A Way to Finance “Green” Infrastructure

As we saw in the previous posting on this subject, one way to “lure” people back to work when they are (at least temporarily) better off not working, is to make them an offer they can’t refuse, or at least would be extremely foolish to turn down.  The offer we suggested, of course, is that it would be beneficial to offer workers a piece of the action, that is, part ownership of the companies that employ them.

Would the Unions Go For It?

In the previous posting on this subject, we looked briefly at the problem of how things like the UBI, welfare, and unemployment compensation can act as a disincentive to work.  The bottom line is, if you pay people not to work, they tend not to work.  The only way a basic income of some kind is not a disincentive to take gainful employment is if you get it in addition to, not instead of, gainful employment, and that is something that it would be complete and total disaster for a government to do.

To Work, or Not to Work?

. . . but is that the question?  Quite a few people have noted over the past several months that the enhanced unemployment benefits have persuaded a number of people not to return to work.  It seems that some people are actually getting more income by not working than they did when they were employed.  As noted in yesterday’s (August 3, 2020, p. A-16) Wall Street Journal,

Why Government Debt is "Bad"

From the perspective of the Just Third Way, the good thing about accumulating massive amounts of material from the past ("Long past?" "No, your past.") is that it becomes glaringly obvious that the local, national, and global economies are sliding swiftly down the skids — and why. This contradicts the modern delusion that the sum total of human knowledge became self-evident only this morning, and anything antedating your 6:30 am wake-up call is either completely wrong, totally outdated, or, like, so totally yesterday, Dude, that it isn't worth considering.

So . . . like, how is this relevant to the title of this posting? Well, Dude, like a lot of policymakers and academics are ridiculing the "Tea Party Types" for being concerned about too much taxation and the huge deficits that result from the misuse of the Federal Reserve by monetizing government debt. After all, His Defunct Majesty Lord Keynes proved beyond the shadow of a doubt that we don't need to worry about deficit financing of government. Debt is good. This is because, in Keynesian theory, you're not actually creating money when you monetize government deficits. Rather, you're just chopping up existing wealth into smaller and smaller bits for easy (re)distribution.

Unfortunately for today's monetary and fiscal policy, Keynes was wrong. Monetizing government deficits isn't simply a case of chopping existing wealth into smaller and smaller pieces until the guppies eat the treasury. It's pledging future taxes collected out of wealth that hasn't yet been produced. The present value of what exists in the economy is not based on what currently exists. That would limit the value of the "general wealth of the economy" to the book value of existing inventories of marketable goods, and the salvage or disposal value of capital goods.

Every accountant knows, however, that the real value of productive capital is not its salvage value, but the present value of what that capital will produce in the future — but that does not yet exist in the form of inventory. This means that the "general wealth of the economy" — what the policymakers and academics appear to believe backs the money supply — consists not only of the present value of existing inventories of marketable goods and services and capital, but of the present value of existing and future marketable goods and services.

Thus, when the government monetizes its deficits, it's not simply cutting up claims on existing wealth into smaller and smaller pieces the better and easier to undermine private property and redistribute wealth. Rather, by issuing currency and creating demand deposits backed by future tax collections, the government is promising to redeem the claims it is issuing in increasing numbers out of wealth that hasn't yet been produced — and becomes less likely to be produced the more the government erodes private property by manipulating money and credit. Hence we have the analysis of Henry C. Adams in the late 19th century, in which he concluded that government deficit spending was a fast track to loss of personal sovereignty on the part of the citizens:

As self-government was secured through a struggle for mastery over the public purse, so must it be maintained through the exercise by the people of complete control over public expenditure. Money is the vital principle of the body politic; the public treasury is the heart of the state; control over public supplies means control over public affairs. Any method of procedure, therefore, by which a public servant can veil the true meaning of his acts, or which allows the government to enter upon any great enterprise without bringing the fact fairly to the knowledge of the public, must work against the realization of the constitutional idea. This is exactly the state of affairs introduced by a free use of public credit. Under ordinary circumstances, popular attention can not be drawn to public acts, except they touch the pocket of the voters through an increase in taxes; and it follows that a government whose expenditures are met by resort to loans may, for a time, administer affairs independently of those who must finally settle the account. (Henry C. Adams, Public Debts, An Essay in the Science of Finance. New York: D. Appleton and Company, 1898, 22-23.)

But, you say, so what? We don't have any real sovereignty left, anyway. With the growing concentration of ownership of the means of production, and the growing State control of what remains, that isn't far from the whole truth. Still, loss of personal sovereignty is only half the problem. Deficit financing leads directly into loss of national sovereignty as well:

The facts disclosed permit one to understand how deficit financiering, carried so far as to result in an interchange of capital and credit between peoples of varying grades of political advancement, must endanger the autonomy of weaker states unable to meet their debt-payments. Provided only that the interests involved are of sufficient importance to make diplomatic interference worth the while, the claims allowed by international law will certainly be urged against the delinquent states, and the citizens of such states may regard themselves fortunate if they succeed in maintaining their political integrity. (Ibid., 28-29.)

As the American economy becomes increasingly weaker, and as that of China, the single largest holder of American debt paper, continues to experience explosive growth, we are seeing the beginning of the end — unless steps are taken immediately, such as enacting the Capital Homestead Act by 2012. And it can be done. In the early 1870s, France managed to repay an indemnity deliberately designed to destroy its economy forever in less than three years by producing massive amounts of quality goods, facilitated by sound money and extension of credit to business — not government.

It can be done. The time to do it is now.  The alternative is to sit idly by while China increasingly throws its weight around, and North Korea and Russia take advantage of the situation.

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May We Suggest . . .?

The stock market decline over the past couple of days has been blamed on "fears that the economic recovery is fizzling." This startling revelation, reported in an Associated Press report displayed on "Yahoo News," caused a panic that "grew Thursday after the government and private sector issued weak reports on a number of fronts." ("Weak economic data suggest recovery is fizzling," Associated Press.) As the report goes on to explain,

Unemployment claims are up, home sales are plunging without government incentives and manufacturing growth is slowing.

Meanwhile, 1.3 million people are without federal jobless benefits now that Congress adjourned for a weeklong Independence Day recess without passing an extension. That number could grow to 3.3 million by the end of the month if lawmakers can't resolve the issue when they return.

The report then goes on and declares that this situation has the economists worried. Why? "As jobless claims grow and benefits shrink, Americans have less money to spend and the economy can't grow fast enough to create new jobs." In other words, only government deficit spending provides the effective demand necessary to stimulate new capital formation, and thus create jobs.

Here's a crazy idea. Why not use the Federal Reserve as it was designed and intended to be used: to create money as needed backed by the present value of existing and future marketable goods and services. By rediscounting eligible loans for industrial, commercial, and agricultural investment, all feasible capital projects can be financed without recourse to existing accumulations of savings. By collateralizing the loans with capital credit insurance and reinsurance instead of retained earnings, accumulated cash can be paid out as dividends, stimulating demand.

One thing more. To make the increase in demand sustainable, all new capital financed by rediscounting eligible paper at the Federal Reserve should be directly owned by as many people as possible. Once the capital has been paid for, the continued distribution of earnings as dividends for consumption, instead of retaining them in the corporations for reinvestment, will ensure that effective demand remains at optimal levels. This will keep demand for labor high, and create more new jobs than any artificial stimulus by government deficits.

That, in broad outline, is what Capital Homesteading proposes to do. For more details, download the free e-book available from CESJ.

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The Slavery of Past Savings

We're starting to hear more about how "Obamanomics" has failed. It's tempting, of course, to blame Mr. Obama for the problem, just as he and others blamed Mr. Bush, but let's face facts. Mr. Obama is no more to blame for the current state of affairs than Mr. Bush was. Each one was and is operating within a seriously flawed paradigm. Because the basic premise is flawed, it's not going to make any difference what is done. Whatever is done will only be the right thing by pure chance, and chances (especially for the majority of people) are getting slimmer by the hour.

Making matters worse is the fact that, even within the seriously flawed Keynesian paradigm Mr. Obama's programs do not make sense. You don't bolster the status quo by pouring money into failed companies or sponsor direct government takeovers of private companies. Instead, the State engages in indirect takeover of private industry by regulating investment returns, the tax rate, inflation, and (above all) artificial job creation that puts money directly into the hands of people who will spend the money not on investment or to bring their asset portfolios back up to previous inflated values, but on consumption, thereby increasing effective demand through full employment.

The flawed basic premise that underlies all of today's monetary and fiscal policy, as well as the bedrock of modern economic thought, is the fixed belief that capital formation can only be financed out of existing accumulations of savings. Held as a virtual religious dogma by academic economists and the politicians and Wall Street speculators and gamblers they advise, what Kelso and Adler called "The Slavery of [Past] Savings" has shackled economic growth, fostered envy and greed, nurtured widespread poverty, and plunged the great mass of people into a condition accurately described as "a yoke little better than that of slavery itself." (Rerum Novarum, § 3)

The following short piece is extracted and condensed from the draft of an upcoming book, tentatively titled "What is Money?" by Norman G. Kurland and Michael D. Greaney. It highlights the seriousness of the problem, and helps us understand Aristotle's observation in De Coelo that a small error in the beginning leads to large errors in the end as it applies to today's confused understanding of the role of existing accumulations of savings in the economy.

The Slavery of Past Savings
By Norman G. Kurland and Michael D. Greaney

Most of modern economics and finance is based on a false assumption: the presumed necessity of existing accumulations of savings to finance capital formation. Prescriptions based on this assumption end up being the wrong thing to do to stimulate a recovery, foster full employment, or achieve sustainable economic development without inflation or deflation.

In their book, The New Capitalists (1961) Louis O. Kelso and Mortimer J. Adler question this basic assumption, thereby earning them the opprobrium of the economics establishment for making (as their subtitle put it), "A Proposal to Free Economic Growth from the Slavery of [Past] Savings." Building on the work of Dr. Harold G. Moulton in his 1935 classic treatise, The Formation of Capital, Kelso and Adler show how capital acquisition for the great mass of currently propertyless people can be financed out of future, rather than past savings by democratizing and monetizing capital credit through commercial bank loans by discounting such loans at a central bank, thereby accelerating private sector growth. Moulton, president of the Brookings Institution, authored The Formation of Capital as part of a series presenting an alternative to the Keynesian New Deal.

The problem as Kelso and Adler saw it was that, given the immense cost of capital in a developing or developed economy, only the people who are already rich, that is, who already own capital, can afford to cut consumption and save. In fact, capital assets are so productive in comparison with mere human labor that the capitalist finds it impossible to consume all the income generated by the capital he or she owns and which accrues to the owner as one of the fundamental rights of private property.

Acting rationally, the capitalist reinvests unconsumed income as a matter of course. This accelerates the generation of increasing amounts of income that cannot be consumed. This in turn causes those who already own far more productive capital than is necessary to provide for all their wants and needs to become increasingly wealthy at an accelerating rate.

In a paradox that has puzzled economists and social scientists for centuries, the very means by which immense quantities of marketable goods and services are provided for the world — the financing of the formation of increasingly efficient and productive capital — is what keeps most people relatively poor and unable to consume everything that is produced. The world is faced with the inexplicable problem that people are in want, even starving and in dire need at a time when there is more than enough unrealized capacity to take care of everyone on earth.

The solution is for those who own little or nothing in the way of capital to become owners of a capital stake sufficient to generate an income that will allow them to meet common domestic needs adequately. Unfortunately, it has become fixed in people's minds that the only legitimate way to become a capital owner is to cut consumption, save, then invest — or to confiscate and redistribute wealth. The former is clearly an impossibility for those whose wages, even opportunities for selling their labor, diminish and in some instances disappear altogether in competition with advancing technology or cheaper labor elsewhere. Some term the latter the equivalent of theft.

Kelso and Adler's answer is to apply basic principles of finance to the science of economics. Thus, if people lack ownership of the means of production other than human labor, and capital is replacing human labor as the predominant factor of production, it seems logical that the solution is to turn people who do not own capital into people who do own capital.

Still, if only existing accumulations of savings can be used to finance capital formation, people who do not own the capital that generates the bulk of income in a developed economy cannot acquire capital. You cannot cut consumption and save unless you own capital, and you cannot own capital unless you cut consumption and save.

As Kelso and Adler discovered, however, a more viable solution is found implicitly in the definition of "money" and in the power of a central bank to monetize and democratize capital credit by discounting non-recourse loans extended by commercial banks for productive projects and collateralized with capital credit insurance, and repay the loans out of future income. Money is anything that can be used in settlement of a debt. "Money" therefore takes the form of a promise to deliver value on demand or at some future date (maturity) to settle the debt. If a promise is "good," that is, we trust the individual or group making the promise to keep his or her (or its) word, then the promise has a current or "present" value.

To acquire ownership of capital, then, a potential owner who lacks an existing accumulation of savings to finance the purchase of capital or to serve as collateral to obtain a loan for the purchase of capital need "merely" make a good promise to pay for the capital in the future. To keep the system in balance, the repayment should preferably come out of the income generated by the capital itself. This promise — asset-backed money — can be made transferable, and used throughout a community as "currency" (current money) until the promise comes due and the holder in due course redeems the promise.

CESJ has developed a proposal, "Capital Homesteading," that is a plan for getting ownership, income, and power to every individual. Adaptable to any economy in the world, Capital Homesteading is an analogue of the 1862 Homestead Act. Capital Homesteading expands the vision of Lincoln to include ownership of land, natural resources, advanced technologies, and infrastructure, including management, marketing and distribution systems, through equity shares in enterprises capable of competing without special protections within a free and just global economy. The idea is that everyone would have a tax-sheltered trust account, similar to an ESOP, financed by non-recourse loans on credit, in which to accumulate income-generating assets. The income from these assets would first be used to repay the acquisition loans with "future savings," then supplement and, eventually, replace income from selling labor, and provide for a secure retirement.

Assuming that only existing accumulations of savings can be used to finance capital formation locks us into a condition of permanent dependency on the rich. The alternative under the past savings assumption is a State that claims the power to manipulate the money supply for its own advantage, or take what belongs to the rich for redistribution among those whom the State finds acceptably poor or deserving. Neither is acceptable from the standpoint of essential human dignity — or basic economic justice.

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The Recession is Over . . . Again, Part II of II

In the previous posting on the End of the Great Recession (again), we noted that the only way to get the economy started again was to stimulate consumer demand. There is, however, a catch to that. The only real way to get an economy started again is to stimulate demand naturally, not artificially — and that means opening up means for ordinary people to be able to spend the income generated by capital instead of having the rich reinvest it or the government tax it and redistribute it. Otherwise, income that would otherwise have been spent on consumption is reinvested to finance new capital, accelerating the accumulation of wealth that cannot be consumed and is therefore reinvested . . . .

You get the idea. To solve this problem requires that ordinary people — people who will spend their capital income on consumption instead of reinvesting it — become owners of the means of production. This does not mean taking away capital from capital owners and redistributing it to capital non-owners. Instead, it means opening up access to capital credit on the part of non-owners so that they become owners of the estimated $2-3 trillion of new capital formed each year in the United States.

Purchase of capital by non-capital owners will, in and of itself, spur demand. This is because capital goods may be capital goods to the purchaser, but they are marketable inventory — consumer goods — to the producer and the seller. The sale of these goods make a profit, or at least are intended to make a profit. In accordance with Say's Law of Markets, this profit represents income to the owner of the capital. If spent on consumption instead of reinvesting the proceeds in more capital, the capital income will provide the demand to get the economy moving again.

This, of course, raises another question: where are people supposed to get the credit with which to purchase capital? Don't people have to cut consumption, save, then invest before they can purchase capital, even capital that pays for itself out of future earnings?

No. The idea that you need to cut consumption and save before investing is a fallacy that has shackled economic development and kept many people in poverty and want who didn't need to be there. The fact is that it is entirely feasible — in fact, extraordinarily beneficial to the economy as a whole as well as individuals — to invest before saving. Since "money" is nothing more than a promise, a contract to deliver wealth (as even Keynes admitted in his Treatise on Money, 1930), all the money that is needed can be created out of the capacity of a borrower to make good on his or her promise to repay the loan out of future profits. Existing accumulations of savings are not necessary, except to serve as collateral — and collateral can be replaced by capital credit insurance and capital credit reinsurance.

A program to achieve the goal of widespread ownership of the means of production can be found in "Capital Homesteading for Every Citizen," an application of the principles of the Just Third Way as found in the binary economics of Louis Kelso and Mortimer Adler. Freedom from the constraints imposed by reliance on the false claim that existing accumulations of savings are absolutely necessary to finance capital formation is, in fact, the whole point of Kelso and Adler's second book, The New Capitalists (1961), with the "revealing" subtitle, "A Proposal to Free Economic Growth from the Slavery of Savings."

Capital ownership is certainly a more attractive prospect than Mr. Bernanke's "jobless recovery" that benefits speculators and gamblers at the expense of the truly productive. It's also the only thing that is actually going to work.

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Stimulus, Part I: Why Obama's Stimulus Package Won't Work

Mr. Obama is indeed correct that the country is at a "perilous moment." The only problem is that, sincere as we assume the president to be, his proposed economic stimulus package will only increase the peril of the moment, to say nothing of wrecking the future.

As I understand it, the whole idea behind Mr. Obama's proposed stimulus package (as of this writing not yet enacted into law) is that the federal government — meaning the taxpayer — will 1) provide funds to help unsuccessful gamblers and speculators recover the money they lost, so they can gamble and speculate again in the vague hope that their doing so will result in some kind of investment that creates jobs, thereby increasing effective demand, 2) provide funds to consumers who presently lack sufficient income to provide sufficient effective demand to keep the economy going, increasing demand and creating jobs, and 3) increase government spending on public works and infrastructure, thereby creating jobs and increasing effective demand.

In the Keynesian universe, the purpose of production is not consumption, but to provide jobs that will generate effective demand. Thus, the basic assumptions underlying Mr. Obama's Keynesian — one might say ultra-Keynesian — approach to economic recovery are 1) increased demand for consumer goods follows increases in capital investment, 2) production for consumption is not necessary, 3) capital investment can only take place by first cutting consumption, then investing, and 4) production does not equal income.

In a Keynesian universe, investors can only form capital when 1) effective demand has been reduced by saving, 2) there is no need for new capital formation other than to create jobs needed to 3) provide wage income to purchase existing goods and services, thereby 4) replacing the funds previously diverted to investment.

Within the Keynesian framework, then, all that should be necessary to stimulate the economy is to 1) create money to replace what was previously diverted to savings, thereby 2) increasing effective demand, 3) clearing existing excess production, and 4) creating jobs to provide income to increase effective demand.

The flaws in the Keynesian program should be obvious. 1) If consumers are simply lent money to increase effective demand, they must at some future time decrease effective demand by the same amount in order to repay the loan, plus reduce future effective demand further by whatever interest rate, risk premium, and service fee is added to the original loan principal. Thus, allowing people to borrow money to finance consumption is worse than self-defeating. It is (not to put too fine a point on it) economic insanity. Because the consumer must pay back more than he or she borrowed, future effective demand is reduced at a greater rate than it was originally increased by the extension of consumer credit. The problem of excess production due to decreased effective demand is worse, and more people lose their jobs in consequence.

2) If a business borrows money for capital formation that results in job creation when there is insufficient effective demand in the economy to justify the investment (a given in Keynesian economics due to Keynes' fixed belief that consumption must be reduced in order to finance capital formation), the business will require a taxpayer subsidy in order to make a profit and stay in business.

a) If the subsidy is provided out of tax collections, effective demand is further reduced, and the business will require increased subsidies to make up for the reduction in effective demand.

b) If the State provides the subsidy by monetizing its deficit (i.e., printing money backed by debt to be repaid by future taxpayers), the resulting inflation will decrease effective demand as the price level increases, again making additional subsidies necessary (whether you call them subsidies, price supports, bailouts, or stimulus packages) in order to make a profit and stay in business.

Either method results in a vicious circle of inflation to overproduction, overproduction to unemployment, unemployment to increased government spending, and increased government spending back to inflation. This is the trap we are in now, with Mr. Obama's stimulus package virtually custom designed to add gasoline to the fire, making the problem infinitely worse.