Privatise the profit, socialise the losses.
Networks and infrastructure = little to no competition. Eg. networks naturally settle in a optimal geographical location and utilize economy of scale then. Can't compete with that. So don't privatise platforms. Rather - make them monopolistic and make them share the revenue with public using a monopoly tax. AT&T model.
Translated to programmer speak: society's OS (law,defence,policing,roads,energy,networks,sewers,etc.) should be uniform and near monopolistic to maximize economy of scale.
Society's Apps (businesses) running in the ecosystem of the OS should be private, numerous and competitive as much as possible.
Occassionally you stumble upon a private business which develops a new network model and after some time it should be refactored from being an App to be part of the OS (eg. twitter).
You could maybe compete on interstate highways or other long-area bits. Maybe. That's stretching it.
Build a competing water supply network to each house? Another set of sewers? Electricity distribution? Hell no.
IMHO all of these things should be communal property & development. The preconditions for free market are not met, it's not possible to compete; so the whole market equation falls apart.
Hand the operation & maintenance out to some company or whatever, there it's possible to compete. But not the actual physical infrastructure.
It's yet another monopoly problem even though it doesn't look like it at first glance. Each house basically sits on a piece of mlonopoly for the parcel below it, preventing others from use.
It's not much of a big deal in general, but in congested big cities, it is a problem. It's the cause of high rents (by Ricardo's law od rent).
The solution is also a kind of monopoly tax - land value tax (LVT). You pay yearly percentage of the market value. Achieving almost optimal allocation instead of current hereditary one.
Establishing "market value" is the rub. Texas for example, does not make real estate sales prices public. This has a lot of perverse effects, one of which is deep-pocketed commercial interests have pummeled public assessors until commercial property is tacitly way undervalued for tax purposes, yet is openly sold for much more than the purported tax basis.
I've heard of a system I found interesting (but alas, can no longer find a reference to link) to competitively establish tax basis on commercial real estate (I wouldn't want this on natural person owner-occupied residential). You claim whatever tax basis you want. It gets published in the open. Whoever can put up completely unencumbered cash over the barrel for that basis + 7% or more though, can purchase the property. And by unencumbered, I mean not even investor syndication. Real, natural person, outright first and only lien on the cash, absolutely no liens tolerated against the property tied directly or indirectly to the cash.
Cash goes into government-controlled escrow. Current owner has one year to pay difference on one year's worth of new imputed tax basis represented by the escrowed cash, and continue from that point forward with the new basis. If the owner comes up with it, the bidder loses 6% of the cash (or whatever the real estate industry commission structure is at that time in that locality) to the local government as commission to facilitate the price discovery. Bidder can increase bid at any time by adding to escrow account, until either current owner "sells" to bidder (and escrow releases 100% to the current owner, no commission), or bidder walks.
I haven't sat down to really pencil it out, but I'm sure if someone did they'd find a way to game such a system, since I figured it otherwise would have been put into use.
There is one major consequence: investor/VC backed/mega-rich major chains would instantly drown out family owned and small businesses that can't compete with gentrification. This is already a plague with Walmart and Amazon absolutely flattening local economies, your proposal would make it an epidemic of yet-unimaginable scale.
Like I said, I found the entire idea of a competitive market in price discovery to establish tax basis fascinating, not the specific implementation details.
If anything, this strengthens the argument. You can buy/rent/... a different parcel nearby, and this only affects you and your planned use of the building. But you can't switch to a different road network, and this affects everyone in their daily life.
That said, I also agree with the sibling post that this is also a problem, just of a different kind.
Land ownership is problematic because neighborhood improvements can be extracted via land ownership. The most effective policy against this extraction is to simply tax the land itself and thus turn it into a liability if the value of the land grows. Ideally, property taxes would be replaced with land value taxes.
If land is a liability the only reason why people would purchase it is to improve the value of the land and make it available for productive uses like renting it out to a large number of people.
The second avenue subway was the most expensive subway in the world on a per mile basis. Considerably more expensive than Paris or Tokyo
> The estimated cost of the Long Island Rail Road project, known as “East Side Access,” has ballooned to $12 billion, or nearly $3.5 billion for each new mile of track — seven times the average elsewhere in the world
Similarly, the fare only covers around 50% of the operating costs which hardly seems fair for NY state taxpayers that pick up the expense despite receiving no benefit.
The competing services for infra in NYC are cabs, car pools, private buses, bike rentals, scooters, subways. For getting into/out of the city, you have a number of bridges. For instance, I can take Lincoln tunnel, Holland Tunnel or ferry. It would be great to have more options and obviously its not easy to build tunnels, but private ferry and water cab services could be expanded
[0] https://www.nytimes.com/2017/12/28/nyregion/new-york-subway-...
[1] https://www.bloomberg.com/news/articles/2019-03-14/what-s-a-...
Even here though, there is a coordination problem to ensure various companies remain mutually compatible.
Then again, I don't think it's viable to build subway tracks and tunnels to compete. Even if you have space under the earth, there may not be space for more stations, and good station locations are important too.
Why should a relatively poor upstate new york taxpayer be paying 50% of the fare of some young finance bro going to work?
Also removing prices removes information. For instance the ferry costs something like $15 per rider to operate compared to around $5 for subway. With both trips at the same price to the consumer, you make the marginal rider indifferent to the two in terms of price where it would be beneficial to have that information to save money and divert resources to the more effective mode
> roads to places I'll never go
Gasoline tax and toll roads are a good way of linking those who benefit to those who provide the good.
> schools my child doesn't attend
A lot of people move out of high tax neighborhoods when their kids graduate high school. I don't think school should be tied to real-estate anyway because it creates really perverse dynamics (people without money end up going to the worse funded schools). So that model doesn't exactly work well right now
> medical procedures that I don't need
I buy health insurance voluntarily and gladly pay for medical procedures that I don't need on the off chance that I need an expensive medical procedure in the future
Or to look at it another way: assume some genie offered to dismantle the NYC train/subway system for free. Assume you're the government and only care about maximizing revenue. Would that be a good deal? Of course not, even if the system wasn't self-sustaining from fares.
> The competing services for infra in NYC are cabs, car pools, private buses, bike rentals, scooters, subways.
You're conflating the infrastructure with the service on top of it. The equal comparison would be railroad project to motorcar roads & bridges. And the latter also have their share of cost overrun stories...
(Also, bridges are the rare case where a ship can compete. But, well, every rule has its exceptions.)
Oh and the fact that it's (even unreasonably) expensive has no bearing at all on the argument. There ain't gonna be some competitor building their own railway line regardless, or especially since the first one was so expensive.
Same thing in many other places - in Kyoto there is big and nicely build station by JR and, Transport Tycon style 200 meters from it another big station by IIRC Kintetsu.
Or in the middle of Tokyo, the Minami Senju station is effectively three station - One on the JR Joban line, one on Tokyo Metro and deep bellow another one on the Tsukuba express line.
So its definitelydoable, even in the most densely populated of places, at least with rail.
Also when you compare with places that have little to no competitionon the rail network you can clearly see the lack of service quality resulting from that. Well, if you get any service at all. :P
Land owners whose land is taken away are given new plots of land that are smaller, but closer to stations. These smaller plots are worth more than the original land because they are now near (future) train stations.
[0] http://www.wctrs-society.com/wp-content/uploads/abstracts/ri...
BTW, that's something else I noticed in Japan - train stations are almost always hubs of commercial and often also cultural activity - there are shops, hotels, good restaurants and often also galleries, event spaces, monuments and even the buildings themselves are often architectonic masterpieces (for example JR Kyoto station, just check it out!). This definitely helps with passenger numbers and keeps the whole thing sustainable not to mention profitable.
In comparison Czech & Slovak railway stations (Prague, Brno, Bratislava) are often run down, dirty, fregvented by questionable people who aren't going to ride the trains and any shops or food places are cheap low quality ones. As a result one tries to spend as little as possible on these train station, let alone spend there any money for the few sub-par amenities available.
It's really strange why it is like this, given the missed commercial opportunities, seems to be much better in other european countries (Vienna, Eindhoven, etc.).
I would actually consider this an odd example of "long-range" transport.
Oh no. Construction, operation and maintenance of electricity and other vital networks (water, gas, sewage, telecommunication) should be done by the government as a government agency with a quality of service mandate and not in form of a profit-oriented company no matter if government owned or private owned / publicly traded - because "competition" and/or a focus on costs is always going to end in price and wage dumping, cutting corners and sometimes in deathly disasters (California fires caused by cutting costs on maintenance, Flint water scandal, Texas infrastructure collaps due to un-hardened systems, ...).
There is this mindset that capitalism is always wrong when the mindset should be capitalism is not always right, which is a completely different perspective. However, I am really disappointed that people don't think about how to make the system work for themselves. Corporate abuse doesn't necessarily have to be the rule. The political environment could be shifted to favor workers instead and to a certain degree this would benefit everyone, not just one side.
[1] https://www.nytimes.com/2000/06/07/opinion/reckonings-a-rent...
Its well understood by people who studied it well. However, there are still many pushes and arguments for privatisation that do not take these well understood facts into account.
This is not an obvious problem nor solution. As posted downstream, risk of polar vortex was even known and discussed by the general manager of the facility: https://www.energy.gov/sites/prod/files/2014/08/f18/karnei_s...
This really applies to the power grid itself. Even the power plants aren't covered by the argument, since if you have a reasonable grid, you can build another power plant of any kind you feel viable in some reasonably suitable place.
[Ed. add.: the grid is actually the market. It facilitates the transactions between power plants and consumers.]
Why do you could think one could recreate such a large cooperative like this without much trouble? Isn't the likely outcome of this bankruptcy a sale of assets to private equity: a situation that can probably never be reversed?
What do you think this cooperative did if it was not facilitating the transactions between power plans and consumers? I'm confused by your assertion.
The power grid is the platform; I'm not sure how the original poster intended to apply the platform argument to the cooperative.
As far as recreating the cooperative goes: it doesn't need to start large, and I'm reasonably sure it doesn't hold much in assets. My understanding is that this cooperative is simply a collective of buyers who "pool their shopping", so money flows in and back out. A new cooperative may need to work its way back up to bulk pricing, but that should be doable?
That’s not “well understood” at all. Folks don’t remember how dysfunctional and sclerotic nationalized industries were in the 1950s and 1960s. There is a reason nearly every developed country got rid of them.
Fortunately, we can see that 40 years later there were no unpleasant side effects from introducing markets into almost every business and service /s.
I don't agree with Rayiner about Texas, but I don't think you can wave your hands at 60s-70s deregulation and say "lol Milton Friedman". The deregulators were right about a lot of stuff.
Cite?
I have lived in two countries, one with privatized market based grid and have not yet had one power failure, one with nationalized grid and producers grid that had daily 8 hours power outages for weeks on end to the point where year on year per capita electricity usage (an important measure for development) was going down.
Anecdotes are not data, but all I can say is that most definitely every nationalised grid does not run better than every privatized grid, and without some data to back your claim I am skeptical.
Generators and users of electricity operated on top of that platform. Generation is a competitive market--many entities can be delivering power into the grid, and the product is fungible. Users don't care where the electricity comes from, just about the price. Electricity generation is therefore quite suitable for market mechanisms.
What happened in Texas was not an example of a privatized "platform" failing. The platform (the grid) was fine. Instead, adverse weather events caused a shortage of the product (electricity) running on top of the platform. Put differently, this is not like a scenario where Texas decided to privatize roads and things went sideways. It's like a scenario where packages didn't get delivered on Christmas because COVID caused an unexpected spike in demand for package delivery, as well as an unexpected shortage of drivers for delivery vehicles.
as an intuition, a solar panel farm in some isolated arizona desert doesn't help folks in maine. conversely, as neither region has that many local suppliers, a few private businesses making rational personal $ decisions to not supply in critical scenarios will put all citizens at risk when those scenarios happebs.
(written as someone living through periodic wildfires allowed through similar market optimism.)
ERCOT serves over 26 million customers in Texas. That's more than large enough to have a highly functioning market.
> and private co's decided to cheap out on weather protections?
What on earth makes anyone think that government-owned power generators in Texas would have invested in weather protections? The sewer systems around the country are publicly owned, yet the public utilities "cheap out" on capacity and routinely dump massive amounts of raw sewage into local waterways during big rain storms that happen every year or two. People are attributing to the structure of the market a failure that's more about the inability of entities in general (public or private) to deal with black swan events.
RE:Weather, when gov-funded climate change scientists collectively predicted adverse weather phenomena would continue accelerating in accordance to global warming, and a lot of communities have been living through it? I started hearing about that 10-20 years ago, it's not news. Next you'll tell me that continued beachfront erosion merits gov bailouts of insurance companies because we couldn't predict that either..
Around the country, there is a $4.5 trillion infrastructure backlog. https://www.asce.org/templates/press-release-detail.aspx?id=.... Almost all of that backlog is on the plate of public entities (road works, sewer works, bridges, etc.) Where do you live that the government has actually addressed crises that it faces in the present and has time to pro-actively address stuff scientists are talking about happening years in the future?
Yeah, maybe competent and pro-active bureaucrats at a government power utility would have avoided this problem. It also could have been avoided by running power plants on unicorn manure, which I hear has natural anti-freeze properties.
Yes, a lot of people live in denial. In security-related areas of all kinds where the ROI is largely unobservable loss prevention, that's why leadership-level people know to ask for budget immediately after any incident... because important stuff doesn't get funded or enforced otherwise.
And agreed, I'm not a superfan of Amtrak. There's a wide spectrum on how to do things. The more I learn about any individual one, the more I learn that most things appear broken from the inside, so I am both consistently awed things work in the daily case, and know that left alone, they won't in the edge cases.
It's not shifting the goal posts. A company that feeds into a market with 26 million customers is not so "local" that a free market can't work. That's bigger than most countries. And you've offered no evidence that a public utility would not have "cheaped out" on weatherization.
> Yes, a lot of people live in denial. In security-related areas of all kinds where the ROI is largely unobservable loss prevention, that's why leadership-level people know to ask for budget immediately after any incident... because important stuff doesn't get funded otherwise.
Disaster after disaster happens, and important stuff still doesn't get funded in the public sector. There is a $100 billion shortfall in water system funding: https://www.infrastructurereportcard.org/cat-item/drinking_w.... Did the Flint water crises have any effect on that? No. Because political entities that are accountable to voters for water rate increases aren't any more willing to invest in risk mitigation than private companies.
> And agreed, I'm not a superfan of Amtrak. There's a wide spectrum on how to do things.
Most public infrastructure in the United States is run like Amtrak. The D.C. Metro had to shut down automated train control (self-driving), which was a feature built into the system in the 1970s, because they had let the track sensors deteriorate so much. We had to shut down the subway in D.C. for weeks at a time a couple of years ago because it was literally killing people. New York's subway system is in the same sorry state: https://www.vox.com/policy-and-politics/2017/7/11/15949284/n...
If Maine has a shortage, they aren't going to get power directly from Arizona, but couldn't they get power from New Hampshire? If New Hampshire doesn't have any spare capacity, couldn't they still supply Maine and get some from Massachusetts to cover for what they send to Maine? And if Massachusetts doesn't have any spare, can't they similarly go ahead and supply New Hampshire, making it up with power from whoever is next west of them, ultimately ending up with Arizona's extra solar power allowing Maine to get through a shortfall?
> The Eastern Interconnection and the Western Interconnection are the largest. Three other regions include the Texas Interconnection, the Quebec Interconnection, and the Alaska Interconnection. Each region delivers power at a nominal 60 Hz frequency. The regions are not usually directly connected or synchronized to each other, but there are some HVDC Interconnectors.
> I don't see why solar in Arizona would not help Maine
Arizona power companies have essentially made home solar system uneconomical.
https://www.huffpost.com/entry/solar-arizona-net-metering_n_...
One of my takeaways is that you really don't want people trying to attempt DIY heating systems. There were ~450 calls for carbon monoxide poisoning, related to people trying to heat their homes with non-electric sources or sources that worked at all. A lot of people tried to run camping stoves indoors. Others ran generators indoors. I believe a girl died because her family tried to stay warm in the car in the garage with the door closed.
> with the available power going to those willing to pay more, presumably because they need it more or can afford it.
I vehemently disagree with this. Wealthy customers should not be able to push the price of electricity high enough that others can't afford to heat their homes. Letting the market figures it out means that those with financial means get to make a choice about what to do, while the poor are universally shoehorned into the worse of the two options.
A significant part of the base load is inelastic demand. People need to heat their homes. People need their refrigerator to work so their food doesn't go bad in a time when you may or may not be able to get groceries. People need to charge their cellphones so they can let their family know that they're okay.
If there were, as you say, it still might not work. But there were a lot of pictures of empty buildings with lots of lights on, etc. so there are inefficiencies. And if customers were automatically switching off (or simply reducing their own usage) as prices went up maybe prices would never have gotten so high. Ideally it would sort of be a fine-grained "rolling blackout" where priority is determined by what a customer chooses to purchase given all the variables that only the customer is aware of. That's a functioning market.
I agree that it may be completely impractical to make it work for electricity.
In theory, the company is meant to declare bankruptcy (or seek more investment from shareholders) as soon as their books say they are insolvent. A company is Insolvent when it's liabilities are higher than it's assets, even by a single dollar.
The theory is that because the company is required to declare bankruptcy as soon as possible, it should only be slightly insolvent and should be able to repay creditors 80-95 cents on the dollar after liquidation.
Owners or shareholders might even put a company into bankruptcy while it's still solvent (if they predict a future insolvency, or just want to wrap the company up). Creditors might get the full 100 cents on the dollar. Any money beyond that is paid as dividends to the owners/shareholders.
In theory, if a company had incompetent or fraudulent accounting practices and didn't know it was insolvent, or it deliberately traded while insolvent, then the liability of the company is pierced and the owner can find themselves on the hook to the creditors.
Companies are only meant to be liability shields if they are run correctly.
In reality, sometimes events cause a company to lose a whole lot of value overnight. A company could be 100% solvent one month and 20% solvent the next. But as long as the company was following best accounting practices, it's legal. Sometimes the assets of a company can lose value after bankruptcy, or due to the bankruptcy. Especially when the company has put a lot of "good will" or "brand recognition" as assets on their books.
In reality, liquidators (who are also private companies) often don't go after owners responsible for fraudulent accounting or mismanagement. They let it slide.
Perhaps because they didn't detect it, or it was too minor to worry about. Perhaps they didn't want to waste their time trying to prosecute. Perhaps they decided their creditors would get more cents on the dollar by not prosecuting, especially if the owner has very little of their own assets.
I also suspect there is a reputation factor. Owners get to select which liquidator handles their bankruptcy (unless it was court ordered) and if one liquidator gets a reputation for going after the owners for every mistake, then they might get less business.
Where I live, there is no formal equivalent to Chapter 11, and liquidation is colloquially known as Bankruptcy.
While the terms may vary, the accounting and the general laws are reasonably constant world-wide.
The other aspect to liquidation is cashflow. Sometimes companies have plenty of assets on the book to cover their liabilities, but these can't feasibly be sold in a timely manner to pay the creditors who want their money now.
If the company is healthy, a bank will be willing to offer a bridging loan. But if the company is less-than-healthy, the only option might be liquidation.
I didn't cover this about, because in these cases, the creditors are almost guaranteed to eventually get 100% of their money back.
Federal funding to help states usually involves two methods. The first is transportation block grants where the federal government gives states money to use towards transportation at their discretion within certain constraints. The other is funding for specific projects. This funding generally involves the state applying to the federal department of transportation for funds toward a specific project. The department of transportation provides these funds out of a pool of money allocated by Congress each year. Congress plays no formal role in how these funds are disbursed. The department of transportation decides using defined set of criteria.
In the past Congress would sometimes earmark funds toward specific projects. This is rare these days as most earmarking of funds is against current congressional rules.
The way I rationalize it is that despite the fact that it might be a bridge in Nowhere, West Virginia, it will likely have wide-reaching impacts. More trucking routes helps almost everything. If I'm a visitor, I'm going to use the bridge, so I should pay some part of that.
Here is an article with a nice chart:
https://www.taxpolicycenter.org/briefing-book/how-does-corpo...
Corporate income tax is the third highest source of tax revenue in the US, at $230bn in 2019. Shareholders also pay capital gains taxes, and companies pay other taxes as well or collect taxes for the government as well like sales taxes.
Given the federal corporate tax rate of 21%, the domestic tax numbers work out nicely if we assume approximately 46% of pre-tax income was from the US and the remaining 54% was foreign. Which seems plausible to me, though that is obviously a vast over-simplification and ignores a lot of details. In particular, the distribution of foreign and domestic deductible business expenses may not be the same as the distribution of revenues.
[0] https://www.wsj.com/market-data/quotes/AMZN/financials/annua...
Even considering all North America + AWS income together, since they paid $1.360B in domestic US income taxes that year (not $162M) the percentage would still be 8.37%, not 1.2%. That's ignoring all foreign taxes and the losses from the International segment. Do you consider a minimum 76% error margin to be "pretty accurate"? I sure don't.
Keep in mind, too, that losses from prior years can be carried forward and deducted from current income. That's part of the reason that there were no taxes paid in the two previous years; the current-year income is only part of the story. This is perfectly reasonable when you consider that $3B in losses one year followed by three years with $1B in annual profits equals no net income for that four-year period. Why should there be any income tax liability when there is no income? The alternative to carrying forward losses would be a refundable tax credit for the years with negative income to offset the taxes collected in profitable years, but that would be very easy to game.
Even with that little detail, the rest of your comment seems spot-on. These power producers did not have enough incentive to deal with big problems, because the short term profits mattered more than potential future losses. That’s explicitly at the philosophical core of the TX power market, which is opposed to mandates, and relied on desire for profits and pressure from peers (peers that don’t want to pay extra into that fund) to encourage good behavior.
It’s unclear if that fund will be sufficient to cover all the losses. May yet need a bailout, which is indeed socialization of the losses.
Generally speaking I'm on your side - but here? No. This case is an incentive for future shareholders of electric utility ops to keep their company accountable for disaster preparation, so that the shareholders don't lose their investment.
unless they are "too big to fail" and effectively part of the government. in that case yes, we all pay for their losses.
Salary leaves a bit of a loophole, not sure how that is regulated.
A tax-funded electric firm would surely not share its profits with anyone, and even if it did it would still be at a net loss to the tax payers. (Since _all_ the funding would come from the tax bill - so its entire turnover is socialised.)
A private firm would actually contribute _more_ to our common because it would be a net tax payer.
Yes, it would not be a net tax payer (on paper), but it would be less of a community drain, and not siphon money out of the common.
I always wondered about that. Maybe because I don’t understand what it’s trying to say. I mean profits of companies benefit many, don’t they? Through jobs, taxes, dividends in case it’s a public company and so on.
What am I getting wrong here?
How do you think the taxes paid by those private utilities will stack up against the massive harm caused by those utilities trying to preserve profits and reduce liability in a crisis? How much do you think it will cost Texan tax payers to dig themselves out of this hole?
When a business venture is doing well, it pays generous salaries to executives and avoids taxes. When the business venture fails or creates grotesque havoc through incompetence or bad principles, a government of cronies will use tax-payers' money to pay for the consequences.
The business venture continues its "mission" and its perpetrators continue their careers.
Think of the extraordinary sums of money given to corporations "too big to fail".
So, while they were all benefiting and making money I didn't see any of that money (privatise the profit), sure some of it got paid out in taxes, but clearly not enough, since:
When their businesses started to fail, I, who didn't make any profits from them, had to pay extra in taxes to save these companies. (socialise the losses)
They only saw upside and no downside, I only saw downside and no upside.
Sure, they paid taxes while they were profited, but my life didn't change much before vs after the crash, in terms of what the government was providing. So the government provided the same to me when they were supposedly earning extra in taxes as they provided when they needed me to pay extra in taxes to bail out the companies. That doesn't sound like the taxes paid by the companies really made much difference (and that difference was easily wiped out by the bailouts anyway). Same goes for any jobs created: would have been cheaper to use the bailout money to pay these people directly (pre crash) than to give them job and let them wreck the economy, and then we have to bail them out anyway.
Edit: people really don’t know how bankruptcy works? Equity holds get wiped out first followed by bond holders.
> If it was a public utility it would be tax payers. That would be socializing losses.
No-one is arguing against that! In both cases the tax payers pay. Just in the privatized case the investors got the profits out year after year, and now threaten to sink the shop in order to get bailed out: that's what sets privatization apart from operating as a public company.
Whether they had enough money paid out through dividends in the run-up to that point or not is situation dependent - the company could not pay dividends at all.
That's just part of the risk. We're now talking about the bill that is still on the table. If the "investors" were fully responsible for their "investments" they would not have worthless shares, but they would have to pay up for what the company still owes. That their risk stops at "shares being worthless" is exactly what I mean by them being shielded.
I learned the energy firm was a coop: they have no shareholders.
But the discussion is still interesting, well at least to me :)
Hence, anything that has real costs higher than their invested stake has effective costs for them at their invested stake. They are shielded to some extent. Especially for low probability high cost events.
This is exactly the point of a limited liability company, but it comes with slightly perverse incentives.
With limited liability the investors are never liable for the debts. That's exactly how limited liability shields investors.
Yes, assuming you meant "shareholders" rather than "investors"—creditors are also investors, having put money into the company with the expectation of a return, but would not be liable for borrowers' debts regardless of limited liability. It's the shareholders who are shielded from liability to the corporation's creditors. But the creditors know this and accept the risk as a cost of doing business with a limited liability corporation. If they don't like the corporation's prospects they are not obligated to extend credit.
The share holders (which often includes the leadership). Their shares drop relatively quickly to close zero.
I think, however, that this is not enough.
Share holders of a company should be liable as individuals for the damages the company causes in case the company cannot pay.
This would strongly encourage share holders to pressure the CEO (which is also usually a share holder) to run the company in a sustainable way.
Also if the CEO does "gross mismanagement", share holders should be able to sue them as individuals, but from the point of customers, share holders should pay.
The only reason "stonks can only go down to zero" is because we have put in rules in the system to make it that way. When a company fills for bankrupcy, the risk for share holders is limited (to their original investment).
If we change the rules and make share holders accountable, then stonks will definetly be able to go way below zero and share holders will need to foot a bill here, potentionally leaving them all bankrupt.
Once that happens, then customers might still be left in debt. IMO at that point employees of the company should start footing the bill. Many employees look away at wrong business practices because there is nothing in for them in trying to push for change and doing the right thing.
If everyone involved with the company would be personally liable, most companies would be run very differently.
Perhaps it's worth a rethink, as it's been a while since the 1800s when capital was scarce.
The kindest thing I could think to call your idea is naive and poorly conceived.
If not the shareholders, someone in control of the company should be held accountable to avoid a "company in trouble? oh well, just shut it down, debt go poof, start again elsewhere, pocket the profits" situation or a situation where the company does something like damaging the environment. Too often do companies also get gutted to avoid paying out in lawsuits. There should always be people to go after. Probably it should be the board and executive team, rather than "I bought a single share" people. Ideally someone with skin in the game (so either being a shareholder, or maybe high salaries are sufficient too).
Also, most often the shareholders of large companies have no knowledge of illegal behaviour because the responsible stakeholders/executives inside the org are hiding that information. Enron is an example.
What we need is more executive accountability. For example jail sentences to the HSBC execs that knowingly facilitated money laundering for the Sinaloa Cartel. Instead what we got was a mere fine which mostly impacted the shareholders.
There is no financial motivation for me to care. Sure, stonks can go to zero, but I still don't care. I have a very diversified portfolio (5k positions) because stonks go to zero all the time, even if companies don't do anything illegal.
If I were liable, I would have to care, because one position could bring down your whole portfolio. I would only invest in companies with a lot of oversight, etc.
I don't think a system in which the government is in charge of the oversight can work; there are just too many companies. I think every party financially invested in the company must be intrinsically motivated to perform a high degree of oversight.
Going to $0.00 is plenty of incentive for shareholders to demand accountability. It makes no sense to me to somehow go even lower than that. And why would shareholders be specifically punished but not creditors? If there is some liability claim how are shareholders not just equally responsible as everyone else including creditors? If Joe down the street buys a share of Enron he’s going to get sued? If Jane who works as the company nurse owns stock is she now getting sued? How does she with her 10 shares effectively make management “less fraudulent”? What leverage?
C’mon.
When a company goes bust or bad things happen, shareholders everywhere lose their investment. That’s a big enough deal as it is.
> If everyone involved with the company would be personally liable...
Liable for what? Are creditors suing shareholders for losses? I guess banks won’t hold shares of companies because then they’d just be suing themselves.
If a company “does damages” and the government failed to regulate the company properly can we sue the government too? What about suppliers? Why draw the line at shares? Maybe everyone who was ever paid by the company should be held liable?
What you’re proposing here could use some work. You’re trying to create a system of infinite liability that just doesn’t make much sense.
FWIW I also believe that creditors should take more responsibility on the credit they give. We saw in the financial bubble of 2008 that there are many incentives for creditors to provide credit to persons and companies that _they know_ won't be able to pay.
> Am I just transferring money from my 401k to someone else’s and then they transfer it back since we both own shares in index funds?
Putting your 401k into stocks and index funds is a choice you make. Nobody forces you to do that, and you, e.g., put them in bonds instead for lower returns and lower risks, or if you are willing to take more risks, there are Index funds and ETF for pretty much any criteria you can imagine. I personally think that using a 401k with index funds on stock is a great choice given how the market has grown the last 100 years, but many countries actually don't have 401ks (e.g. most of Europe doesn't have them) and they do jut fine.
> What you’re proposing here could use some work.
That's a really positive and kind way to put it, thanks. It was just a thought.
The system of "a company is only liable with its assets" is what we have had for a very long time. There are many scams that exploit this, and a continuous stream of gross negliglence or malice that shows up every now and then when those at fault are able to just walk away and do it again.
Unless I misunderstand what you are intending with your original post (and obviously that can be subject to reinterpretation, modification, etc. - i.e. I don't hold anybody to the original idea when there is room for evolution) - if you put money into your 401k into something like, let's say a total stock market index fund - you could be sued for any company doing anything negligent. Right?
Now you might say - well that's the point. You should do your research. So let's say you're risk-adverse to being sued as a shareholder and only buy stock in the S&P 500.
So the S&P 500 Surely those are good companies, right? Sure. Except now there's only a small exclusive group of companies that get investor dollars. You're funneling money straight into the dominant companies. How could a smaller company ever raise capital?
You may recall that index funds and ETFs are made up of individual companies - actual shares. So to the extent that you have to research every company and know it inside and out so that you aren't exposed to potential lawsuits effectively eliminates all individuals from the capital markets. Only the wealthy would have ownership stakes! 401ks are just a convenient vehicle to help regular people save money - many in Europe and elsewhere opine for such a thing (spend some time on the investing subreddit).
Part of the whole point of this exercise is that you want regular people to share in the success of companies. If you open them up to liability, you defeat that. Jeff Bezos and Marc Andreesen can afford liability lawsuits. You and I can't. The rich get richer.
I'm also not sure why bonds would shield you from liability. You're still giving the company money to do these bad things, why does it matter if you have ownership? Hell, maybe companies just issue high-dividend paying bonds and avoid the whole "ownership" liability thing?
I think you're on point with regard to accountability - but that's a current failure of government, not corporations. I'm also not sure about the potential externalities that are caused by making any shareholder liable for a company's bad behavior. From a philosophical standpoint there are a lot of things to consider and I think we'd really have to nail down what specifically the issue is. Certainly workers who work at bad companies should be punished just as much as shareholders, right? Shouldn't the be personally liable even more than shareholders since they make the whole company run? And why would that not extend from management down to the janitor?
Sorry, should have clarified "government bonds" here.
We are hypothetically talking about changing the rules, so we could change them to whatever.
I think the fundamental problems here are a lack of oversight, and also a lack of financial incentive to avoid defaulting in the very long term (as a "mortal" investor, at some point you are going to cash out).
Thinking about the 401k, you mention the S&P500 index, but there are thousands of indices. There could be an S&P500 "proper oversight" index, that filters the S&P500 by some oversight metric. If that gives you 200 stocks instead of 500, and that's too little diversification for you, there could also be an MSCI ACWI IMI "proper oversight" variant as well.
Creating an exemption for 401 and pension plans in general could be an option, but TBH many index funds are big investors in companies, and they do often have a say.
Sure, no problem. But what about when the government does bad things and gets sued? At least something to think about.
I think some of the things you're discussing here are still fundamental government enforcement issues. You can create a "proper oversight" index but that doesn't shield individual investors. Facebook would have been part of that, for example, but now things have changed and the company could be open to liability for damages. I think the main issue here is there is too much risk for individual investors - they can't be experts in every stock or research every company - or get out if they start to see a pattern of fraud. So the only people who will own companies will be wealthy individuals and institutions that can fight lawsuits.
I also don't think this solves the concentration of wealth to the top companies. You can be a small, highly ethical company but not be able to raise capital in the public markets because investors are too risk adverse.
In my view, I think if you believe that there is a lack of oversight and a financial incentive to default, then you need to go back and look at how the government enforces rules that already exist before blowing up the entire capital markets for regular people. They seem to work pretty well, overall. Government bonds pay nothing now - if every investor had to exit the market (me and you) we'd just be stuck with useless dollars and no means to deploy them.
If you haven't read it, Fooling Some of the People All of the Time is a great, but also depressing read into this.
Sure, one could limit this to voting rights, but most big Index funds have voting right on many companies because they own collectively many shares.
One could also limit this to "outside 401k / pension programs", etc.
But if you have a say in what a company does (or can sue them for damages as an investor), you also have a responsibility for what that company is doing.
I don't know what the right solution to this problem is, but in many companies, the shareholders tell the CEO what to do and have no liability. This encourages them to optimize for maximum profits, making smaller "Company sized" damages part of the operating expenses, but without regard for huge damages like in this case.
Which isn't fair either, since it means the damages to these people won't be payed by those who profited from them.