, others will contribute actionable policies and plans to further the rights of all Americans to broadly participate in America’s economic future.
WARNING! This is a “big picture” involved article and requires thinking about the propositions and solutions presented. It is long. Therefore, if you feel you cannot read through it in one session, I suggest you break it up into two or three sessions. During the first session, at least read through the topic “Economic Democracy Has Yet To Be Tried.”
During the late 1960s and throughout the 1970s, following university doctorate studies in economic development and urban and regional planning, I became a political economist and economic justice advocate. During that period I co-founded the advocacy-consulting firm Agenda 2000 Incorporated with my mentors Louis O. Kelso and John W. Dyckman.
Louis Kelso was a leading corporate and financial lawyer, and political economist based in San Francisco and the author of The Capitalist Manifesto (Random House 1958), The New Capitalists (Random House 1961), Two-Factor Theory: The Economics Of Reality (Random House, 1967), and later Democracy And Economic Power: Extending The ESOP Revolution Through Binary Economics (Ballinger Publishing Company, Cambridge, Massachusetts, 1986; reprinted University Press of America, Lanham Maryland, 1991). The first two books were co-authored with Mortimer J. Adler, President of the Institute for Philosophical Research, former professor of the Philosophy of Law at the University of Chicago, and author of The Idea Of Freedom. Kelso’s latter two books were co-authored by Patricia Hetter Kelso, his collaborator and wife since 1963. The four books present Kelso’s theory of binary economics (or the economics of reality), which describes labor and capital as independently productive and the financial tools for democratizing capital ownership in a private property, market economy where most products are exponentially made by physical capital. For more reading visit www.kelsoinstitute.com.
John Dyckman was Professor and Chairman of the Graduate School of Urban and Regional Planning at the University of California, Berkeley and the author of numerous books and articles on urbanization. Under Dyckman, I taught binary economic development theory in the graduate program while running San Francisco-based Agenda 2000 and the advocacy Institute For The Pursuit Of Economic Justice at Berkeley, which I founded.
Throughout this period I lectured at universities throughout the United States, England, and Europe, espousing binary economics and democratized, broadened individual capital ownership.
In 1974, I was a candidate for the United States Congress, running on an economic justice platform (see http://www.foreconomicjustice.org/?p=336). The year prior I testified before Congress on tax reform (see http://www.foreconomicjustice.org/?p=6641).
Economic Power Has To Be Universally Distributed
Binary economics and democratic capitalism, or what could be termed economic personalism, is founded on the principal that economic power has to be universally distributed amongst individual citizens and never allowed to concentrate. It is a value system based on the importance and dignity of every human person. The “pursuit of happiness” phrase in the Declaration of Independence was interchangeable in those times with the word “property.” The original phrasing was “the right to life, liberty and property.” “The pursuit of happiness” phrase was a substitute for the “property” phrase. In the forerunner of the Declaration of Independence and Bill of Rights, the 1776 Virginia Declaration of Rights declared that securing “Life, Liberty, with the means of acquiring and possessing Property” is the highest purpose for which any just government is formed. Democratizing economic power will return us to the innocence and economic power diffusion we had in a pre-industrial society where labor was the principal factor in the creation of wealth.
In simple terms, binary economics recognizes that there are two independent factors of production: humans (labor workers who contribute manual, intellectual, creative and entrepreneurial work) and non-human capital (land; structures; infrastructure; tools; machines; robotics; computer processing; certain intangibles that have the characteristics of property, such as patents and trade or firm names; and the like which are owned by people individually or in association with others). Fundamentally, economic value is created through human and non-human contributions. NOTE, real physical productive capital isn’t money; it is measured in money (financial capital), but it is really producing power and earning power through ownership of the non-human factor of production. Financial capital, such as stocks and bonds, is just an ownership claim on the productive power of real capital. In the law, property is the bundle of rights that determines one’s relationship to things. As Kelso and binary economist Patricia Hetter put it, “Money is not a part of the visible sector of the economy; people do not consume money. Money is not a physical factor of production, but rather a yardstick for measuring economic input, economic outtake and the relative values of the real goods and services of the economic world. Money provides a method of measuring obligations, rights, powers and privileges. It provides a means whereby certain individuals can accumulate claims against others, or against the economy as a whole, or against many economies. It is a system of symbols that many economists substitute for the visible sector and its productive enterprises, goods and services, thereby losing sight of the fact that a monetary system is a part only of the invisible sector of the economy, and that its adequacy can only be measured by its effect upon the visible sector.”
The role of physical productive capital is to do ever more of the work, which produces wealth and thus income to those who own productive capital assets. Full employment is not an objective of businesses. Companies strive to keep labor input and other costs at a minimum in order to maximize profits for the owners. They strive to minimize marginal costs, the cost of producing an additional unit of a good, product or service once a business has its fixed costs in place, in order to stay competitive with other companies racing to stay competitive through technological innovation. Reducing marginal costs enables businesses to increase profits, offer goods, products and services at a lower price (which people as consumers seek), or both. Increasingly, new technologies are enabling companies to achieve near-zero cost growth without having to hire people. Thus, private sector job creation in numbers that match the pool of people willing and able to work is constantly being eroded by physical productive capital’s ever increasing role.
The result is that the price of products and services are extremely competitive as consumers will always seek the lowest cost/quality/performance alternative, and thus for-profit companies are constantly competing with each other (on a local, national and global scale) for attracting “customers with money” to purchase their products or services in order to generate profits and thus return on investment (ROI).
Over the past century there has been an ever-accelerating shift to productive capital — which reflects tectonic shifts in the technologies of production. The mixture of labor worker input and capital worker input has been rapidly changing at an exponential rate of increase for over 239 years in step with the Industrial Revolution (starting in 1776) and had even been changing long before that with man’s discovery of the first tools, but at a much slower rate. Up until the close of the nineteenth century, the United States remained a working democracy, with the production of products and services dependent on labor worker input. When the American Industrial Revolution began and subsequent technological advances amplified the productive power of non-human capital, plutocratic finance channeled its ownership into fewer and fewer hands, as we continue to witness today with government by the wealthy evidenced at all levels.
People invented “tools” to reduce toil, enable otherwise impossible production, create new highly automated industries, and significantly change the way in which products and services are produced from labor intensive to capital intensive — the core function of technological invention and innovation. Kelso attributed most changes in the productive capacity of the world since the beginning of the Industrial Revolution to technological improvements in our capital assets, and a relatively diminishing proportion to human labor. Capital, in Kelso’s terms, does not “enhance” labor productivity (labor’s ability to produce economic goods). In fact, the opposite is true. It makes many forms of labor unnecessary. Because of this undeniable fact, Kelso asserted that, “free-market forces no longer establish the ‘value’ of labor. Instead, the price of labor is artificially elevated by government through minimum wage legislation, overtime laws, and collective bargaining legislation or by government employment and government subsidization of private employment solely to increase consumer income.”
Furthermore, according to Kelso, productive capital is increasingly the source of the world’s economic growth and, therefore, should become the source of added property ownership incomes for all. Kelso postulated that if both labor and capital are independent factors of production, and if capital’s proportionate contributions are increasing relative to that of labor, then equality of opportunity and economic justice demands that the right to property (and access to the means of acquiring and possessing property) must in justice be extended to all. Yet, sadly, the American people and its leaders still pretend to believe that labor is becoming more productive, and ignore the necessity to broaden personal ownership of wealth-creating, income-producing capital assets simultaneously with the growth of the economy.
At Agenda 2000, we used 90 percent, while the Rand Corporation statistic was 98 percent, to represent the productive capital factor input to creating products and services. In concentrated capital ownership terms, roughly 1 percent own 50 percent of the corporate wealth with 10 percent owning 90 percent. This leaves 90 percent of the people scrambling for the last 10 percent, with them dependent on their labor worker wages to purchase capital assets and speculate on securities exchanges purchasing stock previously owned. Thus, we have the great bulk of the people providing a mere 10 percent or less of the productive input. Contrast that to the less than 5 percent who own all the productive capital providing 90 percent or more of the productive input, and who initiate and oversee most of the technological advances that replace labor work by workers with capital work by the owners of productive capital assets. As a result, the trend has been to diminish the importance of employment with productive capital ownership concentrating faster than ever, while technological change makes physical capital ever more productive. Corporate decision makers know this, whether in the United States or China, or anywhere organized assemblies of people engage in production. Technology is an easier and faster way to get a job done with quality consistency. Because technology increases the profitability of companies throughout the world, technology always has the advantage over human labor when the costs of them are the same. But because this is not well understood, what we as a society have been doing is to continually shift the work burden from people labor to real physical capital while distributing the earning capacity of physical capital’s work (via capital ownership of stock in corporations) to non-owners through make-work job creation, minimum wage requirements, and welfare programs. Such policies do not function effectively.
In a democratic growth economy, based on Kelso’s binary economics (human and non-human productive inputs), the ownership of productive capital assets would be spread more broadly as the economy grows, without taking anything away from the 1 to 10 percent who now own 50 to 90 percent of the corporate wealth. Instead, the ownership pie would desirably get much bigger and their percentage of the total ownership would decrease, as ownership gets broader and broader, benefiting EVERY citizen (children, women and men), including the traditionally disenfranchised poor and working and middle class. Thus, productive capital income, from full earnings dividend payouts, would be distributed more broadly and the demand for products and services would be distributed more broadly from the earnings of capital and result in the sustentation of consumer demand, which will promote economic growth and more profitable enterprise. That also means that society can profitably employ unused productive capacity and invest in more productive capacity to service the demands of a growth economy. As a result, our business corporations would be enabled to operate more efficiency and competitively, while broadening wealth-creating ownership participation, creating new capitalists and “customers with money” to support the products and services being produced.
Technological change makes tools, machines, structures, and processes ever more productive while leaving human productiveness largely unchanged (our human abilities are limited by physical strength and brain power — and relatively constant). The technology industry is always changing, evolving and innovating. The result is that primary distribution through the free market economy, whose distributive principle is “to each according to his production,” delivers progressively more market-sourced income to capital owners and progressively less to workers who make their contribution through labor.
Unfortunately, ever since the 1946 passage of the Full Employment Act, economists and politicians formulating national economic policy have beguiled us into believing that economic power is democratically distributed if we have full employment – thus the political focus on job creation and redistribution of wealth rather than on equal opportunity to produce, full production and broader capital ownership accumulation. This is manifested in the myth that labor work is the ONLY way to participate in production and earn income, and that individual talent and effort are what distinguish the wealthy from the non-wealthy. Long ago that was once true because labor provided 95 percent of the input into the production of products and services. But today that is not true. Physical capital provides not less than 90 to 95 percent of the input. Full employment as the means to distribute income is not achievable, except while building a future economy than can support general affluence for EVERY citizen. When the “tools” of capital owners replace labor workers (non-capital owners) as the principal suppliers of products and services, labor employment alone becomes inadequate. Thus, we are left with government policies that redistribute income in one form or another.
Thus, as Kelso asserted, “the government continues to discharge its responsibility for the health and prosperity of the economy through coerced trickle-down; in other words, through redistribution achieved by the rigging of labor prices, by taxation to support redistribution and job “creation,” or subsidization by inflation and by all kinds of welfare, open and concealed.”
Employment in the brave new world, Kelso proposed, starts at the time one “enters the economic world as a labor worker, to become increasingly a capital worker as you go along, and at some point to retire as a labor worker and continue to participate in production and to earn income as a capital worker until the day you die.”
Kelso once wrote: “It doesn’t make any difference what’s going on in the scientific world or the business world or the industrial world, we still believe full employment will solve our income distribution problems. This is what major political figures have always maintained.”
Kelso also was quoted as saying, “Conventional wisdom says there is only one way to earn a living, and that’s to work. Conventional wisdom effectively treats capital (land, structures, machines, robotics and the like) as though it were a kind of holy water that, sprinkled on or about labor, makes it more productive. Thus, if you have a thousand people working in a factory and you increase the design and power of the machinery so that one hundred men can now do what a thousand did before, conventional wisdom says, ‘Voila! The productivity of the labor has gone up 900 percent!’ I say ‘hogwash.’ All you’ve done is wipe out 90 percent of the jobs, and even the remaining ten percent are probably sitting around pushing buttons. What the economy needs is a way of legitimately getting capital ownership into the hands of the people who now don’t have it.”
The capitalism practiced today is what, for a long time, I have termed “Hoggism,” propelled by greed and the sheer love of power over others. “Hoggism” institutionalizes greed (creating concentrated capital ownership, monopolies, and special privileges). “Hoggism” is about the ability of greedy rich people to manipulate the lives of people who struggle with declining labor worker earnings and job opportunities, and then accumulate the bulk of the money through monopolized productive capital ownership. Our scientists, engineers, and executive managers who are not owners themselves, except for those in the highest employed positions, are encouraged to work to destroy employment by making the capital “worker” owner more productive. How much employment can be destroyed by substituting machines for people is a measure of their success – always focused on producing at the lowest cost. Only the people who already own productive capital are the beneficiaries of their work, as they systematically concentrate more and more capital ownership in their stationary 1 percent ranks. Yet the 1 percent are not the people who do the overwhelming consuming. The result is the consumer populous is not able to get the money to buy the products and services produced as a result of substituting machines for people. And yet you can’t have mass production without mass human consumption made possible by “customers with money.” It is the exponential disassociation of production and consumption that is the problem in the United States economy, and the reason that ordinary citizens must gain access to productive capital ownership to improve their economic well-being.
Kelso postulated: “When consumer earning power is systematically acquired in the course of the normal operations of the economy by people who need and want more consumer goods and services, the production of goods and services should rise to unprecedented levels; the quality and craftsmanship of goods and services, freed of the corner-cutting imposed by the chronic shortage of consumer purchasing power, should return to their former high levels; competition should be brisk; and the purchasing power of money should remain stable year after year.”
Without this necessary balance hopeless poverty, social alienation, and economic breakdown will persist, even though the American economy is ripe with the physical, technical, managerial, and engineering prerequisites for improving the lives of the 99 percent majority. Why? Because there is a crippling organizational malfunction that prevents making full use of the technological prowess that we have developed. The system does not fully facilitate connecting the majority of citizens, who have unsatisfied needs and wants, to the productive capital assets enabling productive efficiency and economic growth.
Kelso said, “We are a nation of industrial sharecroppers who work for somebody else and have no other source of income. If a man owns something that will produce a second income, he’ll be a better customer for the things that American industry produces. But the problem is how to get the working man [and woman] that second income.”
Economic Democracy Has Yet To Be Tried
In Kelso’s words, “a democratic capitalist economy is a private-property, free-market economy in which goods and services are produced through the voluntary and universal cooperation of concurrent labor workers and ‘capital workers’ [those who own the “tools] under a politically democratic government.” At present the United States economy, nor for that matter any other economy does not operate as a private-property democratic-capitalist, free-market economy. What needs to transpire is an understanding of binary economics along with instituting capital credit mechanisms that will implement the goal of broadening productive capital ownership in ways wholly compatible with the U.S. Constitution and the protection of private property.
America has tried the Republican “cut spending, cut taxes, and cut ‘entitlements,’ eliminate government dependency and shift to private individual responsibility” and the Democrat “protect ‘entitlements,’ provide tax-payer supported stimulus, lower middle and working class taxes, tax the rich and redistribute” through government brands of economic policy, as well as a mixture of both. Republican ideology aims to revive hard-nosed laissez-faire appeals to hard-core conservatives but ignores the relevancy of healing the economy and halting the steady disintegration of the middle class and working poor.
Some conservative thinkers have acknowledged the damaging results of a laissez-faire ideology, which furthers the concentration of productive capital ownership. They are floundering in search of alternative thinking as they acknowledge the negative economic and social realities resulting from greed capitalism. This acknowledgment encompasses the realization that the troubling economic and social trends (global capitalism, free-trade doctrine, tectonic shifts in the technologies of production and the steady off-loading of American manufacturing and jobs) caused by continued concentrated ownership of productive capital will threaten the stability of contemporary liberal democracies and dethrone democratic ideology as it is now understood.
Without a policy shift to broaden productive capital ownership simultaneously with economic growth, further development of technology and globalization will undermine the American middle class and make it impossible for more than a minority of citizens to achieve middle-class status.
President Obama stated: “What’s at stake is whether this will be a country where working people can earn enough to raise a family, build a modest savings, own a home, and secure their retirement.” As long as working people are limited by earning income solely through their labor worker wages, they will be left behind by the continued gravitation of economic bounty toward the top 1 percent of the people that the system is rigged to benefit. Working people and the middle class will continue to stagnate, resulting in a stagnated consumer economy. More troubling is that this continued stagnation will further dim the economic hopes of America’s youth, no matter what their education level. The result will have profound long-term consequences for the nation’s economic health and further limit equal earning opportunity and spread income inequality. As the need for labor decreases and the power and leverage of productive capital increases, the gap between labor workers and capital owners will increase, which will result in turmoil and upheaval, if not revolution.
Economic democracy has yet to be tried. We are absent a national discussion of where consumers earn the money to buy products and services and the nature of capital ownership, and instead argue about policies (such as a universal basic income) to redistribute income or not to redistribute income. If Americans do not demand that the contenders for the office of the presidency of the United States, the Senate, and the Congress address these issues, we will have wasted the opportunity to steer the American economy in a direction that will broaden affluence. We have adequate resources, adequate knowhow, and adequate manpower to produce general affluence for EVERY citizen, but we need as a society to properly and efficiently manage these resources while protecting and enhancing the environment so that our productive capital capability is sustainable and renewable. Such issues are the proper concern of government because of the human damage inflicted on our social fabric as well as to economic growth in which every citizen is fairly included in the American dream.
The majority of Americans, dependent on labor worker wages, no longer think that jobs and labor wages will return suddenly — if at all — and at a livable earnings level, that the value of their homes will rebound, or that their limited retirement funds will soon be fully restored. Americans are scared but attribute their worsening finances to job losses, reduced hours, wage givebacks, and overall reduced earnings. They do not understand the role of productive capital driven by technological innovation and science and the requirement for them to become capital workers, as well as labor workers, to earn a viable economic future. And until we, as a society, understand how wealth is produced, how consumers earn the money to buy products and services and the nature of capital ownership, we will not be able to set a course to obtain an affluent quality of life for middle and working class citizens, where everyone “can earn enough to raise a family, build a modest savings, own a home, and secure their retirement.” The REAL solution is to build an economy of universally productive individuals and households through broadened wealth-creating, income-producing capital ownership.
Kelsonian binary economics and the various credit mechanisms derived from its understanding are not “socialist” or “communist” solutions but are based on the principles and dynamics of a free market economy. When understood, the current system is exposed as a system rigged to continually concentrate the ownership of capital in the 1 to 5 percent of the population. Also exposed are the dire moral implications of the current system, which is presently propelled by greed in our society. A new system that would ensure equal opportunity for every child, woman, and man to acquire productive capital with the earnings of capital and broaden its ownership universally does not require people to be any better than they presently are, but it does enable our society to leverage both greed and generosity in a way that honestly recognizes and harnesses productive capital as the factor that exponentially produces the wealth in a technologically advanced society.
The resulting impact of our current approaches has been plutocratic government and concentration of capital ownership, which denies every citizen his or her pursuit of economic happiness (property). Market-sourced income (through concentrated capital ownership) has concentrated in individuals and families who will not recycle it back through the market as payment for consumer products and services. They already have most of what they want and need so they invest their excess in new productive power, making them richer and richer through greater capital ownership. This is the source of the distributional bottleneck that makes the private property, market economy ever more dysfunctional. The symptoms of dysfunction are capital ownership concentration and inadequate consumer demand, the effects of which translate into poverty and economic insecurity for the 99 percent majority of people who depend entirely on wages from their labor or welfare and cannot survive more than a week or two without a paycheck. The production side of the economy is under-nourished and hobbled as a result.
While Americans believe in political democracy, political democracy will not work without a property-based free market system of economic democracy. The system is the problem, but it can and must be overhauled. The two prerequisites are political power, which is the power to make, interpret, administer, and enforce laws, and economic power, the power to produce products and services, whether through labor power or productive capital.
Kelso wrote: “In the distribution of social power, whether it be political power or economic power, all things are relative. The essence of economic democracy lies in the elimination of differences of earning power resulting from denial of equality of economic opportunity, particularly equal access to capital credit. Differences of economic status resulting from differences in advantages taken and uses made of differences based on inequality of economic opportunity, particularly those that give access to capital credit to the already capitalized and deny it to the non- or -undercapitalized, are flagrant violations of the constitutional rights of citizens in a democracy.”
Solutions That Work
We cannot balance the budget without cutting out coerced taxpayer-dependent redistribution of the earnings of capital owners contributing their “tools,” which if we did at this juncture would collapse the economy and ruin lives, resulting in social strife, personal suffering and degradation, the erosion of freedom, and ultimately anarchy, which will bring on totalitarian government. While welfare, private charity, boondoggle employment and other redistribution measures are now seen as necessary, they do not have to be sustained indefinitely. There are policies that can be adopted and executed to reverse the ultimate direction of collapse of the American market economy system. Such policies are based on the recognition that as the production of products and services changes from labor intensive to capital intensive, the way in which every human being — not just a few, but every person — earns his or her income must change in the same way. At the core of this quiet revolution is the understanding and commitment to broadening the ownership of productive capital.
Starting with the business corporation, a legal entity created and sanctioned by state and federal government and judicial law, the government should provide tax incentives for full-dividend payouts to its stockholders, or alternatively dictate that from now on 100 percent of all profits be paid out fully as dividend payments to stockholders (thus, eliminating the corporate income tax), who would be subject to progressive individual taxation rates during the short term until a flat tax, after an exemption of $100,000 for a family of four to meet their ordinary living needs, can be instituted. This would effectively prohibit retained earnings financing of new productive capital formation (reinvesting the corporate earnings already earned). The government could also limit debt financing by imposing some ratio formula to annual revenue under which a corporation could debt finance new productive capital formation with borrowed monies. Both retained earnings and debt financing only enhance the ownership holding value of the existing corporate ownership class and do nothing to create new owners. Thus, the rich get richer systematically and capital ownership concentration is furthered, facilitated by financing further productive capital acquisition out of the earnings of existing productive capital (past savings).
In place of retained earnings and debt financing, the government should require business corporations to issue and sell full-voting, full-dividend payout stock to more people to underwrite new productive capital formation, with the purpose of providing opportunity for new owners, both employees of corporations and non-employees, to participate in a growing economy by purchasing the newly issued stock using insured, interest-free “pure credit” repayable out of the full earnings generated by the earnings produced by the actual future capital assets. Of course, there needs to be a financial mechanism put in place that will guarantee loan risks; otherwise banks and lending institutions will not make the loans, and the system will continue to limit access to capital acquisition to those who already own capital — the rich. This is because “poor” people have no security or collateral, or sufficient income resulting in savings to pledge against the loan as security, and/or are disqualified on the grounds of either unproven unreliability or proven unreliability.
Criteria must be created to qualify the corporations, both new start-ups and established ones, subject to this policy and those corporations that qualify overseen so as to insure that their executives exercise prudent fiduciary responsibility to generate loan payback. Once the guaranteed loans are paid back to the lending entity, the new capital formation will continue to produce income for existing and future owners.
While tax and investment stimulus incentives (such as government contracts, grants and loans) are tools to strengthen economic growth, without the requirement that productive capital ownership is broadened simultaneously, the result will continue to further concentrate productive capital ownership among those who already own, and further create dependency on redistribution policies and programs to sustain purchasing power on the part of the 99 percent of the population who are dependent on their labor worker earnings or welfare to sustain their livelihood. By stimulating economic growth tied to broadened productive capital ownership the benefits are two-fold: one is that over time the 99 percenters will be enabled to acquire productive capital assets that are paid for out of the future earnings of the investments and gain greater access to job opportunities that a growth economy generates.
Capital acquisition takes place on the logic of self-financing and asset-backed credit for productive uses. People invest in capital ownership on the basis that the investment will pay for itself. The basis for the commitment of loan guarantees is the fact that nobody who knows what he or she is doing buys a physical capital asset or an interest in one unless he or she is first assured, on the basis of the best advice one can get, that the asset in operation will pay for itself within a reasonable period of time — 5 to 7 or, in a worst case scenario, 10 years (given the current depressive state of the economy). And after it pays for itself within a reasonable capital cost recovery period, it is expected to go on producing income indefinitely with proper maintenance and with restoration in the technical sense through research and development.
Still, there is at least a theoretical chance, and sometimes a very real chance, that the investment might not pay for itself, or it might not pay for itself in the projected time period. So, there is a business risk. This is why: using the example of ESOP financing (next), the lender has no reason to loan to the ESOP trust unless it has two sources of repayment. In addition to determining that the investment is viable and that the business corporation is credit worthy and reliably expected to make loan repayments, there needs to be security against default. Thus, for the lender to make the loan the corporation must provide the security.
Employee Stock Ownership Plan (ESOP)
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 and optimized 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 all of 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. (This is somewhat akin to Henry Ford’s policy to pay workers sufficient wages to enable them to purchase the automobiles they manufacture.)
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 and to those employed by a for-profit business corporation.
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 and the pledge of past savings. 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 minuscule, as are their dividend payments compared to the top 10 percent of capital owners. Statistically, stock market wealth is held by a relatively small number of the most affluent. In reality, most Americans don’t have any stocks to their name. In fact, many Americans don’t even have any savings to their name. A Pew Research survey found that 53 percent of Americans say they have no money at all invested in the stock market, including retirement accounts.
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 through their continuous accumulation of capital asset ownership, 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.
At Agenda 2000 and the Institute For The Pursuit Of Economic Justice, we believed that the business corporation, which holds its capital assets in the form of stock ownership, was society’s greatest social invention and that its executives had a fiduciary responsibility to exercise its vast power and finance capital growth in ways that took in the corporation’s natural constituency of employees as stockholders. We recognized that industrialization established the business corporation as the dominant organizational force of modern America. We saw the business corporation as an untapped, unimagined potential entity for solving the very economic problems that defective corporate strategy has created. We advocated Kelso’s financing tools and economic proposals, while devising other practical ways designed to correct the imbalance between production and consumption at its source, and broaden ownership of productive capital in conformance with private property free market principles.
We also explored financial mechanisms using the Real Estate Investment Trust (REIT) and Community Investment Corporation (CIC) to enable ownership of redevelopment projects by displaced property owners and residents who would share in the profits associated with land planning and development instead of only subsidizing and underwriting billions of dollars worth of commercial and other for-profit real estate projects that further concentrate capital ownership. The CIC is a way for planning and building new communities, or redeveloping low-income communities, under professional management and with access to interest-free Federal Reserve financing to purchase land, with the loans repaid by its land development and rental profits. The CIC was designed as a private-sector economic empowerment vehicle for all citizens who are permanent residents in a defined area. It would replace typical land development corporations whose “urban removal” schemes typically force out low-income residents unable to afford rising real estate costs associated with higher land values.
Unfortunately, pursuing economic democracy has been frustrated by the systemic concentration of economic power and exclusionary access to future capital credit to the advantage of the wealthiest Americans. The so-called 1 percent rulers of corporations have rigged the financial system to enable this already rich ownership class to systematically further enrich themselves as capital formation occurs and technological industrialization spreads throughout the world, leaving behind the 99 percent to depend on income redistribution through make work “full employment” policies, government boondoggles, excessive military build-up and dependence on arms production and sales, and social welfare programs due to the lack of an alternative to full employment and the growing economic helplessness and dependency. The unsatisfied needs and wants of society are not in that 1 percent or for that matter the 5 percent; those people are not the ones who are hurting.
Once the national economic policy bases policy decisions on two-factor binary economics, productive capital acquisition would take place through commercially insured capital credit, resulting in a quiet revolution in which economic plutocracy will transform to economic democracy.
What others and I at Agenda 2000 and the Institute For The Pursuit Of Economic Justice advocated was embracing the goal of teaching working people, the 99 percent, to become capital workers, those who work through their privately owned capital, which is employed in production to supplement their being a labor worker or replace the wage income from their labor entirely. The goal into the future is for all Americans to be capital workers (applying the “tools” they OWN to produce) and not be labor workers dependent on labor earnings too much of our lives. We should all be productive and produce products and services in a way in which the current state of technology permits. Not only is our right to life denied if we don’t have effective access to the ownership of capital, our liberty is denied because without economic power our political power is useless. Thus, the national economic policy should be universal participation in the ownership of productive capital, alongside full employment of the labor workforce as a direct result.
At present, there is a brewing power struggle going on in the United States between individual human beings (citizens) and the plutocratic powers who manipulate our government and the would-be plutocratic powers (top corporate executive managers and financial barons). What the 99 percent movement is really all about is returning America to economic democracy. If we do not achieve economic democracy, then plutocracy will lead to fascism—the ownership of productive capital by the rich and by their institutions.
As Kelso would say, today’s techniques of finance are designed to make the rich richer. None are designed to make the poor richer. That’s why the poor are poor. The reason they are poor is because they do not have viable capital ownership. Thus, we need to focus on revising today’s techniques of finance to broaden capital ownership.
The Purpose Of Production Is Consumption
The purpose of production in a market economy is the consumption of products and services by the consumers who make up the economy. But without income, the non-capital ownership class, the 99 percenters, cannot afford to purchase the products and services they desire. But when incomes rise among consumers who have the need and desire to improve their material standard of living, the market demand for products and services strengthens, which in turn increases production and results in a growth economy that, as a byproduct, creates REAL jobs, not the government style make-work that has become so prominent.
Abraham Lincoln said that the purpose of government is to do for people what they cannot do for themselves. Government also should serve to keep people from hurting themselves and to restrain man’s greed, which otherwise cannot be self-controlled. Anyone who seeks to own productive power that they cannot or won’t use for consumption are beggaring their neighbor — the equivalency of mass murder — the impact of concentrated capital ownership.
Federal Reserve System
On a larger scale, there is another path to solve the security issue, that is, the risk can be absorbed by capital credit insurance or commercial risk insurance. Thus, in order to achieve national economic democracy, we need a way to handle risk management in finance by broadly insuring the risks. Such capital credit insurance would substitute for the security demanded by lenders to cover the risk of non-payment, thus enabling the poor and others with no or few assets (the 99 percenters) to overcome the collateralization barrier that excludes the non-halves from access to wealth-creating, income-generating productive capital.
One feasible way is to lift ownership-concentrating Federal Reserve System credit barriers and other institutional barriers that have historically separated owners from non-owners and link tax and monetary reforms to the goal of expanded capital ownership. Removing barriers that inhibit or prevent ordinary people from purchasing capital that pays for itself out of its own future earnings is paramount as an actionable policy. This can be done under the existing legal powers of each of the 12 Federal Reserve regional banks, and will not add to the already unsustainable debt of the Federal Government or raise taxes on ordinary taxpayers. We need to free the system of dependency on Wall Street and the accumulated savings and money power of the rich and super-rich who control Wall Street. The Federal Reserve System has stifled the growth of America’s productive capacity through its monetary policy by monetizing public-sector growth and mounting Federal deficits and “Wall Street” bailouts; by favoring speculation over investment; by shortchanging the capital credit needs of entrepreneurs, inventors, farmers, and workers; by increasing the dependency with usurious consumer credit; and by perpetuating unjust capital credit and ownership barriers between rich Americans and those without savings. The Federal Reserve Bank should be used to provide interest-free capital credit (including only transaction and risk premiums) and monetize each capital formation transaction, determined by the same expertise that determines it today — management and banks — that each transaction is viably feasible so that there is virtually no risk in the Federal Reserve. The first layer of risk would be taken by the commercial credit insurers, backed by a new government corporation, the Capital Diffusion Reinsurance Corporation, through which the loans could be guaranteed. This entity would fulfill the government’s responsibility for the health and prosperity of the American economy.
The fact is money power rules. When money power is broadly distributed in the hands of the citizens, not the politicians or bankers, the people shall rule.
The Federal Reserve Board is already empowered under Section 13 of the Federal Reserve Act to reform monetary policy to discourage non-productive uses of credit, to encourage accelerated rates of private sector growth, and to promote widespread individual access to productive credit as a fundamental right of citizenship. The Federal Reserve Board needs to re-activate its discount mechanism to encourage private sector growth linked to expanded capital ownership opportunities for all Americans.
Other Actionable Policies
Another actionable policy should provide that any government contract, grant or loan guarantee be only awarded to American companies who, through the government award, expand their ownership to their employees.
Still another short-term action, to reinvigorate “Make It In America” and “Made In America,” is the government should create financial incentives and tax provisions to reward American corporations that bring manufacturing back to the United States from abroad, promote manufacturing investment, and incentivize more investment by foreign companies, all with the condition that the employees and non-employees will share in the ownership benefits generated by the new capital formation projects. The result will be more broadened ownership and in-sourcing of jobs created by the new capital formation projects, and make America self-reliant.
The government should impose robust import levies and tariffs (tax) on particular classes of imports that are determined to be manufactured outside the United States and exported back to the United States that do not qualify as “Fair Trade” and unfairly undercut an American-make equivalent. At present, American business corporations are increasingly abandoning the United States and its communities to invest in productive capital formation outside the United States, particularly in China, Mexico, India, and other parts of Asia, supported by American consumers who cannot afford pricier American-made products. As a result, America is experiencing the deindustrialization of America. This has forced policy makers to adopt a redistributive socialist solution rather than a economic democratic one whereby democratic economic growth of the earning power of the citizens would flourish simultaneously with new, broadly-owned productive capital formation investments in the United States. Such overseas operations have the advantage of “sweat-shop” slave labor rates relative to American standards, low or no taxation, supportive infrastructure provisions, currency manipulation, and few if any environmental regulations — which translate to lower-cost production. Thus, producing the same product or service in the United States would be far more expensive. For most people, economic globalization means a growing gap between rich and poor, technological alienation of the labor worker from the means of production, and the phenomenon of global corporations and strategic alliances forcing labor workers in high-cost wage markets, such as the United States, to compete with labor-saving capital tools and lower-paid foreign workers. Unemployment is high and there is an accelerating displacement of labor workers by technology and cheaper foreign labor, resulting in greater economic uncertainty and unstable retirement incomes for the average American citizen — causing the average citizen to become increasingly dependent on government wealth redistribution programs.
We need a policy change, which assures truly “Fair Trade” and that exponentially reduces the exodus of our manufacturing prowess and invigorates America’s entrepreneurial exceptionalism and competitive spirit to create products and services in the spirit of “the best that they can be.” We need policies that will de-incentivize American multinational corporations and others from undercutting “American Made,” while simultaneously competitively lowering the cost of production through expanded capital worker ownership in more efficient technological invention and innovation. At present, the various incentives in place do not broaden capital ownership but instead further concentrate ownership.
The labor union movement should transform to a producers’ ownership union movement and embrace and fight for this new democratic capitalism. They should play the part that they have always aspired to — that is, a better and easier life through participation in the nation’s economic growth and progress. As a result, labor unions will be able to broaden their functions, revitalize their constituency, and reverse their decline.
Unfortunately, at the present time the movement is built on one-factor economics — the labor worker. The insufficiency of labor worker earnings to purchase increasingly capital-produced products and services gave rise to labor laws and labor unions designed to coerce higher and higher prices for the same or reduced labor input. With government assistance, unions have gradually converted productive enterprises in the private and public sectors into welfare institutions. Kelso stated: “The myth of the ‘rising productivity’ of labor is used to conceal the increasing productiveness of capital and the decreasing productiveness of labor, and to disguise income redistribution by making it seem morally acceptable.”
Kelso argued that unions “must adopt a sound strategy that conforms to the economic facts of life. If under free-market conditions, 90 percent of the goods and services are produced by capital input, then 90 percent of the earnings of working people must flow to them as wages of their capital and the remainder as wages of their labor work… If there are in reality two ways for people to participate in production and earn income, then tomorrow’s producers’ union must take cognizance of both… The question is only whether the labor union will help lead this movement or, refusing to learn, to change, and to innovate, become irrelevant.”
Unions are the only group of people in the whole world who can demand a real Kelso-designed ESOP, who can demand the right to participate in the expansion of their employer by asserting their constitutional preferential rights to become capital owners, be productive, and succeed. The ESOP can give employees access to credit so that they can purchase the employer’s stock, pay for it in pre-tax dollars out of the assets that underlie that stock, and after the stock is paid for earn and collect the capital worker income from it, and accumulate it in a tax haven until they retire, whereby they continue to be capital workers receiving income from their capital ownership stakes. This is a viable route to individual self-sufficiency needing significantly less or no government redistributive assistance.
The unions should reassess their role of bargaining for more and more income for the same work or less and less work, and embrace a cooperative approach to survival, whereby they redefine “more” income for their workers in terms of the combined wages of labor and capital on the part of the workforce. They should continue to represent the workers as labor workers in all the aspects that are represented today — wages, hours, and working conditions — and, in addition, represent workers as full voting stockowners as capital ownership is built into the workforce. What is needed is leadership to define “more” as two ways to earn income.
If we continue with the past’s unworkable trickle-down economic policies, governments will have to continue to use the coercive power of taxation to redistribute income that is made by people who earn it and give it to those who need it. This results in ever deepening massive debt on local, state, and national government levels, which leads to the citizenry becoming parasites instead of enabling people to become productive in the way that products and services are actually produced.
When labor unions transform to producers’ ownership unions, opportunity will be created for the unions to reach out to all shareholders (stock owners) who are not adequately represented on corporate boards, and eventually all labor workers will want to join an ownership union in order to be effectively represented as an aspiring capital owner. The overall strategy should assure that the labor compensation of the union’s members does not exceed the labor costs of the employer’s competitors, and that capital earnings of its members are built up to a level that optimizes their combined labor-capital worker earnings. A producers’ ownership union would work collaboratively with management to secure financing of advanced technologies and other new capital investments and broaden ownership. This will enable American companies to become more cost-competitive in global markets and to reduce the outsourcing of jobs to workers willing or forced to take lower wages.
Kelso stated, “Working conditions for the labor force have, of course, improved over the years. But the economic quality of life for the majority of Americans has trailed far behind the technical capabilities of the economy to produce creature comforts, and even further behind the desires of consumers to live economically better lives. The missing link is that most of those unproduced goods and services can be produced only through capital, and the people who need them have no opportunity to earn income from capital ownership.”
Walter Reuther, President of the United Auto Workers, expressed his open-mindedness to the goal of democratic worker ownership in his 1967 testimony to the Joint Economic Committee of Congress as a strategy for saving manufacturing jobs in America from being outcompeted by Japan and eventual outsourcing to other Asian countries with far lower wage costs: “Profit sharing in the form of stock distributions to workers would help to democratize the ownership of America’s vast corporate wealth, which is today appallingly undemocratic and unhealthy.
“If workers had definite assurance of equitable shares in the profits of the corporations that employ them, they would see less need to seek an equitable balance between their gains and soaring profits through augmented increases in basic wage rates. This would be a desirable result from the standpoint of stabilization policy because profit sharing does not increase costs. Since profits are a residual, after all costs have been met, and since their size is not determinable until after customers have paid the prices charged for the firm’s products, profit sharing [through wider share ownership] cannot be said to have any inflationary impact on costs and prices.”
Unfortunately for democratic unionism, the United Auto Workers, American manufacturing workers, and American citizens generally, Reuther was killed in an airplane crash in 1970 before his idea was implemented. Leonard Woodcock, his successor, nor any subsequent union leader never followed through.
The union movement should also expand beyond representing corporate employees and represent capital ownership empowerment for all propertyless citizens.
Strengthen The Middle Class
There are more actionable policies that will dramatically impact the market economy and strengthen the middle class in a positive way, while expanding the base of private capital ownership and thus strengthening the way consumers make the money to purchase the products and services made possible by the new capital formation. The result will be to expand production and bring more wealth to the economy, which will provide not only growth in expanded ownership of productive capital but also in expanded employment opportunities as the economy revs up to meet expanded consumer demand. Furthermore, the more broadly real capital is acquired by individuals throughout our society with the earnings of capital, the more we will profitably employ unused capacity and promote economic growth. With greater earnings from capital worker investment, people will be able to support and pay for products resulting from “greener” technologies that today people cannot afford. Such policies are perfectly in tune with the natural incentive of business corporations to broaden ownership so that the market for their products will increase. Such policies will liberate the economy.
A Just Third Way And The Capital Homestead Act
Norman Kurland, who was associated with Agenda 2000, is now the Executive Director of the Washington, D.C. Center For Economic & Social Justice (www.CESJ.org), which I am associated, and Managing Director of Equity Expansion International, an investment banking firm helping the 99 percent non-rich to become owners of income-generating equity, without harming the property interests of existing owners. The CESJ advocates a JUST Third Way free market system that economically empowers all individuals and families through direct and effective ownership of the means of production. The CESJ is calling for a Capital Homestead Act (CHA) (www.capitalhomestead.org), which takes its lead from the Homestead Act of 1862. The Homestead Act offered the landless white citizens of America part-ownership of the country by giving them 160 acres of frontier land, free, if they produced on it income for themselves and their families for a period of five years. The slogan of the Capital Homestead Act (aka Economic Democracy Act) is “Own Or Be Owned.” The Capital Homestead Act’s summary can be found at http://www.cesj.org/learn/capital-homesteading/, http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-a-plan-for-getting-ownership-income-and-power-to-every-citizen/, http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-summary/ and http://www.cesj.org/learn/capital-homesteading/ch-vehicles/.
In Lincoln’s America of 153 years ago, the problem confronting the vast majority of the citizens of our nation was that most people owned no land that they could work to sustain their livelihood. Today, the major problem for the vast majority of the people of our nation and of our world, for that matter, is that 99 percent of the people own no capital (or a viable share) in a high-tech, capital-intensive economy. The Capital Homestead Act would make it possible for every American to become a viable owner of productive capital and not just for the tiny elite who now own our corporations. The CHA is primarily a tax-sheltered vehicle for the democratization of capital credit through local banks. It would “enable every child, woman, and man to accumulate wealth and receive dividend incomes from newly issued shares in new and growing corporations, without being taxed on the accumulations (including property and shares gained through inheritance, savings, and arrangements like ESOPs, CSOPs, and CICs). In addition to serving as a source of capital credit for corporate workers, CHAs would also provide an ownership-building account for individuals who do not work for profit-making enterprises, such as school teachers, civil servants, military personnel, police, and health workers, and for individuals who have no remunerative employment, such as the disabled, the unemployed homemakers and children.”
The Center For Economic and Social Justice advocates new justice-committed leaders, especially those who want to end the corruption built into our exclusionary system of monopoly capitalism — the main source of corruption of any political system, democratic or otherwise. The CESJ advocates the need to radically overhaul the Federal tax system and monetary policies and institute proposals to get money power to the 99 percent of American citizens who now only rely on their labor worker earnings. Under the JUST Third Way’s more just and simple tax system, access to ownership of the means of production in the future would by provided to every child, woman and man by requiring the government to lift all existing legal and institutional barriers to private property stakes as a fundamental human right. The system was made by people and can be changed by people. Guided by the right principles of economic justice, “we the people” can organize and demand that the system be reorganized to make true economic democracy the new foundation for true political democracy. The result of this movement of new justice-committed leaders and activists will be inclusive prosperity, inclusive opportunity, and inclusive economic justice.
The following is proposed:
- Eliminate all tax loopholes and subsidies,
- Provide an exemption of $100,000 for a family of four to meet their ordinary living needs,
- Encourage corporations to pay out all their profits as taxable personal incomes to avoid paying corporate income taxes and to finance their growth by issuing new full-voting, full-dividend payout shares for broad-based citizen ownership,
- Eliminate the payroll tax on workers and their employers, but
- Pay out of general revenues for all promises for Social Security, Medicare, government pensions, health, education, rent and subsistence vouchers for the poor until their new jobs and ownership accumulations provide new incomes to substitute for the taxpayer dollars to fill these needs.
- The tax rate would be a single rate for all incomes from all sources above the personal exemption levels so that the budget could be balanced automatically and even allow the government to pay off the growing unsustainable long-term debt, but the poor would pay the first dollar over their exemption levels as would the hedge fund operator and others now earning billions of dollars from capital gains, dividends, rents and other property incomes which under some tax proposals would be exempted from any taxes.
- As a substitute for inheritance and gift taxes, a transfer tax would be imposed on the recipients whose holdings exceeded $1 million, thus encouraging the super-rich to spread out their monopoly-sized estates to all members of their family, friends, servants and workers who helped create their fortunes, teachers, health workers, police, other public servants, military veterans, artists, the poor and the disabled.
- The Federal Reserve would stop monetizing unproductive debt, including bailouts of banks “too big to fail” and Wall Street derivatives speculators, and
- Begin creating an asset-backed currency that could enable every child, woman and man to establish a Capital Homestead Account or “CHA” (a super-IRA or asset tax-shelter for citizens) at their local bank to purposely acquire a growing dividend-bearing stock portfolio to supplement their incomes from work and all other sources of income.
- The CHA would process annually an equal allocation of productive credit to every citizen exclusively for purchasing full-dividend payout shares in companies needing funds for growing the economy and private sector jobs for local, national and global markets.
- The shares would be purchased using interest-free credit wholly backed by projected “future savings” in the form of new productive capital assets as well as the future marketable goods and services produced by the added technology, renewable energy systems, manufacturing factories, rentable space for entrepreneurial endeavor and infrastructure, both repair and new, added to the economy.
- Risk of default on each stock acquisition loan would be covered by private sector capital credit risk insurance and reinsurance, but
- Would not require citizens to reduce their funds for consumption to purchase shares.
The end result is that citizens would become empowered as owners to meet their own consumption needs and government would become more dependent on economically independent citizens, thus reversing current global trends where all citizens will eventually become dependent for their economic well-being on the State and whatever elite controls the coercive powers of government.
Need To Reevaluate And Define New Solutions
We need to reevaluate our tax and central banking institutions, as well as, labor and welfare laws. We need to innovate in such ways that we lower the barriers to equal economic opportunity and create a level playing field based on anti-monopoly and anti-greed fairness and balance between production and consumption. In so doing, every citizen can begin to accumulate a viable capital estate without having to take away from those who now own by using the tax system to redistribute the income of capital workers. What the “haves” do lose is the productive capital ownership monopoly they enjoy under the present unjust system. A key descriptor of such innovation is to find the ways in which “have nots” can become “haves” without taking from the “haves.” Thus, the reform of the “system,” as Kelso postulated, “must be structured so that eventually all citizens produce an expanding proportion of their income through their privately owned productive capital and simultaneously generate enough purchasing power to consume the economy’s output.”
Such reform is based in CESJ’s Monetary Justice policies at http://capitalhomestead.org/page/monetary-justice.
A Virtually Unlimited Potential
The potential is virtually unlimited. Today we accept as normal public ownership of gigantic capital instruments like mass rail, subways, government office buildings, universities, water systems, and power systems. These government-owned enterprises and services could be transformed into competitive private sector companies managed by Private Facilities Corporations with the use of the asset or facility leased to the normal using body. The wages of the Private Facilities Corporation(s) are passed through to the leasing body. This would allow us to build the ownership of what is now public capital into individuals and reduce the cost of government, including public pension systems. Thus, when you build the ownership into the employees of the Private Facilities Corporation(s), who now have a vested interest in its quality of operation and maintenance, the contracted lease rental fee committed by the government entity will give the employee stockholders a reasonable return and lessen or replace the need for supplemental redistribution programs.
Consumer Stock Ownership Plan financing can simultaneously build the ownership into the consumers of monopolies such as telecommunications, water and power companies, mass-transit, and even cable and satellite television, who are the source of all their funding, and dividends paid out to the consumer owners would become an offset to their utility bills.
Then too, natural resources and land development infrastructure projects should be owned by citizens (as in individuals) using CESJ’s Citizen Land Bank (CLB) structure (http://www.cesj.org/?s=citizen+land+bank).
• A CLB is a for-profit, professionally-managed, citizen-owned-and-governed community land planning and development enterprise, designed to enable every citizen of a community of any size to acquire a direct ownership stake in local land, natural resources and basic infrastructure.
• A CLB is a social vehicle for every child, woman and man to gain, as a fundamental right of citizenship, a single lifetime, non-transferable ownership interest in all the Bank’s assets, share equally in property incomes from rentals and user fees from leases or use of the Bank’s assets, accumulate appreciated equity values from enhanced land values, and gain an owner’s voice in the governance of future land development.
• A CLB is an innovative legal and financing tool empowered to borrow on behalf of all citizen-shareholders and service the debt with pre-tax dollars to meet the land acquisition, capitalization and operational needs of the Bank. The CLB shelters from taxation the equity accumulations of citizen-shareholders and protects the outside assets of the citizens in the event of loan default or if the enterprise fails.
• A CLB is a social tool designed to encourage a just, free and non-monopolistic market economy. It applies the democratic principles of equal opportunity and equal access to the means to participate as an owner as well as a worker. It demonstrates that anything that can be owned by government can and should be owned, individually and jointly, by the citizens.
I have touched on a very short list of actionable ideas to broaden capital ownership via capital credit borrowed through banks and invested in “qualified” securities such as newly issued, full-dividend payout, full voting shares in mature companies. There are others, in addition the for-profit Citizens Land Banks, including for-profit Cooperatives and Corporations organized for large-scale local land and infrastructural development and Homeowners Equity Corporations (HEC) for turning renters into owners.
HECs would obtain acquisition loans from commercial banks to purchase distressed properties at the current market value, which in turn would discount the loans at the local Federal Reserve at a rate reflecting transaction costs and a revised risk premium. The homes could then be leased at a realistic market rate to their former owners or new tenants. The tenant would earn shares in the HEC as lease payments were made, sufficient to cover debt service, maintenance, and taxes. When the acquisition loan for a particular property was fully paid, the tenant could exchange his or her HEC shares for title, or continue as a tenant/shareholder at a reduced lease payment, sufficient to cover maintenance and property taxes.
Through such economic democratization reforms, economic growth would be freed from the slavery of past savings, while creating a domestic source of new asset-backed, interest-free money and expanded bank credit to finance new capital formation repayable out of future earnings (savings).
What we really need in our presidential election periods is a national discussion on the topic of the importance of capital ownership and how we can expand the base of private capital ownership simultaneously with the creation of new physical capital formation, with the aim of building long-term financial security for all Americans through accumulating a viable capital estate.
We need a recognition in America that we should deliberately begin to broaden the capital ownership base in a way that is consistent with the laws of property and the Constitutional safeguards of the rights of men and women to own property and be productive.
What needs to be our focus is to adjust the opportunity to produce, not the redistribution of income after it is produced.
The government should acknowledge its obligation to make productive capital ownership economically purchasable by capital-less Americans (the 99 percent) using insured, interest-free capital credit, and, as Kelso stated, “substantially assume financial responsibility for the economy through establishing and supervising the implementation of an economic, labor and business policy of democratized economic power.” Historically, capital has been the primary engine of industrialization. But as used, as Kelso has argued, has, as well, “been the chief cause of the institutional deformities that have created and maintained two incompatible classes: the overcapitalized and the undercapitalized.”
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 a justice-based managed (see http://www.cesj.org/?s=Justice+Based+Management) full-voting, full-dividend-earnings-payout ESOP — not just to trade a single block of stock for wage concessions, but to redesign the future of the corporation 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 as individuals, not just the upper management, and not collectively! When people are in a position to earn the income produced by their physical 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 invention and innovation, while achieving higher employee incomes through the employee-owned productive capital.
Once this goal becomes the national political focus we will see an unbelievable discussion of workable plans to realize the goal. Remember that planning begins with a vision and a goal. This is not rocket science but it does require national leadership. Implementation requires amending a few laws that basically authorize the transactions that will broaden capital ownership paid for with the future earnings of capital investment. Allowing such transactions will provide incentives for profitable opportunities to employ unused capacity and promote stable and robust economic growth.
Still, after a half-century, we have no leaders with a growth strategy that could restore the economic productiveness of the American economy. The growth strategy I have presented is not new, though relatively obscure It has not yet registered in the minds of leaderless politicians and their advisors from the left to the right of the political spectrum and a population of people who have been mis-educated and mis-led by conventional economists from all the conventional schools of economics. This will require a personal commitment to acquiring this knowledge and thinking in new ways.
Economist John Maynard Keynes, whose Keynesian model is widely taught, falsely presumed that the only way to balance mass productive power with mass purchasing power is through a wage system — ignoring the possibility of democratizing future ownership of labor-displacing productive capital technologies and rising ownership incomes as a market-generated means of eliminating wage slavery, welfare slavery, debt slavery and charity slavery for the 99 percent of humanity. Kelso argued that the Keynesian model fails to recognize that “when capital workers [owners] replace labor workers as the major suppliers of goods and services, labor employment alone becomes inadequate because labor’s share of the income arising from production cannot provide the progressively better standard of living that technology is making possible. Labor produces subsistence at best. Capital can produce affluence. To enjoy affluence, all households must engage to an increasing extent in capital work.”
It is imperative that leaders seeking new solutions cease the opportunity presented in presidential and congressional elections to implement effective programs for expanded ownership of productive capital, and address the problem of education on this subject.
One of my favorite Kelso quotes is: “The low credibility of government and of all lesser institutions in America today is a consequence of our own increasingly hollow democracy. It is reflected in the rising domestic crime rate and the social and political alienation of people in all walks of life, except for the rich and their sycophants. The real collapse of American ideological leadership in the world can best be seen in the feebleness and confusion that characterizes American foreign policy. The handwriting on the wall is clear: America must rethink the meaning of democracy and set about within its borders to rationalize its economic policy into one that synchronizes the shift from labor intensive to capital intensive production, with universal capital ownership and the payment of the full wages [earnings] of capital to capital owners, so to restore economic democracy to our economy. We should democratize our plutocratic capitalist economy before we preach democracy to others.”
At one point in 1976, the discussion led to The Joint Economic Committee of Congress endorsing the two-factor policy to broaden capital ownership as an economic goal for America. The 1976 Joint Economic Report stated: “To provide a realistic opportunity for more U.S. citizens to become owners of capital, and to provide an expanded source of equity financing for corporations, it should be made national policy to pursue the goal of broadened capital ownership. Congress also should request from the Administration a quadrennial report on the ownership of wealth in this country, which would assist in evaluating how successfully the base of wealth was being broadened over time.” Unfortunately the Congress or any President has never paid any attention to this policy, and the goal has subsequently been unacknowledged and unheeded by our plutocratic political leaders.
The stark reality is that we are in a depression reflected in rising “real” (not statistical) unemployment and underemployment and instability that we will never escape from until we change our economic policy. Increasingly, more Americans will not be able to ever purchase a home, due to the packed inflationary wage and welfare base factored into the cost of building homes, which inflate prices, and will be forced to rent their entire life or depend on government living assistance — not able to accumulate equity that can help to sustain them in their retirement years. And this is the new reality now facing people in the middle class. The uncertainty of holding onto a good job is frightening to an increasingly wider base of middle-class working citizens. When you factor in the average non-salaried worker, even with a government-mandated minimum labor wage rate of $10.00+ per hour in some states and cities, the outcome is grim. Never mind that consumer demand continues to dwindle because of insufficient income, solely tied to labor worker wages. The impact of the decline in consumer demand due to declining labor worker wages is that production will decline or desist without sustainable consumer demand. Furthermore, those corporations growing the economy, both nationally and globally, will expand globally with investment in new productive capital projects and seek “customers with money” abroad.
This is all coming about because we have severely mismatched the power to produce with the possession of unsatisfied needs and wants. Those capital owners who have unsatisfied needs and wants have ready access through conventional finance to get as much or more productive capital as they want. Our tax laws are designed to further benefit the 1 percent by providing enormous write offs and credits to producers (corporations) who are owned by the few, who already produce more than they can consume. Those who have only their labor power and its precarious value held up by coercive rigging and who desperately need capital ownership to enable them to be capital workers as well as labor workers to have a way to earn more income, cannot satisfy their unsatisfied needs and wants. With only access to labor wages, the 99 percenters will continue, in desperation, to demand more and more pay for the same or less work, as their input is exponentially replaced by productive capital.
But if we change direction and systematically build earning power into consumers, we have the opportunity to reverse the depression perpetrated by systematically limiting the 99 percent to labor wages alone and through technology eliminating their jobs. We need solutions to grow the economy in ways that create productive jobs and widespread equity sharing. We need to systematically make insured, interest-free capital credit to purchase capital accessible to economically underpowered people (the 99 percent) in which the income from the capital investment is isolated until it pays for itself, and then begins to produce a stream of dividend income to the new capital owners. This can only be accomplished by enabling every person to have access to capital ownership and purchase the capital, and pay for it out of what the capital produces. It’s time good and well-intentioned people woke up and adopted a JUST Third Way paradigm (http://cesj.org/learn/just-third-way/) beyond the greed model of monopoly, “hoggist” capitalism and the envy model of the traditional welfare state. This will promote peace, prosperity, and freedom through harmonious justice.
CESJ’s Norman Kurland argues, “The haves represent a tiny fraction of humanity. Our ideas will split them between those who see our point and understand that they would benefit everyone without taking anything away from them during their lives, and those who want to keep ownership in an exclusive club. The latter cannot publicly attack the institution of private property without threatening the legal foundation that gives them their monopoly over the money system and the ownership system.”
We need leadership to awaken all American citizens to force the politicians to follow the people and lift all legal barriers to universal capital ownership access by every child, woman, and man as a fundamental right of citizenship and the basis of personal liberty and empowerment. The goal should be to enable every child, woman, and man to become an owner of ever-advancing labor-displacing technologies, new and sustainable energy systems, new rentable space, new enterprises, new infrastructure assets, and productive land and natural resources as a growing and independent source of their future incomes.
On the basic issue of economic empowerment of each individual, the essential goal needs to be economic democracy, which will finally make political democracy a meaningful reality.
As Kurland points out, the emphasis on the systemic injustices of monopoly capitalism can only be addressed by comprehensive reforms to the tax, monetary and inheritance policies favoring the top 1 percent at the expense of the 99 percent. The current system perpetuates budget deficits and unsustainable government debt, underutilized workers, a lack of financing for financing advanced energy and green technologies, and outsourcing of U.S. industrial jobs to low-wage countries, trade deficits, shrinking consumption incomes among the poor and middle class, and conventional methods for financing productive growth that increase the ownership and power gaps between the top 1 percent and the 90 percent whose combined ownership accumulations are already less than the elite whose money power is widely known as the source of political corruption and the breakdown of political democracy.
The unworkability of the traditional market economy is evidenced by the diverse and growing deficits — federal budget deficit, trade deficit, city, county and state budget deficits — which are making it increasingly impossible for governments at every level to function. The increasing deficit burden is the result of the growing numbers of people who cannot earn, from legitimate participation in production, enough income to support themselves and their families. Thus government is obliged to “redistribute” to starve off economic collapse. The key means of redistribution is taxation — taking from the legitimate producers and giving to the non- or under-producers — to make up the economy’s ever wider income and purchasing power shortfalls.
The fact is that political democracy is impossible without economic democracy. Those who control money control the laws that foster wage slavery, welfare slavery, debt slavery and charity slavery. These laws can and should be changed by the 99 percent and those among the 1 percent who are committed to a just and economically classless market economy, true equality of opportunity, and a level playing field in the future for 100 percent of Americans. By adopting economic policies and programs that acknowledge every citizen’s right to contribute productively to the economy as a capital owner as well as a labor worker, the result will be an end to perpetual labor servitude and the liberation of people from progressive increments of subsistence toil and compulsive poverty as the 99 percent benefits from the rewards of productive capital-sourced income.
The question that requires an answer is now timely before us. It was first posed by Kelso in the 1950s but has never been thoroughly discussed on the national stage. Nor has there been the proper education of our citizenry that addresses what economic justice is and what ownership is. Therefore, by ignoring such issues of economic justice and ownership, our leaders are ignoring the concentration of power through ownership of productive capital, with the result of denying the 99 percenters equal opportunity to become capital owners.
The question, as posed by Kelso is: “how are all individuals to be adequately productive when a tiny minority (capital owners) produce a major share and the vast majority (labor workers), a minor share of total goods and services,” and thus, “how do we get from a world in which the most productive factor — physical capital — is owned by a handful of people, to a world where the same factor is owned by a majority — and ultimately 100 percent — of the consumers, while respecting all the constitutional rights of present capital owners?”
For clarity on this concept that transcends both capitalism and socialism by combining free markets with the democratization of economic power and capital ownership, please see the 28-minute video of CBS’ Mike Wallace’s interview with Mortimer Adler (http://www.hrc. utexas.edu/multimedia/video/2008/wallace/adler_mortimer.html) and Mike Wallace’s interview with Louis Kelso and Senator Russell Long (http://www.youtube.com/watch?v=odDGX8q2o3I).