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PEOPLE’S POLICY PROJECT

People’s Policy Project is a think tank founded in 2017. The primary mission of 3p is to publish ideas and analysis that assist in the development of an economic system that serves the many, not the few.

Matt Bruenig is the founder of People’s Policy Project.

PART 2:

The United States government should create a national social wealth fund along the same lines as the Alaska Permanent Fund (apf). For the purposes of this paper, I will call this proposed fund the American Solidarity Fund (asf).

The American Solidarity Fund will operate the same way that any other social wealth fund operates. Money and assets will be placed into the fund; a public entity will manage those assets in a way that generates investment returns; then those investment returns will be used to fund social spending, in this case a universal basic dividend for the citizens of the country.

The remainder of this section provides details for the various aspects of the asf. Not every detail is essential and there are multiple ways to do most things. Where multiple options exist, I try to detail all of the options and provide my recommendation.

Generally speaking, there are five ways to bring assets into a social wealth fund: voluntary contributions, ring-fencing existing state assets, levies, leveraged purchases, and monetary seigniorage. I recommend all of the above, but think only the latter three are likely to provide substantial ongoing inflows of assets.

Adding assets to the asf through voluntary contributions is pretty simple. The administrators of the asf will create a way for people to donate money or other kinds of assets to the fund and the government will encourage people to contribute.

Lynn Stout and Sergio Gramitto favor this approach in their social wealth fund proposal.55 In their paper, they argue that “ultra-high-net worth individuals are a significant potential source of [social wealth fund] donations” in part because “this cohort already frequently participates in philanthropy” and because, for the ultra-wealthy, “philanthropy is the only real place money can go.” They also note that “if the top decile of equity holders contribute half their holdings to [the social wealth fund], while living or upon death, the fund would within a few decades come to hold forty percent of all corporate equities.”

Stout and Gramitto argue that corporations might “also have reason to donate their own shares.” Contributions to the fund would be good public relations and could be used by companies to counterbalance “the influence of short-term shareholders, especially activist hedge funds.”

I am skeptical that the level of voluntary contributions would be high enough to create an adequately-sized social wealth fund. But certainly nothing is lost by allowing such contributions to be made.

Another way to grow the fund would be to transfer existing state assets into it. Dag Detter and Stefan Fölster are the most prominent advocates of this approach.56

The United States government owns a large amount of physical assets. Those assets include over 450 million acres of land valued at $1.8 trillion,57 over 900,000 buildings worth hundreds of billions of dollars,58 thousands of miles of intercoastal waterway, and countless infrastructure projects. The government also owns the electromagnetic spectrum, which it currently auctions off to telecommunications companies.

After depositing these and other existing assets into the asf, the fund could generate investment income from them by renting them out or, where appropriate, selling them and using the revenues from the sales to buy other more promising assets, such as stocks and bonds. Some of the land and building assets are already being used by the federal government for other purposes. After making the asf the owner of the land and buildings, the other governmental agencies could be made to pay rent to the asf for their use.

Insofar as handling physical assets is labor intensive, this particular source of assets will probably be the most difficult to manage.

The government could also bring assets into the fund through levies, i.e. taxes and fees.

Any type of levy could conceivably serve this purpose. For instance, Peter Barnes proposed, among other things, a value-added tax on the telecommunications sector, which is a type of consumption tax.59 During its 1971 Congress, Denmark’s trade unions proposed building a social wealth fund using a payroll tax, which is a type of labor tax.60

Although levies on consumption and labor can work, levies on capital seem to be a more natural way to go. After all, the purpose of a social wealth fund is to transfer wealth into a collective pool. Applying new levies directly on wealth seems to serve that purpose the best. Thus, what follows are a variety of capital taxes and fees that I think would be ideal mechanisms for bringing assets into the asf.

1. One-time market capitalization tax.

To jump start the fund, the government could impose a one-time tax on the market capitalization of public (and possibly non-public) companies. Companies would have the option of paying this tax in cash or through scrip, i.e. by issuing new shares to the asf. The sec already imposes a 0.01245 percent market capitalization tax on newly-issued securities, which it calls a “filing fee.”61 At the end of 2017, the market capitalization of listed domestic companies was $32.1 trillion.62 A one-off 3 percent market capitalization tax would thus bring in around $1 trillion of assets. And this would amount to only a few months of the total return provided by the stock of these companies.

2. Ongoing market capitalization tax.

To continue bringing money into the fund, the government could impose ongoing market capitalization taxes. This would be done at a lower rate, e.g. 0.5 percent per year. As with the one-time tax, the sec could administer this ongoing tax since it already imposes such a tax on newly-issued securities.

3. IPO tax.

When a company goes public through an initial public offering (ipo), its stock becomes much easier to trade. This “liquidity” is highly valued by investors and so they are willing to pay more money for publicly-traded stock than they are for private equity. This “liquidity premium” is estimated to increase the value of publicly-traded stock by around 20 to 30 percent.63Since it is the government that creates the uniform and tightly-regulated securities markets that make this liquidity premium possible, it stands to reason that it should share in the value it creates. The 0.01245 percent market capitalization “filing fee” currently charged by the sec is too low. It should be raised to, for example, 5 percent (payable in scrip or cash). For consistency purposes, the ipo tax should also be assessed when public companies acquire private companies.

4. Mergers and acquisitions tax.

The government could impose a tax (payable in scrip or cash) on companies that merge with or acquire other companies. The ftcalready imposes such a tax in the form of the fees it collects during premerger reporting under the Hart-Scott-Rodino(hsr) Antitrust Improvements Act of 1976.64 The current hsrfees range from $45,000 to $280,000 depending on the value of the transaction in question. The new tax should be much higher, e.g. 3 percent of the value of the transaction with some minimum threshold so as to exclude very small businesses. The ftc can collect the tax just as it already collects the hsr fees. To avoid duplication, this tax would only be assessed where the ipotax discussed above is not assessed.

5. Financial transactions tax.

The government could levy modest taxes on the volume of financial transactions. Dean Baker estimated in 2016 that a 0.2 percent tax on stock trades, a 0.1 percent tax on bond trades, and a 0.002 percent tax on derivative trades would bring in around $120 billion, or 0.6 percent of gdp.65 It is worth noting that the sec already has a very modest financial transactions tax. It is set at 0.00231 percent of the value of securities transactions.66 Finra also charges a Trading Activity Fee (taf) for certain securities transactions, which is similar to a financial transactions tax.67

These are not the only possible levies, but they are particularly promising levies that directly embody the idea of shifting assets away from the wealthy and into a collective fund.

The government could also borrow money at low interest rates to invest in financial assets with high rates of return. Between 1990 and 2017, the average interest rate for a 1-year treasury bond purchased on the first day of the year was 3.17 percent.74 During the same time, the average total return of the s&p 500 was 11.3 percent.75 The difference between them, 8.13 percent, is the approximate rate of return that could be accomplished by an asf that issued government debt in order to buy stock equity.

For example, if the asf had existed between 1990 and 2017 and borrowed $1 trillion per year at the prevailing 1-year treasury bond rate and invested that $1 trillion into the s&p 500, it would have generated a cumulative return over the period of $2.275 trillion (nominal dollars). That return could have been directly parceled out at as dividends or been deposited towards the principal of the asf.

In the above example, the asf issues debt and buys stock regardless of the relative price of each security. In a more realistic scenario, the asf would be able to make better decisions about when such a move is the most likely to generate an investment return. So, it would not borrow money to invest when treasury rates or price-to-earnings ratios are especially high.

In general, because the return on us government debt is lower than the return on other kinds of marketable securities, the us government should be able to take advantage of that spread to generate investment returns.

The Federal Reserve makes adjustments to the money supply by purchasing securities through open market operations. The way this works is that the Federal Reserve creates new money and then buys assets with it. Right now, the Federal Reserve almost always chooses to buy Treasury bonds. But the government could require that the Federal Reserve inject money into the system by buying more lucrative securities such as publicly-traded equities.

This is what the Bank of Japan (boj) has been doing for the last few years. In January of 2008, the boj owned just 1.5 trillion yen of stocks, shares of exchange-traded funds, and shares of real estate investment trusts.76 In May of this year, the same figure was 21.1 trillion yen, which is equal to $193 billion.77

During the same period, the Federal Reserve also expanded its balance sheet considerably by buying Treasury bonds. In January of 2008, the Federal Reserve owned $740 billion of Treasury bonds. In May of this year, it was a little under $2.4 trillion.78 Had the Federal Reserve instead chosen to buy up total stock market exchange-traded funds, like the Bank of Japan did, it could have profited handsomely off of the massive stock market rise over that period. And if those assets were connected to the asf, the profits could have been paid out to everyone in the country through the corresponding universal basic dividend program.

In addition to directing the Federal Reserve to buy other kinds of securities, the government could also adopt a higher inflation target (e.g. 4 percent rather than the current 2 percent), an idea that already has significant support on the merits.79 A higher inflation target would permit larger expansions of the money supply and therefore enable more purchases of return-generating assets.

After assets are brought into the asf, they have to be managed in some way. The management of asf presents three main questions: 1 what entity will manage it, 2 what assets will it hold, and 3 how will it exercise its ownership rights over its assets? These questions are answered in order below.

1. The Managing Entity:

The cleanest way to manage the asf is by creating a new state-owned enterprise (soe) that is fully owned by the Treasury Department and then “hiring” that soe to be the fund manager. This is the model used by the Alaska Permanent Fund and gpf-Norway. In Alaska, the soe is called the Alaska Permanent Fund Corporation and in Norway it is called the Folketrygdfondet.80

The way this would work in practice is that, pursuant to an act of Congress, the Treasury Department would create a new corporation. Let’s call it the American Solidarity Fund Corporation (asfc). The Treasury would formulate articles of incorporation for the asfc and appoint its board members, board chairs, and auditor. From there, the asfc’s board would be responsible for the management of the asfc, including the election of the asfc’s ceo.

Once the responsibility for managing the asf is handed over to the asfc, the Treasury would not be involved in the day-to-day operations of the fund. But it would be able to create rules, mandates, directives, and other sorts of guidance that the asfc would have to follow. This kind of separation will reduce the administrative burden that the Treasury has to take on itself and provide a certain level of operational independence for the fund managers.

As with the Alaska Permanent Fund Corporation, we should expect the asfc to start out as a fledgling organization and evolve over time into a mature and professionalized operation. This evolution would also likely mean that the asfc would initially rely on some level of outsourcing to carry out its business, but, in the medium and long term, would seek to do all of its fund management with its own staff.

2. Asset Allocation:

What assets the asf will hold is ultimately a political question that will, in practice, be answered by the us Congress or by Treasury mandates that the asfc has to follow. swfs across the world have taken all sorts of approaches to asset allocation and so it is difficult to say there is any settled approach.

One possible approach to asset allocation would be to initially invest in easy-to-manage listed securities like domestic and international equities and bonds. As the fund gets bigger and the asfc becomes a more mature organization, it may make sense to broaden the asf portfolio to include unlisted assets like private equity and real estate.

When thinking about asset allocation, it will be important for decision-makers to consider how best to leverage the unique attributes of the asf: its size, long-term horizon, and low need for liquidity.

In addition to making general asset allocation decisions, the asf could also make narrow allocation decisions that pertain to specific companies. For instance, the Treasury or us Congress could create a process for excluding companies from the fund if those companies are found to violate established guidelines, such as engaging in human rights violations or environmental destruction. Norway’s gpf-Global maintains an exclusion list along these lines.81

3. Ownership Rights:

Since the asf will own shares of companies, it will have the ability to exercise the ownership rights that those shares confer, i.e. vote on shareholder matters like the election of the board and shareholder resolutions. There are three basic approaches to exercising ownership rights:

No Voting. The first approach is to abstain from voting, i.e. to opt out of exercising ownership rights. This is the approach favored by Dean Baker.82 In this scenario, only the remaining private shareholders would vote on board members and shareholder resolutions.

Representative Voting (recommended). The second approach is to make voting decisions through the country’s government. What this means in practice is that the Treasury would issue voting guidelines that the asfc would have to implement on a vote-by-vote basis. For instance, the Treasury could create ceo pay guidelines that the asfc must follow when casting shareholder votes for or against ceo pay packages.

Direct or Proxy Voting. The last approach is to allow the citizen-owners to directly vote on shareholder matters through a website maintained by the asfc. This is the method favored by Lynn Stout and Sergio Gramitto.83 Under this approach, citizen-owners would be allowed to either vote directly on shareholder questions or give away their voting rights to a proxy organization that they trust to exercise them in their interest. Proxy organizations would register with the asfc so that they could be selected on the website and citizen-owners would be permitted to change their preferred proxy organization at any time. For instance, a citizen-owner who was interested in labor rights might give their votes to the afl-cio while a citizen-owner who was interested in the environment might give their votes to the Sierra Club.

In my view, the no-voting option is a serious mistake. If the government does not vote its shares, then it is ceding total control of corporations to the most affluent people in society. It is fair to worry that the government might make bad shareholder votes from time to time, but not reasonable to think that very affluent people will on average make better shareholder votes than a democratically-elected government.

Between the other two options, I have a slight preference for representative voting, at least initially. In the early years, the asf and asfc will need to focus its organizational time on more important implementation challenges and will not own enough assets for their shareholder votes to make much of a difference anyways. Over time, it could make sense to add a direct or proxy voting system.

The final aspect of the asf is the easiest one: paying out the universal basic dividend (ubd) from the return on the fund. Alaska already provides a concrete model for how to do this, but I would recommend some cosmetic and substantive modifications to the Alaskan approach.

Every qualifying citizen should be given one nontransferable share of ownership in the asf, which is what entitles them to receipt of the ubd. The Alaska Permanent Fund does not provide any kind of formal ownership shares, but the residents of the state nonetheless conceptualize themselves as joint owners of the fund. The idea of providing a quasi-formal ownership share was supported by the 1971 Danish trade union proposal, which would have provided each owner “an annual certificate setting out their entitlement in the fund” that “could not be sold for at least seven years” and even then could only be sold “back to the fund itself.”84 Unlike the Danish proposal, I am recommending that the citizen-owners never be permitted to sell their ownership share and that the share remit back to the asf upon its owner’s death.

As part of this ownership arrangement, the asfc should have a website that looks like the sites run by Vanguard or Fidelity where citizen-owners can log on and see their single share of ownership, track its value over time, and so on. This is also where they would input their banking information and address to receive their dividend checks. The purpose of the website and the ownership share generally is to impress upon people that this is their collective wealth fund. This is partially a communications gimmick, but no more so than many of the hyper-abstracted ownership gimmicks that already exist in the country’s capital markets.

The dividend amount should be set equal to a five-year moving average of a percentage of the asf’s market value. The percentage would be set legislatively or by the Treasury and would aim to, on average, withdraw an amount equal to the inflation-adjusted return of the fund. This is a hybrid of the way Norway’s gpf-Global and the Alaska Permanent Fund currently manages fund withdrawals.

(Continue Reading)

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Technocracy is a form of government where decision makers are selected based on their expertise in a given area of knowledge, skill, and ability necessary for a society to persist and optimize. For example many boards exist for the purpose of oversight in various fields that are vital to human health, the economy, security, education, transportation, and other core aspects of a society.

Most people are generalists when it comes to knowledge of how the world works and we rely on experts to inform and guide us in our decision making both in the micro personal level and macro organizational level.

Yet authority requires the consent of the people - so it is necessary to balance the a system between general perspectives of the many with the particular perspectives of the few.

Optimizing policy proposals should be formulated by any resident/citizen through carful scrutiny and process and the residents/citizens should vote on this.

Yet voting is often a narrow-minded discourse where many people vote without comprehensive analysis or information about the full set of ideas and policies. And so a communitarian form of democratic proceeding should refine democratic elections through a convention of moderated discussion groups where ideas can be exchanged and values shared. This deepening of knowledge and awareness and communal discourse will temper narrowness and selfishness as well as force reason and justification.

This process applied to the total will in turn rightly prioritize the interests of the whole rather than the interests of the few, collectivizing that which is vital to the whole and allowing smaller scale private enterprises to hold their rightful place in the distribution of the means of production, in a non-coercive, non-dominant place as a barrier to needless human exploitation.

Each person should have a say in what happens in the governed territory upon which they rely on for persistence and optimization. Macro-scale decisions are never rightly made by the few alone, but through the many by virtue of rational justified positions that are vetted and refined by experts.

Humanity has a dependent relationship with the planet whole, we depend on it, it does not depend on us. Its persistence and optimization equates to our persistence and optimization. Any other position is narrow and short sighted and is unethical respectively to any and all future generations. Decision making must not only be democratic, but they must also prioritize long term persistence and optimization of the planet + people system as a combined whole.

Resources are finite and inefficient use of them results in unnecessary limits to the optimization of systems that people rely on - inefficiency and frivolity promote squalor and lower standards of living. Cooperative and collectivistic forms are fundamentally more economically and resource efficient and lend themselves to efficient paradigms of transportation, agriculture, and industry in turn. And sprawl is antithetical to efficiency as well. Although it is often not directly perceived, the sum total of inefficiencies built in to the environments and systems we use equate with unnecessary toil and suffering.