(Excerpted from a paper prepared by Norman G. Kurland at the request of the Chief Economist for International Economic Affairs, National Security Council, April 19, 1983.)
The Ideological Framework for Expanded Capital Ownership
In the past, most of America’s responses against Marxist aggressions have been defensive, our military actions in response to their military initiatives, our nuclear build-up in response to theirs. On the ideological level, calling our strategy defensive would be a compliment.
Calling for “Freedom and Democracy” without building structures for “Economic Justice” is naive. There is no meat on the message. We should not repeat this disastrous error in the future.
Our Foreign Assistance Act of 1963 stated the overall objective of American foreign aid: “To create conditions in the world under which free societies can survive and prosper.” Twenty years and billions of dollars later our foreign aid programs, as executed, have not impeded Marxism’s global reach.
Indeed, American foreign aid may have helped to pave the way for many of the Marxist revolutions and expropriations of privately owned enterprises that have occurred throughout Asia, Africa, and Latin America since World War II. Handouts by themselves do not deliver justice or help create a more just social order. They often widen the gap between the rich and the poor. They alienate the people we should be helping. They magnify the obvious difference between the rich and the poor: the rich derive their incomes from the ownership of capital and the poor lack effective access to capital ownership.
Thus, handouts create breeding grounds for Marxist-Leninism. Like military aid, they are at best temporary expedients, useful for buying time to attack the social and economic causes that lead to revolution. By not providing the poor in developing countries with the means to become partners in free enterprise growth, we have wasted resources and lives to revolutions that could have been avoided.
In the words of President Kennedy:
“By making peaceful revolution impossible, we make violent revolution inevitable.”
Farmers, workers, technicians, and businessmen in the developing countries now need more direct access to the finest talent and the most advanced technology, ideas, and institutional structures developed within the American free enterprise system. With access to the best tools and talent of our private sector, for mutual profit, the people of developing countries can create for themselves a freer and more just economic future. We can prove to the world that maximum justice and maximum profits can go hand-in-hand.
The time is now ripe for America to reach out to a broadened global constituency, the poor and oppressed of the many countries from which our ancestors fled. By taking the ideological high road against Marxist collectivism, we can now beat the Soviet Union, not with empty words or deadly weapons but with bold private-sector initiatives that all Americans could support. Through a radical extension of the American free enterprise system, economic justice can be brought to the poorest of the poor in developing countries. In a sense it would be a Space-Age version of the original American Revolution.
Broadened equity ownership was included in the 1938 Republican Party Platform. It was also called for in the 1976 and 1980 conventions of the Republican Party. Within the last 8 years Congress has passed 15 laws encouraging employee stock ownership plans (ESOPs) and over 5,000 companies are gradually spreading equity ownership among their several million workers. [Note: Figures are for 1983.] In 1976 the Joint Economic Committee of Congress declared broadened ownership of new capital as a major priority of American economic policy. While some academics and labor spokesmen have voiced skepticism and concern, citing a few cases where ESOPs were abused, even this resistance is diminishing. Several books and hundreds of articles have appeared in recent years favoring expanded ownership policies.
A labor statesman who recognized that the twin problems of productivity decline and cost-push inflation were unsolvable through the traditional wage system was Walter Reuther, the late head of the United Automobile Workers. Speaking before the Joint Economic Committee of Congress in 1967, he stated:
“Profit sharing in the form of stock distributions to workers would help to democratize the ownership of America’s vast corporate wealth. If workers had a definite assurance of equitable shares in the profits,they would see less need to seek . . . increases in basic wages.”
Even John D. Rockefeller III called for such a plan in his book, The Second American Revolution (1973).
In a letter to The Washington Post not long before his death, Senator Hubert Humphrey explained why he supported broadened capital ownership:
“[C]apital, and the question of who owns it and therefore reaps the benefit of its productiveness, is an extremely important issue that is complementary to the issue of full employment. . . . I see these as twin pillars of our economy: Full employment of our labor resources and widespread ownership of our capital resources. Such twin pillars would go a long way in providing a firm underlying support for future economic growth that would be equitably shared.”
The expanded ownership concept, purely on its merits, enjoys broad bipartisan support on Capitol Hill. The first to publicly support the concept was populist Senator Fred Harris in 1972. The first to introduce ESOP legislation aimed at comprehensive reform of the U.S. tax system was conservative Senator Paul Fannin in early 1973. The main champion of employee stock ownership in Congress is Senator Russell Long, who first learned of the ESOP as a result of Senator Mark Hatfield’s initiative to convert the Conrail system into a 100% employee-owned railroad. Other sponsors of ESOP legislation have covered the ideological waterfront, from Robert Byrd and Alan Cranston to John Towers and Mac Mathias, from Jesse Helms and William Roth to Gary Hart and Paul Tsongas, from Phil Crane, Jack Kemp and Bill Frenzel to Parren Mitchell, Don Edwards and Ron Dellums.
Rep. Michael Barnes, Chairman of the House Foreign Affairs Subcommittee on Inter-American Affairs, reacted to a proposed expanded ownership initiative for El Salvador, by recalling the words of former Salvadoran President Duarte:
“If my people believed that tomorrow would be better than today, that their children would have a better life than they have had, then the communists could ship in all the guns they want. There won’t be anyone to pick them up and use them.”
Rep. Barnes added his own footnote:
“There’s more wisdom in that single statement than in everything our government has had to say on the issue in the past two years.”
Basic Components of an Agenda for Economic Justice
To succeed on the ideological front, it would help to organize on a regional basis, perhaps within a regional bank with central banking capabilities, such as the Central American Bank for Economic Integration. From such a base it would be easier to advise on the infrastructural changes that would be necessary within one or more of the developing countries willing to cooperate on the new agenda for stimulating private sector growth linked to broadened ownership.
The strategic objectives would be to maximize growth rates, jobs, and productivity of the private sector within selected countries or target areas, with a zero rate of inflation, and maximum ownership and profit sharing opportunities among all private sector workers as a supplement to free market wage rates.
The four main components of this agenda for economic justice are:
- a new social contract with workers based on expanded capital ownership;
- a two-tiered capital credit system for local banks;
- a regional SDR to establish lower-tier-capital credit; and
- the multinational corporation as a primary vehicle for accelerating private sector growth linked to expanded ownership. These are explained below in more detail
A. A New Social Contract With Workers Based on Expanded Capital Ownership
The traditional wage system rests on a “conflict theory” of management-labor relations. The traditional system takes for granted that workers and owners have different interests and therefore assumes that they will be in conflict. That assumption vanishes under a system which attempts to maximize the ownership opportunities of working people, whenever possible enabling the management and non-management workers to acquire up to 100% of the firm they work for.
The expanded ownership system assumes a merger of interests among all persons with an ownership stake in the enterprise. If implemented properly, maximum profits and maximum justice go together. Job security is enhanced by everyone agreeing to accept modest base wages, generally set in the freely competitive market-place. This allows the company to operate with low fixed costs when times are rough. But workers participate in a monthly cash bonus plan and an annual cash bonus plan, both based on a formula linked to productivity and profits. A wage differential may be instituted so that the highest paid manager is paid a multiple of what other full-time workers are paid, with his increases also coming from his proportionate share of productivity and profits of the overall company; in this way all members of the team prosper or tighten their belts together.
The best ESOP models allow employees to vote their ownership stake in the company, normally measured by their shares of stock. An employee-owned company is generally structured to permit delegated powers and responsibilities, with a minimum of formal meetings or group decision-making. Thus, it is a system which must be delicately structured (like a republican form of government) to balance efficiency with justice; a high degree of autonomy for leadership decisions, with high levels of management accountability and disclosure of results; professionalism at the top, with self-management of the workplace. The basic principle of management is that of “subsidiarity,” where authority is left as close as possible to those responsible for doing the work.
Workers earn their ownership shares, generally based on credit extended to them individually or jointly and repayable with their share of future profits. Ideally, the tax system would avoid the double tax on corporate profits, so that the capital credit for workers could be repaid with future dividends. In the United States workers are taxed on the bonuses or dividends they receive in cash, but they are not taxed until retirement on the stock they accumulate within an ESOP trust. Tax laws that allow workers to accelerate the rate of their equity accumulations help promote savings and investment within the private sector, while reducing the need for redistributive taxation. (See the “Expanded Ownership Act” introduced by Senator Long for additional tax reforms to encourage employee stock ownership.)
Remember, one of the unique features of an ESOP is that it systematically extends the benefits of capital credit among all workers of a company. This allows the employees to borrow to buy outstanding stock from an existing owner (including the government, where it wishes to denationalize a nationalized enterprise), or to buy newly issued stock directly from the company for meeting the expansion or working capital needs of the company. A properly designed loan to an ESOP is more secure than a straight loan to the company because, in addition to normal security on loan repayment, the workers have a stake in the outcome and there are special tax advantages for all parties.
B. A Two-Tiered Capital Credit System for Local Banks
There is one thing that bankers, businessmen, and political leaders in the developing countries can agree on; high interest rates are a major barrier to sustaining a healthy free enterprise system. On the other hand, everyone would agree that nothing would do more to get everyone’s attention and to promote a more broadly-owned and more just free enterprise system than to combine it with the carrot of a radically lowered interest rate. There is a logical way to create a differential of 7.5% or more in prime business loans that would be made available through local bankers. This strategy is known as a”Two-Tiered Interest Rate Policy.” The rationale for this policy is as follows:
High interest rates are choking the life out of business. Today’s interest rates have effectively stifled business expansion and modernization, have depressed innovation and productivity, and have curtailed the absorption into a revitalized private sector of millions of unemployed and underemployed and excess government workers in almost every free enterprise nation.
Much of today’s economic malaise stems from the money-creating policies of central banks like the International Monetary Fund (IMF), which reflects the same policies as the Federal Reserve Bank and the central banks of the major Western economies. The IMF is an emergency lending organization to which 146 governments belong. Because of the central role the IMF plays in international finance, the debts of poor countries are expected to reach $650 billion by the end of 1983, nearly $400 billion of which is owed to private banks. Many of these countries cannot afford the interest payments at today’s high rates, let alone the principal.
When it issues Special Drawing Rights (SDRs, sometimes called “paper gold”), the IMF “creates money” which can be used for making loans. We call this “pure credit,” to contrast it with credit based on already existing savings. How “pure credit” is used, however, determines whether it will be inflationary or not and whether or not it will be an asset-backed currency.
The IMF, like all central banks today, including our Fed, fails to distinguish between supply-side and demand-side credit, between self-liquidating credit for productive purposes and non-self-liquidating credit for non-productive purposes. Self-liquidating credit is used to buy things intended to produce new wealth or future savings sufficient to pay its own acquisition costs. Non-self-liquidating credit (e.g., loans to cover government costs or consumer credit), by definition, is never used to buy things expected to “pay for themselves.” While capital credit creates a healthy demand for the plant and equipment producers need to supply more consumer goods and increase real consumer incomes, non-productive government credit simply pumps new currency into the economy, giving consumers a false sense of their buying power. Productive credit increases the supply of new marketable wealth or is used to acquire new income-producing investments. Non-productive credit, in contrast, merely stimulates demand, creating artificial buying power to purchase existing wealth, commodities, and securities. For example, the IMF monetizes non-productive government deficits when it buys that government’s debt paper, instead of allowing market savings rates to discipline government overspending. This fuels inflation.
The discount powers of an international central bank like the IMF could be the key to uniting the workers and owners of developing countries, without taking anything away from present owners, except the dubious “right” to monopolize future access to capital credit. It should not be forgotten that control over capital credit represents control over future ownership patterns.
A more logical and just use of a central bank’s credit machinery would be under a two-tiered interest structure. The higher level would be geared to market-rate yields on existing savings. This reservoir of credit would remain available for all forms of conventional loans, including loans to governments and state-owned enterprises. The higher interest rates would discourage these less productive and non-productive uses of credit. This works against inflation.
The proposed lower level would create a new reservoir of credit, reserved exclusively for structuring a more just and productive future for free enterprise. Only credit intended for productivity-oriented purposes in the private sector would be eligible.
But there is a hitch. The lower-tier would be reserved exclusively to channel the “magic” of future capital credit in ways that systematically transform wage-earners into an ever-widening base of capital owners, or to save farmers and entrepreneurs from losing their farms and businesses because of today’s high interest rates. This combination of reduced credit costs and worker ownership is counter-inflationary by design.
For business reasons, and to underscore the injustice to workers of state-owned enterprises, this lower-tier should never be used, for example, to help refinance the $26 billion in debt like that recently negotiated with the Polish Government by Western bankers. Today they use the savings of Western workers to supply the credit to build State-owned enterprises, at the expense of the capital-starved Western factories which are laying off their own workers.
No longer will Western capitalists give their own money to buy the rope to hang themselves. Instead, unsubsidized lower-tier credit would be used to denationalize some of the government-owned enterprises in communist countries and organize them into employee-owned stock corporations, using a “qualified ESOP.” In this way, the “magic” of capital credit would become our most powerful weapon in pointing out the ideological contradictions of Marxism-Leninism.
Every dollar saved in interest costs could add a dollar to the bottom-line profits of the borrowing businesses and farms or save a dollar in prices to their customers. But it would also be a dollar for promoting economic justice for working people.
C. A Regional SDR to Establish Lower-Tiered Capital Credit
The third major component in the agenda for economic justice is to mobilize friendly countries in a development region like the Caribbean Basin in support of a new unit of international credit. The IMF cannot be expected to play this role. As mentioned earlier, the Central American Bank for Economic Integration might be the ideal place to start this new initiative. CABEI could, with the backing of the United States and countries which might respond positively to these ideas, issue a new currency, a Caribbean Basin SDR, to be used for regional economic development linked to expanded capital ownership and issued exclusively through the lower-tier discount window of the regional central bank as outlined below:
Eligibility for access to the lower-tier discount rate at the regional central bank should be based on the following criteria:
(1) The privilege of discounting “eligible” paper should be limited exclusively to commercial banks declared “eligible” by the regional central bank.
(2) “Eligible” loan paper should be:
(a) Limited to private-sector productive credit instruments;
(b) Issued for any commercial, industrial, or agricultural purposes or ventures determined to be economically feasible by the lending bank. (Credit for speculation in securities or commodities, unfriendly acquisitions, consumer or home purchase credit, public-sector programs, or for other non-productive purposes should be declared specifically ineligible for lower-tier interest rates.);
(c) Designed to be repaid on a self-liquidating basis, primarily through projected future pre-tax profits of the enterprise guaranteeing the loan’s repayment;
(d) Made the direct debt obligation of a capital credit mechanism that is “qualified” for ownership-expanding purposes by the regional bank or some expanded ownership authority approved by the cooperating countries in the region, including an ESOP trust for corporate employees; a general stock ownership corporation (GSOC), a professionally-managed real estate planning and development corporation for spreading equity ownership among residents of development communities; production and marketing cooperatives owned by workers and farmers; and small businesses and family farms which provide all their regular full-time workers with equitable opportunities to share in ownership and profits; consumer stock ownership plans (CSOPs) to spread equity ownership among customers of highly capital-intensive enterprises, like public utilities, cablevision, mass transit systems, etc.; and Village Corporations, for equity participation by rural workers in integrated agro-industrial enterprises;
(e) Collateralized by whatever tangible and intangible assets are to be acquired with the loan proceeds, plus shares of corporate stock to be acquired by an ESOP or other qualified capital diffusion mechanism;
(f) Guaranteed by the general credit of the sponsoring enterprise;
(g) Endorsed for negotiability by the member bank or banks discounting such paper;
(h) Insured to cover the risk of default, when appropriate, by a premium paid by the borrower or the lending banks to a regional central bank-approved public or private capital diffusion insurance company;
(i) Supported, when appropriate, by documented business plans and feasibility studies justifying the need for capital credit; and
(j) Endorsed by every collective bargaining unit representing employees of the sponsoring enterprise whose members are to receive ownership benefits as a result of the loan.
(3) All credit charges (including bank administrative charges and profits, the risk of default, etc.) above the fixed central bank discount rate of 1% or less, would be set by marketplace competition between qualified member banks. While higher-risk loans would naturally cost more, the normal bank mark-up on money to their best business customers would still keep the lower-tier prime rate at about 3%.
(4) The regional central bank could also require that all new currency issued through the lower-tier discount window be matched by “eligible paper,” creating an asset-backed currency reflecting the economy’s true increases in productive capacity. The central bank could add a 100% reserve requirement for lower-tier participation. This would eliminate the power of member banks under fractional reserve banking to leverage their lending capacity for “non-eligible” purposes with currency supplied at lower-tier rates. The supply of new money would thus be tied closely to real income-producing growth of the economy, thus keeping the region’s overall money supply under tightened control of the regional central bank.
Other Advantages of a Two-Tiered System
The two-tiered interest system would not involve tax-payer dollars. No loan funds or interest rate subsidies would come from the taxpayers or in any way increase government borrowings. (In fact, this radical lowering of the cost of money to local banks and their business borrowers-by accelerating growth in private investment, jobs, and productivity should quickly begin to cut government deficits.)
Since the two-tiered interest strategy would strike directly at the underlying causes of inflation-by discouraging excessive demand with higher interest rates and by encouraging maximum production with 3% prime rates or lower–an “inflation premium” would not be justified for capital credit linked to broadened ownership.
“Eligible” commercial banks, not the regional central bank itself, would still scrutinize feasibility of each loan before it was made. Approved local banks with access to the discount windows of the regional central bank would make all loans and set interest charges to eligible borrowers. Thus, bank lending practices could continue to insulate the central bank from political pressures to favor one borrower over another.
For both the upper and the lower tiers, the market would still determine the cost of money, including bank charges and profits. Bank markups and differential risk premiums which are normally included in interest rates would not be reduced. Both the volume of loans through the commercial and agricultural departments of local banks would greatly expand, along with bank profits. Once commercial loan officers fully understand their expanded role and new business opportunities under the two-tiered credit system, they can be expected to support it. (Today less than 20% of all U.S. new capital formation is financed through commercial banks.)
D. Multinationals Corporations as Primary Vehicles for Accelerating Private Sector Growth Linked to Expanded Ownership
American assistance to the developing countries could be vastly expanded, with reduced taxpayer support, if U.S.-based multinational corporations could be encouraged to link their investments overseas with the expanded ownership objectives called for under the Capital Homestead Act. [See author’s paper “The Future of the Multinational Corporation.” ] For example, through use of ESOP financing the multinationals would not only convert their foreign employees into capital owners, but in so doing would automatically be creating a broadened political constituency for a global common market based on free enterprise principles. No troops or foreign aid could offer a more effective safeguard against future expropriations and nationalizations of U.S.-based companies around the world. This would also facilitate the transfer of U.S. know-how and technology in ways that would further peaceful growth and expanded U.S. markets.