Sunday, February 12, 2017

Nickel-and-Dime Socialism by Matt Bruenig

Socialism is the idea that capital (the means of production) should be owned collectively. There are divergent ideas about how to achieve this in reality. One approach is to have the government hold it collectively in social wealth funds. This is (more or less) the socialism of Yanis VaroufakisRudolf Meidner, and John E. Roemer. It is also my brand of socialism, at least for the time.
This socialist strategy has two main parts: 1) the management of social wealth funds, and 2) the transferring of private wealth into the social wealth fund. There are challenges to both parts, but challenges that I think can be overcome.

1. Managing the social wealth fund

Slogan-happy conservatives will tell you that the government is necessarily an oafish operator that cannot run anything right, making the idea that they could create and manage huge wealth funds absurd on its face. But governments, in the US and abroad, already manage big funds pretty successfully.
In 2015, the Federal Retirement Thrift Investment Board was managing $458 billion of assets for the federal employee defined-contribution retirement fund called the Thrift Savings Plan. In the same year, California was managing $302 billion of assets for the state employee defined-benefit retirement fund called CalPERS. Abroad, Norway currently manages $897 billion in its social wealth fund. And these three funds are just the tip of the iceberg when it comes to wealth managed by state actors.
1.1. Bigness Problem

Some argue that the existing funds only work because they are smaller scale than a robust social wealth fund would be. For the social wealth fund to really approach full-blown socialization, it is going to have to grab up a huge share of the national capital. This is a problem because capital markets only work when there are many smaller actors actively trading against one another, something a social wealth fund would effectively eliminate.
This is a fair objection, but it is able to be overcome easily. If a social wealth fund gets to be so big that it is creating problems (for the capital market, the fund, or anything else), it will be possible to just break the fund up into smaller funds that operate independently from one another. Indeed, elements of Norway’s political establishment have been toying with splitting up their wealth fund for years. By creating many smaller funds that trade separately from one another (and against one another), it should be possible to solve all the problems associated with funds that are too big.

In addition to the problems of bigness being solvable, they are also not unique to social wealth funds. In fact, creating a robust system of actively-traded social wealth funds might actually save the capital markets from the rise of passive investing and the similar problems associated with that rise. As Inigo Fraser-Jenkins noted last year to much fanfare, management of equity has increasingly moved from active traders that try to determine where the market is going in order to make investment decisions and towards passive funds that just buy and hold the whole market (or big swaths of the market) indiscriminately. As the blob of index funds continues to increase their share of the overall equity market, they will collectively create the exact same problems the big social wealth fund is supposed to have.
Thus it’s hardly a knock on the social wealth fund idea that it may have the same problems that market competition for asset management is already creating. This is especially true because there is actually a solution to these problems when they arise for social wealth funds: split them up. No similar solution exists for beating back the growth in passive management strategies.

1.2. Incentive Problem
Naysayers have also suggested that the social wealth funds will have an incentive problem: without the threat of termination or customer withdrawal, the managers of the public funds will have no reason to perform well. Fund managers at investment banks face brutal competition, both inside their firms and outside their firms. If they do very well, they can get big bonuses. If they don’t, they can lose their jobs. Since the social wealth funds do not operate that way, they will wind up saddled with subpar managers that allocate capital poorly and squander the public’s money.
This objection is less fair than the bigness one. Worker motivation is not as straightforward as many seem to think. Loads of studies suggest that performance is not strictly based on monetary rewards and penalties, but instead on a whole variety of factors including how well they are treated, how much they enjoy their work and their coworkers, etc.
But putting aside that general point, this objection also fails because it would be possible to create the same incentives private investment firms already have within the social wealth fund system. You could create incentive-based pay that rewards managers based on the returns they generate. You could base retention on performance. If you have multiple funds, you could also move money in and out of the funds based on how well they are performing, even killing off the funds that do very poorly. All these things are doable.
Thus, neither the bigness problem nor the incentive problem is impossible to overcome. It would seem that, on its face at least, you really could socialize the ownership of the means of production through these kinds of funds, if you were careful about it.

2. Transferring wealth into the social wealth fund

The more difficult problem is how to move private wealth into the social wealth fund. People partial to this form of socialization disagree about how best to do this, with some favoring snap socialization that moves all the private wealth over at once and others favoring gradual socialization that fills up the social wealth fund over time. I am partial to the latter approach and favor using a diversity of nickel-and-dime expropriation strategies that could, over time, add up to a lot.
2.1. Financial Transactions Tax
A financial transactions tax (FTT) would require traders to remit a tiny percentage of the value of each of their trades. Its proponents usually pitch it as a sales tax, but that’s misleading because a sales tax is a levy on final consumption while an FTT is really a levy on wealth. The Tax Policy Centerhas estimated that a well-designed FTT of 0.1% could raise $50 billion per year (or $541.5 billion between 2016 and 2025).

2.2. Mandatory Share Issuances
Right now, the US taxes corporate income at a statutory rate of 35% (the effective rate is much lower). The way this works is corporations determine what their profits are and then take 35% of them (actually less) and remit that money to the state. If we wanted to build up the wealth fund quickly, we could replace the corporate income tax with mandatory share issuances.
There are two ways to do this. The first way, favored by Dean Baker, is to have companies give a one-time grant of shares to the government equal to whatever we think an appropriate tax rate would be. So, instead of taxing corporate income at 20%, we could have each corporation give the state shares equal to 20% of its outstanding shares. This would make the state the 20% owner of the company and would entitle it to 20% of the dividends, buybacks, and any other payouts to shareholders.

The second way, favored by Rudolf Meidner, is to have companies give an annual grant of shares to the government equal to some percent of their annual profits. So, instead of taxing corporate income at 20% every year, we would have companies give over shares equal in value to whatever their corporate income tax liability would be that year. So, if a company had profits of $100 million, the 20% mandatory share issuance would require them to give the state shares equal to $20 million. This is a much more aggressive strategy than the one favored by Baker because, in the long-run, it would result in far more of the company’s equity getting transferred into the social wealth fund.
2.3. Countercyclical Asset Purchases
Roger Farmer and Miles Kimball have collectively written dozens of posts making the case that a social wealth fund could be filled up by snapping up cheap and risky assets when the economy goes into recession. The case involves a lot of arguments, but the main ones are that 1) countercyclical asset purchases would stabilize financial markets, preventing the kind of wild drops we see during recessions such as in the Great Recession, 2) the government is already implicitly on the hook for bailing out financial markets anyways because their total collapse would ruin the country, and 3) given (2), we might as well allow the public to enrich themselves in the process of stabilizing financial markets by taking direct positions in the assets that are going to be bailed out.

The way this would work is that when the financial markets plunge (they have more rigorous definitions of how to determine when this has happened), the social wealth fund (through the Treasury) would issue bonds at very low rates and use the money raised from those issuances to snap up equities and other higher-yield financial assets. Mechanically, what it means is the social wealth fund would trade newly minted, low-yield treasuries for higher-yield financial assets, satisfying the financial market’s sudden demand for safe, liquid assets while increasing the holdings of the social wealth fund in the medium and long term.
2.4. Fund Management Excise Taxes
When people put their money in things like mutual funds, the fund manager takes a percent of what they invest each year as its compensation. So, for instance, a Vanguard Fund might charge you 0.1% of the amount that is in your account each year for its management fee.
One of the interesting things about these management fees is a lot of people really have no idea what a reasonable management fee is. This has opened the door for tons of funds to basically scam investors out of money by charging a, say, 4% management fee, which might seem reasonable on its face, but is actually very expensive.
A fund management excise tax would take advantage of this apparent insensitivity many have to management fees. The government could require fund managers to pay an annual tax equal to, say, 0.3% of the assets they manage. This 0.3% would be passed on to the fund’s clients, with most not even realizing what’s going on and with the rest having no way to avoid it (unless they want to become a retail investor). Such an excise tax, if high enough, might even help curb the allegedly problematic rise of passive management discussed above.
2.5. Large Endowment Taxes

This idea may not raise much money but it would be incredibly fun. Basically what you do is say that institutions with sufficiently large endowments (think Yale and Harvard) have to pay a wealth tax equal to some percent of their holdings each year.
2.6. Net worth tax
Piketty has advocated using a progressive wealth tax to raise money. The way this would work is people would be required every year to determine their net worth (assets minus liabilities) and then that net worth would be subject to a tax schedule (e.g. all net worth over $1 million would be taxed at 1%). Wealth taxes of this sort already exist in France and Norway.

2.7. Land value tax
As the Georgists have argued, land value is able to be easily seized (without distortion of any sort) by levying a tax equal in value to land rents. So, for instance, if we can determine that the annual rental value of a parcel of land is equal to $10,000, we could in theory levy a $10,000 tax on its owner without a problem. In so doing, we would effectively add the land to the social wealth fund, since the rent that flows to the land would become socialized.
We already have property taxes in this country (which levy a percentage of the value of the land and dwellings). This would basically be like that, but only levy on the value of the land rent, not the dwellings. In order to avoid harming incumbent landowners too much, we would want to phase the land value tax in over many years.
2.8. Inheritance Tax

We already have such a tax, called the Estate Tax, which is levied on a small percentage of very large inheritances. We should want to increase taxes on inherited wealth as much as possible.
2.9. Other Stuff Too
This is not an exhaustive list, but I hope it gets across the basic gist of the nickel-and-dime socialization strategy. Rather than going for one big seizure, it seems better to just nickel-and-dime people at as many points in the wealth ownership system as possible. Over time, this could amount to a lot of money and put the country on a path towards gradually socializing most of the wealth in the country. Such a gradual path would not shock the system too much in the short term and would allow people to still engage in private wealth accumulation.

2.10. The Savings Problem
Even though it is meant to minimize this problem as much as possible, this sort of nickel-and-dime approach may drag on private savings some. At least, that’s what the opponents of the idea will say. The nickel-and-diming will in total reduce the return on savings and thus somewhat reduce the incentive to do so.
As an initial matter, it’s important to push back on these simplistic theories of savings behavior. People save for all sorts of reasons that are not directly related to how much return they will get from it. This includes having money for a rainy day, securing their relative position in the wealth hierarchy, and because they just don’t have any desire to consume at this time (e.g. people who literally have too much money to consume).

With that said, there may be some drop in the national savings rate from this reform. If we drop below an adequate savings rate, the state will need to pick up the slack caused by a drop in private savings by increasing public savings. With a social wealth fund, this should be easy to do: just reinvest as much of the fund’s annual return each year as is necessary to keep the overall national savings rate where it needs to be.


For the above reasons, I think a nickel-and-dime social wealth fund strategy is a viable way to move towards socialism. This is not an exhaustive account of all that could be said on this topic (I’d need a book to be able to lay it all out), but it provides more details on my thinking on this than I ever have before.

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