On August 21, 2015, Paul Krugman writes in The New York Times:
Rand Paul said something funny the other day. No, really — although of course it wasn’t intentional. On his Twitter account he decried the irresponsibility of American fiscal policy, declaring, “The last time the United States was debt free was 1835.”
Wags quickly noted that the U.S. economy has, on the whole, done pretty well these past 180 years, suggesting that having the government owe the private sector money might not be all that bad a thing. The British government, by the way, has been in debt for more than three centuries, an era spanning the Industrial Revolution, victory over Napoleon, and more.
But is the point simply that public debt isn’t as bad as legend has it? Or can government debt actually be a good thing?
Believe it or not, many economists argue that the economy needs a sufficient amount of public debt out there to function well. And how much is sufficient? Maybe more than we currently have. That is, there’s a reasonable argument to be made that part of what ails the world economy right now is that governments aren’t deep enough in debt.
I know that may sound crazy. After all, we’ve spent much of the past five or six years in a state of fiscal panic, with all the Very Serious People declaring that we must slash deficits and reduce debt now now now or we’ll turn into Greece, Greece I tell you.
But the power of the deficit scolds was always a triumph of ideology over evidence, and a growing number of genuinely serious people — most recently Narayana Kocherlakota, the departing president of the Minneapolis Fed — are making the case that we need more, not less, government debt.
Why?
One answer is that issuing debt is a way to pay for useful things, and we should do more of that when the price is right. The United States suffers from obvious deficiencies in roads, rails, water systems and more; meanwhile, the federal government can borrow at historically low interest rates. So this is a very good time to be borrowing and investing in the future, and a very bad time for what has actually happened: an unprecedented decline in public construction spending adjusted for population growth and inflation.
Beyond that, those very low interest rates are telling us something about what markets want. I’ve already mentioned that having at least some government debt outstanding helps the economy function better. How so? The answer, according to M.I.T.’s Ricardo Caballero and others, is that the debt of stable, reliable governments provides “safe assets” that help investors manage risks, make transactions easier and avoid a destructive scramble for cash.
Now, in principle the private sector can also create safe assets, such as deposits in banks that are universally perceived as sound. In the years before the 2008 financial crisis Wall Street claimed to have invented whole new classes of safe assets by slicing and dicing cash flows from subprime mortgages and other sources.
But all of that supposedly brilliant financial engineering turned out to be a con job: When the housing bubble burst, all that AAA-rated paper turned into sludge. So investors scurried back into the haven provided by the debt of the United States and a few other major economies. In the process they drove interest rates on that debt way down.
And those low interest rates, Mr. Kocherlakota declares, are a problem. When interest rates on government debt are very low even when the economy is strong, there’s not much room to cut them when the economy is weak, making it much harder to fight recessions. There may also be consequences for financial stability: Very low returns on safe assets may push investors into too much risk-taking — or for that matter encourage another round of destructive Wall Street hocus-pocus.
What can be done? Simply raising interest rates, as some financial types keep demanding (with an eye on their own bottom lines), would undermine our still-fragile recovery. What we need are policies that would permit higher rates in good times without causing a slump. And one such policy, Mr. Kocherlakota argues, would be targeting a higher level of debt.
In other words, the great debt panic that warped the U.S. political scene from 2010 to 2012, and still dominates economic discussion in Britain and the eurozone, was even more wrongheaded than those of us in the anti-austerity camp realized.
Not only were governments that listened to the fiscal scolds kicking the economy when it was down, prolonging the slump; not only were they slashing public investment at the very moment bond investors were practically pleading with them to spend more; they may have been setting us up for future crises.
And the ironic thing is that these foolish policies, and all the human suffering they created, were sold with appeals to prudence and fiscal responsibility.
Paul Krugman is wrong when he states that …”governments aren’t deep enough in debt.” The United States national debt is nearly 20 trillion dollars based on the promise that American taxpayers will eventually pay the debt.
Krugman needs to read the article “A New Look at Prices and Money: The Kelsonian Model for Achieving Rapid Growth Without Inflation.” at http://www.cesj.org/wp-content/uploads/2013/11/pricesandmoney.pdf. In this paper a case is made for a major transformation of any nation’s monetary system so that in the future new money would be created in ways that would unharness the full productive potential of society, while closing the growing wealth gap between the richest 10 percent and the rest of society — and to do so voluntarily without the need to redistribute existing wealth. Prices, wages and interest rates would be controlled under the proposed model of development completely by competitive market forces, not by the whim of central bankers, politicians or organized power blocs.
This paper also shows that Say’s Law of Markets — that supply can create its own demand and demand its own supply — can be made to work if capital credit is universally accessible to all. This new paradigm, first developed by Louis Kelso and later refined by Robert Ashford and Rodney Shakespeare (“Binary Economics: The New Paradigm”) would result in an asset-backed money supply that would provide sufficient liquidity to banks and other financial institutions for financing all or most of the new productive assets which are added each year to grow the economy.
Krugman does not address the structural problems of the system but instead proposes to simply buy more time by borrowing more at low interest rates. Buying more time is his solution, followed by pretending that this will result in forward-looking growth. Yet national public debt has become harder to service because pretend-and-extend policy making has created a depression in real, capital asset investment and consumption (not the gambling casino stock market trading second-hand (owned) stock, because the extent of all productive capital asset OWNERSHIP is concentrated.
In concentrated capital ownership terms, roughly 1 percent own 50 percent of the corporate wealth with 10 percent owning 90 percent. This leaves 90 percent of the people scrambling for the last 10 percent, with them dependent on their labor worker wages to purchase capital assets. Thus, we have the great bulk of the people providing a mere 10 percent or less of the productive input. Contrast that to the less than 5 percent who own all the productive capital providing 90 percent or more of the productive input, and who initiate and oversee most of the technological advances that replace labor work by workers with capital work by the owners of productive capital assets. As a result, the trend has been to diminish the importance of employment with productive capital ownership concentrating faster than ever, while technological change makes physical capital ever more productive. Corporate decision makers know this, whether in the United States or China, or anywhere organized assemblies of people engage in production. Technology is an easier and faster way to get a job done. Because technology increases the profitability of companies throughout the world, technology always has the advantage over human labor when the costs of them are the same. But because this is not well understood, what we as a society have been doing is to continually shift the work burden from people labor to real physical capital while distributing the earning capacity of physical capital’s work (via capital ownership of stock in corporations) to non-owners through make-work job creation, minimum wage requirements, and welfare programs. Such policies do not function effectively.
Even with historically low interest rates when the federal government borrows, say to repair obvious deficiencies in roads, rails, water systems and more and to upgrade such or finances the military-industrial complex, which perpetuates continuous war, only the people who already own productive capital are the beneficiaries of debt through contract work sold in the name of job creation, but in reality systematically concentrates more and more capital ownership in their stationary 1 percent ranks. Yet the 1 percent are not the people who do the overwhelming consuming, and instead “re-invest” to further accumulate ever more capital wealth ownership. The result is the consumer populous is not able to earn the money to buy the products and services produced as a result of substituting machines for people. And yet you can’t have mass production without mass human consumption made possible by “customers with money.” It is the exponential disassociation of production and consumption that is the problem in the United States economy, and the reason that ordinary citizens must gain access to productive capital ownership to improve their economic well-being.
The ever-growing trillions of dollar debt liability will come due on the heirs of today’s Americans.
Austerity is not a solution, however, but a way of buying time until a solution can be implemented. The only way out of the hole is not to cut spending (consumption), especially since there is a level below which you cannot go, but to increase income (production).
This is “Say’s Law of Markets.” It is based on Adam Smith’s first principle of economics, articulated in The Wealth of Nations: “Consumption is the sole end and purpose of all production.” The obvious corollary, of course, is that you can’t consume what hasn’t been produced — which is exactly the United States’ problem as well as other debt-ridden countries.
In short, you can mint, print, or borrow all the money you want, but if you’re not producing a marketable good or service for consumption, even if you have a mountain of gold, silver, or government debt paper backing your currency, you are trying to get out of a hole by digging it deeper.
If something doesn’t exist, you can’t consume it. the only thing that’s going to get the United States and other debt-ridden countries out of the hole they are in is to increase production dramatically, not just cut consumption, however essential austerity is in the short run.
The whole discussion on reforming the money and credit system leads right into this, as does tax reform. Let’s take taxes first.
Four principles must guide the tax reform. 1) Efficiency: the tax system raises enough money to run the government without giving too much disincentive to produce. 2) Understandability: people should be able to pay their taxes without having to become an expert. 3) Equitability: people must be taxed in accordance with their ability to pay. 4) Benefit: people who receive the benefit should pay for it.
Thus, the fairest tax given these principles is a single rate imposed equally on all income above an exemption sufficient to enable people to live in reasonable comfort. In addition, the tax laws must permit a tax deferral on income used to purchase capital assets, up to an amount sufficient to generate an adequate and secure income.
Thus, every citizen should have a Capital Homestead Account (CHA) or Economic Democracy Account in which he or she can accumulate a reasonable ownership stake of income-generating assets on a tax-deferred basis. A CHA (a super-IRA or asset tax-shelter for citizens) would be available at their local bank to purposely acquire a growing dividend-bearing stock portfolio to supplement their incomes from work and all other sources of income. Now — how do they buy the assets in the first place on which to defer the taxes?
That’s where the necessary money and credit reforms kick in. Obviously, if a rich person or a corporation can finance new capital without using past savings, so can everyone else — and it’s better for the economy. The fact is, the more people who are productive, the more income there is, and the more income there is, the more demand there is, and the more demand there is, the more people can produce and sell ad infinitum.
Thus, every child, woman, and man can open up a Capital Homestead Account or Economic Democracy Account in which every individual can accumulate up to, let’s say, $1 million on a tax-deferred basis. And at a ROI (“Return On Investment”) of a conservative 20 percent (in direct new asset-based new stock issues), would generate taxable income of $200,000 every year.
Further, companies can be encouraged to pay out all earnings as dividends by making dividends tax-deductible by the corporation — and substantially raising the corporate tax rate to give more encouragement. That way a corporation has a choice: avoid all taxation of income by paying it out to the shareholders (who can pay taxes on their dividends the same as any other income), or pay even more taxes than they do now.
Besides, if they finance growth by selling new shares instead of retaining earnings, the new shareholders are going to need the full stream of profit attributable to their shares to pay for those shares. Issuing shares instead of retaining earnings to finance growth will create a lot of new shareholders, and create a lot of new demand to justify more growth and jobs.
Thus, if everybody has the right to borrow money to purchase new shares that pay for themselves out of future dividends — and all profits are paid out as dividends — ordinary people can become capital owners without risking anything they might have at present, which for most people in the United States is not a risk because they don’t have anything to lose at present as it is. If the money is created using interest-free capital credit, there will always be enough money for new capital formation — and for creating new owners without taking anything from anybody else.
What about security for the capital credit loans? What if the borrower defaults, i.e., doesn’t make the loan payments?
There’s an entire industry that already exists to help people handle risk. It’s called “insurance.” Using the risk premium on all loans as an actual insurance premium (ala the Federal Housing Administration concept), a borrower or lender can take out a capital credit insurance policy that pays off in the event of default.
Instead of tax, monetary and inheritance policies favoring the top 1 percent at the expense of the 99 percent, these comprehensive policy and program reforms should become national policy as a necessary solution to correct the systemic injustices of monopoly capitalism. The current system perpetuates budget deficits and unsustainable government debt, underutilized workers, a lack of financing for financing advanced energy and green technologies, and outsourcing of U.S. industrial jobs to low-wage countries, trade deficits, shrinking consumption incomes among the poor and middle class, and conventional methods for financing productive growth that increase the ownership and power gaps between the top 1 percent and the 90 percent whose combined ownership accumulations are already less than the elite whose money power is widely known as the source of political corruption and the breakdown of political democracy.
The unworkability of the traditional market economy is evidenced by the diverse and growing deficits––federal budget deficit, trade deficit, city, county and state budget deficits––which are making it increasingly impossible for governments at every level to function. The increasing deficit burden is the result of the growing numbers of people who cannot earn, from legitimate participation in production, enough income to support themselves and their families. Thus government is obliged to “redistribute” to starve off economic collapse. The key means of redistribution is taxation––taking from the legitimate producers and giving to the non- or under-producers––to make up the economy’s ever wider income and purchasing power shortfalls.
The fact is that political democracy is impossible without economic democracy. Those who control money control the laws that foster wage slavery, welfare slavery, debt slavery and charity slavery. These laws can and should be changed by the 99 percent and those among the 1 percent who are committed to a just and economically classless market economy, true equality of opportunity, and a level playing field in the future for 100 percent of Americans. By adopting economic policies and programs that acknowledge every citizen’s right to contribute productively to the economy as a capital owner as well as a labor worker, the result will be an end to perpetual labor servitude and the liberation of people from progressive increments of subsistence toil and compulsive poverty as the 99 percent benefits from the rewards of productive capital-sourced income.
