No, this is not a posting on the situation at the University of Notre Dame, where the president, the Rev. John Jenkins, C.S.C., has openly flouted explicit instructions from the U.S. Bishops' Conference and directives from the Vatican, and ignored "hints" from prominent Catholics and petitions from concerned students, faculty, alumni, and friends of the University in extending an invitation to Mr. Obama to speak at this year's Commencement. This is, rather, another attempt to reach the powers-that-be in Ireland and alert them to the possibilities offered by Capital Homesteading and the Just Third Way for solving the current economic crisis. This is a slightly edited version of a letter we sent to Dr. Alan Barrett of the Economic and Social Research Institute (ESRI) in Dublin, www.esri.ie, the leading think tank in Éire.
Dear Dr. Barrett:
The article in yesterday's Irish Independent, prepared from a review provided by your organization ("Republic's Economy is Fastest Shrinking in Developed World") gives a much-needed warning about the direction in which the current economic crisis is leading not only Ireland, but the world. Paradoxically, your statement quoted at the end of the article to the effect that it is too early to decide whether the proposed measures will be adequate suggests that there is hope — if only because what you said indicates a certain openness of mind to innovative solutions that are both financially feasible and ecologically sound.
In view of that, I would like briefly to introduce the work of the Center for Economic and Social Justice ("CESJ"), www.cesj.org, to you, and then suggest some possible areas of cooperation between your organization, and our all-volunteer think tank and its interfaith membership.
CESJ was founded in 1984 by a small group of Jews, Christians, Muslims, and others who came together on the basis of a set of shared values based on the natural law tradition of the west to promote the economic justice principles developed by Dr. Louis O. Kelso and Dr. Mortimer J. Adler, and the social doctrine of Pope Pius XI as analyzed by "America's greatest social philosopher," Father William J. Ferree, S.M., Ph.D., who was one of CESJ's co-founders.
Kelso and Adler's work is best set forth in the two books they co-authored, both with misleading titles but profound thought, The Capitalist Manifesto (1958) and The New Capitalists: A Proposal to Free Economic Growth from the Slavery of Savings (1961). Louis Kelso is best known as the inventor of the Employee Stock Ownership Plan ("ESOP"), a financing vehicle that has resulted in more than 11 million workers becoming part owners of the more than 11,000 companies for which they work. Mortimer Adler, as you are probably aware, designed the "Great Books" program at the University of Chicago, Illinois, and was considered the premier American Aristotelian of the 20th century.
Father Ferree was, at different times, president of Chaminade College in Honolulu, Hawaii, Rector of the Catholic University of Puerto Rico, and Chairman of Dayton University. His most important work was his doctoral thesis, The Act of Social Justice (1941) in which he explained Pope Pius XI's revolutionary breakthrough in the field of social morality. At the time of his death in 1985, Father Ferree was hard at work on a new book intended to integrate the economic justice principles developed by Kelso and Adler into the social teachings of the Catholic Church.
After reviewing the work of your institute as described on your website, I believe that an approach CESJ calls, "The Just Third Way," especially as embodied in our "Capital Homesteading" proposal, might have much to offer you. In particular, we have specific proposals designed to address the problem areas targeted in the article in the Irish Independent:
Unemployment. Demand for capital and labor follows increased consumer demand. Economic growth and thus job creation thus results from increases in consumer spending, as Dr. Harold Moulton demonstrated in his 1935 monograph, The Formation of Capital. Consistent with "Say's Law of Markets," which states that production equals income, and thus supply generates its own demand, and demand generates its own supply, the Just Third Way addresses the problem of unemployment by opening up democratic access to capital credit for new, financially feasible investment. As new capital is formed and financed in ways that allow first the workers, and then every citizen to share equitably in the ownership of the new capital, jobs are created first to produce the capital, then to supply labor for the new or expanded productive enterprise. The wages paid during this process increases consumer demand, which leads to additional new capital formation and more job creation. Additionally, when companies can obtain financing for new capital by selling shares to the workers and other citizens instead of retaining earnings, all earnings above working capital needs can be paid out, further increasing consumption income and thus effective demand, once the workers and other citizens have paid for their shares out of dividends.
Housing. The Just Third Way would address the housing and building trades crisis with a new ownership/financing vehicle called the "Homeowners' Equity Corporation" ("HEC"). A HEC is a proposed for-profit stock corporation whose shareholders would be homeowners in danger of foreclosure. HECs — and there should be many, to provide redundancy, lower risk, and ensure competition in a community — would purchase distressed properties at the current market value. HECs would obtain acquisition loans from commercial banks, which in turn would discount the loans at the central bank 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. Financing the purchase of properties through the central bank and its member banks would cost the taxpayer nothing and be the first step in restoring a currency backed by hard assets instead of government debt.
Deflation. The Just Third Way addresses the twin evils of inflation and deflation by the same method. In classic banking theory, money can be created at will without inflation if (and only if) the money is used to finance capital projects that pay for themselves out of their own future earnings. Because money can be created through the banking system and backed up by the central bank for as many financially feasible projects as are brought to commercial banks for financing, there is no danger of deflation. Because the money created for capital investment is canceled once the loan by means of which the money was created is repaid, there is no danger of inflation. There is always enough money, and the price level remains stable. The need to accumulate savings to use as collateral is eliminated by using capital credit insurance, backed up by a capital credit reinsurance pool to spread risk even further, instead of concentrating the risk in individual borrowers, lending institutions, or the State.
Government debt. The Just Third Way's Capital Homesteading proposal includes a complete reform of a nation's tax system. Much of the complexity found in the tax systems of many countries results from the basic assumption of Keynesian economics that capital formation cannot be financed except out of accumulated savings. While Keynes' assumption contradicts classic banking theory as well as historical fact analyzed by Dr. Harold Moulton, the world's tax systems reflect the presumed necessity of favoring the wealthy in order to induce them to save and reinvest their income to finance capital formation and thereby create jobs. This greatly reduces consumption income, and the government inflates the currency to increase effective demand so that "excess" production can be cleared. This lays the foundation of the erroneous Keynesian belief that there is a necessary trade-off between inflation and unemployment. This also greatly reduces the tax base, forcing the government to borrow both to meet its expenditures as well as to cause inflation to increase consumption and maintain the desired number of jobs artificially. Without the need to reduce the tax base by favoring the rich or make up for the decrease in effective demand by inflating the currency through government borrowing, the State can begin following sound, non-politically motivated monetary and fiscal policies and begin paying down debt without risking the harm that Keynes was convinced would result.
If these brief descriptions of some of our proposals intrigue you, I invite you to pay a visit to the CESJ website, www.cesj.org. I would draw your particular attention to the free download available of our book, Capital Homesteading for Every Citizen, as well as the paper on the HEC. If you have any questions, or if you would like to discuss anything on the website or grounds for possible future collaboration, you will want to make contact with Dr. Norman G. Kurland, president of CESJ. Dr. Kurland can be reached via e-mail telephone using the information given on the website.
Dr. Kurland's concern for justice for the poor has been evident since his work in the Civil Rights movement in the American south in the early 1960s, continuing through his collaboration with the late labor statesman Walter Reuther of the United Auto Workers in Reuther's "Citizens' Crusade Against Poverty." Later, Dr. Kurland was instrumental in persuading the late Senator Russell Long of Louisiana to champion the Employee Stock Ownership Plan ("ESOP") invented by Louis Kelso.
Dr. Kurland also served as Deputy Chairman for the Presidential Task Force on Project Economic Justice under President Ronald Reagan, and presented the report on CESJ's efforts to promote economic and social justice in a 1987 private audience with His Holiness Pope John Paul II, more fully described in CESJ's "accomplishments brochure." Most recently, Dr. Kurland has developed the concept of the "Natural Resource Bank" which would have the capacity to vest all inhabitants of a region with a direct, definable private property stake in the land and natural resources. Dr. Kurland was also influential in developing the HEC, described above.
Thank you. We look forward to hearing from you.
Thursday, April 30, 2009
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The Man Who Would Make Everybody Richer
Monday, Jun. 29, 1970 TIME
EVEN in an age that venerates heresy, the iconoclastic philosophy of Louis Orth Kelso outrages many a professional economist. "A crackpot theory," argues Money Expert Milton Friedman. "Instead of saying that labor is exploited, Kelso says that capital is exploited. It's Marx stood on its head." Replies Kelso: "Damn right-and what's wrong with that?"
Kelso, 56, a highly successful San Francisco corporate lawyer, author and sometime economist, insists that economic ideologists as diverse as Karl Marx and John Maynard Keynes have been wrong. They have overstressed one factor-the role of labor-in the production of industrial wealth. Kelso holds that "the second factor," capital, is increasingly more important than labor because both technology and modern management aim at saving labor.
The U.S. economic system is in trouble, Kelso insists, because 5% of the population owns the capital-money, securities, land and tools-that produces about 90% of the wealth. This means that the rich grow richer while the bulk of U.S. workers are denied an opportunity to obtain a worthwhile share of the nation's abundance. What Kelso wants to do is turn 80 million workers into capitalists through a complex maneuver that would enable almost everybody to buy blue-chip stocks with borrowed money and ultimately enjoy a "second income" from the dividends.
The Closed Frontier. Kelso's idea has elicited increasing debate lately among bankers, corporate executives and officials of several governments. Venturesome companies have used some of his methods to shift ownership to their employees. Early this year, Alberta, Canada's historic haven for economic experimenters, began a formal study of Kelso's entire doctrine. Last week, as he has for more than a decade, Kelso hopped across the U.S. expounding the merits of his "universal capitalism." In Chicago, he met with a group of insurance men. In Washington, he dined with five Republican Congressmen, two Administration aides and Elliot Richardson, the incoming Secretary of Health, Education and Welfare. At week's end Kelso flew to Stanford University to give a lecture to executives of 13 California companies.
The Denver-born son of a poverty-plagued musician, Kelso developed his theories partly from his own struggle to make a living. He went to work when he was in the ninth grade and drove a dynamite truck to earn his way through the University of Colorado, from which he holds degrees in both finance and law. He grew interested in economics, he says, "by brooding about the absurdity of the Depression." While stationed in the Canal Zone as a Navy intelligence officer during World War II, he wrote a 600-page manuscript pro pounding his views. It lay in a closet for 15 years, until Philosopher Mortimer Adler, intrigued by a conversation with Kelso, asked to read it. Adler was so fascinated that he collaborated with Kelso on The Capitalist Manifesto, published in 1958; it has since sold 50,000 copies. To further his reform cause, Kelso later started in Washington the Institute for the Study of Economic Systems. Last year he gave the institute $52.000 from the six-figure income that he draws as senior partner in Kelso, Cotton, Seligman & Ray, one of San Francisco's ten largest law firms.
In his latest book, Two-Factor Theory: the Economics of Reality (coauthored by Patricia Hetter), Kelso maintains that the American system is "coming apart" because of its "defective financial and economic framework." One of his most potent arguments is historical. Until the close of the frontier, even the poorest laborer could acquire capital virtually free, in the form of land. "That opportunity motivated the building of the most powerful economy on earth," declares Kelso. Now that the free land is gone, he contends, the U.S. seems to have forgotten that "property is the only power capable of protecting the individual's political freedoms and rights." Homesteading with Stocks. Kelso calls for a kind of Homestead Act that would make stock, rather than land, available to people who lack the cash or credit to buy it. He envisages creation of a federal agency to insure "capital diffusion loans," much as the Federal Housing Administration insures mortgage loans. He would empower banks to borrow funds directly from the Federal Reserve for such lending.
The plan might begin by helping the poor and unemployed. An eligible borrower would go to a bank and obtain, for example, $4,000 a year for five years (or $20,000 all together) to buy stock in corporations. The bank, protected against loss by the Government insurance, would put the money in escrow; a trust officer would buy a diversified portfolio of dividend-paying shares. Kelso figures that the stocks would ultimately pay for themselves through dividends. Thus the borrower could pay off the loan, then own the stocks outright and enjoy a dividend income from $20,000 of capital.
Raising the Dividends. At present, a $20,000 portfolio of high-grade stocks generally pays about $1,000 a year, or 5% in dividends. But Kelsonian economics calls for a return of at least 20%, or $4,000 a year-a level that Kelso figures could take 5,000,000 families off the welfare rolls in five years. To increase the dividend payout, Kelso would gradually abolish corporate income taxes and require companies to distribute all of their earnings to stockholders. Kelso maintains that the Government's revenue loss would be temporary and bearable. One reason is that rising personal-income-tax collections would greatly offset the gradual decline in corporate tax take. He also foresees a decline in Government expenditures for welfare and "make-work" activities -subsidies for uneconomic farms, dubious construction and military projects -that, by his estimate, now occupy one-third of the U.S. labor force.
The benefits of the plan would spread to middle-class workers in two ways. First, Kelso estimates, the funds for capital investment through increased stock sales would support economic expansion at hitherto undreamed-of rates of perhaps 15% or 20% a year, creating a great demand for labor. Second, companies would be tempted to adopt Kelso's plan voluntarily, partly because of a quirk in tax laws. For example, if Beneficial Paper Co., with 1,000 employees, wanted $20 million to build a factory, it would issue $20 million worth of new common stock. An employee-owned trust, set up somewhat like existing pension and profit-sharing trusts, would buy the shares with money borrowed from a bank. Here the tax quirk comes into play: the company could agree to make tax-deductible contributions to the trust to enable it to repay the loan; if the company itself borrowed the money from the bank, the loan would have to be repaid in after-tax dollars.
Without corporate income taxes, the dividends from the employee trust's investment ought to average $4,000,000 a year, says Kelso, enabling the trust to repay the loan in five years. After that, each of Beneficial Paper's 1,000 employees would not only own $20,000 worth of stock' but would also have a second income of $4,000 a year.
Some companies have already set up tax-sheltered trusts that allow their workers to become stockholders on credit. When the employees of San Francisco-based First California Co. found that the investment banking firm was for sale, they converted their profit-sharing plan into a stock bonus trust. The trust used its cash, plus a borrowed $1,000,000, to buy F.C.C.'s common shares, pledging the assets of the company to secure the loan. Within 2± years, the trust repaid the loan out of company profits. In similar fashion, employees used a Kelso-devised fund to buy Peninsula Newspapers, Inc. of Palo Alto, Calif.
Unbottling the Genie. Like any adventurous idea, Kelso's plan has drawbacks. Critics argue that even if Congress could be persuaded to change the necessary laws-a big if-his second-income plan would merely be a substitute for today's Government redistribution of wealth through taxes, welfare, giveaways and make-work programs. Another difficulty is that Kelso concentrates on the manufacturing sector of the economy, noting that greater capital investment would lead to more productivity. But he tends to play down the rising importance of the economy's service sector, in which productivity growth is slow and cannot be rapidly expanded by capital investments.
Present stockholders might logically object that issuance of so many new shares to finance plant expansion would dilute their equity in corporations. Kelso notes, however, that stockholders' proportional share in the old assets of a company would remain the same; only the new wealth created by expansion would be spread widely among the new shareholders. To be sure, if Kelso's plan were widely adopted, the stock market might lose its lure as a casino. Reason: investors would have much less incentive to gamble on rising stock prices and much more inducement to invest for steady income. Kelso expects that his plan would smooth the gyrations of stock prices. Even in a bear market, he argues, the public's appetite for new shares would hardly diminish because investors would not be risking their own savings to acquire stock. And he figures that people who own stock as a source of second incomes would be apt to retain it as long as corporations avoid large cuts in their dividends.
Despite the flaws, Executive Vice President Walter Hoadley of the Bank of America calls Kelsonian theory "a forward-looking concept designed to preserve our enterprise system." Kelso himself seems convinced that his time has come. "I let the genie out of the bottle, and it's not going back," he says. "What did the French College of Surgeons call Pasteur? A mere chemist. I think that I am the Pasteur of finance."
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