Wednesday, November 12, 2008

"Where Obama Can Be Bold"

In keeping with our policy of offering unsolicited advice to world leaders, here is a copy of our latest letter to the Washington Post which, in common with virtually other media outlet throughout the globe, is giving truckloads of advice to President-elect Obama. The only difference is that our advice is good.

Dear Sir(s):

While phrasing it in terms of a "what if," Michael Gerson got it right in his column in today's Washington Post ("Where Obama Can Be Bold," A19). The best and wisest form of reparation is to open up equal opportunity to acquire and possess income-generating assets. This would be fully justified not as reparations for slavery, per se, but as fair compensation for the barriers imposed by our social structures on descendants of slaves.

The issue then becomes, should the taxpayer be required to pay? No. That would be as unjust as the barriers a government-funded reparations program would presumably be designed to lift. No one alive today was a slave owner, and most Americans are not descendants of someone who owned slaves in the Antebellum South. Further, the immense demands placed on the taxpayer in the current financial crisis leave no room for something as potentially divisive and costly as cash reparations.

There is, however, a solution — one that would benefit all Americans, and help put the country itself back on a sound financial footing. Consistent with the principles of Keynesian economics, Mr. Gerson assumes that the seed money for a tax-free savings account can only come from existing accumulations of wealth, i.e., the tax base, or savings borrowed by the government.

The fact is, however, that 1) investment can take place without first cutting consumption and saving, and 2) without the necessity of a class of very rich people who can afford to save enough to finance the capital needs of an economy. In his 1935 monograph The Formation of Capital, Dr. Harold Moulton, then president of the Brookings Institution demonstrated that between 1830 and 1930 the bulk of the financing for capital investment did not come from savings, but from the extension of bank credit. The loans were repaid out of "future" or "forced" savings after investment, instead of financed by cutting consumption before investment. In 1958 Louis O. Kelso invented the Employee Stock Ownership Plan ("ESOP") as a means whereby ordinary people could become owners of capital without first having to cut consumption and save, ideally financing the acquisition by proper use of the commercial banking system and a central bank.

Kelso's program, which the Center for Economic and Social Justice later developed into a proposal called "Capital Homesteading for Every Citizen," from the book with the same title, would provide financing for tax-deferred (not free) investment accounts — savings, as every economist knows, equals investment. By financing all of America's capital needs in this way, at present rates of growth, a child born today who received an annual equal right to borrow newly-created money for capital investment could accumulate in the neighborhood of $500,000 of income-generating capital assets by age 65, and increase gross taxable dividend income over the same period by nearly $2 million. Under the tax reforms recommended under Capital Homesteading, a "typical" family of four would pay no income or payroll taxes until aggregate family income exceeded $100,000.

In the initial stages of a Capital Homesteading program it would be perfectly feasible to double, even triple the amount that individuals whose median net worth fell below a certain threshold could borrow for vetted, financially feasible investments. This would build in an automatic reparations feature without forcing anyone through the humiliating and possibly impossible process of proving that they or their ancestors were sufficiently oppressed to meet bureaucrats' preconceived notions.

Finally, of course, this could all be done without a cent of taxpayer money. It even has the potential to get the government out of the bailout business, thus taking the immense load off the back of current and future taxpayers.

Donations to CESJ support our Capital Homesteading projects and Just Third Way initiatives, and are tax deductible in the United States under IRC § 501(c)(3).