Tuesday, October 23, 2012

Is Binary Economics "Practical"?

Many people think that the principles and overall theory of binary economics sound good, and it would be nice if everyone could own enough capital to provide him or her with an adequate and secure income, but it can't happen. The system just doesn't work that way, and you can't change the system.

That's not entirely correct. True, the economy is in such bad shape that a quick fix is no longer possible. There are, however, some things that could be done immediately. First, the Federal Reserve should stop monetizing all discretionary government spending. Ideally, there would be no monetization of government debt, but it can't be eliminated overnight.

Second, the Federal Reserve has the power right now to provide all the liquidity necessary to supply the private sector directly, not through increases in government spending, with all the financing the private sector needs for new and replacement capital. It can do this by rediscounting bills from commercial banks for financially feasible new and replacement capital, not speculation in the stock market, bailouts of failed companies, or purchase of toxic assets.

Frankly, the stimulus packages are like a gunshot wound to the economy. Returning the Federal Reserve to its original mission of providing liquidity to the private sector would apply a bandage and stop much of the bleeding.

We stress, however, that even returning the Federal Reserve to its original purpose is only a temporary, short-term measure. Unless a Capital Homestead Act or something very similar is passed at the earliest possible date, the economy will not be able to sustain itself. There must be widespread capital ownership if the economy is to survive.

That's what can be done at the "macro level," that is, at the level of the overall economy. At the "micro level," that is, at the level of a single company, a little more can be done. Under current law in the U.S., it is possible to reorganize a company as a Subchapter S corporation so that, if it is 100% owned by the workers through an ESOP trust, it pays no corporate income tax. In and of itself, this makes the company better able to survive during an economic downturn.

If the profits are paid out to the workers instead of being retained in the company, the local economy — and thus the company — benefits by the increase in consumption power. If the company implements what we call "Justice-Based Management" or other participatory management system, and combines it with profit sharing and worker ownership, studies by the National Center for Employee Ownership in Oakland, California, have shown that a company measurably increases its profitability, sometimes by as much as 150%.

As we said, though, this is all short-term. Without a Capital Homestead Act very soon, and the monetary, tax, and financial reforms that the global economy desperately needs, we don't see any hope for any lasting improvement.