Socialism: spec the pilot in numbers, and guard it against gaming

Add "The Pilot, in Numbers": a one-time $350M, ~400-co-op pilot with
a power-calculated sample size, loan limits, a checked definition of
market rate, two pre-registered deciding measures (fair survival with
a pay and membership guardrail, and a Treasury-rate hurdle for the
loan book), a matched SBA comparison plus a lottery at the margin, a
year-12 review, a fast-track vote on success and a self-executing
wind-down on failure. Built around the FONDES and Venezuela failures.

Add "Guarding the Pilot": rules against hidden-boss shells, capital
claim drains, split borrowers, relabeled rescues, zombie survival,
sabotage, a rigged review, and political favoritism.

Link both from the index, bank, test, capital and lock pages, and add
the pilot's weak points and the federal-vs-state question to Open
Problems.

Co-Authored-By: Claude Opus 5.5 <[email protected]>
Claude-Session: https://claude.ai/code/session_01QWPs69B8nQZjtPEUXMKzZx

JoshHeaps.Net/Content/Socialism/pilot-spec.md

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+---
+title: The Pilot, in Numbers
+section: Growing the Sector
+order: 65
+summary: The concrete pilot: how much money, how many co-ops, what gets measured, against whom, and the exact results that grow the bank or shut it down.
+---
+
+# The Pilot, in Numbers
+
+[The Test](the-test.md) says the bank runs as an experiment. You can't fault an experiment that has no numbers, so this page supplies them. Every number here is a first draft and open to argument. What matters is that they're written down *before* the first loan, so nobody (me included) can pick them after seeing the results.
+
+The rules that stop people from gaming the pilot (sham co-ops, hidden owners, rigged comparisons) have their own page: [Guarding the Pilot](pilot-safeguards.md).
+
+## The short version
+
+| | |
+| --- | --- |
+| **Money** | $350 million, once. |
+| **Lending window** | Years 1–5 (up to year 8 if good applicants are scarce). |
+| **Target** | About 400 new worker co-ops. |
+| **Loan size** | Up to $3 million per co-op, including all later loans. |
+| **Price** | Market rate: what a similar conventional business would pay. No personal guarantees from members. |
+| **Compared against** | Similar new conventional firms that got similar-sized loans, plus a lottery among borderline applicants. |
+| **Final review** | Year 12, by an independent reviewer. |
+| **Passes if** | Co-ops stay open about as well as the comparison firms *while paying their members fairly*, and the bank earns at least what the money would have earned in Treasury bonds. |
+| **Shuts down if** | Either of those fails. |
+
+The rest of this page explains each line.
+
+## Two warnings from real life
+
+Two public efforts to fund co-ops went badly. The pilot is built to avoid repeating them.
+
+**Uruguay's FONDES.** In 2011 Uruguay set up a public development fund to lend to worker-run firms. By 2016 it had funded 22 firms, and almost 90% of its loans (US$63 million of US$69 million) had been written down as uncollectable. Eight firms got 93% of the money. Three with close ties to the governing party got nearly half. The biggest single loan, US$15 million, went to Alas Uruguay, an airline formed by the workers of the failed state airline. It stopped flying ten months after launch. The original bill capped any one firm at 3% of the fund, but lawmakers raised the cap to 15% before passing it. ([El Observador, 2017](https://www.elobservador.com.uy/nota/-en-que-estan-los-principales-emprendimientos-financiados-por-el-fondes--20176201600); [El Observador, 2015](https://www.elobservador.com.uy/nota/mitad-de-dinero-del-fondes-fue-para-empresas-companeras--201572500))
+
+What went wrong: most of the money went to *rescuing firms that had already failed* under other owners, a few borrowers got most of it, and politics chose them. Uruguay reformed the fund in 2015. It added a 10% cap per business group and a limit of two loans per firm in five years ([la diaria, 2016](https://ladiaria.com.uy/articulo/2016/6/arrancando-de-cero/)).
+
+**Venezuela's co-op boom.** After 2001, Venezuela gave co-ops cheap state loans, first pick of government contracts, and tax breaks. Registered co-ops went from under 800 to over 100,000 in a few years. A 2006 government census found only about 50,000 actually operating. Many had been set up to collect the benefits, not to run a business ([YES! Magazine, 2007](https://www.yesmagazine.org/issue/latin-america/2007/05/12/venezuelas-co-op-boom); [Grassroots Economic Organizing](https://geo.coop/blog/some-counter-intuitive-effects-government-support-co-ops-venezuela)).
+
+What went wrong: cheap money attracts people who want the money, not the co-op. That's the main reason [the bank](the-bank.md) charges market rates.
+
+## Why a new bank, not existing programs
+
+Fair question. Congress already made co-ops eligible for the Small Business Administration's (SBA's) main loan program in 2018, through the Main Street Employee Ownership Act. It has barely been used. The SBA kept requiring personal guarantees on those loans, meaning individual members pledge their own homes and savings if the business fails. That doesn't work for a firm owned by dozens of workers ([House Committee report, 2018](https://www.congress.gov/committee-report/115th-congress/house-report/645/1); [NCEO, 2022](https://www.nceo.org/employee-ownership-blog/house-committee-urges-sba-fully-implement-main-street-eo-act)).
+
+Private co-op lenders exist and do good work, but they're small. Shared Capital Cooperative, lending to co-ops since 1978, had about $20 million in assets in 2021 ([offering statement](https://www.sec.gov/Archives/edgar/data/1722839/000121390021050617/ea148092-1a_sharedcapital.htm)). The pilot's question is what happens when financing on normal commercial terms is available at real scale. The existing channels can't answer that.
+
+## How much money, and why
+
+**$350 million, one time.** In the pilot, the bank lends only its own capital. It doesn't borrow on top of it. That makes the worst case easy to state: taxpayers can lose at most $350 million, minus whatever is repaid.
+
+It breaks down like this:
+
+- **About $300 million for loans.** Around 400 co-ops with a typical first loan of about $500,000 is roughly $200 million. The rest is for follow-on loans to co-ops that grow. For comparison, Shared Capital's average loan is about $230,000. The pilot's loans are larger because it's meant to fund real businesses with real payrolls, not only very small ones.
+- **$20 million, capped, for business help:** bookkeeping, governance training, legal setup. Venezuela's census blamed many of its failures on the lack of exactly this. This money is a public cost, stated openly and capped, and it's counted in the pilot's total cost to taxpayers. It isn't allowed to hide inside loan pricing.
+- **The remainder** is a cash cushion and running costs.
+
+## Why about 400 co-ops
+
+This is the number that lets the test tell a real answer apart from luck.
+
+New businesses close a lot. Of all US business locations opened in 2013, only about 35% were still open ten years later ([Bureau of Labor Statistics](https://www.bls.gov/bdm/us_age_naics_00_table7.txt)). With closures that common, a small pilot is noise: 30 co-ops could look great or terrible by chance.
+
+To be confident that co-ops do "at least about as well" as conventional firms, you need to see several hundred closures across both groups. Standard survival statistics say that about 400 co-ops, each compared with five similar conventional firms, give roughly a 90% chance of a clear verdict if co-ops really are exactly as durable. If they're *more* durable, as the best existing study suggests (below), a clear verdict is easier to reach.
+
+That also means a roughly 10% chance of shutting down a pilot that was actually working. That's the cost of putting the burden of proof on the co-ops, and it's stated openly.
+
+**The honest problem with 400.** The whole US worker co-op sector was about 751 firms in 2023, roughly triple what it was a decade earlier ([NCEO summary of the Democracy at Work Institute census](https://www.nceo.org/employee-ownership-blog/democracy-at-work-institute-releases-its-2023-worker-cooperative-state-of-the-sector-report)). That's about 50 new co-ops a year. Reaching 400 in five years means roughly doubling the rate at which co-ops get founded.
+
+That creates exactly the pressure that sank Venezuela: an institution with a target lowers its standards to hit it. So:
+
+- **No lending targets.** Nobody is paid, promoted or judged on loan volume.
+- **If good applications fall short, the lending window stretches** (up to year 8) instead of standards dropping. The final review moves back by the same amount. That rule is fixed now.
+- **A shortfall is itself a result.** If good co-op applicants don't show up even when financing is available, that's evidence for the "co-ops are rare because they're hard, not because they're unfunded" explanation, and it gets reported that way.
+
+## Who can borrow
+
+- **New worker co-ops only, for the main test.** "New" means the *business* is new, not just the legal paperwork. A conventional firm that reincorporates as a co-op isn't new (see [Guarding the Pilot](pilot-safeguards.md)).
+- **Existing co-ops may borrow too, but they're scored separately.** Firms that have already survived for years would make the results look better than they are.
+- **No rescues of failed conventional firms.** That's where FONDES lost its money, and it's a different experiment (see *Voluntary buyouts* in [Open Problems](open-problems.md)).
+- **At least three worker-members at the first loan**, meeting the [co-op definition](worker-ownership.md) and accepting [the lock](the-lock.md).
+- **Members are on the payroll as employees.** That gives them minimum wage, unemployment insurance and workers' compensation like any other worker. It also means the co-op shows up in the government business records the test relies on.
+- **Any legal industry.** Loan officers judge business plans, not industries. But no single industry may take more than 25% of the money lent, and no single county more than 10%, so one bad sector or one local market can't sink the whole test.
+
+## Loan terms
+
+- **$3 million per co-op, lifetime.** That's under 1% of the fund. FONDES let one airline take over a fifth of its money. That can't happen here. Related co-ops share one limit (see [Guarding the Pilot](pilot-safeguards.md)).
+- **Paid out in stages** as the business hits agreed milestones, not in one lump.
+- **No personal guarantees from members.** The risk that the business fails is exactly the risk the bank exists to price and carry. Loans can be secured by the business's own assets, like any business loan.
+- **Underwriting can rely on cash flow**, not only on collateral. Collateral-heavy lending mostly measures how much wealth the founders already had, which shuts out the workers co-ops tend to serve.
+
+## What "market rate" means
+
+The bank prices each loan the way a normal lender would price a conventional business with the same numbers: same revenue, same industry, same track record, same collateral. Because there are no personal guarantees, the rate is higher than it would be with them. That's the honest price of the risk.
+
+Two checks keep the price honest:
+
+- **An annual audit**, in both directions. Each year an outside auditor compares a sample of the bank's loans with rates on comparable conventional small-business loans. It also checks the things that don't show up in the rate: who gets approved, how much collateral is required, and how often troubled loans get softer terms. If loans are systematically too cheap, the shortfall is counted as a loss against the bank's results. If they're too expensive, the affected loans are repriced.
+- **A private market check.** Every loan is offered to private and community lenders, who can buy up to 20% of it on the same terms. How often they say yes is published. If nobody ever wants a piece, that suggests the price is too low for the risk.
+
+## What gets measured
+
+All of this is written down and filed in a public study registry before the first loan, the way serious medical trials and a few careful social-policy studies already do. One example is the [Oregon Health Insurance Experiment](https://www.nber.org/programs-projects/projects-and-centers/oregon-health-insurance-experiment/oregon-health-insurance-experiment-background). The actual analysis code is filed too, so the method can't quietly change later.
+
+**The two measures that decide the outcome:**
+
+1. **Fair survival.** Does the co-op stay open and keep treating its members fairly? A co-op counts as *failed* if any of these happens:
+   - it closes, or falls below three members or a minimum level of sales;
+   - for two years running, its members' median pay per hour (wages plus profit share) falls below 85% of the matched conventional firms' median;
+   - it stops being a real co-op: fewer than three-quarters of its work hours are done by members, or its workers are kept on probation past the limit.
+
+   The pay rule matters. Co-ops can survive a bad stretch by cutting their own pay instead of cutting jobs, and the best existing study couldn't rule that out. A co-op that survives by paying its people far less than the business down the street hasn't passed.
+2. **The bank's money.** At the end, after every loss, write-off and running cost, has the loan book earned at least what the same money would have earned in Treasury bonds over the same years? Anything less means taxpayers lost money compared with just holding bonds. Loans still outstanding are valued at what a buyer would pay for them. Loans that were restructured to avoid default are marked down, so going easy on struggling borrowers can't hide losses.
+
+A useful yardstick: among the SBA's mature loan groups from 1992 to 2004, loans making up about 6% to 10% of the money lent eventually defaulted, and about 37% of the defaulted amount was later recovered ([GAO-20-618](https://www.gao.gov/products/gao-20-618)). A lender charging market rates with losses in that range covers them from interest.
+
+**Measures that are published but don't decide:** jobs created, wages at the bottom and top and the gap between them, revenue per worker (a rough measure of productivity), how long members stay, injury rates, and the bank's default and recovery rates. Also:
+
+- **Who got loans.** Approval rates and loan terms by the founders' race, gender and personal wealth. If collateral-based lending quietly shuts out the people co-ops mostly serve, it should show.
+- **Local effects.** Business openings and closures in the counties where co-ops were funded, so any damage to existing local businesses is visible.
+- **Results by industry**, including care work like home health and cleaning, where most US co-op members work today.
+
+Why only two deciding measures: the more measures you allow to count, the easier it is to find *one* that looks good. Two, fixed in advance, can't be gamed that way.
+
+## Who co-ops are compared against
+
+This is the hardest part of any test like this. Co-ops that got a loan aren't like the average new business. They had a plan good enough to get a loan. Comparing them with *all* new businesses would flatter them.
+
+**Main comparison: new conventional firms that got a similar-sized loan through the SBA's main program.** They're matched on industry, region, start year, starting size, legal form, and the number of founders. Businesses with more founders tend to survive longer, and co-ops always have at least three. This group is imperfect in both directions. SBA borrowers had to show they couldn't get credit elsewhere, which makes them a weaker comparison. But their loans carry a government guarantee that makes credit cheaper for them, which makes them a stronger one. The reviewer reports both biases openly. Researchers have already matched SBA borrowers with similar firms in government business records ([Brown and Earle, *Journal of Finance*, 2017](https://papers.ssrn.com/abstract=2641184)), so the data work is feasible.
+
+**Second check: a lottery at the margin.** Among applicants whose scores land just around the approval line, the bank decides by lottery who gets a loan. Then it follows both groups. This is the cleanest test of the core claim: *does access to financing make co-ops that would otherwise not exist, or not survive?* The lottery group will be small, so it supports the main result rather than replacing it.
+
+**Third check:** co-ops against *all* similar new firms.
+
+**Sales count the same way on both sides.** A conventional firm that gets bought hasn't necessarily failed, and a co-op can't be bought at all because of [the lock](the-lock.md). So acquisitions and mergers, on either side, are counted as neither success nor failure in the main analysis, with a second analysis counting them both ways.
+
+**What existing evidence predicts.** The strongest study so far followed every firm in Uruguay from 1997 to 2009: about 29,000 firms, 223 of them worker-run. After leaving out very small businesses and adjusting for tax differences, worker-run firms were about 29% *less* likely to close in any given period than conventional ones ([Burdín, *ILR Review*, 2014](https://journals.sagepub.com/doi/10.1177/001979391406700108)). The advantage was clearest in services. In manufacturing and transport there was no clear difference. That's encouraging, but it's one country, and it's why pay is built into the survival measure above.
+
+## The timeline
+
+- **Year 0.** Charter the bank. File the full analysis plan, code, benchmarks and thresholds. Name the reviewers.
+- **Years 1–5.** Lending window, stretching to year 8 if applications fall short.
+- **Year 6.** Public interim report. It can't trigger growth. It can only trigger the emergency stop.
+- **Year 12.** Final review. Every co-op funded has been open for at least seven years. That covers most of the danger period for new businesses and, almost certainly, at least one recession.
+
+**The reviewers:** the Government Accountability Office (GAO), Congress's own auditor, which already reviews SBA lending, working with academic economists nominated by the National Academies of Sciences. They must have no ties to the bank or to co-op advocacy groups. The bank's staff don't grade their own work. The reviewers can depart from the filed plan only in a signed, published explanation, and the filed plan's result is always reported alongside.
+
+## The decision rule
+
+At year 12, both measures must pass:
+
+1. **Fair survival.** We can be 95% confident that co-ops' chance of failing in a given year, as defined above, is no more than 25% higher than the comparison group's. If co-ops are exactly as durable or more, this should pass. If they're clearly worse, it fails.
+
+   Why allow up to 25% rather than demanding exact equality? No test can prove two things are *exactly* equal. You can only rule out differences bigger than some margin, and a tighter margin takes more co-ops. Ruling out a 10% gap would take somewhere around 1,500 to 2,000 co-ops, more than twice the entire US co-op sector. The 25% margin is also a value judgment, stated openly: a society might reasonably accept firms that are a little less durable in exchange for workplaces people govern themselves. Readers who think that price is too high should say so. Burdín's result suggests the margin won't matter, because co-ops may well come out ahead.
+2. **The bank's money** earned at least the Treasury rate.
+
+**If both pass:** the charter triggers a fast-track, up-or-down vote in Congress on a second capitalization, with no amendments and no committee bottleneck. It can't be automatic, because no Congress can bind a later one's spending. A fast-track vote is the most that can honestly be promised. If the bank is later allowed to borrow, its debts carry **no federal guarantee**, written into the charter. Fannie Mae and Freddie Mac needed a taxpayer rescue in 2008 partly because markets had always assumed the government stood behind them. This bank shouldn't be able to create that assumption.
+
+**If either fails, the shutdown happens by itself, with no further vote needed.** No new loans. The remaining loans are offered at fair value to co-op and community lenders, who keep the same repayment terms. Whatever they don't buy is collected by the Treasury on the original terms until paid off. None of it goes to distressed-debt buyers. The money goes back to the Treasury. The co-ops stay co-ops, because [the lock](the-lock.md) is in their own charters, but they're on their own.
+
+**There is no "inconclusive, keep going" option.** If the evidence doesn't clearly show co-ops holding their own, that counts as a fail. The burden of proof is on the co-ops, which is where a skeptic would put it.
+
+**The emergency stop.** If net losses ever pass 20% of the capital ($70 million), new lending freezes, and the reviewers report within six months on the cause:
+
+- **A recession:** lending restarts only if the SBA's own loans from the same years lost money at a similar rate. That's a fixed comparison, not a judgment call.
+- **Fraud:** lending restarts once the reviewers certify the specific gaps are closed and recovery has been pursued. Otherwise one organized fraud ring could end the experiment on purpose (see [Guarding the Pilot](pilot-safeguards.md)).
+- **Bad lending decisions:** no restart. That's a result.
+
+## What this pilot can't tell you
+
+- **Whether the labor market changes.** 400 co-ops won't move anyone's wages. See [The Test](the-test.md).
+- **Whether the best founders come.** The test measures the co-ops that *did* apply. If strong founders stay away ([The Founder Problem](founder-problem.md)), a pass means "the co-ops that exist can compete," not "co-ops would win with everyone's best people."
+- **Whether co-ops do better with a full support network.** The pilot funds individual co-ops. It doesn't build [the federation](federation.md) that Mondragon relied on, so co-ops that join a federation are reported separately.
+- **Whether it survives politics.** Congress can refuse the second capitalization, or repeal the whole thing. See [The Constitution](constitution.md).