Re: Yes, the Earth is Round (2) With self-financing depreciationcashflows

[Dellerman@worldbank.org]

Shann replied to "Yes, the Earth is Round" in three parts.  I will comment on
the three parts here so as not to further clog  inboxes.

1. This part was rather terminological in the sense that it emphasized using new
terms like "procreative capital" when there was no new concept.  Moreover it is
not good terminology to label an asset with a property that it would have under
a certain array of prices and not under others.  A buggy-whip-producing machine
may have been "procreative" around the turn of the century but not now so it is
not an attribute of the asset itself but the array of prices in the economic
context.  All this is well known in the economic theory of capital, and I won't
waste anyone's time debating terminology.

2. This part analyzed the dilution+taxbreak argument, and in spite of much
darting off in many other directions, agreed with the argument.  Shann wanted to
make the depreciation calculations explicit rather than implicit (prior to the
EBIT) which is fine but does not change the dilution argument in the slightest.
He gives a long numerical example which only reiterates my point that you need
some change in labor compensation or productivity to prevent the result that the
ESOP shares are paid for by dilution and tax breaks.  He uses a $200 dollar
reduction in labor costs to precisely counterbalance the $200 ESOP contribution,
and that is exactly the sort of thing that is needed to counteract the dilution
effect.  My only puzzlement in the submission is that if Shann now understands
his own example of the shares being paid for by reductions in labor
compensation, why does he continue the rhetoric full-force about procreative
capital?  I am afraid the intellectual fog has not quite lifted.

The "answer" to the twice-paid-for argument seemed to only be that not both
payments were in cash.  No one said both payments were in cash so I fail to see
the point.  The cash injected into the company is paid for twice: once in the
shares issued to the ESOP and the second time in the loan payments packaged as
ESOP contributions.  Since the shares don't come back to the company when the
ESOP contributions are made and since each transaction is a stand-alone quid pro
quo transaction, that makes the injected cash "twice-paid-for".  But the second
payment is attenuated with the tax break, etc etc.

3. Here again, I couldn't find much counterargument about dynamic expiring
property rights.  There were a few paragraphs on the virtues of saving upfront
costs with leasing rather than buying property.  Nothing controversial there.
He emphasized that he is only considering voluntary changes, not expropriation
or state-mandated attenuations of property rights, which takes it out of the
realm of public policy debate (which is where I thought we were) and into the
realm of personal financial or estate planning.  Of course, any property owner
could choose to parse the bundle of usual property rights and sell certain
expiring or lease-like rights to a current user and the remaining long-term
ownership could be sold or gifted to a land trust or community land bank.  That
does not answer either of the problems I raised about paying for the transfer to
the land trust (assuming a gift reminds me of the old economist joke about
"assume a can opener") and about the supply effects of attentuated property
rights on produced property.  If the construction firm building a chemical plant
could only be paid the value of a short-term capitalized lease and had to gift
the remaining value to a procreative asset trust, then it would have a large
effect on the supply of procreative assets--that is the the "funny" (in the
sense of weird, not ha-ha) part of the idea.  If the lease period is around the
lifetime of the asset, then one is only kidding oneself to make a big
distinction between owning an asset and buying a long-term lease.

Moving on:  Since no one has yet dented the dilution+tax break argument, I will
stop reiterating those points and move on in later submissions to the
risk-bearing arguments discussed by Harrington and Upton.
_______________________________
David Ellerman
Economic Advisor to the Chief Economist
World Bank, Room MC4-335
1818 H St., NW
Washington, DC 20433
Ph: 202-473-6368
Fx: 202-522-1158