JoshHeaps.Net/JoshHeaps.Net/Content/Socialism/open-problems.md

title, section, order, summary

title	section	order	summary
Open Problems	Guardrails	140	An honest list of what isn't solved yet.

Open Problems

An honest list of what the model hasn't solved yet, most dangerous first.

1. Adverse selection on founders. (The most dangerous.) The lock removes the exit, and profits are shared with every member. In the success case a co-op founder ends up with somewhere between a fifth and a twentieth of what a conventional owner of the same firm would (The Founder Problem). For founders without wealth the gap in what the bet is worth is smaller, but at the top it's decisive. If the strongest founders go conventional, the bank's portfolio is the rejected pool, and the test fails for reasons that say nothing about co-ops. The pilot can at least tell how much of a result is down to founders: Co-ops or Their Founders? measures founders on both sides from government records, and the verdict has to say how much their backgrounds explain. That doesn't change pass or fail, because if the lock keeps strong founders away, that's part of what the lock does. Still open: nothing yet makes the deal better for the founders the model most needs, and with about 400 co-ops, "too few to tell" is a likely answer.

2. The horizon problem. (Mostly answered.) Members near retirement have little reason to vote for investments whose payoff arrives after they leave. The evidence from France and Italy finds no underinvestment where co-ops must keep a reserve, and Investing for the Long Run closes the main routes around this model's reserve: pay above the going rate, sales of assets, development spending, high pay that turns into losses, and worn-out equipment still in use. A warning light shows when a co-op stops replacing its equipment, and big bets get an independent opinion before members vote. Still open: nothing forces a co-op to maintain what it has, a bad bet that fails after its backers leave falls on the people who came after, and it's unsettled whether 30% is enough and whether the account rate is right. Members' accounts now pay back within three to seven years (Member Capital Accounts), so they help less with long-lived investments than accounts held until members leave. Letting members sell their places to incoming workers was rejected, because that is how the plywood co-ops ended up sold.

3. Members' savings sit inside their employer. (Partly answered.) Member capital accounts are capped at a year's pay, protected by a solvency test, and now insured by a pool the co-ops pay for (Protecting Members' Savings). It covers final wages, former members' payouts and a protected slice of current accounts. Premiums are now estimated from Europe's wage guarantee funds and US closure and default rates: at least 0.25% of payroll for final wages, and probably 2% to 3% a year of covered savings, which takes nearly all the interest on a protected slice. The reserve target is sized for a five-year wave of failures like 2008–2012, and cover for current members' savings waits until the pool has its own track record. Still open: the pool has no government backing, so a worse recession could outrun it; the estimates rest on rough data, not co-ops; the reserve takes about fifteen years to build; and it needs a federal charter to avoid fifty states' insurance laws. Also open: an account paid out when a member leaves would probably be a pension plan under federal law, which would forbid the co-op from using the money. So accounts now pay each year's credit back on a fixed schedule of three to seven years, whether or not the member has left. That's designed to stay outside pension law, but it isn't settled until the Labor Department answers. It gives up the trust, disclosure and fiduciary rules that pension law would bring, which the model only partly replaces, and it leaves the co-op less of its members' money to invest for the long run. State wage laws are a second risk: in some states, California likely among them, a credit in a member's account could count as wages, which can't be held back, charged with losses or paused. Co-ops in those states don't use accounts until the state changes its law (Owners Are Still Workers), so members there build no savings in the co-op.

4. Is the lock too rigid? A co-op that should be sold (a better operator exists, the members want out) can only go to another co-op. If the co-op sector is small, that buyer pool is tiny, and viable firms may be liquidated instead of rescued. The federation as buyer of last resort is a partial answer. Critics on the right add a sharper version: a lock that outlasts a repaid loan by generations is a permanent restriction on selling property, bought with one loan, and it binds members who never agreed to it. The lock is now built to hold in layers, including an independent lock share and rules against selling the business piece by piece (The Lock). Its biggest legal gap is bankruptcy: federal bankruptcy law generally overrides limits on selling a bankrupt company's property, so the lock only holds in bankruptcy if Congress amends that law. When a Locked Co-op Goes Bankrupt drafts that amendment. It's modeled on how bankruptcy law already treats charities. Only co-ops can buy a failed co-op whole, its workers can keep it running and bid with the wages they're owed, and creditors who never chose to lend are paid the lock's cost from the federation fund. It still needs Congress, a later Congress can repeal it, and while the co-op sector is small, some viable businesses will be broken up for lack of a co-op buyer. Italy offers a softer model: a co-op there can convert into an ordinary company, but its accumulated reserves go to the co-op development fund, not to the members (Has This Been Tried?). That would keep the part of the lock that stops members cashing out what earlier generations built, and drop the part that stops a firm from ever changing hands.

5. Scale. (Partly answered.) Even a total success at pilot scale leaves most workers in conventional firms. The labor-market effect needs a sector large enough to move wages, and nobody knows how long growth to that size takes, if it happens at all. That's the price of not forcing it. After a Pass: How Big, How Fast works through the numbers: even growing at twice the recent pace every year, co-ops would take about 19 years to reach 1% of today's private jobs. Growth after a pass comes in capped stages sized to demand the reviewers certify, and the labor-market effect gets its own test, by lottery, in local markets where co-ops could become a large share of one kind of work. Still open: the closest evidence cuts both ways (big retailers paying more didn't lift other employers' pay; hospitals hiring nurses did), the local test can only find fairly large effects, and co-ops may never become a big enough share anywhere to find out.

6. Political durability. (Partly answered.) Gradual construction invites gradual repeal. Making It Last builds the bank to survive a hostile government: the lending standards and the test are fixed in law, board vacancies can't freeze lending, the verdict says "not tested" rather than "failed" if the bank turns away applicants who meet its own standards (every rejection is re-scored, the line is more than 1 in 10 clear passes turned away, and the result has to be one those applicants could have changed; see the line), and repeal can't unlock the co-ops. Still open: after the Supreme Court's 2026 ruling any president can replace the bank's board; money not yet lent can be taken back in a budget bill; the lock's bankruptcy protection depends on a federal law that can be repealed; and at pilot scale the sector has no real constituency. The 1-in-10 line is a judgment call with no benchmark behind it. The bank's law lets applicants and borrowers sue to enforce its deadlines and signed loans (Who can go to court), but that's untested, lawsuits are slow, and if the Justice Department won't defend the law itself, the people left to defend it may not be allowed to. The Constitution probably requires that the board have the last word on each loan, so the board can overrule its staff, only in writing, by named vote and in public (Who has the last word). Whether the credit officers can keep protection from being fired after Slaughter is unsettled, and a president who empties the board hands its power to the Treasury Secretary.

7. Growth and dilution. (Partly answered.) Softened by the tenure ramp, not eliminated, and federal tax law softens it less than the founding plan expected: by default, the part of a share new members haven't reached goes to the reserve, not to other members (How a Locked Co-op Is Taxed). In steady state, an equal split per head still means a marginal hire must generate the average surplus to break even for incumbents. Capital-intensive expansion into lower-margin lines will face internal resistance conventional firms don't have. When Growing Means Sharing makes Mondragon's answer the standard path: a lower-margin line becomes its own locked co-op, funded from the parent's reserve as a finite, voteless investment, under rules that stop it being used to push existing workers out or move money through insider deals. Still open: growth that can't be split off still dilutes, spin-offs create richer and poorer co-ops (the groups can pool profits, but don't have to), and the evidence comes from co-ops that could hire non-members, so it probably understates the problem under the lock.

8. Who decides which sectors are "essential"? (Partly answered.) Subsidy authority is price-setting power over a large chunk of the labor market, and every low-margin industry will suddenly discover it is Essential. Who Decides What's Essential takes the choice away from people. A fixed formula decides: work qualifies only if public programs already pay for most of it and it pays badly. The money goes to workers by the hour, measured from records like Medicaid's visit logs, and states whose rates fall behind inflation lose federal Medicaid money in step. The data sources are now named: federal payment records for public money, and Census revenue, with new Census questions on a deadline and rules so status can't flip on noise. Still open: counted properly, hospitals are near the line, which would add their low-paid jobs and a great deal of cost; child care's status is undetermined until the new data exists; other work mostly paid for by families doesn't qualify; employers and owners may still capture some of the money; and it plausibly costs tens of billions of dollars a year.

9. The 1/N problem. (Mostly answered.) Peer monitoring works at 30 people; at 10,000 your extra effort raises the pool by a rounding error. The answer is culture and structure: co-ops really do push out free riders, and the federation model keeps units small enough for monitoring to bite while pooling risk above them. Does Sharing the Profit Mean Less Effort? turns that into rules: small teams with their own numbers, team bonuses whose formula members set in advance, and a fair, fast dismissal process with protections against retaliation and discrimination. Still open: the evidence comes from conventional firms with profit sharing, not co-ops, and a small shared stake may even make people less willing to speak up; the pilot tracks value added per hour as co-ops grow to find out.

10. The pilot's own weak points. The pilot puts the burden of proof on the co-ops, which means roughly a 1-in-10 chance of shutting down a pilot that was actually working. It tests individual co-ops, not the federation support network Mondragon relied on. Its lotteries test help after the loan and, since the pre-launch lottery was added, help before it (Help Before the First Loan), but only among groups that come forward, not outreach to workers who never think of starting a co-op. The pre-launch help now has a cost ceiling set in advance, $400,000 of total public cost per extra co-op still open at year four, but there's no good benchmark for it, and the lottery is small enough that "not settled" is a likely verdict (The cost ceiling). Founders now put in a small stake they can pay in unpaid work, but founders who can't afford months of unpaid work still face a barrier. Its comparison group (small businesses with government-backed loans) is biased in directions that partly cancel out, by amounts nobody knows. And market-rate lending based on collateral may mostly reach founders who already have some wealth. Approval rates by race, gender and wealth are published so that shows up, but publishing a gap doesn't close it.

11. Drift toward the safest co-ops. (Partly answered.) A bank that lends only to co-ops can still lend mostly to the safe ones, like consultancies started by people with savings, as America's co-op bank did. Who the Bank Lends To sets aside $90 million of the loan money for co-ops in lower-paid work, which goes back to the general pool only if the reviewers certify the bank handled those applications fairly. Results are reported for that group and for first-time owners without much wealth, and the verdict has to say which kinds of co-ops it covers. Still open: the set-aside makes money available but can't make groups apply; it can be used mostly on work just under the average wage; first-time owners without wealth get reporting, not money; and in work whose prices are set by Medicaid or contractors, a failure may say more about the price than about co-ops.

12. Taxes. (Partly answered.) A locked co-op is a corporation that pays tax once on members' profit shares, under the part of the tax code written for co-ops. How a Locked Co-op Is Taxed fits the model to it: profit is shared per hour worked, workers who aren't members get a share too, wages reach the going rate before any profit is shared, and charges come out of the current year's share before older, already-taxed balances. Still open: nobody has ruled that a co-op with an outside lock-holder and a reserve that goes to the federation counts as a co-op for tax purposes; whether profit shares owe payroll tax is unsettled; the ramp no longer shields senior members from new hires unless it's paid as wages; workers without work authorization can't be members; and the kept reserve pays 21% even though nobody owns it.

13. Federal or state? (Mostly answered.) The test stays federal, because one bank with one plan makes one clean experiment. Any state can copy the bank under the same published rules, reported separately, and a model state law protects the lock for co-ops that choose it (The Lock in State Law; Making It Last). No state has adopted anything like it, and a co-op organized in a state that hasn't relies on its charter alone. Still open: whether a few state lenders sharing one plan would have been the stronger experiment after all, since the most durable public bank in America, North Dakota's, is a state bank.

14. Voluntary buyouts: in or out? (Answered.) In, on a separate track: $100 million of its own, healthy firms only, a willing seller, no new tax break, a capped price the seller shares the risk on, a vote of the whole workforce, and its own test of money and pay, so it can't flatter the startup result (When an Owner Wants to Sell to the Workers). Still open: whether a price set by the market is fair to workers who pay it out of their own future work, and whether about 60 deals can show more than that the loans get repaid. The comparisons are now set out: SBA-financed purchases, ESOP sales and deals that fell through, with a loss rate fixed by formula in advance (Who buyouts are compared against). With so few deals, the loss test can catch a track that does much worse than SBA lending, but it can't show that buyouts do better. Why co-ops can't simply use the SBA is now spelled out: its rules ask a co-op, unlike an ESOP, for cash up front and one member's personal guarantee. The bank's deals do without both, so they rest on the seller's paid-last share and a coverage test on past cash flow (Why not just use the SBA?). Under the SBA's rules from October 2026, those two rules are nearly the whole gap, and both are SBA policy it could change itself. If it does, or a small fund covers the cash stake, much of the track may not be needed. Whether that's enough in place of cash and guarantees is something only the loss record will show. State programs paid for by Treasury and USDA's rural guarantees already allow co-op buyouts in pieces. The track uses them, but can't count them as private money or use them to hide losses (Other public help). How often private lenders will really take an equal share is unknown, so deals the bank makes alone are capped at a third of the money. The help each sale needs, the workers' adviser, checks on deals that fall through and help after the sale, costs the public roughly $110,000 to $240,000 per closed deal, about $12 million in all. That comes out of the same margin the money test measures, so the track passes only if losses stay low (What the help costs).

15. Work where people don't stay long. (Partly answered.) In home care, most workers leave within a year or two. Membership is now automatic after a short probation, the buy-in comes out of profit shares rather than pay, and pushing people out before they'd join counts against the co-op (When People Don't Stay Long). Still open: with a five-to-ten-year profit share ramp, only a small minority of care workers ever reach a full share, so the people who stay collect much of the profit the others helped make. A much shorter ramp for low-margin, high-turnover co-ops would fix that, but it would go against the founding plan's range and weaken the ramp's protection against under-hiring. Also open: whether default members take part in governance, and whether Social Security counts a profit share as earned income for SSI, which decides whether members on SSI lose more by joining. SSI may also count an account credit as income when it's made. Until Social Security answers, members on SSI get their share all in cash and join only if they say yes (How a Locked Co-op Is Taxed), and workers who have only an IRS taxpayer number still can't be members. How labor law treats worker-owners now has its own page (Owners Are Still Workers). Federal labor law probably doesn't protect members' own organizing, so the charter does, and fixing the law takes a separate bill that may never pass. Some states leave members out of unemployment insurance, and whether founders' unpaid work before the co-op forms is outside wage law still needs the Labor Department's answer. A federal rule due in 2030 requires 80% of certain Medicaid home care payments to go to care workers' pay. Co-ops meet it from wages alone and pay any shortfall as wages, but in that work it leaves little room for profit shares or a reserve, and whether the rule survives is unknown (When Medicaid decides how much goes to pay).

16. What the rules cost a small co-op. (Partly answered.) Every check the model adds costs a small co-op money. What the Rules Cost a Small Co-op scales checking to size: a yearly review and a fixed list of tests instead of an audit for small co-ops, audits by lot and on warning signs, and a lock-holder review every two years. Even so, the model's own estimate is 1% to 2.5% of a small co-op's sales, which could be a large part of the profit in cleaning or home care. Whether lighter checking lets more cheating through is something the audits by lot will show. Italy's "false co-ops" are the warning.

Not problems here, because nobody's company is forcibly bought: valuing every firm in the economy, owners stripping value before a takeover, foreign capital flight, and years of payouts to former owners. The contractor boundary isn't an economy-wide problem either. Its co-op version, hiring non-members to dodge membership, is handled by the lock's membership requirement.