Re: HOMESTEAD: Ray Carey's Democratic Capitalism

["David Spitzley" <dspitzle@wash.k12.mi.us>]

>>> john@medaille.com 07/27/05 11:59 AM >>>
>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.
---------------------------------------------------------

Well, Kelso was mainly opposed to redistribution of income and existing assets, 
but he seemed to see the default operation of the market in allocation of >new< 
assets to be the central flaw in modern capitalism, so I think it's fair to say 
he agreed with you.

---------------------------------------------------------
>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. 
--------------------------------------------

Yeah, that's pretty much what Corey Rosen's argument was when I talked to him 
about this in years past; from what he can see there's sufficient low-cost 
financing lying around unused by ESOPs that he things opening the Federal 
Reserve window is a solution in search of a problem.  I'm still inclined to 
think that, particularly in an environment where typical interest rates are 
higher than they are now, Kelso's standard 2.5% rate for lending to ESOPs could 
be a pretty significant leg-up, but that's a question for modeling and 
empirical research.

--------------------------------------------
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.
--------------------------------------------

Hey, don't overestimate how much of a cut they'd have to take for ESOPs to be 
good for everybody; it's basically a question of what the elasticity of 
profitability is relative to employee ownership share.  If the typical 
multi-national company could, for example, see a 7% increase in profits per 
share by giving the workers a 5% ownership stake with accompanying 
participatory workplace reforms, that would be a pretty strong lever for 
starting things moving.  If the lowest 90% of households in the US snagged an 
additional 5% share of the nation's assets, I think that would be a pretty 
damned impressive improvement.


David

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