Naturally we cannot give the complete Capital Homesteading program in a blog posting or two. Even the "fleshed out" outline given in the book Capital Homesteading for Every Citizen (Arlington, Virginia: Economic Justice Media, 2004) is a manual to guide policymakers and advisors to put together a specific legislative package, not to detail every step that needs to be taken. Finally, the point of this blog series is to point the way to a restoration of private property, a goal that, strictly speaking, concerns only two of the four pillars of an economically just society that we listed earlier in this series, 3) restoration of the rights of private property, especially in corporate equity, and the "fatal omission," 4) widespread direct ownership of the means of production.
Not that these two pillars can be separated from the first two, 1) a limited economic role for the State, and 2) a free and open market as the best means for determining just wages, just prices, and just profits, in any realistic manner. If this blog series has done nothing else, it has demonstrated that, even in this simplified presentation, all the elements of the Just Third Way are so intertwined and interdependent on all the others — just as the institutions of the common good come together in a complex and interdependent network — that isolating them even for the purposes of analysis and discussion is extremely difficult. We cannot consider the restoration of property without also taking into account the role of the State and the market, any more than we can understand what needs to be done without clearly distinguishing between the natural right to property — the absolute right every human being has to be an owner, individually or in free association with others — of the means of production, from the socially determined rights of property: the specific institutions that define what an owner may do with what he or she owns, and often, for the sake of expedience, whether a specific thing (such as a nuclear bomb) should be private owned.
We must, therefore, keep current social and legal conditions in mind when considering the problem. To this we necessarily add all the principles of the Just Third Way as well as the basic precepts of the natural moral law and the laws of economics. Unless we fall into the trap of Machiavelli and start believing that the end justifies the means, we cannot take short cuts by redefining basic institutions, or asserting that a particular expedient is good when we know full well — or should know, based on common sense — that it is really bad. On the contrary, we must keep all these things in mind without denigrating or dismissing any of them.
That being the case, we can present (at least in brief) the case for enacting a Capital Homestead Act.
As a first principle we take as a given that productive capacity must be restored. We can no longer adhere to the Keynesian dogma that it is possible to continue to redistribute and consume wealth without producing anything. That requires an examination of the system by means of which capital is financed and put to use, as well as the distributive mechanism inherent in the rights of private property.
In "normal" times in the United States, public and private productive capital grows annually at a rate exceeding $7,000 for every man, woman and child. This amount increases dramatically if we include replacement capital. This new and replaced capital, the source of America's capacity to produce in greater abundance than other economies, is almost inevitably financed in traditional ways. That is, financial institutions and other sources of capital credit assume as a given what we have already demonstrated is false: that capital formation is always financed out of existing accumulations of savings. Since the rich and the super-rich are the only people who can afford to save under this assumption, few, if any, new owners will be created, and ownership of the means of production will become increasingly concentrated.
Over the years this assumption — the "slavery of past savings" — that underpins traditional methods of corporate finance has resulted in policymakers' and academics' unthinking adherence to Keynesian dogma. This has led to an enormous and growing wealth gap. A rough estimate is that the wealthy top 10% in the United States own 90% of all directly held corporate stock. Most citizens have not accumulated sufficient savings — if they have managed to save at all — to meet their household needs for more than a month or so. If a typical worker becomes disabled or loses his or her job, he or she has little or nothing in the way of income-generating investments. Most people are wholly dependent on jobs, welfare, or charity to meet their needs. The non-rich have no independent source of an adequate and secure income.
Capital Homesteading is designed to close this growing wealth gap through the restoration of private property in the means of production, and do so in a manner consistent with free enterprise values of private property, free market competition, and minimal government intervention with voluntary choices among producers and consumers. In other words, Capital Homesteading is designed to lower barriers so that the poor and non-rich can lift themselves up into capital ownership, without taking anything away from the rich except the monopoly the rich currently enjoy on future wealth acquisition. Like the "the Great American Desert" covered by Abraham Lincoln's Homestead Act of 1862, the Capital Homestead Act is oriented to an open frontier — the technology frontier. Unlike land, however, which is limited, the technology frontier need never be "closed." The opportunity to become an owner of a part of the technology frontier can and should be made equally accessible to everyone as a fundamental right of citizenship.
The Capital Homestead Act is a proposal to provide a package of integrated income, gift, retirement and inheritance tax reforms, combined with monetary policy changes and other structural improvements to national economic policy. These are designed to provide every citizen an equal opportunity to own, control, and share profits from productive capital by opening up democratic opportunity to obtain capital credit, the primary means by which new and replacement capital is financed in an advanced economy.
The political rationale behind the Capital Homestead Act is that there is no reason that those who already have capital (and collateral to qualify for capital loans) should have a monopoly or be the exclusive beneficiaries of the government's control over "social goods" like money and credit that largely determine who will own future capital. A political democracy cannot rest comfortably and sustain itself on a foundation of government-supported economic plutocracy. Decentralized wealth would also counter the corrupting influences of concentrated wealth in campaign financing, and inhibit or even prevent the continuation or reformation of the "unholy trinity" of the federal government, the central bank, and Wall Street.
An essential premise of Capital Homesteading is that those who have no capital should have equal access to credit in order to acquire capital. This capital credit can be made available by the country's central bank — the Federal Reserve System — and allocated through local lenders for financing the capital needs of the productive economy. To address the growing wealth gap in market economies, Capital Homesteading would end the monopoly held by those who already have capital and thus collateral to qualify for capital loans. As we saw in the previous posting on taxation, the belief that capital formation can only be financed out of existing accumulations of savings "forces" the State to grant favorable — and inherently unjust — tax treatment to the very rich in order to encourage them to reinvest their capital earnings, further concentrating ownership of the means of production, and laying the groundwork for an eventual State takeover of the economy, resulting in an unending pendulum swing between different degrees and forms of economic and social injustice.
As described in Louis Kelso and Mortimer Adler's two books, The Capitalist Manifesto (1958) and The New Capitalists (1961), the monetization of capital credit under Federal Reserve policy and reinforcement by loan default insurance as a substitute for traditional collateral would facilitate the implementation of Capital Homesteading. Capital Homesteading reforms would then enable every citizen to establish a tax-sheltered Capital Homestead Account (CHA) at a qualified local lending institution. A Capital Homestead Act would allow every citizen to purchase and accumulate dividend-yielding, full-voting shares to supplement retirement income, relieving the burden on Social Security as the aged population expands. As with most ESOPs ("Employee Stock [or Share] Ownership Plans") and in contrast to IRAs ("Individual Retirement Accounts"), the citizen would put up none of his own money. Through the CHA, each citizen would gain access to self-liquidating capital loans at low service charges to buy equity shares. These shares would be expected to recover their purchase price out of future pretax dividends. The loan insurance, with premiums paid out of dividends, would cover the risk that the loan failed to be self-liquidating.
To encourage the issuance of new shares for meeting the financing needs of an enterprise, the double tax on corporate profits would be eliminated for companies that sell full dividend payout, voting shares to CHAs, or extend these provisions to existing share issuances. To secure economic independence, each citizen would be sheltered from taxes on his or her CHA accumulations below $1,000,000, or an average of $10,000 per year for a centenarian. (Obviously, not everyone will live to be one hundred years old or be able to put $10,000 each year into his or her Capital Homestead Account. Some people will only be able to put in the amount of their annual capital credit allocation, estimated at $7,000 — although this is expected to increase dramatically as our current slow- or no-growth economy regains its health. Others will take the opportunity to put existing accumulations into their CHAs, or inherit sufficient wealth to reach the tax-favored accumulation limit immediately, carrying forward the tax deferral until completely offset against future income. Ten thousand a year is simply a rough guess as to how much an average person might be able to put into a CHA each year when he or she doesn't have to worry about cutting consumption in order to save.)
As noted, capital credit insurance would replace the usual demand for collateral for properly vetted capital loans that create new owners. All other loans, such as those on which the risk premium for an insurance policy would be prohibitive, loans for speculation, consumption, government expenditures, and owners who wished to retain sole ownership of their companies, would not qualify for capital credit insurance or for discounting at the central bank. Instead, such borrowers would have to go to the pool of existing savings.
We anticipate that this will benefit current savers immensely — and provide a lucrative replacement investment for the rich who will lose their monopoly on ownership of new capital. The primary benefit, of course, will result from the fact that the federal government, unable to monetize its deficits by selling "secondary" government securities to the Federal Reserve by means of the fiction of passing them through bond traders, will be forced to go to existing accumulations of savings if it wishes to spend more than it receives in tax revenues. This will drive up the market cost of capital for existing accumulations of savings, possibly into the double digits, thereby benefiting people who invested their retirement savings in government bonds. This will have the added benefit of making the interest free credit available to companies that share ownership increasingly attractive, and cause owners who want to retain sole ownership and total control to rethink their position.
By far the best investment into which existing accumulations of savings can be put, however, will be capital credit insurance and reinsurance. One of the first rules of insurance is that you must never invest your insurance pool in the same thing that you are insuring — a rule that AIG "forgot" in their anxiety to cash in on the investment bubble. Given that all — or virtually all — new capital formed is financed in a way that creates new owners and collateralized with capital credit insurance, the insurance industry will likely do one of two things, probably both: 1) specialize in specific industries and invest the insurance or reinsurance pool in a diversified portfolio of other industries, and 2) invest a significant portion of the insurance or reinsurance pool in government securities.
Paradoxically, investing capital credit insurance and reinsurance pools in government bonds will ultimately back the money supply with the full faith and credit of the United States government — but in a manner far more secure and financially sound than at present. Currently, of course, the officially recognized money supply, M1 (coin, currency, demand deposits), is backed almost 100% by federal government debt. (There is a tiny amount in "United States Notes," that can be recognized by their red serial numbers and seals, that are "officially" backed by gold, but these are rarely if ever seen in circulation, having been hoarded by collectors.)
Under Capital Homesteading, the money supply would have several layers of backing, compared to the current one layer of government debt. First, of course, the currency and demand deposits would be backed by the liens taken by commercial banks on hard assets financed by extending credit to feasible and properly vetted capital investments. The liens themselves would be backed by the hard assets — level two. The third level would be the capital credit insurance policy, representing a claim on the insurance pool made up of existing accumulations of savings and government securities. The fourth level would be the capital credit reinsurance — that is, insurance on the insurance, which consists of a claim on the reinsurance pool composed of existing accumulations of savings and government securities. The federal government, backing the promissory notes issued by the Federal Reserve with its full faith and credit, would be the fifth level.
Thus, instead of Henry Simons's Chicago Plan in which the money supply would be backed directly by 100% reserves in the form of government securities (debt), the money supply would be backed by 500% reserves, of which less than 100% would be in the form of government securities, and none of it directly.
To further promote CHAs, a "National Capital Credit Association" (NCCA) would be set up to facilitate and securitize capital acquisition loans. The NCCA, which could be owned and controlled by CHA lenders and citizens, would package insured CHA loans, create software for helping lenders to scrutinize the feasibility of CHA loans, and set uniform standards for CHA insurers, reinsurers, and lenders.
The NCCA and competitors qualified by the Federal Reserve would then bundle and take these securitized CHA loans to the discount window of the regional Federal Reserve Bank. The Federal Reserve would treat these insured dividend-backed securities (DBSs) as it currently treats government debt paper, using them as a hard-asset backing for the currency. An added benefit would be that as the federal government pays down the national debt, all debt backing would be removed from the money supply. The result would be a stable, asset-backed "flexible" currency that could increase and decrease as the economy requires without inflation or deflation — as the Federal Reserve was set up to provide in 1913.
That is the essence of the Capital Homestead Act. To get into greater detail, the Capital Homestead Act is designed to:
1) Generate millions of new private sector jobs by lifting ownership-concentrating Federal Reserve credit barriers in order to accelerate private sector growth linked to expanded ownership opportunities, at a zero rate of inflation.A number of specific financing and ownership vehicles have been proposed to facilitate the implementation of a Capital Homesteading program. We've mentioned a number of these already, but it will be useful to recap.
2) Radically overhaul and simplify the federal tax system to eliminate budget deficits and ownership-concentrating tax barriers through a single rate tax on all individual incomes from all sources above basic subsistence levels. Its tax reforms would:
a) eliminate payroll taxes on working Americans and their employers;
b) integrate corporate and personal income taxes; and
c) exempt from taxation the basic incomes of all citizens up to a level that allows them to meet their own subsistence needs and living expenses, while providing "safety net" vouchers for the poor.
The "Capital Homestead Account" or "CHA" is the primary tax-sheltered vehicle for the democratization of capital credit through local banks. It would enable every man, woman and child to accumulate wealth and receive dividend incomes from newly issued shares in new and growing companies, without being taxed on the accumulations (including property and shares gained through inheritance, savings, and arrangements like ESOPs, CSOPs and CICs). In addition to serving as a source of capital credit for corporate workers, CHAs would also provide an ownership-building account for individuals who do not work for profit-making enterprises, such as school teachers, civil servants, military personnel, police, and health workers, and for individuals who have no remunerative employment, such as the disabled, the unemployed, homemakers and children.
The "Citizens Land Cooperative" or "CLC" (previously known as the for-profit "Community Investment Corporation" or "CIC") allows residents of a community to share in the control and profits associated with land planning and development.
The "Employee Stock (Share) Ownership Plan" or "ESOP" channels low-cost credit for financing the needs of business corporations (such as expansion, capitalization and ownership transfers), and links private sector workers to ownership shares and dividend incomes in the companies for which they work. Shares acquired on credit by worker-owners are paid for out of the future corporate profits they help to generate.
The "Consumer or Customer Stock Ownership Plan" or "CSOP" lets customers of utilities share in the governance and profitability of "natural monopolies," like telecommunications, water and power companies, mass-transit and cable television.
Thus, Capital Homesteading is in no way "pie-in-the-sky" or otherwise unrealistic. Instead, it is, as we have seen, a much more rational and financially feasible way to run an economy than the current slapdash, panic-stricken crisis management that results from adherence to disproved Keynesian dogma.