Tuesday, February 18, 2014

A Simple Solution to a Complex Problem


Yesterday’s Washington Post (02/17/14) carried two columns related to the growing economic inequities.  From Robert Samuelson there was “Economists in the Dark.”  From Lawrence Summers there was “How to Curb Inequality.”  Both were on page A19.

Rather than write two separate blogs, we thought we’d handle both at once, since both, frankly, have nothing substantive to propose.  They just highlight the problem and throw up their hands.

Income and Ownership Gap, 1847
True, both commentators make good and necessary points. Economic inequality is a serious and growing problem.  Tax and monetary reform is an effective way to address the situation.

Unfortunately, neither Summers nor Samuelson (nor anyone else) address the causes of inequality.  They focus on symptoms, and analyze different forms of redistribution and their effectiveness.  This does nothing to solve the underlying problem.

Issuing more government debt to depreciate the currency and redistribute wealth through inflation will not do the trick.  It inevitably hurts the people it was intended to help, and concentrates more and more wealth in the hands of those who own capital.

Government job creation
This is actually one of the reasons why Keynesian economics “likes” inflation: it “forces” savings, transferring wealth from wage earners to producers so that producers will presumably invest in more new capital and create jobs.  Unfortunately, the Keynesian theory relies on the false assumptions that 1) labor is ultimately responsible for all production, and therefore 2) forming additional capital necessarily means creating new jobs.

Alas.  The fact of the matter is that 1) both labor and capital produce marketable goods and services and in the same way, and 2) the effect of capital is to replace human labor, not enhance or increase it.
Is labor alone productive?

The only way to “create jobs” when people have only their labor to sell is to mandate or encourage unnecessary employment just to get income to people, a complicated and unnecessarily expensive and wasteful form of redistribution.  Within the current economic framework, Milton Friedman was right: the correct thing to do when people don’t have jobs is just give them money.  Don’t bother with “creating” unnecessary jobs.

Of course, a better answer to the problem is not just to give them money, however necessary that might be as a short term expedient.  Handing out the cash (i.e., redistribution) does not address the real problem: lack of democratic access to the means of acquiring and possessing the capital that is replacing human labor as a factor of production at an increasing rate.

In other words, don’t just give them money, although that's a very good, even virtuous thing to do.  Give them opportunity . . . and the means to take advantage of the opportunity.

Monetizing economic growth directly by creating money for the private sector to finance new capital formation in ways that expand the base of capital ownership would allow currently propertyless people to own capital without redistributing existing capital or income.  Prohibiting further monetization of government debt would force government to live within its means and stabilize the currency.

18th Century American Tax Revolt
Greatly simplifying the tax system by imposing a single tax rate on all income above an exemption sufficient to meet ordinary living expenses would diminish the need for redistribution.  Most of the current complications in the tax code are there to encourage people to save to finance new capital.  Financing new capital formation out of future savings instead of past savings would remove the need for a lot of the complexity and injustice.

In addition, making dividends tax deductible at the corporate level, but fully taxable for the recipient, would encourage full payout of earnings.  This would stimulate consumption naturally without government-induced inflation or any other form of redistribution.

These and other measures to restructure the economy through equality of opportunity to own capital can be found in the “Capital Homesteading” proposal by the Center for Economic and Social Justice (CESJ), as detailed on the new website.

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