Re: HOMESTEAD: Ray Carey's Democratic Capitalism

[John Médaille <john@medaille.com>]

At 11:38 AM 7/27/2005 -0400, David Spitzley wrote:
> >>> john@medaille.com 07/27/05 10:29 AM >>>
> >  Nevertheless, alternate formulations of ESOPs could eliminate the
> > necessity of sub-market asset pricing, so it is important to distinguish
> > between weaknesses in the actual implementation and inherent flaws in the
> > original concept.
>
>Someone will have to show me these "re-formulations," since the market only
>exchanges equal values. Without a sub-market purchase, either voluntary or
>compelled, nothing really changes.
>---------------------------------------------
>
>John, your basic complaint seems to be that there needs to be thumb on the 
>scales somewhere in order to make significant social changes through 
>ESOPs, and basically I think you're right.  I make no claims that this 
>could be implemented in practice, but Kelso advocated using the Federal 
>Reserve window to provide sub-market >financing<.

Than we both agree that *something* needs to be sub-market for anything to 
change.  Employees would have to get a better rate than everyone else for 
the stock purchases. It cannot be a pure market transaction, since market 
transactions cannot redistribute power.

>  To that extent ESOPs would be in a position to acquire capital under 
> terms more favorable than those available under "free market" conditions, 
> which presumably could induce some significant shifts in the ownership 
> landscape.  Since the ownership transitions would be triggered by 
> changing the Fed's method of infusing new money into the economy, rather 
> than by redistributive taxation or expropriation of existing owners, 
> Kelso thought it would be a superior and less-disruptive mechanism for 
> altering the ownership structure of the country.  It has always struck me 
> as a relatively clever approach.
>
>So, the reformulation would be that rather than providing tax incentives 
>to sellers to essentially subsidize the ESOP, the ESOPs would get their 
>oomph from sub-market interest rates which would enable them to repay loan 
>principle from earnings on the purchased assets, which Kelso argued would 
>not otherwise be feasible.

The question then becomes how much of an oomph is that, and who pays for 
the lowered interest rate. That would be a cost to someone, no? The only 
"transfer" here would be the value of the lower interest rate. But the 
current owner would still have as much market power after the transaction 
as he did before. I don't think there is enough there to really change 
anything significantly. The only time ESOPs work is when the current owners 
voluntarily give up power and control. Now, if it could be shown that they 
would make as much or more with only, let of say, one-third of their 
current ownership (due to efficiencies from employee ownership) then they 
might be induced to do so. But that is a big if.


John C. Médaille

"A dead thing can go with the stream...
but only a living thing can go against it."
         -G. K. Chesterton
http://www.medaille.com/distributivism.htm
john@medaille.com

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