Wednesday, February 26, 2014

Capitalist Socialism, II: The Citizens Land Bank


In yesterday’s posting we saw that the United States could easily go the way of ancient Rome.  No, really.  If we really understand that Rome didn’t really “fall,” but slowly decayed and transformed into the Medieval world as conventional government spent itself into oblivion trying to meet every need, and then the modern world (where governments are spending themselves into bankruptcy trying to meet every need), it becomes comprehensible.

The "Fall" of Rome
Eschewing the turgid and self-interested (not to say anti-Christian) analysis of Edward Gibbon in favor of J. B. Bury or Theodore Momsen (or even, gasp, original source documents), we realize that common conceptions of what happened are, more often, misconceptions.  We don’t have to accept them.

Similarly, to address the problems of today, we can accept the usual fallacies that those in power put forward to justify what they are going to do anyway.  That, or we can consider some truly innovative solutions to turn what Pope Leo XIII called “new things” in his landmark encyclical, Rerum Novarum.

Author of Rerum Novarum
Take, for instance, the problem of decaying infrastructure.  As we related yesterday, we can let the rich take over financing new infrastructure and, eventually, become the owners and local rulers in a new feudalism.

We could, as an alternative, figure out a way to bolster tax revenues so that the government can once again afford to carry out what many consider its proper function: providing goods that individual citizens cannot ordinarily afford themselves.

Or we could do something new and innovative to address an old and recurring problem.  Since infrastructure is intended to provide a good for the public, why not figure out a way that the public can finance infrastructure and, being the financing source, become the direct and equal owners of all public land and infrastructure?

Rebuilding Infrastructure
This can be done through a vehicle called the “Citizens Land Bank,” or “CLB” for short.

A CLB has the potential to solve a number of problems caused by insufficient State revenue from taxes, or relying on the rich to carry out the functions of government.  For one, it employs advanced techniques of corporate finance.  This frees financing from the “slavery of past savings,” and thus dependence on a tax system that in turn relies on people being able to pay their taxes out of past savings.

The idea of the CLB is simple.  Although the State can own infrastructure and land on behalf of the people, wouldn’t it be better if people could own the same thing on their own behalf?  Of course it is.  The problem is how to do it when ordinary people don’t have the money to buy it.

As to how everyone instead of the State can own land and infrastructure, that’s easy to answer.  The corporate form of ownership was specifically designed for many people to own a single thing.

It is irrelevant how many people own a corporation.  If you want a lot of people to own the corporation, simply issue more shares.  If you want fewer people to own the corporation, either don’t issue as many shares, or buy back shares that have already been issued.

The big problem is how people who do not have the ability to save out of what is already in many circumstances an inadequate income are to purchase shares, that is, capital. This is especially the case with infrastructure, typically a very expensive proposition.

The answer is not through past savings, which are by definition a monopoly of the rich, but through future savings.  Future savings are based on making a promise to repay a loan now out of profits to be generated in the future.

By making such a promise, it is not necessary to cut consumption in the past to accumulate savings.  It is possible to save by increasing production in the future.  Turning production in the future into money now is what commercial banks were invented to do.

By having commercial banks backed up by the central bank create money for productive purposes, anybody who can demonstrate a reasonable possibility of repaying a loan out of future profits can become an owner of capital without having to cut consumption or decrease current income.  By using the corporate form of business organization, especially when limited liability is included, people without savings need not risk current income or whatever pittance they have managed to accumulate.

Combining the corporation with future savings shows us how to finance all new capital as well as infrastructure without having to rely on the rich or the State for anything except their acquiescence.  Traditional corporate finance always uses future savings, for no businessman will finance new capital unless it can pay for itself within a reasonable period of time.

When capital can pay for itself, of course, it is unnecessary to cut consumption in the past to pay for the capital.  It is only necessary to increase production in the future.

This is the way the rich have traditionally financed new capital.  That being the case, why can’t ordinary people?

Why can’t they?  The fact is, they can.  It is only necessary that the capital be able to pay for itself out of future profits.

Infrastructure can pay for itself if, instead of relying on taxing everybody to pay for infrastructure, only the people who use the infrastructure are “taxed.”  By shifting from general taxation to particular user fees, infrastructure can be made as “inherently financeable” as any other form of capital — and be more fair in who pays for it.

For ordinary people to own infrastructure, then, it is only necessary to set up a for-profit corporation, and issue a single no-cost, non-transferable, voting, and fully participating share to every man, woman, and child in an area.  The infrastructure can be financed by expanding commercial bank credit and rediscounting the paper at the Federal Reserve.

In this way the currency would be backed by revenue-generating infrastructure instead of a vague government promise to pay out of taxes that might never materialize.  The loans used to finance the infrastructure would be repaid by user fees instead of general taxation.  After the loans were repaid, the shareholders — the public — would receive income in the form of dividends.

Why, then, wait for the State to finance infrastructure, which it has already indicated it does not have the money or the tax base to do, or the rich, who will use their position to take over control of the government?  Wouldn’t it be better to use advanced techniques of corporate finance to everyone’s advantage, rebuild infrastructure in a way that benefits everyone, and makes every citizen an owner?

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