What kinds of stock ownership plans should there be? Of esops, other sops, and "ownership societies"

Cornell Law Review

Volumn 92, Issue 5, 2007, Pages 865-952

  Hockett, Robert ^a  

^a Cornell Law School ^*

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EID: 34547800604     PISSN: 00108847     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (433)

1. In using this term, I do not wish to identify with the recent "tax relief" or Social Security "reform" proposals presently associated with the phrase. For a conspicuous case of such use of the term, see The White House, Fact Sheet: America's Ownership Society: Expanding Opportunities (Aug. 9, 2004), http://www.whitehouse.gov/news/releases/2004/08/ 20040809-9.html.
2. Briefly, material freedom is freedom exercised through control over resources. That freedom is bounded and accountable because everyone shares equal moral claims to resources that they have not created. I intend "joint and several" freedom to suggest a conceptual complement to joint and several liability. The idea is that everyone would enjoy resources in equal amounts as a fraction of the jointly shared total. See generally Robert Hockett, Whose Ownership? Which Society?, 27 CARDOZO L. REV. 1 (2005) (describing the relationship between liberty and equal opportunity).
3. JOHN LOCKE, TWO TREATISES OF GOVERNMENT 288 (Peter Laslett ed., Cambridge Univ. Press 1988) (1690) (arguing that individuals obtain ownership through their labor over property previously held in common, "at least where there is enough, and as good left in common for others").
4. See id.; see also ROBERT NOZICK, ANARCHY, STATE, AND UTOPIA 174-82 (1974) (coining the term "Lockean proviso" to describe Locke's theory of acquisition and offering a Paretian update to the proviso deeming an appropriation of resources ethically permissible only if those consequently excluded from access to those resources are no worse off than they otherwise would have been).
5. Perhaps this sustainable society of owners would resemble James Meade's "property-owning democracy," the image of which figures briefly, before disappearing, in the work of John Rawls. J. E. MEADE, EFFICIENCY, EQUALITY AND THE OWNERSHIP OF PROPERTY 40-65 (1965); see JOHN RAWLS, A THEORY OF JUSTICE 242 (rev. ed. 1999). Or perhaps this society would be something like that envisaged by Meade's contemporaries, the Distributist contributors to early-twentieth century Catholic social thought.
6. See generally HILAIRE BELLOC, THE SERVILE STATE passim (1912) (arguing that people are not truly free where there exists centralized ownership of means of production);
7. G. K. CHESTERTON, THE OUTLINE OF SANITY passim (1927) (advocating a wide distribution of small holdings of land and other capital as the best guarantee of a free society). For an interesting contemporary echo of such thinking,
8. see RAGHURAM G. RAJAN & LUIGI ZINGALES, SAVING CAPITALISM FROM THE CAPITALISTS: UNLEASHING THE POWER OF FINANCIAL MARKETS TO CREATE WEALTH AND SPREAD OPPORTUNITY 30-36 (2003) (noting how the difficulty of obtaining funding in underdeveloped financial systems stems from a "tyranny of collateral" and results in such economies being both underproductive and distributively unfair).
9. This began with early American land policy and accelerated during the early 1860s with the Homestead and Land Grant Acts. See Robert Hockett, A Jeffersonian Republic by Hamiltonian Means: Values, Constraints, and Finance in the Design of a Comprehensive and Contemporary American "Ownership Society," 79 S. CAL. L. REV. 45, 99-104, 143-46 (2005).
10. See id. at 103.
11. See id. at 144-45.
12. Not surprisingly, some scholars disagree over the degree to which the Homestead and Land Acts contributed to the spread of farms and the growth of agricultural productivity in the nineteenth century. Compare, e.g., ALAN F. ZUNDEL, DECLARATIONS OF DEPENDENCY: THE CIVIC REPUBLICAN TRADITION IN U.S. POVERTY POLICY 26-42 (2000) (judging the Homestead Act to have been largely successful), with ROBERT A. DAHL, A PREFACE TO ECONOMIC DEMOCRACY 71-72 (1985) (arguing that the Homestead Act "made but a modest contribution to farm ownership"), and Terry L. Anderson & Peter J. Hill, Cowboys and Contracts, 31 J. LEGAL STUD. 489, 506-13 (2002) (arguing that private contracting preceded the Homestead Act and was a more efficient manner for distributing land). See generally Hockett, supra note 6, at 99-104 (outlining the history of the Land and Homestead Acts of the eighteenth and nineteenth centuries and their relation to the Civic Republican, Classical Liberal, and Pragmatic Consequentialist political traditions). No final adjudication is necessary here. Even if critics were unambiguously correct, the tendency to idealize the period would itself reveal some deep feature of our desires and ideals.
13. Of course, we took land for homesteading too. But, sadly, we took it from people whom we believed had no rights. On the political significance of public giving without the appearance of taking, see Hockett, supra note 2, at 80-81.
14. Under the system where the United States government issued and honored bonds, the American people served as the ultimate guarantor of loans, thereby creating a national market and lessening risk. See Hockett, supra note 6, at 93, "Full faith and credit" alludes to the constitutional use of the term to describe obligations of the federal government. Because the U.S. government has never defaulted on its debt, it may be the best possible guarantor of credit.
15. See id. at 104-20.
16. See id. at 146-53.
17. See id. at 95.
18. I find this thought hard to escape. If I am simply misguided, I'll be grateful to be corrected.
19. I further discuss the sense in and degree to which the government has not yet seriously spread firm shares in Part I.
20. But see supra note 10.
21. See Hockett, supra note 6, at 92-94.
22. See infra Part II. This Article primarily treats ESOPs. Another present (and again piecemeal) means is public encouragement of new and small business formation. I think that these efforts are laudable, but not enough, Why I think ESOPs are inadequate will emerge in this Article, in particular in Part III. In a subsequent article, I will treat why small business encouragement is inadequate. The short answer is that small business encouragement is analogous less to the nineteenth century spreading of land than it is to the sixteenth century financing of exploration. It is terribly important and much to be praised, but also too speculative a public venture upon which to ground a stable and sustainable ownership society. It also bears noting that currently, ownership stakes in privately held companies - sole proprietorships, partnerships of all kinds, subchapter S corpora tions, and limited liability companies - are concentrated among Americans situated in the top decile of income and wealth. See Brian K. Bucks et al., Recent Changes in U.S. Family Finances: Evidence from the 2001 and 2004 Survey of Consumer Finances, FED. RES. BULL., Mar. 22, 2006, at A24.
23. See Hockett, supra note 6, at 96.
24. See id. For statistics on the pervasiveness of federal loan assistance for education, see id. at 153.
25. See infra Part III; see also Robert Hockett, Just Insurance Through Global Macro-Hedging: Information, Distributive Equity, Efficiency, and New Markets for Systemic-Income-Risk-Pricing and Systemic-Income-Risk-Trading in a "New Economy, " 25 U. PA. J. INT'L ECON. L. 107, 174-82 (2004) (discussing income risk in the modern global economy).
26. I do not wish to speak dogmatically or with a false certainty here, but it appears that this is both desirable and possible, particularly in view of our shortfall in spreading securities, see infra Part I, the contrasting success of our finance programs for homes and education, see infra Part V, and the ease with which one can dispel the more obvious objections, see infra Part VI. Thus, it is tempting to think both that we should spread more stock ownership and that we can fashion an analogue to our home and education programs for doing so. If I am wrong about the urgency of this need, or if this analogy breaks down, I would be grateful to have my error pointed out.
27. I address the critical role of credit in financing stock option plans (SOPs) in infra Parts II.A, III.D, and V.
28. For a discussion of the apparent political need of this ethical warrant, see Hockett, supra note 2, at 80-83. I discuss patronage and the ethical warrant that it provides in Parts II.C and IV.
29. See infra notes 33-40.
30. The other principal means through which society distributes corporate ownership is retirement funding. See infra notes 90-91 and accompanying text. My concern here, however, is with building an ownership society in which citizens partake for more than the final years of their lives.
31. See infra Part III.
32. Hockett, supra note 6; Hockett, supra note 2.
33. See Hockett, supra note 6, at 99-120 (detailing historical and modern American home finance).
34. See id. at 144-53 (detailing historical and modern American higher education finance).
35. See id. at 99 (noting that the "three-legged stool" consists of homesteading, capital homesteading, and human-capital homesteading).
36. B. MARK SMITH, THE EQUITY CULTURE: THE STORY OF THE GLOBAL STOCK MARKET 6 (2003) (describing the equity culture as "pervasive" and "commonplace").
37. See STEVE FRASER, EVERY MAN A SPECULATOR: A HISTORY OF WALL STREET IN AMERICAN LIFE passim (2005) (providing an exhaustive cultural history of Americans' self-image as constituting a "shareholder nation"); see also PETER F. DRUCKER, THE UNSEEN REVOLUTION: How PENSION FUND SOCIALISM CAME TO AMERICA 1 (1976) (suggesting that the United States is "the first truly 'Socialist' country" because workers, through pension funds, own the "'means of production'"); RANDY MARTIN, THE FINANCIALIZATION OF DAILY LIFE 12 (2002) (asserting that financialization "asks people from all walks of life to accept risks into their homes that were hitherto the province of professionals"). Particular thanks to Jeff Rachlinski, who pressed on me the significance of this apparently widespread perception.
38. See Brian C. Roseboro, Assistant Sec'y, Office of Pub. Affairs, U. S. Treas., A Review of Treasury's Debt Management Policy, Teleconference Address at the UBS Eighth Annual Reserve Management Seminar for Sovereign Institutions (June 3, 2002), available at http://www.ustreas.gov/press/ releases/po3149.htm ("[The] Treasury over the past few decades has been quite successful at . . . fostering the deepest, most liquid securities market in the world.").
39. See, e.g., MSNBC, Stocks & Economy, http://www.msnbc.msn.com/ id/3032222/ (last visited Apr. 7, 2007).
40. See, e.g., Wall Street Week with Fortune (PBS television broadcast Aug. 27, 2004) (interviewing Internet analysts on the IPO of Google).
41. Consider The Motley Fool, a Web-based investment site whose investors regularly turn up on radio talk shows. See The Motley Fool, http://www.fool.com/ (last visited Apr. 7, 2007). Similarly, Marketplace, the syndicated public radio program highlighting financial news, also maintains a Web site. See Marketplace, http://marketplace.publicradio.org/ (last visited Apr. 7, 2007).
42. See, e.g., BOB FROEHLICH, WHERE THE MONEY IS: How TO SPOT KEY TRENDS TO MAKE INVESTMENT PROFITS (2001);
43. DAVID GARDNER & TOM GARDNER, THE MOTLEY FOOL INVESTMENT GUIDE: How THE FOOL BEATS WALL STREET'S WISE MEN AND HOW YOU CAN TOO (rev. ed. 2001);
44. JAMES K. GLASSMAN & KEVIN A. HASSETT, DOW 36,000: THE NEW STRATEGY FOR PROFITING FROM THE COMING RISE IN THE STOCK MARKET (1999);
45. PETER LYNCH WITH JOHN ROTHCHILD, BEATING THE STREET: THE BEST-SELLING AUTHOR OF ONE UP ON WALL STREET SHOWS YOU HOW TO PICK WINNING STOCKS AND DEVELOP A STRATEGY FOR MUTUAL FUNDS (1993).
46. See, e.g., INV. CO. INST. & SEC. INDUS. ASS'N, EQUITY OWNERSHIP IN AMERICA, 2002, at 15 (2002) (noting that approximately 49.5% of U.S. households owned equities in 2002).
47. See infra notes 57-65 and accompanying text.
48. See infra note 57 and accompanying text. Although ownership of other financial assets is certainly relevant to one of our primary concerns - income independence - this Article focuses on equities for two reasons. First, most Americans who own corporate equities own other kinds of financial assets to a much lesser extent (and in an even more unequal distribution), meaning that holdings of the other financial assets do not substantially offset the shortfall in stock ownership. See Bucks et al., supra note 19, at A10-A19 (providing distributions of household financial assets, broken down by quintile of household income, and showing that bank accounts, bonds, stocks, life insurance, and other assets are even more unevenly distributed than equity securities);
49. see also SEC. INDUS. ASS'N, 2005 SECURITIES INDUSTRY FACT BOOK 66-67 (Grace Toto ed., 2005) (stating that the median household holding liquid financial assets beyond cash holds 36.9% of those assets in equities and 11.1% in federal, municipal, and corporate bonds). Second, conventional wisdom suggests that individuals nearing retirement typically exchange equity holdings for less volatile investments.
50. See infra Part I.A. The distinctions between these categories will become plain as we proceed. Briefly, "direct" ownership is holding title to securities of the firm that issues those securities. In contrast, ownership of a firm is "indirect" when one holds title to shares in a firm which itself holds tide to the securities. And "beneficial" ownership simply refers to one's legal status as beneficiary of a trust managed by a trustee, which holds title to the securities.
51. See infra Part I.B. My reason for this division lies in the way I organized the predecessor articles. Briefly, spreading ownership resonates with several American ideological traditions - what I call, with I think little if any idiosyncrasy, the Civic Republican, Classical Liberal, and Pragmatic Consequentialist traditions. See Hockett, supra note 6, at 49-55. All three traditions, and especially the first two, value the independence that ownership confers upon owners. See id. But the first also conspicuously values the manner of responsible civic engagement - participation - that ownership encourages. See id. at 49-51. Accordingly, with respect to firm ownership, the Civic Republican tradition will favor direct owning over indirect owning, and both of these over mere beneficial owning.
52. INV. CO. INST. & SEC. INDUS. ASS'N, supra note 40, at 15.
53. LAWRENCE MISHEL ET AL., THE STATE OF WORKING AMERICA 2004/2005, at 287 (2005) (stating that 51.9% of households held stock of some kind in 2001).
54. See Bucks et al., supra note 19, at A1.
55. See id. at A19.
56. Id.
57. Id.
58. See, e.g., GLASSMAN & HASSETT, supra note 39, at 4 (asserting that while stocks in 1999 were on the rise, "astounding profits will be made [and] [t]his book will show you how easy it is to participate").
59. See Bucks et al., supra note 19, at A19.
60. See, e.g., MISHEL ET AL., supra note 46, at 1 ("Despite being two and a half years into economic recovery, many of the problems that beset working Americans in the 2001 recession and protracted jobless recovery persist today.").
61. See, e.g., Mihir A. Desai et al., Taxation and the Evolution of Aggregate Corporate Ownership Concentration 34-36 tbls.1 & 2 (Nat'l Bureau of Econ. Research, Working Paper No. 11,469, 2005).
62. See MISHEL ET AL., supra note 46, at 286 (describing homes as more widely held than other assets like stocks and bonds); Bucks et al., supra note 19, at A22 (noting that ownership of homes rose most for families in the middle of income and wealth distributions).
63. See, e.g., Desai et al., supra note 54, at 34-36 tbls.1 & 2 (showing that over the years 1929-2000, the top 1% of Americans received on average 13.15% of nondividend income, yet received 28.4-63.79% of all dividend income for an average of near 50%).
64. MISHEL ET AL., supra note 46, at 287 tbl.4.7.
65. Id.
66. Id. at 289 tbl.4.9.
67. Id.
68. Id.
69. Id.
70. Id.
71. Id.
72. Id.
73. Wealth class is determined by the household's net worth.
74. MISHEL ET AL., supra note 46, at 290 fig.4D.
75. For simplicity, I have divided the percentage of shares owned by the bottom 40% equally in Graph 2. However, it is possible that all or most of this meager quantity of shares belongs to people in the sixtieth to eightieth percentile, with the bottom 20% owning no stock.
76. INV. CO. INST. & SEC. INDUS. ASS'N, supra note 40, at 6 fig.5. Each of the following percentages should of course be divided approximately in half in order to calculate what percentage of the population at large holds portfolios of the associated values. If we include a null portfolio for those holding no securities at all, we must add 50% to half of the 14% figure to reflect the fact that 57% of Americans hold either no stock at all or stock valued at less than $10,000. I trust that the average scholarly reader will appreciate how truly small even a $50,000 portfolio (which 75% of Americans do not have) is.
77. Id.
78. Id.
79. Id.
80. The growing increments simply reflect the dramatic nature of the skew found in Graphs 1 and 2. The table would grow very long indeed were it to remain divided into $10,000 increments, and a tiny fraction of Americans - the very wealthy - would represent most of its length. Also, please note again that, according to the Federal Reserve's latest data, this situation has not improved and indeed appears in most respects to have worsened. See Bucks et al., supra note 19, at A10-A19.
81. By undifferentiated I mean simply those who hold any stock at all, whether directly, indirectly, or beneficially. See supra note 43.
82. In this sense, ownership includes, as it is typically defined to include, rights to control.
83. See supra note 43.
84. See supra note 42.
85. So, of course, will the distinction between holding equity as opposed to other financial assets. See supra note 43. Absent proximity to "the vicinity of insolvency" on the part of the firm, of course, holding debt does not typically confer control rights or fiduciary rights upon the holder. E.g., Credit Lyonnais Bank Nederland, N.V. v. Pathe Commc'n Corp., No. 12150, 1991 Del. Ch. LEXIS 215, at *108 (Del. Ch. Dec. 30, 1991). See generally Henry T.C. Hu, Risk, Time, and Fiduciary Principles in Corporate Investment, 38 UCLA L. REV. 277 (1990) (describing the relationship between fiduciary principles and risk preferences).
86. I take the terms from Hockett, supra note 2, at 5-28, where I employ them to designate what I identify as the three dominant traditions of American political ideology. I then endeavor to identify a range of overlapping consensus among those traditions with a view toward forging a unitary ideological template upon which to construct a politically stable ownership society. See id. at 29-56.
87. Adherents to the Civic Republican tradition of American political thought might take interest in holding securities for this reason. See, e.g., DAVID P. ELLERMAN, THE DEMO CRATIC WORKER-OWNED FIRM 76-91 (1990) (discussing possible capital rights arrangements in "democratic" worker-owned firms);
88. Gregory S. Alexander, Pensions and Passivity, 56 LAW & CONTEMP. PROBS. 111, 130 (1993) (discussing the attraction of empowering ERISA beneficiaries to "make decisions and to practice self-governance");
89. William H. Simon, Social-Republican Property, 38 UCLA L. REV. 1335 passim (1991) (discussing historical antecedents of various conceptions of property that foster the kind of citizen autonomy and participation valued in the Civic Republican tradition).
90. I ignore here the owning of nonpublic firms. It happens that ownership of nonpublic firms is also statistically rare. See Bucks et al., supra note 19, at A22. Yet even were this not so, more ownership of public firms, even by owners of nonpublic firms, would be counseled by the diversification considerations discussed in Part III.
91. MISHEL ET AL., supra note 46, at 288.
92. Id.
93. Id. This suggests that beneficial ownership - primarily through pension plans - constitutes the most significant form.
94. Id.
95. INV. CO. INST. & SEC. INDUS. ASS'N, supra note 40, at 4.
96. Id.
97. Id.
98. Id.
99. Id. at 5 fig.3. About 44% initially purchased stock outside of these plans, and 8% initially acquired stock both inside and outside of employer plans in the same year.
100. Id.
101. Indeed, this is sufficiently significant to have prompted Peter Drucker, somewhat hyperbolically, to refer to an "unseen revolution" through which "pension fund socialism" had come to America. See DRUCKER, supra note 34.
102. INV. CO. INST. & SEC. INDUS. ASS'N, supra note 40, at 4. The corresponding number for indirect holdings through mutual funds outside employer plans was somewhat smaller, with only 28.7 million Americans holding such stock as of January 2002. Id.
103. Id.
104. Id.
105. Id.
106. See supra note 79 and accompanying text.
107. These concerns will be elaborated in detail in Part III.
108. INV. CO. INST. & SEC. INDUS. ASS'N, supra note 40, at 65. This represents 12.3 million individuals. Id. Recall that investors who beneficially own shares lack control rights. See supra text accompanying note 75-80.
109. INV. CO. INST. & SEC. INDUS. ASS'N, supra note 40, at 65.
110. Id.
111. Id. at 70.
112. Id. It is perhaps worth noting that a want of diversity also afflicts the direct ownership of stock by most Americans who own in this way. According to the Federal Reserve, 34.6% of those households owning any stock directly in 2004 held stock in only one firm, 59.5% held stock in three or fewer firms, and only 9.5% held stock in fifteen or more firms. See Bucks et al., supra note 19, at A15. Moreover, for 37.1% of these direct holders, at least one of the firms owned either employed or had employed the head of the household or that person's spouse or partner.
113. See id.
114. INV. CO. INST. & SEC. INDUS. ASS'N, supra note 40, at 70.
115. Id. at 71.
116. Id.
117. Id. The scare quotes around "portfolios" are meant to convey that a portfolio including but one firm's securities is not truly a portfolio.
118. Id. at 88.
119. Id. For those who worry over the degree to which stock ownership in America is either indirect or beneficial, such beneficial indirect ownership may raise additional concern. On the other hand, the greater mean and median values of such portfolios, presumably stemming from their diversification advantages, should afford some solace. There is, of course, some inherent tension between the goals of income security and governance, just as risk avoidance and commitment generally represent alternatives rather than partners.
120. See, e.g., Bucks et al., supra note 19, at A14-A24 (providing many more similar statistics).
121. Consider again the dollar figures assayed above in Subpart I.A, in particular the $50,000 statistic. See supra note 69.
122. See supra text accompanying notes 104-08 (showing the small size of retirement plans).
123. See supra notes 75-80 and accompanying text.
124. For a discussion of how much more widely distributed these assets became after the federal government implemented strategies to augment credit, see Hockett, supra note 6, at 116-17 (discussing home ownership), 153 (discussing human capital). This Article is predicated in part on the prospect of employing the same basic strategy to spread firm shares. See infra Part V.C.
125. See MISHEL ET AL., supra note 46, at 293. See generally Robert Hockett, Asset-Accumulation Programs for the Middle Class and Poor (Mar. 13, 2007) (unpublished draft, on file with author) (tracking the differences between home finance and higher-education finance programs that benefit the poor and those that benefit the wealthy).
126. See infra Part V.C.
127. Employee Retirement Income Security Act of 1974, 29 U.S.C. §§1001-1461 (2000); see JOHN H. LANGBEIN & BRUCE A. WOLK, PENSION AND EMPLOYEE BENEFIT LAW 68-84, 89-96 (4th ed. 2000) (discussing the origin and structure of ERISA).
128. The closing of the South Bend, Indiana, Studebaker plant precipitated the congressional action culminating in the passage of ERISA. See LANGBEIN & WOLK, supra note 116, at 68-72. Studebaker had grossly underfunded its employee pension fund, leaving the suddenly unemployed pensioners doubly bereft. See id. Those familiar with recent bankruptcies, particularly in the airline industry, might be tempted to say plus ça change. See, e.g., Evan Parez, Delta Moves to Shed Pensions, WALL. ST. J., June 20, 2006, at A13.
129. For a brief catalogue of ESOP types, see JOSEPH RAPHAEL BLASI, EMPLOYEE OWNER SHIP: REVOLUTION OR RIPOFF? 64-84 (1988).
130. See id. at 64.
131. See id. at 68-78.
132. See id. at 65-68, 78-84 (describing the principal ESOPs that do not employ credit - "nonleveraged ESOPs," "tax-credit ESOPs" (TRASOPs), and "payroll ESOPs" (PAYSOPs)).
133. The transactions which follow are related, in slighdy differing order and somewhat less detail, in EMPLOYEE BENEFIT RESEARCH INST., FUNDAMENTALS OF EMPLOYEE BENEFIT PROGRAMS 121-22 (3d ed. 1987).
134. See 29 U.S.C. § 1107(d)(6) (2000) (defining an employee stock ownership plan under ERISA). Defined contribution (DC) plans should be distinguished from defined benefit (DB) plans. See EMPLOYEE BENEFIT RESEARCH INST., supra note 122, at 65. The former prescribe a schedule of payments made into an account for the benefit of the employee, who in turn bears both gains and losses realized by the investment portfolio over time.
135. See id. DB plans, by contrast, prescribe payments made out to the employee upon her retiring, and the employing firm effectively bears the aforementioned upside gains and downside losses realized by the fund out of which payments are made.
136. See id. at 68-69.
137. See 29 U.S.C. § 1103(a) (providing that employee benefit plan assets must be held in trust). This insulates funds earmarked for employees from the other financial operations of the firm and affords the employee-beneficiaries the benefit of fiduciary obligations owed them by the plan's trustee.
138. See id. § 1104. It is regrettably not clear, however, that the trust protections offered employees by pension trusts are as fulsome as those offered beneficiaries of other trusts.
139. See, e.g., In re WorldCom, Inc., 263 F. Supp. 2d 745, 757-58 (S.D.N.Y. 2003) (finding that ERISA defines fiduciary obligations more narrowly than does the common law trust doctrine).
140. See ELLERMAN, supra note 80, at 111.
141. See 29 U.S.C. § 1103(a)(1). For a partial exception, which need not here detain us, see id. § 1103(a)(2).
142. See id. § 1104(a)(1).
143. See ELLERMAN, supra note 80, at 111.
144. See id. Because the trust purchases shares at fair market value, ESOP proponents sometimes misleadingly describe the purchase as an injection of equity. It would be more accurate, however, to characterize it as a publicly subsidized debt finance accompanied by a stock giveaway.
145. See id.
146. See id.
147. See id.
148. See id. Thus the sponsoring firm both borrows and repays on behalf of employees for the purchase of its own stock, giving partial ownership of itself as an employee benefit.
149. See Darien A. McWhirter, Employee Stock Ownership Plans in the United States, in UNDERSTANDING EMPLOYEE OWNERSHIP 43, 44 (Corey Rosen & Karen M. Young eds., 1991). Typically, the employee-beneficiaries can sell or redeem their shares only upon retirement or exit from the firm, and typically the firm buys the shares back.
150. See id. at 51-52. There are sometimes voting restrictions as well.
151. See id. at 48. This is significant when considering what ownership should mean.
152. See id. at 45.
153. with one possible, though minimal, caveat noted below, the employee-beneficiaries neither pay nor pledge anything. The firm, in effect, does it all. Or nearly all, as we'll see when we turn to the government's role. See infra Part II.B.
154. See HENRY HANSMANN, THE OWNERSHIP OF ENTERPRISE 105 (1996).
155. See id.
156. See ELLERMAN, supra note 80, at 110; HANSMANN, supra note 137, at 105;
157. Corey Rosen, Employee Ownership: Performance, Prospects, and Promise, in UNDERSTANDING EMPLOYEE OWNERSHIP, supra note 134, at 1 & 20 tbl.1.2. For a partial list of companies that have established ESOPs,
158. see Gianna Durso, The Structure and Implementation of ESOPs in Public Companies, in THE EXPANDING ROLE OF ESOPS IN PUBLIC COMPANIES 11, 23-27 tbl.2.1 (Karen M. Young ed., 1990);
159. Rosen, supra, at 10-11 tbl.1.1. ESOP-like structures have expanded in jurisdictions outside the United States as well.
160. See ELLERMAN, supra note 80, at 113-14; Rosen, supra, at 18-19. A helpful catalogue of the one thousand largest firms with more than 4% employee ownership is found in JOSEPH RAPHAEL BLASI & DOUGLAS LYNN KRUSE, THE NEW OWNERS 257-301 (1991). The catalogue does not disaggregate employee ownership by ESOP, profit-sharing, 401 (k), and option plans, but it is nonetheless suggestive both in light of the fact that ESOPs account for almost half of employee-owned equity, and the surprising number of firms on the list that are 20% or more owned by employees. See id.
161. See id. These plans covered between three-hundred thousand and six-hundred thousand new employee participants per year.
162. See Durso, supra note 139, at 23-27 tbl.2.1; McWhirter, supra note 134, at 60-61; Rosen, supra note 139, at 10-11 tbl.1.1.
163. Kelso believed that contemporary economists remain wedded to the labor theory of value, but that there are "really two productive factors, labor and capital" that enter into production, with the latter accounting for an ever-growing share of value added. ELLERMAN, supra note 80, at 119-20; see also Hockett, supra note 6, at 125. Economists have not found these discoveries compelling. See ELLERMAN, supra note 80, at 119-20. I should perhaps not be so snarky, however. Kelso's motives, energy, and inventiveness, as distinguished from his sally into theory, were nothing if not praiseworthy. He was a lawyer and investment banker, not an academic theorist, who typically pitched his advocacy to legislators and the general public, and thus his primary audience was not the academics that criticized him. See STUART M. SPEISER, A PIECE OF THE ACTION 148-49, 188 (1977).
164. HANSMANN, supra note 137, at 105.
165. ELLERMAN, supra note 80, at 120.
166. Louis O. KELSO & PATRICIA HETTER KELSO, DEMOCRACY AND ECONOMIC POWER: EXTENDING THE ESOP REVOLUTION 62 (1986).
167. Smart M. Speiser, Broadened Capital Ownership - The Solution to Major Domestic and International Problems, 7 J. POST KEYNESIAN ECON. 426, 429 (1985) (emphasis added). For more on this idea, see infra note 314.
168. John Case, A Company of Businesspeople, INC., Apr. 1993, at 79, 86.
169. For a plenary and not unsympathetic discussion of the available evidence, see BLASI, supra note 118, at 25-27, 221-38.
170. See I.R.C. § 404(a)(9) (2000). ESOPs also enjoy the tax advantages of employee pensions generally. Most of these are noted below, but this section primarily focuses on what is unique to ESOPs.
171. 29 U.S.C. § 1104(a)(1)(B) (2000).
172. See id. §1104(a)(1)(C).
173. See id. §1104(a) (2). Courts have in some instances agreed with the Department of Labor that there can be circumstances in which the prudent investor standard would require the ESOP trustee to refrain from purchasing employer stock. See, e.g., Moench v. Robertson, 62 F.3d 553, 571 (3d Cir. 1995). Any other assets in which the ESOP might invest remain subject to the general diversification requirement. See 29 U.S.C. § 1104(a)(2).
174. See I.R.C. § 61(a)(4) (including "interest" in the general definition of gross income).
175. See id. §133(a). But see Small Business Job Protection Act of 1996, Pub. L. No. 104-188, §§ 1602(a), (c), 110 Stat. 1755, 1833 (repealing the interest exclusion previously allowed under I.R.C. § 133(a) for all securities acquisition loans made after August 20, 1996, except for loans made pursuant to a binding written contract which was in effect before June 10, 1996).
176. See I.R.C. § 311 (a) (providing that a corporation may not deduct dividends from its gross income).
177. See id. § 404(k).
178. See id. §§ 501 (a), (c). This advantage is not unique to ESOPs as distinguished from other ERISA plans.
179. See id. § 1042(b)(1). Such conditions include that proceeds of the sale be reinvested in a domestic corporation within one year,
180. see id. § 1042(c) (3), and that the ESOP own at least 30% of the sponsoring firm's shares after the sale,
181. see id. § 1042(b) (2).
182. See id. § 2057.
183. See id. § 2210.
184. Id. § 4975.
185. See 29 U.S.C. § 1108(e) (2000).
186. See id. § 1108(b)(3); I.R.C. § 4975(d)(3).
187. The ESOP is nominally independent because of the role taken by the sponsoring firm's board in selecting and directing - indeed, even functioning as - the ESOP trustee. See supra notes 124-127.
188. See Shamrock Holdings, Inc. v. Polaroid Corp., 559 A.2d 257, 275-76 (Del. Ch. 1989).
189. Contra NCR Corp. v. Am. Tel. & Tel. Co., 761 F. Supp. 475, 495 (S.D. Ohio 1991).
190. Cf. NCR Corp., 761 F. Supp. at 496 ("[B]oth solicitors concur in the proposition that the vast majority of NCR employees will vote with management.").
191. Most stock held by ESOPs is nonvoting stock - the median ESOP holds 10% of its sponsoring firm's shares but only 5% of that firm's voting rights. See U.S. GEN. ACCOUNTING OFFICE, EMPLOYEE STOCK OWNERSHIP PLANS: BENEFITS AND COSTS OF ESOP TAX INCENTIVES FOR BROADENING STOCK OWNERSHIP 39-40 (1986). The reason for this differs for closely held and publicly traded firms. With litde exception, closely held firms enjoy all applicable ESOP tax benefits even if their ESOPs do not pass acquired stock voting rights through to employees such that these shares only vote on fundamental transactions - matters which must, according to charter or applicable law, be decided by supermajorities of outstanding shares voted. See I.R.C. §§ 409(e)(3), 401 (a) (22). Although in the case of publicly held firms the voting rights must be passed through to the employee-beneficiaries, this is only required with respect to stock actually allocated to employee accounts.
192. See id. § 4975(e)(7). Yet, the allocation occurs only gradually as the original loan is amortized.
193. See McWhirter, supra note 134, at 44. This lack of control rights ought to give pause to those who would see any incipient workplace democracy in the growth of ESOPs. Professor Alexander's general concerns about contemporary pension practice generally are particularly applicable to ESOPs.
194. See Alexander, supra note 80 passim.
195. I am far from the first to suggest the importance of public support for the spread. See, e.g., BLASI, supra note 118, at 68-78;
196. ELLERMAN, supra note 80, at 110-11;
197. HANSMANN, supra note 137, at 105-06.
198. The overall impact of this temperance, however, is probably minimal. For one thing, the evidence is scant. See, e.g., ELLERMAN, supra note 80, at 90-91. Perhaps more importantly, it seems highly unlikely that rational employees would be willing to reduce their wages sufficiently to offset the dilution. After all, the shares are deferred compensation and confer none of the consumption benefits of control. Finally, the shares are undiversified investments. It would be far more sensible for employees willing to sacrifice pay for stock to insist upon voting and diversified stock.
199. See BLASI, supra note 118, at 25-27, 221-38, 263.
200. The other-regarding shareholders might pardy be actuated by the ideological and political motivations that we shall discuss presendy.
201. See Richard L. Doernberg & Jonathan R. Macey, ESOPs and Economic Distortion, 23 HARV. J. ON LEGIS. 103 passim (1986);
202. Michael W. Melton, Demythologizing ESOPs, 45 TAX L. REV. 363 passim (1990).
203. See Hockett, supra note 6, at 57-68; Hockett, supra note 22, at 142-73;
204. Hockett, supra note 2, at 31-51;
205. see also Robert Hockett, Three (Potential) Pillars of Transnational Economic Justice: The Bretton Woods Institutions as Guarantors of Global Equal Treatment and Market Completion, 36 METAPHILOSOPHY 93, 97 (2005). See generally Robert Hockett, Minding the Gaps: Fairness, Welfare, and the Constitutive Structure of Distributive Assessment (Cornell Law Sch. Legal Studies Research Paper Series, Paper No. 06-039, 2006), available at http://ssrn.com/author=602726 (discussing opportunity-egalitarian distribution formulae as particularly influential among competing accounts of distributive ethics).
206. See Hockett, supra note 6, at 57-68;
207. Hockett, supra note 22, at 142-73;
208. Hockett, supra note 2, at 31-51.
209. See Hockett, supra note 6, at 57-68;
210. Hockett, supra note 22, at 142-73;
211. Hockett, supra note 2, at 31-51.
212. See Hockett, supra note 6, at 57-68;
213. Hockett, supra note 22, at 142-73;
214. Hockett, supra note 2, at 31-51.
215. See Hockett, supra note 6, at 73-83;
216. Hockett, supra note 2, at 58-72, 80-87.
217. See Hockett, supra note 6, at 73-83;
218. Hockett, supra note 2, at 58-72, 80-87. I employ scare quotes in this section to register that the "newness" and "taking" or "giving" in question are experienced pre-reflectively as their proceeding from cognitive dispositions would suggest. Thus, I speak of predisposed framings here rather than considered judgments.
219. See Hockett, supra note 6, at 73-83;
220. Hockett, supra note 2, at 58-72, 80-87.
221. See Hockett, supra note 6, at 73-83;
222. Hockett, supra note 2, at 58-72, 80-87.
223. It is potentially exogenous in two senses - one trivial and the other less so. First, one must use it responsibly to derive utility from it as a kind of resource. Second and less trivially, how much one has of this resource is at least in part - and sometimes in significant part - the product of fortune or fate rather than effort. One can hold less simply by having been born to the wrong parents, so to speak. See Hockett, supra note 2, at 31-51.
224. Such spreading is "superficial" in light of Part II.B.
225. It is viewed as an employee benefit predicated upon lengthy labor patronage - a kind of loyalty - to the firm. See infra Part IV.
226. See Hockett, supra note 6, at 98-120, 143-53; see also infra Part V.B (discussing the histories and shared financial structure of these programs).
227. See Hockett, supra note 6, at 135-37.
228. See id. at 98-120, 143-53.
229. See KELSO & KELSO, supra note 145, at 160-62.
230. See id. at 65; see also Jeffrey N. Gordon, Employees, Pensions, and the New Economic Order, 97 COLUM. L. REV. 1519, 1520 (1997) (stating that "stock prices [had] nearly trebled in real terms" in the fifteen years before 1997).
231. This is, essence, my charitable reformulation of Kelso's oftentimes puzzling pronouncements. See supra note 145 and accompanying text; see also Hockett, supra note 6, at 124-30 (discussing Kelso's formulation of the prototype ESOP as a "schema operating for the benefit of the nonwealthy, capitally disenfranchised").
232. To some degree, capital incomes are presumably more secure because downsizing short of full bankruptcy and liquidation sheds laborers but not shareholders, but the basic point remains significant. For an example of how shareholders fare better than workers in downsizings, see C.A. Harwell Wells, The Cycles of Corporate Social Responsibility: An Historical Retrospective for the Twenty-First Century, 51 U. KAN. L. REV. 77, 82 (2002).
233. See Hockett, supra note 22, at 174-77.
234. See id. at 180-82.
235. See id. at 177-80.
236. See id. at 178-79.
237. See id. at 180-82. For a general discussion of business cycles, see FISCHER BLACK, BUSINESS CYCLES AND EQUILIBRIUM (1987);
238. ROBERT E. LUCAS, MODELS OF BUSINESS CYCLES (1987); MODERN BUSINESS CYCLE THEORY (Robert J. Barro ed., 1989);
239. EDMUND S. PHELPS, STRUCTURAL SLUMPS: THE MODERN EQUILIBRIUM THEORY OF UNEMPLOYMENT, INTEREST, AND ASSETS (1994) (developing and testing a structural unemployment theory).
240. It would afford what we might call "automatic Keynesianism" - a means by which business-cycle volatility would be modulated by maintaining income. See Hockett, supra note 6, at 129.
241. For more on these prospects, see infra Part IV.
242. I borrow the term from Joel Feinberg. See JOEL FEINBERG, Justice and Personal Desert, in DOING & DESERVING: ESSAYS IN THE THEORY OF RESPONSIBILITY 55, 58-61 (1970). A desert base is simply the warrant for a claim that one is deserving of something, as "[d]esert without a basis is simply not desert." Id. at 58. For example, my bravery in combat might be the desert base underlying my receipt of the Silver Star for Valor. My persuading warring parties to lay down their arms might similarly ground my receipt of the Nobel Peace Prize. And so on.
243. See supra Part II.A.
244. See supra note 11 and accompanying text.
245. For more on the uses of these forms of credit and credit enhancement, see infra Part V.
246. See infra Part V.B. For a more comprehensive account, see Hockett, supra note 6, at 104-20, 146-53.
247. So far as I have been able to determine, Henry Hansmann is the only scholar who has devoted significant discussion to the relations between patronage and firm ownership. See HANSMANN, supra note 137. My employment of the concept of patronage will be somewhat more elastic than Hansmann's, however - as is perhaps intimated by my addition of the qualifier "ethically salient." My understanding of the term will accordingly be a bit different as well. I do not believe, however, that my understanding and employment of the term will be incompatible with Hansmann's.
248. Hansmann appears to be less explicitly concerned with the ongoing nature of patronage relations, while being more explicitly concerned with a particular species of relating to the firm - selling to or purchasing from it - than I. See infra note 205. I think our distinct concerns with patronage nonetheless compatible, however. For, first, my concern with the possible ethical salience of patronage naturally lends itself to an emphasis upon longer-term relations, at least among those who purchase from or contribute to firms in small increments per transaction. (Duration of relating substitutes for magnitude of individual transaction.) And, second, patronage relations potentially involving more than purchasing and selling seem to be implicit in Hansmann's understanding of the term, as evidenced by his occasional recourse to the broader relational concept of "supplying," which figures prominently in his treatment of stockholders as financial capital suppliers. See HANSMANN, supra note 137, at 15.205 Hansmann defines "patrons" as "persons who transact with a firm either as purchasers of the firm's products or as sellers to the firm of supplies, labor, or other factors of production."
249. See HANSMANN, supra note 137, at 12.
250. Hansmann devotes much of his path-breaking monograph to showing both that a particular class of patrons typically owns most firms operating within a particular industry, and why those particular classes end up being the more efficient owners. My interest in this Article, though not incompatible with Hansmann's interest, is nonetheless distinct. The distinction accounts for my somewhat broadened understanding and employment of the concept of patronage. My concern is with patronage as a form of ongoing relation between persons and firms, such as can be viewed in part as the patron's consistent conferral of some manner of benefit upon the firm, such as in turn can engage our willingness to view the patron's coming to own a share of the firm as ethically unobjectionable - as something better than the product of a mere handout. That is to say that my angle on patronage here is as a desert basis. See supra note 198. I do not believe that this basis for interest in patronage places me in any way at odds with Hansmann's efficiency-grounded basis for interest in the same. For I do not here suggest that firms should be owned by patrons of a different kind than those that he shows to be the more efficient owners of firms in particular industries. Rather, I simply propose that more patrons within the class be added to the rosters of owners. The remainder of this Part will both make this plain and unpack more fully the ways in which patronage relations might be seen ethically to underwrite benefit conferrals upon current non-owners within patronage classes.
251. See supra Part II.C (suggesting reasons behind public support for ESOPs).
252. See supra Part III.B.
253. Indeed, customers constitute the most efficient class of owners in certain industries, including the farm supply industry, in which consumer cooperatives are common; rural electricity, in which customer cooperatives are again prominent; clubs affording members high-status associative goods, which, again, tend to be owned by their members; and urban housing, in which housing cooperatives are prominent. See HANSMANN, supra note 137, at 147-223.
254. Sometimes patrons naturally come to own parts of the firms they regularly patronize, apparently for reasons rooted in comparative efficiencies of governance and contracting. See id. at 24-34. But my interest in an ownership society warrants fostering ownership even where it does not naturally arise, as seems to have occurred with the proliferation of ESOPs. See supra Part II. Those reasons presumably also afford at least a provisional reply to similar objections that might be made to disgorgement remedies in contract, owing to their inefficiently coupling purchases from with investments in firms. Thank you to Daniel Markovits for calling this latter comparison to my attention. For more on the reasons that I believe prompt our interest in an ownership society, see Hockett, supra note 6, at 49-84;
255. Hockett, supra note 2, at 1-86.
256. I allude to Ithaca, New York, where I live, but there are countless similarly situated locales, not all of them university towns and not all of them as isolated as Ithaca. Indeed, one might plausibly apply this example to a community or sector of a large city, as commonly found in New York, Chicago, and Los Angeles. Also note that the next example makes no reference to such communities at all. All examples in this Article are meant to be illustrative rather than exhaustive.
257. For an analysis of the various grounds upon which an ownership society might be attractive, see Hockett, supra note 2, at 5-78.
258. Facilitating local business ownership will not afford optimal diversification, as personal incomes and those of local firms fluctuate together as in the case of local or regional slumps. My aim here is to use patronage relations as ethically salient grounds for public action facilitating ownership, pursuant both to (a) the hypothesis posited in Part II.C concerning public willingness to subsidize ESOP expansion, and (b) the further elaboration of that hypothesis in this Article's predecessor pieces concerning why we have acted similarly to promote spreading home ownership and higher education. I have already addressed the project of democratizing the sharing of income risk across localities and even across nations in a separate article. See Hockett, supra note 22, at 212-56. I hope that these pieces afford a rough template for how best to render our society more efficient at spreading ownership.
259. In a way, the store in the previous example was also an example of a natural monopoly because small towns support less competition among smaller suppliers than do cities.
260. Such shares might be distributed in proportion to customers' patronage, such as amounts purchased from the firms.
261. See supra Part II.A.
262. This SOP should not be confused with Kelso's proposed "consumer stock ownership plan," which appears to be little more than a producer co-op. See KELSO & KELSO, supra note 145, at 67-73.
263. Of course, this point assumes such a plan will compensate the dilution of existing stockholders as in the case of ESOPs - by an array of benefits counterpart to those described above in connection with ESOPs in Part II. Thanks to Heidi Craig for emphasizing the need to address the dilution concern in connection with SOP forms other than the ESOP.
264. The appropriable rents justification for property rights appears to originate, at least in its now canonical formulation, with Harold Demsetz, Toward a Theory of Property Rights, 57 AM. ECON. REV. 347 (PAPERS & PROC.) (1967).
265. Legally speaking, this claim, associated with Richard Epstein, is hyperbolic. But one can readily grasp the intuition behind it. See RICHARD A. EPSTEIN, TAKINGS: PRIVATE PROPERTY AND THE POWER OF EMINENT DOMAIN 99-100 (1985).
266. See, e.g., id. For a fascinating though disquieting documentary account of the strategic framing of tax policy issues by champions of estate tax elimination, see MICHAEL J. GRAETZ & IAN SHAPIRO, DEATH BY A THOUSAND CUTS: THE FIGHT OVER TAXING INHERITED WEALTH (2005).
267. I employ scare quotes because I seek to convey, rather than embrace, the attitude pursuant to which some view the government as an alien force rather than an agent of collective action.
268. The goal is to avoid providing a windfall to some group of randomly selected beneficiaries with no greater claim to the rents than does any other member of society.
269. See infra Part IV.C.
270. Scare quotes again indicate my attempt to express a pre-reflective manner of perception. See supra note 178. I am uncomfortable with this perception and resort to it as what strikes me as a compromise with territorialist psychological dispositions that are regrettable at best. Some such primitive intuition seems to underwrite the judgment that coal found between Canada and Mexico is "American" coal, rather than North American coal or "the coal of mankind." Ideally I would prefer to repudiate the intuition, but if I cannot, I may as well harness it for good purpose.
271. In 1980, a voter initiative was introduced to establish the Alaska General Stock Ownership Corporation (AGSOC), which would have provided Alaskan citizens ownership interests in the Alaska oil pipeline. See Alaska Div. of Elections, Alaska Initiatives on Previous Ballots, http://www.gov.state.ak.us/ ltgov/elections/initbal.htm (last visited Mar. 3, 2007). British Petroleum expressed interest in selling its investment in the pipeline to AGSOC, which would have enjoyed the backing of state credit to borrow for the purchase. See William Greider, Alaska Inc.: An Economic Experiment, WASH. POST, Oct. 22, 1978, at Al.
272. Under federal matching legislation in effect at the time - specifically, Subchapter U of Chapter 1 under Subtitle A of the Internal Revenue Code - AGSOC would also have enjoyed favorable federal income tax treatment. See Revenue Act of 1978 § 601, Pub. L. No. 95-600, 92 Stat. 2763, 2892-97 (repealed 1986). The AGSOC plan would also have prohibited any one individual from owning more than ten shares in order to prevent concentrated ownership. See Greider, supra. The Alaskan ballot measure nevertheless lost on a close popular vote (approximately 78,000 to 72,000). See Alaska Initiatives on Previous Ballots, supra. Notwithstanding the failure of this ballot initiative, Alaska did adopt a cognate program. See infra note 229.
273. See U.S. CONST, amend. X.
274. For example, we could define a closely associated municipality or state as one that could tax the enterprise exploiting the resource.
275. This is not to be confused with Kelso's proposed "GSOPs," see KELSO & KELSO, supra note 145, at 75-83, "COMCOPs,"
276. see id. at 88-92,
277. or "RECOPs," see id. at 99-103. Though similarly geared toward spreading ownership firms, these proposals are both conceived on entirely different - indeed, puzzling - grounds and are more importandy of different financial structure. For a more general charitable interpretation and correction of Kelsonian theories and schemes,
278. see Hockett, supra note 6, at 124-42.
279. Here, the degree of patronage might be measured by years of residence. I ignore, for present purposes, the matter of crafting terms to avoid conflict with court decisions overturning state laws that burden interstate travel. In Zobel v. Williams, 457 U.S. 55, 64 (1982), the Supreme Court rejected Alaska legislation that awarded pipeline dividends to state residents based on the duration of their residence until the point when distributions began. In contrast, allowing the number of shares distributed thenceforth to grow with years of residence would not seem constitutionally offensive so long as one could begin to accumulate shares immediately upon establishing residence. Cf. Shapiro v. Thompson, 394 U.S. 618, 641 (1969) (invalidating a one-year waiting period for Social Security Benefits); Edwards v. California, 314 U.S. 160, 177 (1941) (striking down a California law prohibiting the transport of a nonresident indigent person into the state).
280. In addition to overcoming capacity, such a system may trigger statutory lending limits. See 12 U.S.C. § 84 (2000). A national banking association cannot have more than 15% of its unimpaired capital and unimpaired surplus in loans and credit extended to an individual, including a trust, that are not fully secured. See id. § 84(a) (1). Also, a national banking association's total outstanding fully-secured loans and credit extensions cannot exceed 10% of the association's unimpaired capital and unimpaired surplus. See id. § 84(a)(2).
281. See, e.g., DAVID RICARDO, THE PRINCIPLES OF POLITICAL ECONOMY AND TAXATION 33-45 (J.M. Dent & Sons Ltd. 1973) (1817) (describing rentiers as windfall beneficiaries of scarcity of land) ; l ADAM SMITH, AN INQUIRY INTO THE NATURE AND CAUSES OF THE WEALTH OF NATIONS 161-63 (Edwin Cannan ed., Univ. of Chi. Press 1976) (1776) (describing rent as a monopoly price, not consequent to any expense laid out by the rentier).
282. Hansmann suggests a number of reasons for the absence of urban utility cooperatives analogous to rural electrical cooperatives, among them the comparative transience of urban dwellers and conflicts of interest among disparate classes of prospective urban owners. See HANSMANN, supra note 137, at 173-79. While such phenomena presumably account in part for the absence of spontaneously generated (sorry - pun foreseen but not intended) urban utility cooperatives, they do not stand in the way of publicly facilitated partial ownership of corporate utilities by their customers. Moreover, to whatever degree we might worry that partial ownership by customers is "not enough," we can readily mitigate the worry by means familiar to other, existing utilities-ownership scenarios. Hence, rates can be regulated with a view to preventing price discrimination as among classes of users, and any worry over the development of, say, "absentee ownership" in the long run would seem to be mitigated or mitigable by (a) the fact that highly transient residents of a municipality likely will not come to acquire much in the way of shares in any event, (b) the possibility of recourse to required redemption (indeed, we might even arrange to have transients trade their erstwhile utilities' shares for shares in utilities located in their new locales, with the utilities themselves in turn exchanging the shares), or at worst, (c) the possibility of recourse to mere beneficial ownership by the new owners, legal ownership to remain with consumer trusts established for the purpose of retained legal ownership. Indeed, as Hansmann himself points out, some municipal utilities can readily be likened to cooperatives, organized, as they are, quite similarly. See id. at 178.
283. A variation, perhaps, on the 1979 Remington electric razor advertisement, in which Victor Kiam averred, "I liked it so much, I bought the company." I Liked the Slogan So Much . . ., BBC NEWS, May 30, 2001, http://news.bbc.co.Uk/1/hi/uk/1357091.stm.
284. Pub. L. No. 104-104, 110 Stat. 56 (codified as amended in scattered sections of 47 U.S.C.). For commentary, see PETER W. HUBER ET AL., THE TELECOMMUNICATIONS ACT OF 1996: SPECIAL REPORT (1996); 74 AM. JUR. 2D Telecommunications § 16 (2001).
285. See 47 U.S.C. § 336(a) ("[T]he Commission . . . (1) should limit the initial eligibility for such licenses to persons that, as of the date of such issuance, are licensed to operate a television broadcast station or hold a permit to construct such a station (or both); and (2) shall adopt regulations that allow the holders of such licenses to offer such ancillary or supplementary services on designated frequencies as may be consistent with the public interest, convenience, and necessity."). For a discussion of the FCC's grant under the Act of a free spectrum for HDTV, see Matthew Spitzer, Dean Krattenmaker's Road Not Taken: The Political Economy of Broadcasting in the Telecommunications Act of 1996, 29 CONN. L. REV. 353 365-67 (1996).
286. Even if that patronage is, in a liberal polity such as our own approximates, an attenuated or "thin" kind of patronage. The degree to which citizenship as a form of patronage is thin might track the degree to which the polity's "theory of the good" is thin. See RAWLS, supra note 5, at 347. A polity that acknowledges the "priority of the right over the good," id. at 28, will be a polity which, qua polity, maintains but a "thin theory of the good," id. at 347-50, reserving "thicker" conceptions of what it is to lead a good life to citizens as individual life-planning agents. Citizenship itself would accordingly be minimally defined in bare justice terms, and claims to basic resource minima would be rooted in the basic justice to which every citizen is entitled as a citizen. To the degree that a polity departs from the minimal liberal ideal, however - e.g., in the direction of a civic republic whose citizens deliberately share certain thicker values additional to that of justice (such as those of shared participation and deliberation themselves, notwithstanding the wishes of some not to take part) - the form of patronage to which citizenship itself amounts will correspondingly grow thicker. Being a citizen will involve closer relating with and value-sharing with one's fellow citizens qua citizens. And it might then activate concerns we hold on behalf of others which are grounded more in fellow-feeling now as well as in bare justice. For more on the degree to which the American polity appears to incorporate civic republican as well as classical liberal values, see Hockett, supra note 2, at 5-24.
287. See supra Part II.C.
288. See supra notes 173-76 and accompanying text.
289. See Hockett, supra note 2, at 29-56. In that article, I endeavor to identify an overlapping consensus among our dominant political traditions - a consensus that converges on a shared ideal that I label an "efficient equal-opportunity republic."
290. See id.; see also Hockett, supra note 22, at 142-73. The "self-evident" remark of course alludes to THE DECLARATION OF INDEPENDENCE para. 1 (U.S. 1776).
291. See Hockett, supra note 2, at 36-51.
292. See id. passim.
293. See supra Part II.B.
294. We might begin by targeting those who benefit their country through military, AmeriCorps, or like service, similar to the large-scale post-Homesteading era education-spreading programs which began with veterans as beneficiaries. See Hockett, supra note 6, at 144-46.
295. we do this already with federal home finance and higher education assistance, which employ both financial need and law-abidingness criteria. See id. at 95 & n.119, 96-97.
296. In 2001, Prime Minister Blair implemented the Child Trust Fund (or, more popularly, "baby bonds"). See Blair Banks on Baby Savings Scheme, BBC NEWS, Apr. 27, 2001, http://news.bbc.co.Uk/1/hi/ uk_politics/1297324.stm. Former Senator Bob Kerrey of Nebraska proposed something similar stateside in 2000 called "KidSave" accounts. See Idea of the Week: KidSave, NEW DEM DISPATCH (Wash., D.C), Oct. 13, 2000, http://www.dlc.org/ndol_ci.cfm?contentid= 2372&kaid=131&subid=207.
297. In 1999, President Clinton proposed "universal savings accounts" (USAs). See Press Release, Office of the Press Sec'y, The White House, Remarks of the President on Universal Savings Accounts (Apr. 14, 1999), available at http://clinton4.nara.gov/WH/New/html/19990414-3020.html; PAMELA PERUN, URBAN INST., MATCHING PRIVATE SAVING WITH FEDERAL DOLLARS: USA ACCOUNTS AND OTHER SUBSIDIES FOR SAVING (1999), http://www.urban.org/publications/309272. html. President George W. Bush advocated a similar structure of private accounts, though one without government income support, in his 2005 State of the Union address and in other public appearances. See George W. Bush, State of the Union Address (Feb. 2, 2005), available at http://www.whitehouse.gov/ news/releases/2005/02/20050202-11.html; Bush Pushes Private Accounts, CBS NEWS, May 4, 2005, http://www.cbsnews.com/stories/2005/05/04/politics/ main692991.shtml.
298. This might be deemed unnecessary in view of the full faith and credit enjoyed by a federal institution. See 12 C.F.R. pt. 3, app. A (2007). Indeed, even if the trust functioned as a government-sponsored entity (GSE), it would be viewed as only 20% risky for bank capital regulation purposes, whereas investments issued direcdy by the federal government itself are not considered risky at all because the federal government's obligations are fully guaranteed. See id.
299. The previous discussion should have made clear, however, that in all the proposed SOPs, the exact nature of the rewarded patronage relationship can take many forms.249 See Nancy J. Altman, Response, The Reconciliation of Retirement Security and Tax Policies: A Response to Professor Graetz, 136 U. PA. L. REV. 1419, 1428 (1988) ("Social Security requires that all workers contribute some wage-related amount for their benefits and that the longer workers are employed and the higher their covered earnings, the greater their cash benefits. Because benefits are tied to previous living standards, Social Security encourages work." (footnotes omitted)).
300. For example, the offspring of wealthy families might not qualify for any CitSOP benefit.
301. See infra Part V.B.
302. Fund shares would be valued as are any mutual fund's shares. Individual issuer shares would be valued as are any issuer's - by the market for publicly valued firms, or pursuant to the cash flow method for closely held firms. See generally MCKINSEY & Co. ET AL., VALUATION: MEASURING AND MANAGING THE VALUE OF COMPANIES 131-297 (3d ed. 2000). I ignore here the question of means of avoiding imprecision occasioned by market fluctuations, accounting indeterminacies, and the like, as there are no difficulties specific to the present case not already dealt with by familiar means in other investment company contexts.
303. As previously noted, diversification is built into the CitSOP concept. If, however, an insufficient variety of firm types participated in CitSOP arrangements, the added diversification of SOP Mutual would be beneficial.
304. We might even subsidize or require (the latter perhaps in the form of benefit conditionally) some baseline amount of financial counseling, as it does for federal home and education finance programs. See Hockett, supra note 6, at 92.
305. See supra Part II.C.3.
306. See Hockett, supra note 22, at 183-203 (elaborating and discussing relevant insurance economics principles);
307. Hockett, supra note 2, at 90-98 (discussing risk in finance and insurance markets); infra Part V.B.
308. The following discussion, except where noted, is based on Hockett, supra note 6, at 104-20, 146-53.
309. See J. Paul Mitchell, Historical Overview of Federal Policy: Encouraging Homeownership, in FEDERAL HOUSING POLICY AND PROGRAMS: PAST AND PRESENT 39, 41 (J. Paul Mitchell ed., 1985).
310. See id.
311. See id.
312. Id.
313. See Milton P. Semer et al., Evolution of Federal legislative Policy in Housing: Housing Credits, in FEDERAL HOUSING POLICY AND PROGRAMS: PAST AND PRESENT, supra note 258, at 69, 73.
314. Pub. L. 72-304, 47 Stat. 725 (codified as amended at 12 U.S.C §§ 1421-1449 (2000)).
315. See 12 U.S.C. § 1423. The system was overseen by a Federal Home Loan Bank Board (FHLBB) operating rather like the Federal Reserve Board, which oversees the Federal Reserve System. See Hockett, supra note 6, at 106.
316. See Hockett, supra 6, at 106-07.
317. See Pub. L. 73-43, 48 Stat. 128 (codified as amended at 12 U.S.C. §§ 1461-1468 (2000)).
318. Refinancing was available through a Home Owner's Loan Corporation (HOLC) established by the HOLA. See Hockett, supra note 6, at 107.
319. See Pub. L. No. 73-479, 48 Stat. 1246 (codified as amended 12 U.S.C. §§ 1701-1750 (2000)). The MSB deposit insurance system was administered by a newly established Federal Savings and Loan Insurance Corporation (FSLIC), designed along lines analogous to the then-recent Federal Deposit Insurance Corporation (FDIC).
320. See Hockett, supra note 6, at 109.
321. See Semer et al., supra note 262, at 78.
322. See Hockett, supra note 6, at 113-14 nn.198-99.
323. See About Fannie Mae: Understanding Fannie Mae, http://www.fanniemae.com/aboutfm/understanding/index.jhtml?p= About+Fannie+Mae&s=Understanding+Fannie+Mae (last visited Mar. 2, 2007).
324. See Frequendy Asked Questions: Fannie Mae's Business, http://www.fanniemae.com/faq/faq2.jhtml?p=FAQ (last visited Mar. 2, 2007).
325. See, e.g., PAUL DICKSON, SPUTNIK: THE SHOCK OF THE CENTURY 4-7 (2001). For an interesting archive of materials, see The New York Times on AOL: Sputnik (1997), http://www.nytimes.com/partners/aol/special/sputnik/.
326. See DICKSON, supra note 273, at 227-28.
327. Pub. L. No. 85-864, 72 Stat. 1580.
328. Servicemen's Readjustment Act of 1944, Pub. L. No. 78-346, 58 Stat. 284 (codified as amended in scattered sections of 12 & 38 U.S.C).
329. Servicemen's Readjustment Act § 201-209. The GI Bill offered more modest financial assistance to veterans seeking higher education immediately following the Second World War. That too was consistent with the Method, especially with its "conditioning" strategy.
330. See Pub. L. No. 88-452, 78 Stat. 508 (repealed 1981).
331. Pub. L. No. 89-329, 79 Stat. 1219 (codified as amended in scattered sections of 20 & 42 U.S.C).
332. See supra Part V.B. 1.
333. See Hockett, supra note 6, at 148-49.
334. See Pub. L. 92-318, 86 Stat. 235.
335. See id. § 133; Fannie Mae: Company History, http://www.fundinguniverse.com/company-histories/Fannie-Mae-Company-History. html (last visited Mar. 3, 2007); SLM Holding Corp.: Company History, http://www.fundinguniverse.com/company-histories/SLM-Holding-Corp-Company- History.html (last visited Mar. 3, 2007).
336. See SLM Holding Corp.: Company History, supra note 283.
337. See, e.g., Sallie Mae, About Us, http://salliemae.com/about/ (last visited Mar. 3, 2007).
338. See, e.g., SLM Holding Corp.: Company History, supra note 283.
339. See Sallie Mae, supra note 285.
340. See, e.g., id.
341. See U.S. DEP'T OF EDUC, BIENNIAL EVALUATION REPORT 1993-1994: FEDERAL FAMILY EDUCATION LOAN PROGRAM (1995), available at http://www.ed.gov/pubs/Biennial/ 502.html.
342. See Hockett, supra note 6, at 87-153;
343. Hockett, supra note 2, at 95-102.
344. In connection with the "not yet all" caveat, note that higher education finance and home finance often will be of little use to some citizens, absent access to nonhuman capital. For among other things, the Method itself works in conjunction with the beneficiaries' earning income that enables them to amortize their publicly facilitated mortgage debts or student debts. See supra Part V.B. Yet stochastic short-to-medium term "mismatch" between productive investment and consumer demand, mismatch between technology-driven productivity improvements and consumer demand, and global outsourcing periodically slacken domestic demand even for highly skilled labor, see supra Part III, which is most Americans' primary source of income, see supra Part I. So there must ultimately be a symbiosis among the three basic types of ownable capital - homes, educations, and firm shares - in an optimally functioning ownership society wrought by the Method. That is, our completed ownership society will have to constitute a three-legged stool. In addition to better supporting an ownership society as a whole, the spreading of share ownership can only strengthen the other legs of home and higher education ownership.
345. See supra Part IV.C.
346. See supra notes 269-72 and accompanying text.
347. I will address the market distortion objections that this might occasion infra Part VI.A.
348. Hockett, supra note 6, at 92;
349. see also Semer et. al., supra note 262, at 83-84.
350. Congress could also require financial counseling, as with home and education lending. See Hockett, supra note 6, at 92.
351. See supra Part V.B.
352. This, recall from Part V.B, is part of how the Method works.
353. See supra text accompanying notes 263-66.
354. See Federal Reserve Act of 1913, ch. 6, § 13, Pub. L. 63-43, 38 Stat. 251, 263-64 (codified as amended in scattered sections of 12 U.S.C). Section 13 of the Federal Reserve Act provides for the discount window through which the Federal Reserve monetizes payables of participating depository institutions, in effect trading liquidity for assets in a manner analogous to the way secondary markets securitize payment obligations. Even though not its original purpose, the discount window has primarily been used by government, usually the United States government, though sometimes other government, to monetize its debt by discounting. See NORMAN G. KURLAND, THE FEDERAL RESERVE DISCOUNT WINDOW, http://www.cesj.org/homestead/reforms/moneycredit/ discountwindow.html (last visited Mar. 3, 2007).
355. The principal nongovernmental uses in large "bailout" packages proposed for institutions thought to be too big or too important to allow to fail. See KURLAND, supra; see also Frederick S. Cams, A Two-Window System for Banking Reform, FDIC BANKING REV. (Wash., D.C.), June 1995, at n.37, available at http://www.fdic.gov/bank/ analytical/banking/1995sprg/rbr01a01.html ("Chrysler and Lockheed are nonbank examples.").
356. See Hockett, supra note 6, at 136 n.265, for additional discussion of the Federal Reserve's discount window.
357. This seems to be a reasonable assumption. See supra note 300.
358. See Hockett, supra note 6, at 115-16, 149.
359. Id. at 149.
360. See Hockett, supra note 6, at 149 & n.308.
361. This was a key factor, for example, in Federal Reserve Chairman Alan Greenspan's and others' opposition to President Clinton's proposals in 1999 and 2000 to invest government surpluses in the stock market for the benefit of Social Security solvency. See, e.g., Amy Goldstein & Steven Mufson, Greenspan Wary of Stock Plan, WASH. POST, Jan. 21, 1999, at A1;
362. Carolyn Lochhead, Skepticism over Plan for Social Security, S.F. CHRON., Jan. 21, 1999, at A1;
363. Fred E. Foldvary, Editorial, Keep Government out of the Stock Market, PROGRESS REP., 1999, http://www.progress.org/ archive/fold75.htm.
364. Home finance programs had the opposite effect on the rental market. The choice to favor home-ownership as the primary American domiciliary mode was forthrighdy a choice not to favor rental or leasing. See, e.g., U.S. Commission on Urban Problems, Publicly Assisted and Subsidized Housing, in FEDERAL HOUSING POLICY AND PROGRAMS: PAST AND PRESENT, supra note 258, at 319, 331-36 (explaining the sluggish results of rental supplements).
365. Indeed it is absurd to suggest that markets could so much as exist absent public facilitation via bodies of law such as those just mentioned. See, e.g., 2 DAVID HUME, A TREATISE ON HUMAN NATURE 293 (T.H. Green & T.H. Grose eds., 1890) (1740) (positing three "fundamental laws" requisite to the preservation not only of markets but of society itself: "that of the stability of possession, of its transference by consent, and of the performance of promises");
366. ADAM SMITH, THE WEALTH OF NATIONS 213-338 (Edwin Cannan ed., Univ. of Chi. Press 1976) (1904) (describing the necessity of public maintenance of institutions providing for the common defense, dispensation of justice, commercial marketplaces, and general education for society to attain opulence or, indeed, even to endure at all as a society).
367. See 12 C.F.R. pt. 3, app. A (2007).
368. It is Well established that a portfolio containing as few as thirty randomly selected stocks will bear scarcely more risk than does the market as a whole. See, e.g., WILLIAM F. SHARPE, GORDON J. ALEXANDER & JEFFERY V. BAILEY, INVESTMENTS 187 (6th ed., 1999). Choosing stocks not randomly but with a view to their countervarying will, of course, lower the number required to diversify-away idiosyncratic risk.
369. See, e.g., id. at 190. There is persistent evidence that as few as ten well-chosen securities can create a portfolio that performs as well or nearly as well as (in some cases even better than) many market indices as wholes.
370. See, e.g., JEREMY J. SIEGEL, STOCKS FOR THE LONG RUN 65-69 (2d ed. 1998) (discussing, with caveats, successes of the so-called "Dow 10 strategy"). Much of the research from which these familiar results derive springs from the pioneering work initiated by Harry Markowitz.
371. See, e.g., HARRY M. MARKOWITZ, PORTFOLIO SELECTION: EFFICIENT DIVERSIFICATION OF INVESTMENTS (1959);
372. Harry Markowitz, Portfolio Selection, 7 J. FIN. 77 (1952).
373. That is, if new investment with the borrowed funds can reasonably be expected to follow approximately the same pattern as previous investment with unborrowed funds, then there is no reason to expect some listed firms to benefit disproportionately from "capital homesteading" - a manner of analogue, perhaps, to the patronage-tracking on the beneficiary side.
374. See BURTON G. MALKIEL, A RANDOM WALK DOWN WALL STREET 255-59 (8th ed. 2003) (discussing long-run return reversals). On the other hand, the index fund strategy might cut against the participation values held by civic republican advocates of an ownership society. See supra Part I.B. Requiring facilitated investments in funds organized as corporations, in which shareholders hold governance rights, rather than in funds organized as trusts, in which only fiduciary rights protect shareholders, might mitigate such a problem.
375. See, e.g., GLOBAL INSIGHT, VENTURE IMPACT: THE ECONOMIC IMPORTANCE OF VENTURE CAPITAL BACKED COMPANIES TO THE U.S. ECONOMY 18 (3d ed. 2007), http://www.nvca.org/pdf/ NVCA_VentureCapital07.pdf (providing various statistical indicators of the importance of venture capital funds to innovative, new technology firms);
376. see also RAJAN & ZINGALES, supra note 5, at 64-66 (remarking on the roles played by venture capitalists in "young firms" with "tremendous growth opportunities").
377. See generally THE TOBIN TAX: COPING WITH FINANCIAL VOLATILITY (Mahbub ul Haq et al. eds., 1996) (outlining James Tobin's proposal for an international tax on foreign exchange transactions);
378. James Tobin, A Proposal for International Monetary Reform, 4 E. ECON. J. 153 (1978) (proposing arguments for international monetary reform through taxation).
379. Kelso and his followers used to say that "capital pays for itself." See supra text accompanying notes 146-48. That claim, however, is either grossly misleading or tautologous. See supra text accompanying note 148; supra Part II.B. Absent de facto creditallocative public intervention, arbitrage will close the spread between lending charges and equity returns, and capital will pay for itself in no more than the trivial sense that rational investment dollars will not exceed discounted expected returns. Kelso and his followers do not intend to be trivial; they are simply misleading, conveniently neglecting to mention the credit-allocative role of the public when arguing that capital "pays for itself."
380. See supra Part V.B. There has, of course, been a good bit of what might be thought of as irrationally exuberant speculation in the housing market in recent years. I do not intend to rest the case upon yields wrought under those conditions. Nor is the case weakened by what will be unusually low, perhaps indeed negative, returns should it turn out that there has been a bubble and the bubble bursts. I should also note a possible caveat here: Henry Hansmann informs me that some recent studies show housing scarcely to appreciate in real value over time. Because I have not yet seen these very new studies, I do not yet know what definitively to make of them. But I can say at least the following: First, if housing stock appreciates at any rate greater than the program-dampened real mortgage borrowing rate, then the program creates a spread and enables needful households to arbitrage that spread effectively. Second, this spread is all the greater in as much as one derives value above asset appreciation, one effectively enjoys housing rent free. And third, as in the education case, insofar as we have publicly assisted first home purchase by our citizenry on the basis of values discussed supra Part II.C, and those values are realized by housing in the ways discussed supra Part V.B.2, then the spread between borrowing rates and realized value is greater still.
381. See SIEGEL, supra note 309, at 50-51 (citing studies indicating that from 1936 to 1950, annual returns averaged about 12% per year and reached a high of over 14% between 1950 and 1962, and that even factoring in the Great Depression, equity returns averaged 9% per year between 1926 and 1960).
382. See generally ELROY DIMSON ET AL., TRIUMPH OF THE OPTIMISTS: 101 YEARS OF GLOBAL INVESTMENT RETURNS (2002) (providing a broad perspective on international financial markets to 2001);
383. MALKIEL, supra note 311 (arguing for index fund investments over individual securities and actively managed mutual funds because of superior returns).
384. See, e.g., SIEGEL, supra note 309, at 3-18 (charting and discussing superior nominal and real returns on equity over fixed-income-yielding, i.e., interest-bearing, investments since 1802). The puzzling persistence of the premium borne by equity relative to debt - puzzling because arbitrage would be expected to close it - is discussed infra Part VI.D.
385. This would serve as a quality standard imposed on firms wishing to participate.
386. I emphasize once again that I do not wish here to advocate this, only to draw attention to the possibility. Note that Raguram Rajan and Luigi Zingales would seem sympathetic to some such forced recourse to outside finance, given their opinion concerning the regressive roles played by those they call financial "incumbents." See e.g., RAJAN & ZINGALES, supra note 5, at 61-62, 166-71 (discussing linkages between retained earnings, the free cash flow problem, and corporate stagnation and waste wrought by financial incumbents, and contrasting these with the efficiencies and opportunities gleaned by forced recourse to financial markets with many and new participants);
387. see also Michael C.Jensen, Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers, 76 AM. ECON. REV. 323 (1986) (initiating discussion of the free cash flow problem in the financial literature).
388. See generally ADOLF A. BERLE JR. & GARDINER C MEANS, THE MODERN CORPORATION AND PRIVATE PROPERTY (1932) (arguing that management has stripped shareholders of many of the property rights ordinarily thought to inhere in share ownership).
389. This is so because under a mandatory dividend rule, a principal source of income deriving from ownership would be profit sharing - dividends - rather than exclusively capital gains realized only through selling shares.
390. Moreover, regular dividend payments and reliance upon outside financing have become much less common in recent decades. And in all events most such firms as might be affected by any such change - the well-established firms, per our quality concerns discussed at Part VLA - already are federally regulated by the federal securities laws, under whose jurisdiction most of these firms fall by virtue of being publicly listed and held.
391. See 12 U.S.C. § 84 (2000); 12 C.F.R. pt 3, app. A (2007).
392. The problem does not arise in the case of higher education finance, of course, because the asset is inalienable by law - it has been very long indeed since we have permitted contracts of indentured servitude. Moreover, there seems a natural limit of sorts to the amount of education most individuals wish to purchase for themselves.
393. Great thanks to Henry Hansmann for pressing me on the challenges addressed in this subpart.
394. See supra Part V.B.2.
395. See supra Part VLB.
396. See, e.g., Hockett, supra note 22, at 193-94 (explaining that merit ratings, deductibles, and co-insurance contracts incentivize people to prevent the event that is insured against from occurring).
397. I ignore for present purposes another potential problem - portfolio regulation of commercial lenders - on the theory that those who argue against me in this subpart will simply respond that I ought to be arguing for the removal of that regulation.
398. See supra Parts I and IV.C; see also Robert Hockett, A Jeffersonian Republic by Hamiltonian Means 267-81 (Mar. 7, 2007) (unpublished manuscript, on file with author).
399. For example, even Merrill Lynch's pioneering cash management accounts (CMAs) and their offshoots appear to have been expensive to establish and administer, as evinced by their having originally been available only to depositors of substantial means. See, e.g., Krinsk v. Fund Asset Mgmt., 875 F.2d 404, 406-07 (2d Cir. 1989) (detailing features of CMAs, including the requirement of a minimum initial deposit of $20,000); 42 Op. Att'y Gen. Or. 273, 275 (1981) ("Participation in the CMA program requires a minimum investment of $20,000 in securities or cash.").
400. See supra Part V.B.I (citing sources noting that mortgage insurance had been thought impossible for any agent ever to offer profitably).
401. See generally Kenneth J. Arrow, Le Role de Valeurs Boursières pour la Répartition la Meilleure des Risques, in 11 ÉCONOMETRIE, COLLOQUES INTERNATIONAUX DU CENTRE NATIONAL DE LA RECHERCHE SCIENTIFIQUE 41 (1953) (introducing what since have come to be known as "Arrow Securities," contingent claims to compensation in the event that certain states of the world eventuate, as a means of optimally distributing risk to its most efficient bearers);
402. see also Maurice Allais, Généralisation des Théories de L'Équilibre Économique Général et du Rendement Social au Cas du Risque, in 11 ECONOMETRIE, supra, at 81 (criticizing the argument in Arrow, supra, and offering putative improvments thereto);
403. GERARD DEBREU, THEORY OF VALUE (Cowles Found. 1989) (1959) (incorporating Arrow's proposed use of contingent claims into a complete, abstract model of an economy in intertemporal general equilibrium).
404. Antecedent observations are found in JOHN R. HICKS, VALUE AND CAPITAL (1939).
405. See generally ROBERT J. SHILLER, MACRO MARKETS (1993) (putting forward proposals for establishing new markets to manage the biggest economic risks facing society);
406. ROBERT J. SHILLER, THE NEW FINANCIAL ORDER (2003) (advocating the use of financial derivatives to reduce the economic risk faced by individuals and countries);
407. Hockett, supra note 22 (exploring, through exploitation of insurance and hedging devices, means available to price and insure against individual income risk wrought by the new global economy).
408. See HedgeStreet, About HedgeStreet, http://www.hedgestreet.com/ abouthedgestreet/ (last visited Mar. 5, 2007) (describing a market where traders can hedge against or speculate on economic events and price movements "from commodities and currencies to economic indicators, employment, fuel, housing prices, inflation, and interest and mortgage rates"). The Commodity Futures Trading Commission approved HedgeStreet for operation in February 2004.
409. See Press Release, HedgeStreet, CFTC Approves HedgeStreet Exchange, http://www.hedgestreet.com/abouthedgestreet/newsreleases/ newsrelease_l. html (last visited Mar. 5, 2007).
410. I am alluding to the old saw concerning the Chicago economist who, when his attention is directed to a ten-dollar bill lying in the street, remarks that it cannot be a real ten-dollar bill because were it so it would have been picked up.
411. A good case in point seems to have been the person of Fischer Black, whose appreciation for the beauty and sheer rationality of the capital asset pricing model (better known as "CAPM") and general equilibrium theory appears to have led him to suppose that neither asset price spreads nor government monetary policy were possible. See PERRY MEHRLING, FISCHER BLACK AND THE R EVOLUTIONARY IDEA OF FINANCE 232-43 (2005). Intriguingly enough, none other than that arch-Chicagoan Milton Friedman dismissed Black's view here as no more than a rehash of the venerable but discredited "real bills" doctrine.
412. See id. at 157.
413. I discussed some of the forms of inertia described here at greater length in Hockett, supra note 22.
414. Regulation (and perhaps economies of scale) thus far prevents small-time players from participating in hedge funds. See, e.g., 15 U.S.C. §§ 80a-2(a) (51), 80a-3(c) (1), (c) (7) (2000). See generally STAFF REPORT TO THE U.S. SECURITIES & EXCHANGE COMMISSION: IMPLICATIONS OF THE GROWTH OF HEDGE FUNDS (2003), available at http://www.sec.gov/news/studies/hedgefunds0903.pdf (examining the role that hedge funds play in financial markets and the government regulation of hedge funds).
415. There are other such spreads, incidentally, which financial theory tells us ought not to endure, and whose presence is now taken to indicate the likelihood of nontheory-tutored preferences, unexpected cognitive distortions, or both on the part of smaller market actors. One is that between otherwise identical assets offered across borders, the price spread between which is commonly attributed to "home bias." See, e.g., HAL S. SCOTT, INTERNATIONAL FINANCE 460-61 (12th ed. 2005). Another, more puzzling spread is that between participated loans and bonds.
416. See, e.g., HOWELL E. JACKSON & EDWARD L. SYMONS JR., REGULATION OF FINANCIAL INSTITUTIONS 156-57 (1999). Finally, most puzzling of all is the notorious and long-recalcitrant "equity premium puzzle" - the fully six percentage point spread between long-run equity and fixed-income asset yields over the past century, which in theory should long since have been closed by arbitrage.
417. See, e.g., Shlomo Benartzi & Richard H. Thaler, Myopic Loss Aversion and the Equity Premium Puzzle, 110 Q.J. ECON. 73, 73 (1995);
418. Narayana R. Kocherlakota, The Equity Premium: It's Still a Puzzle, 34 J. ECON. LITERATURE 42, 43 (1996);
419. Rajnish Mehra & Edward C. Prescott, The Equity Premium: A Puzzle, 15 J. MONETARY ECON. 145, 145 (1985).
420. As for the particular spread between lending rates and long-term index fund yields, there appear to be straightforward, small-fry investor-protective and credit-allocative regulatory explanations ready: small-time investors cannot yet participate in hedge funds, see supra note 337.
421. and lending limits of course limit commercial lenders' lending to hedge funds, or indeed to any borrowers over certain percentages of their lendable funds, see supra note 230. As in the home and higher education finance cases described at Part V.B, federal credit enhancement work in the securities case on behalf of small household investors would both tend to widen the spread I am discussing and could be readily targeted in ways similar to home and higher education finance credit.
422. Insofar, that is, as the unemployment rate remains relatively low, the long-term rate from individual to individual remains yet lower, and earnings do not stagnate or drop more precipitously than they have for the past three decades.
423. See supra notes 2-27 and accompanying text;
424. Hockett, supra note 6, at 49-57, 163-64;
425. Hockett, supra note 2, at 5-24, 29-31.
426. See supra Part II.C.2.
427. For an analysis of the marginal propensity to consume, see JOHN MAYNARD KEYNES, THE GENERAL THEORY OF EMPLOYMENT INTEREST AND MONEY 113-31 (1936).
428. See JULIET B. SCHOR, THE OVERSPENT AMERICAN: UPSCALING, DOWNSHIFTING, AND THE NEW CONSUMER 19-20 (1998) ("[A]verage hours of work have risen about 10 percent in the last twenty-five years.");
429. JULIET B. SCHOR, THE OVERWORKED AMERICAN: THE UNEXPECTED DECLINE OF LEISURE 61-66 (1991) (explaining how higher wages allow employers greater control over employees, thereby permitting them to demand more hours of work).
430. Kelso once reported that the newspaper employee-beneficiaries on whose behalf he "invented" the first ESOP retired early, but not before the credit extended their ESOP trust had been paid. See KELSO & KELSO, supra note 145, at 53, 124. And this indeed might have been a particularly rosy early retirement scenario in any event.
431. We might expect a more modest version of the culturally enriched, less wanting society prophesied with some whimsy (and some trepidation) by John Maynard Keynes. See JOHN MAYNARD KEYNES, Economic Possibilities for Our Grandchildren, in ESSAYS IN PERSUASION 358, 372 (1963) ("The course of affairs will simply be that there will be ever larger and larger classes and groups of people from whom problems of economic necessity have been practically removed.").
432. See, e.g., DANIEL H. PINK, FREE AGENT NATION 233-40 (2001) (using "e-tirement" to show that older Americans past retirement age want to work, on their own terms, and do so via the Internet).
433. See Hockett, supra note 6, at 82.