ESOP-COOP in the time of COVID - Public Policy

This is part three. Read it last.

Joint action between ESOPs and COOPs should include publicly or privately available insurance for ownership shares. One third if voting and preferred shares would be traded to a central pool in return for pool shares. If 25% +1 of a firms *sharehold requests it, the fund would use insurance fund voting shares to investigate, possibly suspend and, if cause were found, reorganize management, add or shed components. Taking either too much or too little risk or any corruption would be cause for reorganization. This is better diversification than playing the Wall Street roulette wheel. The workers win, not the house.

Multiple ERISA changes may be required to maximize the opportunities cooperation affords. Additional changes in public finance are also worth noting.

Enacting an employer-paid subtraction VAT to replace payroll, corporate, property and low rate income taxes would fund or virtually fund education, childcare and child income, healthcare and retirement services. These would either be provided by the government or by the employers in lieu of tax payments. 

Employer payment or reporting is a different version of present reporting and tax flows, but with virtually no household filing requirements. This change would also eliminate the incentive to have a gig economy, franchises and 1099 employment disguised as contracting. Liabilities are turned to tax credits. Longevity and childbirth are also encouraged. In time, incentives will no longer be required, but this is not that time.

Higher income earners would pay salary surtaxes or these could be replaced with higher tier subtraction VAT rates on such income. Some high wage individuals could sell their services as consultants, but these firms would have to pay the subtraction VAT instead. For people with large personal staffs, this may be preferable for all concerned. Salary surtaxes could be prepaid with bonds and either would fund debt reduction and payment of net interest on the national debt.

A Credit Invoice VAT would fund domestic military and civilian spending. Like a carbon VAT, receipt visibility would induce pressure for spending cuts and environmental good citizenship. This tax also funds legacy OASDI benefits.

The most relevant change is to move taxation of capital income (rent, dividend, interest, pass through), inheritance and gains taxes to an Asset VAT at point of sale or distribution. All such activities, short or long term, would be taxed.

The tax would be marked to market price at option exercise or the first sale after inheritance or gift. Most importantly, sales to qualified ESOPs and COOPs would be tax free. This includes sales at or during retirement.

The requirement to sell all shares at this point would be eliminated. This lowers dividend rates required to build up share balances because distribution would continue during spend down. Note that a big ERISA change is required here.

The A-VAT, with or without the S-VAT, will encourage ESOP formation and growth. By applying it to all stick sales, it will reduce trading volume, volatility and purchase prices. Passive investment by heirs and trusts to avoid taxation will go away because S-VAT and I-VAT liability and the A-VAT ESOP exemption end their utility, as well as the need for a large public sector.

*Either 25% retained ESOP shares or 25% of COOP members.

ESOP-COOP in the time of COVID - Solutions

Cookie-cutter, low-impact, remedies will not cure COVID fevered hyperinflation. The current mix offered by NCEO is thin gruel where chicken soup is needed. Here is my recipe.

It is not more social democracy. This will only make hyperinflation worse. State socialism, especially in the hands of the current authoritarian administration, would be even worse.

Hyperinflation results when public policy leads to negative feedback loops and rational expectations collapse. If the public sector breaks down, the alternative that remains is some form of economic and social separatism, preferably a loose one. By loose, I mean that, while insular activity occurs, exchanges in goods, services and people continue with the outside world. Not everything (including people) must be made and stay in-house.

Finding the balance is a make-buy decision. Such decisions are implicit in the current economy. In purely competitive economies, perfect information and freedom lead to perfect economic solutions. Capitalism turns information into a closely held resource. ESOPs and COOPs open the books to members. The better the information, the better the decisions.

The difference between an ESOP and a COOP is how voting occurs. ESOPs vote by share, COOPs by employee. A COOP could be an ESOP if each member had one voting share and the remainder in preferred shares.

In the current market, employees are in their own with social democratic assists. This secures education finance, retirement security, education and a limited safety net from subsidies to bankruptcy protection.

Housing, clothing, food, leisure, transportation and other consumer goods decisions are taken at the personal level, as are purchasing additional services over and above those provided publicly. Some of these may be funded by the employer as well, such as work uniforms, transit subsidies, company cars, cafeterias, daycare, health insurance and technical training.

In times if both pandemic and hyper inflation (or to just improve the lives of members), ESOPs can create tighter relationships with providers of goods and services to guarantee availability.

Alternate payment relations, from barter to standard labor hours exchange, as well as interlocking or common ownership insulate the firm from financial and biological disruption. This is called vertical integration, as opposed to monopolistic or governmentally imposed horizontal integration.

ESOPs and COOPs have, or at least can have, lower executive pay and more equal salary structures, with incentive bonuses and equity more broadly distrubuted. Indeed, in a labor hour based exchange system, one person's labor us as valuable as another's.

Longevity and innovation would be rewarded with additional shares, rather than unequal wages. Family subsidies would be separately paid, ideally with direct or virtual subsidies.

ESOPs can buy or merge with localized grocery stores, provide low or no cost housing with lower pay to younger or single employees. ESOPs and COOPs can hire doctors, buy contingent care and specialist services from hospitals, purchase timeshares, pay for post-secondary education or provide low or zero interest loans in exchange for a service requirement.

This would all be peonage if provided by a capitalist firm. It is not if it is cooperatively owned by members. Doing so is  to democratically take make-buy decisions. The degree to which these options are practical depends in firm size. Multiple ESOPs or employers may jointly purchase consumed services as well, for example, a jointly held office park with a dedicated clinic or daycare (both for sick and well children).

In times if crisis, it may be easier to find cooperative partners. If such relations had already been in force, the impact of the current pandemic would be more easily managed. The best immunity to COVID is to get sick and recover. Having your own medical staff and supplies means you can determine how that decision is made. It also means enough toilet paper.

ESOP-COOP in the time of COVID - Scenarios

The National Center for Employee Ownsership is holding its virtual annual convention this year. If registrations are still open when my stimulus payment arrives later this week, I may register. Chances improve if, after seeing this essay, they put me on a virtual panel.

Among NCEOs offerings are assistance to member firms and individuals in dealing with COVID. They are all tailored to a predictable, status quo situation where government programs work as designed and the usual semi-egalitarian, semi-hierarchist management model can remain as it is. Just describing these assumptions show how unlikely they are to reflect reality.

Enhanced unemployment benefit levels and one time stimulus payments will keep food in the table with rents, mortgages, car note and credit card payments continuing to service the asset backed securities holding these debts. The gamble is that the great American quarentine will end in short order with little disruption.

The optimistic view is that nothing collapses in the next six months, Federal and State Unemployment Insurance premiums increase enough for continued program solvency and trust fund replenishment and a change in administrations results in minor income tax rate hikes to suck extreme liquidity out of financial markets.

A less optimistic view is that there may be some mild inflation, but people returning to work will increase the supply of goods and services enough to make it a blip rather than a trend.

A heroic assumption is that Leader McConnell will agree to a mild tax increase on capital income to suck up liquidity at the top and Speaker Pelosi will agree to limit already passed UI benefits to get people back to work.

Even more heroic is McConnell agreeing to minimum wage hikes, which will get people back to work quickly and give most workers below the executive level a raise. Lower executive compensation will take money out of the speculation (don't call it investment) sector, leading to long term growth and greater opportunity and equality.

A more pessimistic, and therefore more likely, scenario is that cheap money by the Federal Reserve and subsidized returns to asset securities lead to the creation of more junk bonds and Ponzi schemes to spread the cancer to all investors, leading to (or deepening) the recessionary trend in the current economy.  Combine this with higher income individuals and the better funded unemployed pushing more money at an ever-decreasing supply of goods and services. The result is hyperinflation.

The only good side is the elimination of household debt. This possibility could scare up support for higher taxes and a quicker opening of the economy, but I would not bet the securities holding the mortgage on your farm on it.