Austerity is back. With many Americans feeling the economic pinch, and with the Trump administration cutting many government services, federal cutbacks are suddenly on the table. That leaves many state and local governments scrambling to figure out how to pay for vital public services without relying on taxpayer dollars.
Fortunately, there is a way to do that. By deploying the same financing strategies used by major corporations, university endowments, the Social Security Trust Fund, the Alaska Permanent Fund and the proposed sovereign wealth fund, it is possible to design a financing mechanism to fund the services that Americans need.
Called “future returns investment,” it would catalyze wealth creation from various investment portfolios, such as stocks and bonds, with the future returns from those investments used to pay for public needs.
The United States has a history of deploying such methods. In the 1890s, the Farmers’ Alliance used a system of loans, some government-backed, to access credit more easily to buy seed and equipment. In the 1970s, corporate lawyer Louis O. Kelso established financing vehicles to diffuse wealth creation to broader segments of the population. Kelso is best known as the inventor of the Employee Stock Ownership Plan, in which ownership of thousands of businesses has been shared with each company’s employees. Today, nearly 14 million workers are covered by ESOPs, almost as many as are members of labor unions, and they collectively receive $127 billion annually.
While ESOPs benefit the employees of a particular company, Kelso proposed other related financing vehicles as part of his vision for “universal capitalism” in which every little guy and gal would receive a “piece of the action,” as Kelso called it, instead of concentrated ownership by an elite few.
For example, a General Stock Ownership Plan (GSOP for short) such as the Alaska Permanent Fund, has been an effective vehicle for sharing Alaska’s oil wealth with every Alaskan. A Consumer Stock Ownership Plan (CSOP) was designed by Kelso to help a co-op of nearly 5000 struggling farmers in California’s Central Valley to outmaneuver corporate fertilizer monopolists and purchase their own fertilizer plant, which drastically lowered the price of fertilizer.
CSOPs and GSOPs could be deployed today to facilitate funding of crucial needs and services such as healthcare, housing, college education, public transportation and renewable energy without relying so much on public tax dollars.
The plan, which allows for infinite variations and innovations, is that the government would charter a trust fund that would raise an initial source of investment assets, such as oil revenue in the case of Alaska, or a bank loan, or even revenue from a municipal bond or U.S. Treasuries. Those funds would then be invested, for example, by purchasing stock shares in a large and diversified portfolio of successful publicly traded companies. The investments would be managed by a professional investment firm. After a specified number of years, enough future returns on these investments will accumulate, which can be used to finance public services. No tax dollars are necessary.
A natural concern is that this financing mechanism might crash with the volatility of the stock market. Historically speaking, over a five- to 10-year horizon, the stock market nearly always goes up. Since 1928, the U.S. stock market has risen on average nearly 10 percent annually, and the market is up three out of every four years.
So, the problem is not volatility but whether the stockholder has the financial resources to tolerate the risk of the ups and downs. Most people rarely possess this capability. Having a financial cushion to tolerate risk is an advantage that upper-income people enjoy and is one of the reasons they mostly benefit from the incessant wealth-creating machine of the financial markets. And since investment success is inevitably tied to the rise of new technology, wealthy investors reap the lion’s share of innovation.
With a GSOP or CSOP, the risk is taken by the trust, and the returns are distributed to the beneficiaries in the form of housing, healthcare, college, renewables, and even a guaranteed basic income is possible. By allowing people to directly benefit from new investments paid for out of future earnings, we can better ensure that the profits of economic growth and technological innovation will be more broadly shared.
For example, New Mexico generously invests its newfound oil wealth into helping to pay for young students’ college education. However, New Mexico could better optimize its oil wealth by instead investing those revenues into a GSOP. After waiting about 10 years for the investment returns to accumulate, New Mexico could use those returns to pay for not only a university education but for many other public needs, such as housing or public transportation.
Cities like Houston, Atlanta or Chicago could raise initial investment capital from municipal bonds, then invest that in a GSOP or CSOP-type vehicle. Once the future investment returns had accumulated, those funds would be available to pay off not only the initial investors but also have enough left over for the construction of affordable housing.
Given the current climate of austerity politics, and with state and local governments looking for ways to pay for public services, these ideas and proposals have more potential than ever.