Enhancing poor and middle class earning capacity with stock acquisition mortgage loans.

• Author: Ashford, Robert

1. Introduction

   There is growing concern in the USA and many other countries regarding the declining share of national income earned by eighty to ninety percent of the adult population. Expressions like "the hollowing out of the middle class" are increasingly found in academic and popular writings. Because incentives for the present investment to employ labor and capital to produce goods and services require a reasonable anticipation of future demand for those goods and services, this declining trend does not bode well for the long-term prospects for the profitable employment of labor and capital, retirement security, and sovereign credit-worthiness.

   Although a number of analyses of this phenomenon and possible solutions to enhance the economic opportunities of poor and middle-class people have been advanced, two facts generally clearly distinguish the economic prospects of the top earners from the rest: As one moves up the wealth pyramid, (1) capital earnings of individuals comprise an increasing portion of the total earnings of wealthier individuals, and (2) those individuals are increasingly acquiring additional capital with the earnings of capital. Regarding future economic opportunities, these facts present both a dark side and a brighter side. On the dark side, they provide a structural explanation regarding how the top earners succeed in claiming a growing portion of national income. On the brighter side, they suggest that the economic prospects of poor and middle-class people could be likewise enhanced if (1) they were also extended the economic opportunity to acquire capital with earnings of capital and (2) then after the capital is acquired (and fully paid for) they too could supplement their labor earnings and welfare payments with capital income. On the long-run macro-economic level, this prospect would provide reasonable expectation of greater consumer demand in future years and therefore greater incentives to employ labor and capital in earlier years.

   Of course, another factor that distinguishes the top earners from the rest is that they already own a substantial capital estate that they can use either to supplement their consumer spending (rarely) and/or (much more frequently) to acquire more capital with the earnings of capital. It is widely recognized that it is progressively easier to acquire additional millions.

   Owning little or no capital (with many having a negative net worth), poor and middle-class people are told that to acquire capital they must work hard, save, and invest wisely which historically has not proven effective. In light of the growing concentration of capital acquisition and the declining share of national income earned by poor and middle-class people, this method is likely to prove even less viable for most people in the future.

   Moreover, it is instructive to recognize that the "work-hard, save and invest wisely" is not how most capital is acquired in the USA today. If one considers the capital holdings of the top 10% of earners, virtually all (through direct stock holdings, mutual funds, and retirement plans) own diversified portfolios in America's three thousand or so largest credit worthy companies. These companies comprise over 90% of America's investible assets. (1) Furthermore, to acquire additional capital, these companies rely almost entirely on the earnings of capital. (2) In addition, the ownership of these corporations is highly concentrated. In approximate terms, 1% of the people own 40-50% of corporate wealth; 10% own 90%; and 90% are left to scramble for 10%, with many of them having a negative net worth. (3) Thus, although business corporations have proven to be excellent means to acquire capital with the earnings of capital in industrialized economies, their benefits have not yet been made available to a substantial degree to poor and middle-class people. This article offers an analysis that reveals how business corporations may voluntarily choose to broaden their share ownership to include poor and middle-class people, enhance the earning capacity of those people, improve corporate profitability as well as shareholder wealth, and lay the structural economic foundation for sustainable growth.

   Ironically, many heavily indebted poor and middle-class people routinely receive unsolicited offers of consumer credit to acquire consumer goods and services that they cannot afford with their declining share of earnings. At the same time, these people have virtually no access to capital credit which would enable them (1) to acquire capital with the future earnings of capital and (2) then after the capital is acquired (and fully paid for) to supplement their labor earnings and welfare payments with capital income. With access to capital credit, in a relatively short period of time (the time that it takes well-managed capital to "pay for itself') poor and middle-class people could begin to increasingly earn by owning capital just as the top earners do, and thereby reduce and eventually largely eliminate reliance on consumer debt.

   One reason that poor and middle-class people do not have access to the capital credit that well-capitalized people routinely enjoy is traceable to sound banking principles. To extend capital credit lenders typically require two "secured" sources of loan repayment: (1) the anticipated secured cash flow from the capital acquisition sufficient to fully satisfy loan repayment (principal plus interest) and (2) a sufficient security interest in "collateral" (assets) in the event that the cash flow is insufficient to repay loan obligations. Collateral may be any valuable asset: tangible or intangible (including investments, guaranties, and capital credit insurance). (4)

   Well-capitalized people and corporations who have identified a capital investment expected to pay for its acquisition cost in a competitive period of time (frequently referred to as the "capital cost recovery period") usually have access to capital credit because the expected cash flow from the capital investment plus their available collateral satisfies the two-source-loan-repayment requirement of sound secured lending principles. When individuals take advantage of such credit, indirectly, by way of their share ownership of corporations, the capital credit is "non-recourse" as to the individual shareholders beyond the value of their shares. In other words, if the projected earnings of the capital investment are insufficient to repay the loan, the lender may attach and seize the corporate assets secured as loan collateral, and the attachment and seizure may depress or entirely extinguish the value of the corporate shares, but the lender has no additional recourse to the shareholders other earnings or assets. Finally, when borrowers (and shareholders borrowing indirectly through the corporate form) prefer not to subject their assets or shares to risk of loss or when they have insufficient collateral to finance capital acquisition, they may choose to satisfy the collateral requirement by way of capital credit insurance either by paying an insurance premium to a capital credit insurer or by reimbursing the lender for the cost of such insurance.

   In light of the foregoing principles, the question remains: how can poor and middle-class people who lack the personal earning capacity and collateral assets to qualify for capital credit be included in this wealth-enhancing process...