The Solution To America’s Economic Decline

Gary Reber, ForEconomicJustic.org, March 1, 2013

As a nation, we have lost the essence of the “American Dream”––economic freedom and self-sufficiency realized through private property ownership rights and democratic government.

Our basic premises should be:

There is no genuine political liberty without economic liberty, and that which is destructive of economic liberty is necessarily destructive of political liberty. Liberty does not mean license to steal or hoard.

The “American Dream” of 1776 enunciated in the founding papers of the Republic, underwrote minimal Government and maximal individual political and economic liberty, and drew inspiration from the widely held view that life, liberty, and property were an inseparable trinity.

That dream has largely been converted into a nightmare in modern America through the concentrated control effects of giant Government and monopoly capitalism, which may be handmaidens in tyranny. This situation has come about because of philosophical thinking that is inadequate to meet the needs of the 21st century, thinking which has not kept pace with the fruits of science; and the situation is also due to a combination of conspiracy, greed, and archaic political philosophy.

In a modern, technological era it is the ownership of productive capital wealth, not the labor of people that is the primary creator of affluence.

Hence, it is access to ownership of productive capital wealth, not to jobs, wherein the national economic policy guidelines for the 21st century ought to lie. As ownership of productive capital wealth becomes widely diffused, political power ought also to be widely diffused.

Productive capital wealth is defined as the non-human means of producing products and services (land; structures; infrastructure; tools; human-intelligent and non-human-intelligent machines; super-automation; robotics; digital computerized processing and operations; certain intangibles that have the characteristics of property, such as patents and trade or firm names; and the like owned by people.

Tectonic shifts in the technologies of production are constant and result in new formations of productive capital wealth, whose role is to do ever more of the work, which produces income to the owners of the capital assets. People invented tools to reduce toil, enable otherwise impossible production, create new highly automated industries, and significantly change the way in which products and services are produced from labor intensive to capital intensive––the core function of technological invention.

Businesses employ both productive capital and people, but full employment is not an objective of businesses. Companies strive to keep labor input and other costs at a minimum in order to produce efficiently and profitably. Because of the ever-accelerating shift to productive capital to lower business operational costs, jobs are constantly being eroded. The other aspect impacting job security––the overwhelming source of income for the majority of Americans––is global competition and the sourcing of low-cost “slave” labor. As a result, American businesses seeking to compete in global markets and within the United States market, which is driven by low pricing demand, have out-sourced manufacturing to other countries whose labor costs are significantly lower and whose tax extraction rates and environmental regulations are respectively far less costly and stringent. Such out-sourcing is motivated by the market demand to produce their products and services more efficiently and more profitably.

This combination of free market forces means that private sector job creation in numbers that match the pool of people willing and able to work is constantly being eroded by physical productive capital’s ever-increasing role, compounded by far less costly out-sourcing of production.

As a result, there are fewer and fewer “customers with money” to purchase the products and services that can be more efficiently produced with productive capital. Economic growth will always be stalled when there are high levels of economic inequality because there will be an imbalance between production and consumption.

Why is this happening?

The reason is simple. A relative few people OWN the preponderance of the nation’s productive capital wealth and are positioned to OWN the FUTURE productive wealth, from which they earn dividend income and valuable capital gains asset growth. This is why there is widening economic inequality resulting in class conflict between the so-called 1 percent “successful” ownership class and the 99 percent, who are capital-less or under-capitalized, and whose ONLY source of income is a job or taxpayer supported government welfare derived from tax extraction and national debt. This Income inequality is exponentially crippling the United States from realizing its creative and social and just economic potential.

Thus, there is the imbalance between production and consumption. A few wealthy people are thereby able to rig the “system” to manipulate the lives of people who struggle with declining labor worker earnings and job opportunities, and then accumulate the bulk of the money through monopolized productive capital ownership. Our scientists, engineers, and executive managers who are not owners themselves, except for those in the highest employed positions, are encouraged to work to destroy employment by making the capital owner more productive. How much employment can be destroyed by substituting machines for people or lowering operational costs is a measure of their success––always focused on producing at the lowest cost. Only the people who already own productive capital are the beneficiaries of their work, as they systematically concentrate more and more capital ownership in their stationary 1 percent ranks. Yet the 1 percent are not the people who do the overwhelming consuming. The result is the consumer populous is not able to get the money to buy the products and services produced as a result of substituting “machines” for people or devaluing labor wages and salaries. And yet you can’t have mass production without mass human consumption. It is the exponential disassociation of production and consumption, which is the problem with the United States economy, and the reason that ordinary citizens must gain access to productive capital ownership to improve their economic well-being.

For the nation to overcome widening income inequality, the obvious, logical solution is for people to OWN THE “MACHINES” and non-human means of production that result from technology. Broadening productive capital ownership should be the priority course of action for the FUTURE. “FUTURE” is capitalized to emphasize that the private property rights of ALL citizens MUST be respected, honored, and protected. Thus, ANY solution(s) to transform the United States into an OWNERSHIP CULTURE must not undermine or seize the private property of the 1 to 10 percent who now own up to 90 percent of the corporate wealth. Instead, the solution(s) MUST expand the ownership pie over time and result in EVERY American child, woman and man earning income to support an affluent life. The result would be that those who now own America would still be owners but their percentage of the total ownership would decrease, as ownership gets broader and broader, and benefits the traditionally disenfranchised poor and working and middle class, who will become sought-after “customers with money.” Thus, productive capital income would be distributed more broadly and the demand for products and services would be distributed more broadly from the earnings of capital and result in the sustentation of consumer demand, which will promote economic growth. This also means that society can profitably employ unused and idle productive capacity and invest in more productive capacity to service the demands of a growth economy.

 

This balanced Just Third Way approach to building a FUTURE economy that supports affluence for EVERY American is presently not in the national discussion. It appears that the President of the United States, the elected Congressional representatives and Senators, academia, and the media are oblivious to this principled solution that has the ingredients to power economic growth at double-digit GNP rates.

 

This goal requires investment in FUTURE income-producing productive capital assets while simultaneously broadening private, individual ownership of the resulting expansion of existing large corporations and future corporations. Not only is employee ownership the norm to be sought wherever there are workers but beyond employee ownership the norm should be to create an OWNERSHIP CULTURE whereby EVERY American can benefit financially by owning a SUPER IRA-TYPE Capital Homestead Account (CHA) portfolio of income-producing, full-voting, full-dividend payout securities in America’s expanding corporations and those newly created to produce the future products and services needed and wanted by society.

This master plan agenda can be accomplished by applying the logic of corporate finance, which is self-financing and asset-backed credit for productive uses to grow the economy. People invest in capital ownership on the basis that the investment will pay for itself. The problem facing the nation is routed in the financial system, which must be reformed.

The solution is not to focus on JOB CREATION but to focus on OWNERSHIP CREATION whereby EVERY American can acquire private, individual ownership in FUTURE income-producing productive capital asset investments without the need to limit their financing requirements to past savings and/or require workers to reduce their consumption incomes to become owners. This is not about creating small businesses, which tend to be operated by hands-on entrepreneurs and proprietors, but about creating a viable portfolio of income-producing, full-dividend, full-voting stock ownership in large corporations, whereby there is no education and talent requirement to simply be a share owner. Large corporations are already publicly owned by millions of Americans. But what they have purchased is value-diluted stock through the “stock market exchanges,” purchased with their earnings as labor workers. Their stock holdings are relatively miniscule, as are their dividend payments compared to the top 10 percent of capital owners. And no one addresses whether Dow Jones gains have to do with the reality of the health of businesses. The stock market deals in secondhand securities, which essentially translates to a gaming casino. Wall Street has convinced us to see ourselves as “investors” instead of “gamblers” and “perceived values” instead of “bets.”

Conventionally, most people do not have the right to acquire productive capital with the self-financing earnings of capital; they are left to acquire, as best as they can, with their earnings as labor workers. This is fundamentally hard to do and limiting. Thus, the most important economic right Americans need and should demand is the effective right to acquire capital with the earnings of capital.

America has tried the Republican “cut spending, cut taxes, and cut ‘entitlements’” and the Democrat “protect ‘entitlements,’ provide tax-payer supported stimulus, lower middle and working class taxes, tax the rich and redistribute” brands of economic policy, as well as a mixture of both. Republican ideology aims to revive hard-nosed laissez-faire appeals to hard-core conservatives but ignores the relevancy of healing the economy and halting the steady disintegration of the middle class and working poor. Unfortunately, not enough conservative thinkers have acknowledged the damaging results of a laissez-faire ideology, which furthers the concentration of productive capital ownership. They are floundering in search of alternative thinking as they acknowledge the negative economic and social realities resulting from greed capitalism or “Hoggism.”

The Just Third Way is a balanced approach, which encompasses the realization that the troubling economic and social trends (global capitalism, free-trade doctrine, tectonic shifts in the technologies of production and the steady off-loading of American manufacturing and jobs) caused by continued concentrated ownership of productive capital wealth will threaten the stability of contemporary liberal democracies and dethrone democratic ideology, as it is now understood. Without a policy shift to broaden productive capital ownership simultaneously with economic growth, further development of technology and globalization will undermine the American middle class and make it impossible for more than a minority of citizens to achieve middle-class status.

Economic democracy has yet to be tried. We are absent a national discussion of where consumers earn the money to buy products and services and the nature of capital ownership, and instead argue about policies to redistribute income or not to redistribute income.

But how will we ever achieve affluence for EVERY American and eliminate poverty and reliance on taxpayer-supported government welfare, which is fueling national debt? This will require a return to higher income tax and corporate tax rates, which are lowered or entirely eliminated when corporations have demonstrated growth decisions that enable their workers and other citizens to finance their future growth and share in the companies’ fate as share owners. This would enable us to more effectively create investment stimulus incentives through reduced tax rates. While tax and investment stimulus incentives are excellent tools to strengthen economic growth, without the requirement that productive capital ownership is broadened simultaneously, the result will continue to further concentrate productive capital ownership among those who already own, and further create dependency with redistribution policies and programs to sustain purchasing power on the part of the 99 percent of the population who are dependent on their labor worker earnings or welfare to sustain their livelihood. By stimulating economic growth tied to broadened productive capital ownership the benefits are two-fold: one is that over time the 99 percenters will financially benefit from acquiring productive capital assets that are paid for out of the future earnings of the investments and gain greater access to job opportunities that a growth economy generates.

Starting with the business corporation, a legal entity created and sanctioned by state and federal government and judicial law, the government should provide tax incentives for full-dividend payouts to its stockholders, or alternatively legislate that from now on 100 percent of all profits be paid out fully as dividend payments to stockholders (thus, eliminating the corporate income tax), subject to individual taxation. This would effectively prohibit retained earnings financing of new productive capital formation (reinvesting the corporate earnings already earned). The government could also limit debt financing by legislating some ratio formula to annual revenue under which a corporation could debt finance new productive capital formation with borrowed monies. Both retained earnings and debt financing only enhance the ownership holding value of the existing corporate ownership class and do nothing to create new owners. Thus, the rich get richer systematically and capital ownership concentration is furthered, facilitated by financing further productive capital acquisition out of the earnings of existing productive capital.

In place of retained earnings and debt financing, the government should incentivize business corporations to issue and sell full-voting, full-dividend payout stock to more people to underwrite new productive capital formation, with the purpose of providing opportunity for new owners, both employees of corporations and non-employees, to participate in a growing economy. This approach can be applied to singular corporations or multiple corporate diversification facilitated with private capital credit insurance or a government reinsurance agency (ala the Federal Housing Administration concept). This would provide the solution to the need for a financial mechanism put in place that will guarantee loan risks; otherwise banks and lending institutions will not make the loans, and the system will continue to limit access to capital acquisition to those who already own capital—the rich. This is because “poor” people have no security or collateral, or sufficient income to pledge against the loan as security, and/or are disqualified on the grounds of either unproven unreliability or proven unreliability.

Criteria must be created to qualify the corporations subject to this policy and those corporations that qualify overseen so as to ensure that their executives exercise prudent fiduciary responsibility to generate loan payback. Once the guaranteed loans are paid back, the new capital formation will continue to produce income for existing and future owners, and subsequently provide “customers with money” to support the output of the economy.

This approach would use the existing taxing power of government in a way to restructure the economy along the guidelines of universal access to ownership of productive capital wealth with a thrust toward the creation of new wealth.

The ultimate result of the use of the taxing power of government to stimulate the widespread access to ownership of productive capital wealth should be a growing independence of an economically emancipated people both from reliance upon government and from the wage slavery brought into being by monopolistic and oligarchic ownership; and the role and function in our lives both of government and of monopoly and oligarchy ownership ought to diminish.

The national goal should be to foster an economic policy direction toward broadening private ownership participation for all people in the capital wealth base of our economy.

The American Dream since the time of the Founding Fathers has been to foster individually owned free enterprise. Our economic policies, and tax laws foster concentration of business ownership in the hands of a wealthy few by subsidizing and favoring narrowly owned conglomerates and monopolistic combines. This is not good. We need a new economic policy thrust, which will promote the birth of profitable new business enterprises and expand the ownership of large corporations, while stimulating the entrepreneurial creative spirit of business innovators.

This is an agenda for “a quiet revolution”––a national movement for economic justice, tax equity, and governmental responsibility. The thrust of this movement is to focus upon tax reformation and economic policy. To guide this movement toward realizing the goal of economic justice positive and constructive reforms in the tax laws, policies, and procedures of the U.S. Government will be necessary.

When the Federal income tax was authorized by the 16th amendment to the Constitution, it was designed to levy taxes in a progressive and fair way on all income, “from whatever source derived,” in order to pay for the legitimate functions of Government as authorized by the people through their elected representatives.

But, over the years, exception after exception has been made to this principle; tax loopholes have allowed the wealthy and the wealthy owners of the corporations to escape high taxes. This means that the tax burden has fallen increasingly on low- and moderate-income working people.

The average American worker works at least 2 out of 5 days just to pay taxes, while scores of wealthy people with incomes over $1 million pay no Federal income taxes at all.

This is not just.

There is hardly any progressivity in taxation. Those with low and moderate incomes pay a higher percentage in taxes than those with higher incomes.

Tax loopholes and Government subsidies are really a welfare program for the rich.

Recommendations For Tax Reformation: A Just Tax Concept For The U.S. Government

Implicit in the original income tax concept was the “ability-to-pay-theory,” that those who earn or receive more income should pay a progressively larger proportion of their incomes to support Government.

Another concept inherent in the original income tax law was that Government should limit in some manner the vast personal incomes derived by a few people or legal entities owning huge amounts of capital wealth and property.

Tax policies today encourage concentration of capital wealth and property, generating on one hand a huge governmental bureaucracy to regulate centralized economic activity, and on the other hand, an ever-expanding number of economically dependent people requiring another huge government bureaucracy to administer to their needs.

The economic, social, and legal injustices of our society are fostered by tax policies which enable the rich to become richer, while the majority of the working people, the elderly, small businessmen, family farmers, and poor pay the taxes.

As a nation, we must adopt an economic policy designed to broaden private individual ownership of all forms of property––particularly property ownership rights which yield viable incomes to people. The function of Federal tax policy then should be to encourage broadened ownership, and discourage private concentrations of capital wealth and excessive personal incomes from property holdings.

For genuine tax reform, positive, constructive, and just reforms in tax law, with review every 5 years or less, are needed.

Recommended Tax Reforms

  1. Personal earned incomes and property-derived incomes

The tax rate would be a single rate for all incomes of natural persons from all sources above a personal exemption level so that the budget could be balanced automatically and even allow the government to pay off the growing unsustainable long-term debt, but the poor would pay the first dollar over their exemption levels as would the hedge fund operator and others now earning billions of dollars from capital gains, dividends, rents and other property incomes which under some tax proposals would be exempted from any taxes. Provide an exemption of $100,000 for a family of four to meet their ordinary living needs.

Eliminate the payroll tax on workers and their employers, but pay out of general revenues for all promises for Social Security, Medicare, Medicare, government pensions, health, education, rent and subsistence vouchers for the poor until their new jobs and ownership accumulations provide new incomes to substitute for the taxpayer dollars to fill these needs.

  1. Inheritance and estate taxes

As a substitute for inheritance and gift taxes, a transfer tax would be imposed on the recipients whose holdings exceeded $1 million, thus encouraging the super-rich to spread out their monopoly-sized estates to all members of their family, friends, servants and workers who helped create their fortunes, teachers, health workers, police, other public servants, military veterans, artists, the poor and the disabled.

Each year tens of billions of dollars in capital wealth assets is passed along to heirs under current tax laws. The revenues generated from inheritance taxes should be pledged to support the Social Security program, thus achieving a reduction in Social Security taxes, which are becoming a tax burden.

  1. Corporations and business taxes for non-small business enterprises
  2. Investment credit tax incentives––The net result of new capital wealth formation is to create more productive land, industrial plant and equipment, machinery, tools, et cetera. In a highly technological economy the purpose of scientific advancement is not to create jobs (labor intensive production), but to substitute more efficient machines, buildings, tools, and productive land for labor; that is, human work effort. This is the basis of increasing productivity, and has been since the invention of the wheel to today’s age of cybernetics. Invention and innovation are supposed to save labor and free people for the enjoyment of the good life, the pursuant of happiness, and the improvement of their minds and bodies––to enable the fulfillment of the needs of the flesh (man’s material needs and well-being), so that the works of the soul may flow.

With an economic policy designed to foster widespread private equity ownership participation in the capital wealth assets of our economy, the use and purpose of the investment tax credit device as a special governmental subsidy to private corporations has a significant potential for encouraging broader ownership of income-producing productive property rights among all people.

If an investment tax credit is given to a business organization, it should be limited to finance real new capital wealth expansion for widespread private ownership participation by individuals and families.

The Federal Reserve should stop monetizing unproductive debt and begin creating an asset-backed currency that could enable every child, woman and man to establish a Capital Homestead Account or “CHA” (a super-IRA or asset tax-shelter for citizens) at their local bank to acquire a growing dividend-bearing stock portfolio to supplement their incomes from work and all other sources of income. The CHA would process an equal allocation of productive credit to every citizen exclusively for purchasing full-dividend payout shares in companies needing funds for growing the economy and private sector jobs for local, national and global markets. The shares would be purchased on credit wholly backed by projected “future savings” in the form of new productive capital assets as well as the future marketable goods and services produced by the newly added technology, renewable energy systems, plant, rentable space and infrastructure added to the economy. Risk of default on each stock acquisition loan would be covered by private sector capital credit risk insurance and reinsurance, but would not require citizens to reduce their funds for consumption to purchase shares.

 

  1. Nonpublic close corporations––All non-publicly registered and traded corporations, that is, those that are close corporations owned by a few people, and not classified un definitions set by the Small Business Administration, Department of Commerce, as a “small business,” or whose stock is not traded on the open markets and broadly owned, should be taxed as personal holding companies. The tax policy for close corporations, which by their nature concentrate wealth and limit free enterprise, should result in expanded ownership of capital wealth and discourage such organizations.

The income of such corporations should be treated as the personal incomes of their owners and taxed at personal income tax rates as herein recommended.

This tax policy will discourage private concentrations of capital wealth, and encourage viable small businesses and widespread private popular ownership shares in the small and large business corporations of America.

  1. Public corporations––Tax policy of the Federal Government should encourage broad private ownership of public corporations, Publicly registered business corporations should be taxed on a basis which encourages broad ownership and the fullest distribution of earnings to their owners.

The following tax policies for all publicly owned private corporations should be applied, based upon the philosophy that a corporation is a creature of the State, created by law, recognized as an “artificial person,” able to amass vast amounts of capital wealth with limited liability, and can have a life in perpetuity. Since a corporation is a legally created entity, and not a human being, its function, powers responsibilities, and ownership are a matter of significant social, political, and economic policy.

Public corporations should be taxed as follows:

If profits are retained, that is, reinvested and not paid to the stockholder-owners, the corporation will pay a 90 percent tax on retained earnings.

Dividends paid out to stockholders-owners would be deductible from corporate earnings thus making these earnings subject to personal income tax rates.

All subsidiary corporations and partially or wholly owned enterprises of a parent or holding corporation will be taxed as a separate enterprise entity, as under the above recommended policy.

  1. Business sole proprietorships and partnerships, and close corporations classified as small business

No change in existing tax procedure are necessary, except that the tax rate on such business incomes would be the same for individuals.

  1. Capital gains tax–non-public corporations and close corporations

For individuals, capital gains realized on the sale of a personal residence, owned and occupied by a natural person or persons and/or a family would be taxed at the personal income tax rate.

All other capital gains in property interests (real or personal, securities et cetera) unless exchanged within 1 year for property of equivalent value, would be taxed at the personal income tax rate.

  1. Capital property holdings tax: Limits on ownership

All individuals, whether their property is combined with others in joint tenancies, co-tenancies, or community property holdings of natural persons should be subject to a capital property holdings tax if the certified net worth or equity value of the property holding of the taxpayer exceeds $1 million.

  1. Tax loopholes and subsidies

Eliminate all.

Legitimate Functions Of Government And Governmental Responsibility

Tax policy must, by necessity, be linked to a definition of the legitimate functions of Government and governmental responsibility with respect to the uses of Federal tax revenues.

Therefore, the tax revenues flowing to the Federal Government as a result of these recommendations should be used for the following purposes:

  1. Promote the general welfare for all people.
  2. Encourage viable and broadly owned business enterprise, and a free competitive market.
  3. Foster broad private individual ownership of the capital wealth base of our economy.
  4. Insure a fair and meaningful stake among individuals in the future of our nation.
  5. Promote economic justice for all people.
  6. Enhance civilization, and encourage the arts, science, significant educations, and other creative human endeavors.
  7. Guarantee individual liberty, and economic security and independence for all people.
  8. Promote peace and world enrichment, while providing for the common defense.
  9. Encourage community enhancement and environmental quality.
  10. Enhance life, health, and personal happiness for all people.
  11. Foster domestic tranquility and fraternity.
  12. Encourage human tolerance, respect, and personal responsibility and dignity.
  13. Promote mutual cooperation and trust for mutual benefit for all people.

The ultimate result that we should seek is growing independence of an economically emancipated people both from reliance upon government and from the wage slavery brought into being by monopolistic and oligarchic ownership, and the role and function in our lives both of government and of monopoly and oligarchic ownership ought to diminish.

Recommendations For Future Study

While these tax reform recommendations will generate substantial revenue increases to the Federal Government, strengthen the nation, and result in reducing the burden upon all poor and working people, particularly those families with incomes under $30,000 per year, an in-depth study is necessary to determine the full impact of such a new tax and economic policy thrust, as herein advocated.

A Tax Reformation Commission should established by the U.S. Congress to conduct an in-depth study of these tax reform recommendations and those of others to determine the impact of these measures on the economy, the structure of private property ownership and free enterprise, the concentration of wealth, income distribution, and revenues generated to the Federal Government.

The U.S. Congress should establish a census of wealth valuation inventory. Every 5 years, the Commissioner of Internal Revenue, in conjunction with the Bureau of the Census, should conduct a valuation census of the property holding of all individuals, held in accordance with regulations published in the Federal Register. These records should be treated with the same confidentiality as is presently given to personal income tax records.

The wealth valuation computations for each individual would be used to establish one’s priority relative to other individuals for qualifying for Government programs aimed at strengthening the self-sufficiency of the individual through acquisition and ownership of new and/or transferred capital wealth assets.

Concluding Remarks

The fact is that political democracy is impossible without economic democracy. Those who control money control the laws that foster wage slavery, welfare slavery, debt slavery and charity slavery. These laws can and should be changed by the 99 percent and those among the 1 percent who are committed to a just and economically classless market economy, true equality of opportunity, and a level playing field in the future for 100 percent of Americans. By adopting economic policies and programs that acknowledge every citizen’s right to become a capital owner as well as a labor worker, the result will be an end to perpetual labor servitude and the liberation of people from progressive increments of subsistence toil and compulsive poverty as the 99 percent benefits from the rewards of productive capital-sourced income.

A National Right To Capital Ownership Bill that restores the American dream should be advocated by the progressive movement, which addresses the reality of Americans facing job opportunity deterioration and devaluation due to tectonic shifts in the technologies of production.

The Federal Reserve Bank should be used to provide interest-free capital credit (including only transaction and risk premiums) and monetize each capital formation transaction, determined by the same expertise that determines it today––management and banks––that each transaction is viably feasible so that there is virtually no risk in the Federal Reserve. The Federal Reserve Board is already empowered under Section 13 of the Federal Reserve Act to reform monetary policy to discourage non-productive uses of credit, to encourage accelerated rates of private sector growth, and to promote widespread individual access to productive credit as a fundamental right of citizenship. The Federal Reserve Board needs to re-activate its discount mechanism to encourage private sector growth linked to expanded capital ownership opportunities for all Americans.

The labor union movement should transform to a producers’ ownership union movement and embrace and fight for this new democratic capitalism. They should play the part that they have always aspired to––that is, a better and easier life through participation in the nation’s economic growth and progress. As a result, labor unions will be able to broaden their functions, revitalize their constituency, and reverse their decline. Unfortunately, at the present time the movement is built on one-factor economics––the labor worker. The insufficiency of labor worker earnings to purchase increasingly capital-produced products and services gave rise to labor laws and labor unions designed to coerce higher and higher prices for the same or reduced labor input. With government assistance, unions have gradually converted productive enterprises in the private and public sectors into welfare institutions.

The unions should reassess their role of bargaining for more and more income for the same work or less and less work, and embrace a cooperative approach to survival, whereby they redefine “more” income for their workers in terms of the combined wages of labor and capital on the part of the workforce. They should continue to represent the workers as labor workers in all the aspects that are represented today––wages, hours, and working conditions––and, in addition, represent workers as full voting stockowners as capital ownership is built into the workforce. What is needed is leadership to define “more” as two ways to earn income.

If we continue with the past’s unworkable trickle-down economic policies, governments will have to continue to use the coercive power of taxation to redistribute income that is made by people who earn it and give it to those who need it. This results in ever deepening massive debt on local, state, and national government levels, which leads to the citizenry becoming parasites instead of enabling people to become productive in the way that products and services are actually produced.

There is a solution to America’s economic decline, which will result in double-digit economic growth and simultaneously broaden private, individual ownership so that EVERY American’s income significantly grows, providing the means to support themselves and their families with an affluent lifestyle. The Just Third Way Master Plan for America’s future is published at http://foreconomicjustice.org/?p=5797.

President Trump’s Laughable Plan To Cut His Own Taxes

CreditThomas Colligan

On April 26, 2017 the editorial board of The New York Times writes:

As a rule, Republican presidents like offering tax cuts, and President Trump is no different. But the skimpy one-page tax proposal his administration released on Wednesday is, by any historical standard, a laughable stunt by a gang of plutocrats looking to enrich themselves at the expense of the country’s future.

Two of Mr. Trump’s top lieutenants — Steven Mnuchin and Gary Cohn, both multimillionaires and former Goldman Sachs bankers — trotted out a plan that would slash taxes for businesses and wealthy families, including Mr. Trump’s, in the vague hope of propelling economic growth. So as to not seem completely venal, they served up a few goodies for the average wage-earning family, among them fewer and lower tax brackets and a higher standard deduction.

The proposal was so empty of illustrative detail that few people could even begin to calculate its impact on their pocketbooks. Further, depending on where they live, some middle-class families might not benefit much or at all, because the plan does away with important deductions like those for state and local taxes.

As to the rationale offered up by Mr. Mnuchin and Mr. Cohn, even many conservative economists believe that the argument that tax cuts will pay for themselves, by increasing investment and creating jobs, is the same supply-side fantasy that has repeatedly been proved wrong. This durable nonsense would instead add mightily to a federal debt that Americans will be paying off for generations to come.

Continue reading the main story

Here again, the long-term consequences were hard to figure, because Mr. Cohn and Mr. Mnuchin offered no estimates of the plan’s costs; guesswork by some analysts put the figure in the same ballpark as the tax plan Mr. Trump offered during the campaign, or about $7 trillion in additional debt over the first 10 years and nearly $21 trillion by 2036.

Whatever the number, the outcome cannot be good. There are legitimate reasons to run deficits, including lifting the economy in tough times, strengthening the military against proven threats and building or rebuilding public infrastructure. Borrowing trillions of dollars to provide a huge windfall for people at the top is not one of those reasons.

Mr. Trump’s plan aims to cut corporate tax rates from 35 percent to 15 percent. To hear the administration tell it, the present rate is choking investment and killing jobs. In fact, big businesses are earning record profits, and many of them pay no federal taxes. The corporate income tax brought in just 10.6 percent of the federal government’s revenue in 2015, down from between a quarter and a third of revenue in the 1950s, according to the Pew Research Center. A better approach, as part of broad-based reform, would be to eliminate loopholes that have encouraged businesses to avoid their fair share of taxes.

Mr. Trump would also apply that 15 percent tax rate to pass-through income that business owners get from limited liability companies, a change that would directly benefit real estate developers like him. This would also create a huge incentive for wealthy Americans to turn their earnings into pass-through income in order to avoid paying higher personal income tax rates. This is no idle threat. Many Kansas residents, including the men’s basketball coach of the University of Kansas, have sheltered income in L.L.C.s since that state exempted income generated through such legal structures from its income tax in 2012.

In addition to lowering the top individual income tax rate to 35 percent, Mr. Trump would do away with the alternative minimum tax, which accounted for a vast majority of the taxes he paid in 2005, according to his leaked tax return from that year, and is one way of making sure that most well-off Americans pay a significant tax on ordinary income. He would also get rid of the estate tax, benefiting mainly wealthy families like his.

It is hard to know whether Mr. Trump’s tax plan or some version of it could pass. Republican leaders have said that they want to pass revenue-neutral changes to the tax code that would not explode the deficit. Still, many of these same lawmakers went along with the budget-busting tax cuts offered by President George W. Bush.

Regardless of the plan’s fate, Mr. Trump has already sent a strong message about where his sympathies really lie. They lie not with the working people who elected him, but with the plutocracy that envelops him.

Trickle-down economics DOES NOT WORK!!!

This should not be complicated and, in fact, there is a simple reason why inequality is widening. It is the perpetual CONCENTRATED OWNERSHIP of productive capital assets (land, structures, machines, super-automation, robotics, digital computerization, etc.) due to a system that bases FUTURE growth on financing with “past” savings, rather than finance economic growth paid for with “future” savings out of the earnings of the investments. Unfortunately, conventional economists, academia, political leaders, and the national media assume that the only way to finance new wealth-creating, income-producing capital is by cutting consumption and accumulating money savings. While incorrect, such thinking leads to the conclusion that only the rich can OWN or that the State must own or control the rich so they do what’s right.

The forces of greed capitalism want low-pay “slave labor” incomes for worker input in the production of products and services in order to keep labor input and other costs at a minimum and maximize profits to the ownership class. The reality is that the ownership class continues to amass capital ownership and derive the income and capital gains earned from their private ownership rights. The ownership class is benefiting from the reality that in most economic tasks, productive capital (not labor) is doing ever more of the work, is creating ever more of the wealth, and is contributing to ever more of the economic growth due to increasing capital productiveness rather than increasing human productivity. As a result, private sector job creation in numbers that match the pool of people willing and able to work is constantly being eroded by physical productive capital’s ever increasing role. The problem is that the ownership class has not taken the initiative to distribute more broadly private capital acquisition by workers and others simultaneously with the growth of businesses. The problem is the system is plagued with injustice and inefficient distribution of wealth. If we are to set the nation on a path to prosperity and growth then it is essential that we recognize that growth is primarily a function of increasing capital productiveness rather than increasing labor productivity. The question before us is who will OWN this FUTURE capital productivity and the resulting wealth-creating, income-producing capital assets?

Unfortunately with the means of production controlled narrowly due to concentrated capital ownership, which is benefiting from tectonic shifts in the technologies of production that eliminate jobs and devalue the worth of labor, there are fewer and fewer “customers with money” to purchase the products and services that the economy is capable of producing. Thus, the consumer populous is not able to get the money to buy the products and services produced as a result of substituting machines for people and fewer well-paying jobs. And yet you can’t have mass production without mass human consumption. It is the exponential disassociation of production and consumption that is the problem in the United States economy, and the reason that ordinary citizens must gain access to productive capital ownership to improve their economic well-being.

While millions of Americans own diluted stock value through the “stock market exchanges,” purchased with their earnings as labor workers, their risked stock holdings are relatively miniscule, as are their dividend payments compared to the top 10 percent of capital owners. Even when economies are perceived as experiencing steady, low-inflationary, job-providing growth, the reality is that most people do not earn enough to sustain their reasonable needs and, instead, are heavily in debt and/or dependent upon some form of earnings redistribution to meet consumption wants and needs. While technological innovation and invention promises the increasing abundance of substantially increased output with much less human effort, there is widespread poverty, even in boom times in which too many people remain poor. “Trickle-down” does not solve poverty because for too many people, the “trickle” is usually only menial, low-pay jobs or welfare, open and concealed. The reality is that capital is the primary source of affluence, whereas labor rarely produces more than subsistence. The solution is to enable EVERY American to acquire capital and pay for their acquisition out of the future earnings of the capital––thus self-financed capital ownership acquisition in the non-human factor of production.

This paradigm shift impacting society does not have to be a painful transition. It should be welcomed because the promise is to eliminate toil––the labor work that one would not do if they were not paid to do it.

The United States lost 6.3 million manufacturing jobs between January 1990 and the industry’s low point in January 2010, a 36 percent decline, according to the Bureau of Labor Statistics. Since that low point, the industry has not added near enough jobs to offset the millions of losses. While America needs and will continue to need workers who can make and fix machines and the software that makes them run, still private sector job creation in numbers that match the pool of people willing and able to work will continue to be eroded by physical productive capital’s ever increasing role. As for jobs, they will be limited to the highly-skilled and technical variety or the non- and low-skilled variety that companies seek to replace with machines. Such anemic job creation is far too limited to solve the reality that by the year 2020, more than 50 percent of the jobs available will be minimum wage jobs!

There’s nothing new about machines replacing people, but the rate of replacement is exponential and the result is that productivity gains lead to more wealth for the OWNERS of the non-human factor of production. However, for others who have always been dependent on jobs as their source of income, there has been a steady decline to poverty level labor incomes.

But what about China, the place where all the manufacturing jobs are supposedly going? True, China has added manufacturing jobs over the past 15 years. But now it is beginning its shift to super-robotic automation. Foxconn, which manufactures Apple’s iPhone and many other consumer electronics and is China’s largest private employer, has plans to install over a million manufacturing robots within three years. Thus, in reality off-shoring of manufacturing will eventually be replaced by human-intelligent super-robotic automation. And this is not unique to China, it is occurring in the United States and other countries as well, as ever-advancing technology allows businesses to reduce operating costs.

The pursuit for lower and lower cost production that relies on slave wage labor will eventually run out of places to chase. Eventually, “rich” countries, whose productive capital capability is narrowly owned by its citizens, will be forced to “re-shore” manufacturing capacity, and result in every-cheaper robotic manufacturing.

“The era we’re in is one in which the scope of tasks that can be automated is increasing rapidly, and in areas where we used to think those were our best skills, things that require thinking,” says David Autor, a labor economist at Massachusetts Institute of Technology.

Businesses are spending more on technology now because they spent so little during the recession. Yet total capital expenditures are still barely running ahead of replacement costs. “Most of the investment we’re seeing is simply replacing worn-out stuff,” says economist Paul Ashworth of Capital Economics.

Yet, while the problem is one that no one can no longer ignore, the solution also is one starring them in the face but they just can’t see the simplicity of it.

The fundamental challenge to be solved is how do we reinvent and redesign our economic institutions to keep pace with job destroying and labor devaluing technological innovation and invention so not all of the benefits of owning FUTURE productive capacity accrues to today’s wealthy 1 percent ownership class, and ownership is broadened so that EVERY American earns income through fully-paid-out stock ownership dividends so they can afford to purchase the products and services produced by the economy.

None of this is new from a macro-economic viewpoint as productive capital is increasingly the source of the world’s economic growth. The role of physical productive capital is to do ever more of the work of producing more products and services, which produces income to its owners. Full employment is not an objective of businesses. Companies strive to keep labor input and other costs at a minimum. Private sector job creation in numbers that match the pool of people willing and able to work is constantly being eroded by physical productive capital’s ever increasing role. Over the past century there has been an ever-accelerating shift to productive capital––which reflects tectonic shifts in the technologies of production. The mixture of labor worker input and capital worker input has been rapidly changing at an exponential rate of increase for over 237 years in step with the Industrial Revolution (starting in 1776) and had even been changing long before that with man’s discovery of the first tools, but at a much slower rate. Up until the close of the nineteenth century, the United States remained a working democracy, with the production of products and services dependent on labor worker input. When the American Industrial Revolution began and subsequent technological advance amplified the productive power of non-human capital, plutocratic finance channeled its ownership into fewer and fewer hands, as we continue to witness today with government by the wealthy evidenced at all levels.

People invented tools to reduce toil, enable otherwise impossible production, create new highly automated industries, and significantly change the way in which products and services are produced from labor intensive to capital intensive––the core function of technological invention. Binary economist Louis Kelso attributed most changes in the productive capacity of the world since the beginning of the Industrial Revolution to technological improvements in our capital assets, and a relatively diminishing proportion to human labor. Capital, in Kelso’s terms, does not “enhance” labor productivity (labor’s ability to produce economic goods). In fact, the opposite is true. It makes many forms of labor unnecessary. Because of this undeniable fact, Kelso asserted that, “free-market forces no longer establish the ‘value’ of labor. Instead, the price of labor is artificially elevated by government through minimum wage legislation, overtime laws, and collective bargaining legislation or by government employment and government subsidization of private employment solely to increase consumer income.”

Furthermore, according to Kelso, productive capital is increasingly the source of the world’s economic growth and, therefore, should become the source of added property ownership incomes for all. Kelso postulated that if both labor and capital are independent factors of production, and if capital’s proportionate contributions are increasing relative to that of labor, then equality of opportunity and economic justice demands that the right to property (and access to the means of acquiring and possessing property) must in justice be extended to all. Yet, sadly, the American people and its leaders still pretend to believe that labor is becoming more productive.

Kelso also was quoted as saying, “Conventional wisdom says there is only one way to earn a living, and that’s to work. Conventional wisdom effectively treats capital as though it were a kind of holy water that, sprinkled on or about labor, makes it more productive. Thus, if you have a thousand people working in a factory and you increase the design and power of the machinery so that one hundred men can now do what a thousand did before, conventional wisdom says, ‘Voila! The productivity of the labor has gone up 900 percent!’ I say ‘hogwash.’ All you’ve done is wipe out 90 percent of the jobs, and even the remaining ten percent are probably sitting around pushing buttons. What the economy needs is a way of legitimately getting capital ownership into the hands of the people who now don’t have it.”

A National Right To Capital Ownership Bill that restores the American dream should be advocated by the progressive movement, which addresses the reality of Americans facing job opportunity deterioration and devaluation due to tectonic shifts in the technologies of production.

There is a solution, which will result in double-digit economic growth and simultaneously broaden private, individual ownership while stimulating job growth during an era where a FUTURE economy is built that supports general affluence for EVERY American, so that EVERY American’s income significantly grows, providing the means to support themselves and their families with an affluent lifestyle. The Just Third Way Master Plan for America’s future is published at http://foreconomicjustice.org/?p=5797 and www.cesj.org.

Policies need to insert American citizens into the low or no-interest investment money loop to enable non- and undercapitalized Americans, including the working class and poor, to build wealth and become “customers with money.” The proposed Capital Homestead Act (www. http://cesj.org/homestead/index.htm) would produce this result.

The solution is obvious but our leaders, academia, conventional economists and the media are oblivious to the necessity to broaden ownership in the new capital formation of the future simultaneously with the growth of the economy, which then becomes self-propelled as increasingly more Americans accumulate ownership shares and earn a new source of dividend income derived from their capital ownership in the “machines” that are replacing them or devaluing their labor value.

An essential part of the solution will require the reform of the Federal Reserve Bank to create new owners of future productive capital investment in businesses simultaneously with the growth of the economy. The solution to broadening private, individual ownership of America’s future capital wealth requires that the Federal Reserve stop monetizing unproductive debt, including bailouts of banks “too big to fail” and Wall Street derivatives speculators, and begin creating an asset-backed currency that could enable every man, woman and child to establish a Capital Homestead Account or “CHA” (a super-IRA or asset tax-shelter for citizens) at their local bank to acquire a growing dividend-bearing stock portfolio to supplement their incomes from work and all other sources of income. The CHA would process an equal allocation of productive credit to every citizen exclusively for purchasing full-dividend payout shares in companies needing funds for growing the economy and private sector jobs for local, national and global markets. The shares would be purchased on credit wholly backed by projected “future savings” in the form of new productive capital assets as well as the future marketable goods and services produced by the newly added technology, renewable energy systems, plant, rentable space and infrastructure added to the economy. Risk of default on each stock acquisition loan would be covered by private sector capital credit risk insurance and reinsurance, but would not require citizens to reduce their funds for consumption to purchase shares.

The end result is that citizens would become empowered as owners to meet their own consumption needs and government would become more dependent on economically independent citizens, thus reversing current global trends where all citizens will eventually become dependent for their economic well-being on our only legitimate monopoly –– the State –– and whatever elite controls the coercive powers of government.

Support Monetary Justice at http://capitalhomestead.org/page/monetary-justice.

Support the Capital Homestead Act (aka Economic Democracy Act) at http://www.cesj.org/learn/capital-homesteading/, http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-a-plan-for-getting-ownership-income-and-power-to-every-citizen/, http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-summary/ and http://www.cesj.org/learn/capital-homesteading/ch-vehicles/.

Arthur Laffer’s Theory On Tax Cuts Comes To Life Once More

Arthur Laffer in 1981. His theory linking tax cutting and economic growth has been revived in President Trump’s plan. CreditAssociated Press

On April 25, 2017, Peter Baker writes in The New York Times:

A white cloth napkin, now displayed in the National Museum of American History, helped change the course of modern economics. On it, the economist Arthur Laffer in 1974 sketched a curve meant to illustrate his theory that cutting taxes would spur enough economic growth to generate new tax revenue.

More than 40 years after those scribblings, President Trump is reviving the so-called Laffer curve as he announces the broad outlines of a tax overhaul on Wednesday. What the first President George Bush once called “voodoo economics” is back, as Mr. Trump’s advisers argue that deep cuts in corporate taxes will ultimately pay for themselves with an explosion of new business and job creation.

The exact contours of the plan remained murky and Mr. Trump will not produce a fully realized proposal on Wednesday. But what the president has called a tax reform plan is looking more like a tax cut plan, showering taxpayers with rate reductions without offsetting the full cost by closing loopholes or raising taxes elsewhere. In the short run, such a plan would add many billions of dollars to the national deficit. Mr. Trump contends that it will be worth it in the long run.

“The tax plan will pay for itself with economic growth,” Steven Mnuchin, the Treasury secretary and main architect of the plan, told reporters this week.

Continue reading the main story

The scope of the president’s plan, as it has leaked out in recent days, has excited the markets even as it has worried fiscal hawks. If this feels like a familiar debate, it is because it has played out repeatedly in the past four decades as the dominant Republican orthodoxy shifted from deficit reduction to tax cuts.

Presidents Ronald Reagan and George W. Bush both cut taxes deeply on the promise of economic payoffs, putting aside concerns about deficits, which grew during their tenures. Mr. Trump at points during the campaign talked tough about deficits, promising not only to eliminate them but also to wipe out in just eight years the entire $19 trillion in national debt that has accumulated over the history of the United States — a pledge so wildly unrealistic that even he has since dropped it.

Indeed, since taking office, Mr. Trump has made no sustained effort to rein in deficit spending. In his first partial spending plan, called a skinny budget, he proposed $54 billion in cuts to domestic and foreign spending programs, some of them quite deep, to pay for $54 billion in additional military spending. That would leave the bottom line unchanged. In the current fiscal year, which started under former President Barack Obama, the government is spending $559 billion more than it is taking in through taxes, according to the Congressional Budget Office.

Mr. Trump’s plan reportedly will cut corporate tax rates to 15 percent from 35 percent, and cut taxes for small businesses and other firms that pay through personal income taxes as well. The administration has also promised tax breaks for middle-income Americans. And the plan may be paired with an expansive spending proposal to build new roads, bridges and other infrastructure.

Mr. Mnuchin argues that an ambitious tax cut would unleash businesses that now feel constrained by one of the highest corporate tax rates in the world. Corporations would be freed to build plants and create jobs in the United States instead of in foreign countries, and would bring home money that currently is sheltered overseas.

While a corporate tax rate cut of the dimension Mr. Trump envisions would reduce tax revenues by more than $2 trillion over the next 10 years, Mr. Mnuchin noted that an increase in economic growth of a little more than one percentage point would generate close to the same amount. The goal, he said, was to produce a sustained national growth rate of 3 percent, instead of the 1.8 percent now projected over the next decade. That would not include the cost of personal income tax cuts.

The question comes down to how the effect of a tax cut is measured. Under what is called static scoring, changes are judged without assuming any difference in growth. Under what is called dynamic scoring, assumptions are made about how much growth will change. “Under dynamic scoring, this will pay for itself,” Mr. Mnuchin said at a public forum last weekend. “Under static scoring, there will be short-term issues.”

Critics scoffed at the math. “There is not a shred of evidence to support the secretary’s pay-for-itself claim,” said Jared Bernstein, a top White House economics adviser under Mr. Obama. “Sure, significantly faster growth would spin off more revenues. But there’s simply no empirical linkage between tax cuts and growth that’s both a lot faster and sustained.”

Douglas Holtz-Eakin, a former Congressional Budget Office director who advised Senator John McCain’s Republican presidential campaign in 2008, was equally skeptical. “I can imagine cutting the rate to 15 percent,” he said. “I can imagine growing a percentage point faster. I can imagine raising $2 trillion in revenue. I can’t imagine them being one and the same policy.”

N. Gregory Mankiw, a Harvard University economist who was chairman of the President’s Council of Economic Advisers under the younger Mr. Bush, said tax cut supporters exaggerate the possible growth benefits while opponents overemphasize the budgetary cost. “A reasonable rule of thumb, in my judgment, is that about one-third of the cost of tax cuts is recouped via faster economic growth,” he said.

One-third, of course, is not the same as fully paid for, which is one reason some Republicans on Capitol Hill are concerned. “I certainly want to see corporate taxes decreased,” Representative Leonard Lance, Republican of New Jersey, said on CNN. “I’m not sure we can go down to 15 percent.”

The Committee for a Responsible Federal Budget, an advocacy group focused on reducing deficits, said that Mr. Trump’s tax plan was more likely to increase growth by 0.2 percentage points than by the higher estimates Mr. Mnuchin forecast. “These tax cuts, of course, would not pay for themselves,” the group said in a statement. “As we’ve explained before, there is little evidence to suggest any major tax cut could pay for itself with economic growth alone.”

But one fan of Mr. Trump’s approach is Mr. Laffer, now 76 and still every bit the believer in the virtues of lower taxes as he was the night he went to a restaurant in 1974 with three fellow conservatives named Dick Cheney, Donald H. Rumsfeld and Jude Wanniski and outlined his thinking on that famous napkin.

He said that he would urge Mr. Trump to close loopholes and eliminate tax shelters as he slashed rates, but that even without doing so, a corporate tax rate cut would generate cascades of tax revenue. The businesses themselves would no longer look for ways to avoid paying, and so report more of their income.

“We would bring people back and we would create jobs without tariffs and without protectionism,” Mr. Laffer said by telephone. “I’m a big believer in using honey rather than vinegar, and incentives are much better. I think it would be a flood of businesses coming back in short order, and it would stop inversions” — when companies move overseas for tax reasons.

He also said greater economic activity would increase revenues from other taxes, including those on personal income and sales. Moreover, he said, with more jobs would come lower expenses for welfare.

“It’s a slam dunk,” Mr. Laffer said. “It’s a no-brainer.”

Politically, at least. He noted that both Mr. Reagan and the second Mr. Bush won re-election.

Correction: April 25, 2017 Because of an editing error, an earlier version of this article misattributed the passage beginning with the quotation, “We would bring people back and we would create jobs without tariffs and without protectionism,” and concluding with the quotation, “It’s a no-brainer.” The remarks were made by Arthur Laffer, not Jude Wanniski.

https://theintellectualist.co/study-tax-cuts-linked-increased-income-inequality-not-economic-growth/

This is about cutting taxes and thereby increasing savings for investment and thus “job creation.” It doesn’t work (as was pointed out in a blog on “Is Greed Good?” on the Center for Economic and Social Justice blog site at www.cesj.org). Why?

There are a number of serious problems associated with using past savings to finance new capital formation. We’ll look at three of the worst (if we tried to cover them all, we’d have to write a ten volume encyclopedia just for the short version).

One. Accumulating money savings before investing reduces consumer demand, thereby restricting consumption. This has a triple whammy.

First, the people who most need to become capital owners are the very ones who can’t afford to cut consumption. Since the purpose of capital in production is to replace human labor with something more efficient or less costly, driving down the market value of labor, non-owning workers need to replace the income from labor with income from capital . . . but don’t have the means to purchase capital.

Second, cutting consumption in order to save to invest in new capital means that there is less reason to invest in new capital. This is because the demand for new capital derives from consumer demand. If consumer demand falls because people are saving instead of consuming, so does the demand for new capital.

Third, it throws a monkey wrench into Say’s Law. Say’s Law is based on the principle that the purpose of production is consumption. If production is diverted to reinvestment, the system goes out of balance.

Two. As technology advances and grows correspondingly more expensive, using past savings to finance new capital formation assumes the existence of a class of capitalists, necessarily small, who have the capacity to cut consumption in the required amounts. This, too, has a triple whammy.

First, since capital ownership must be restricted to as few people as possible in order to have people who can save the required amounts, most people are restricted to wages and welfare for their consumption income.

Second, depending on wages alone for income always results in “creating jobs” just to provide people with consumption income. This increases costs and raises prices to the consumer . . . which cuts demand and decreases the demand for new capital and the need for new jobs. If consumer demand falls far enough, layoffs and RIFs (reduction in the [work] force) reduce the number of jobs.

Third, to make up for the loss of income, government begins printing money, inflating the currency, transferring purchasing power from producers to non-producers, and inflating prices even more, adding to the problem.

Three. The idea grows and spreads that “greed is good.” Why? Because in the past savings paradigm you need a very small number of people to be as rich as possible to invest as much as possible. Violating Adam Smith’s first principle of economics, the idea becomes to create as many jobs as possible regardless whether the production is needed to satisfy consumer demand. [make-work]

Mere accumulation — “greed” — becomes a virtue. This is because there is presumably no other way to ensure that there is sufficient financial capital in the system to finance new capital formation and create jobs . . . even (or especially) if the jobs do not result in any marketable good or service, a pillar of Keynesian economics with its obsession with “full employment.”

But —
What if there is another way to finance new capital? What if there is a way to make every child, woman, and man into a capital owner without the necessity of having to accumulate savings before purchasing the capital?

Support Monetary Justice at http://capitalhomestead.org/page/monetary-justice.

Support the Capital Homestead Act (aka Economic Democracy Act) at http://www.cesj.org/learn/capital-homesteading/, http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-a-plan-for-getting-ownership-income-and-power-to-every-citizen/, http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-summary/ and http://www.cesj.org/learn/capital-homesteading/ch-vehicles/.

What To Do When A Restaurant Puts A Minimum-Wage Service Charge On Your Bill

Back on February 17, 2017, Paul Constant writes on Civic Ventures:

The Latest Anti-$15 Trick Is to Complain About the Cost of Doing Business. Here’s Why It’s Bogus.

The joke in media circles is that if you can find three instances of anything, no matter how ludicrous—people wearing their pants backward, anti-deodorant activists, a tiny online community that doesn’t believe tornadoes exist—you can write a trend piece about it in the lifestyle section of your local paper.

Well, have I got a trend piece for you: three Washington state restaurants recently started adding surcharges, fees, and charges to customer bills, ostensibly in response to increased minimum wages statewide and within the city of Seattle. More specifically, a handful of restaurant owners and regional managers made that decision — it’s very likely the wait staff and dishwashers weren’t consulted on this policy before it was implemented.

Here are the restaurants in question:

Case 1: Michael Tomasky writes at the Daily Beast about a weird charge that appeared on a room service bill at Seattle’s W Hotel:

On the morning of Jan. 31, the man ordered room service. Yogurt and granola, bread, juice, and coffee. The staff person brought the food and the bill, which came to $23 even. The man looked down at the bill and noticed that there was a $2.21 food tax charge; nothing unusual there. But then there was also something called the “MW Surcharge,” totaling $1.50. MW Surcharge, the man thought; what the heck is that?

His question was answered immediately as he looked at the bottom of the bill, where he saw the words: “A 6.5 percent surcharge has been added to help offset the cost of the Seattle Minimum Wage. This is not for services provided and is not paid directly to service staff.”

Case 2: TV station KREM in Spokane:

A restaurant on the north side of town is charging a minimum wage fee after a law went into effect that raised the Washington minimum wage to $11.

Waddell’s Pub and Grille North is charging a service charge of 3 percent on each bill, they said, instead of being forced to raise their prices.

The owners have named it the “minimum wage fee.”

Case 3: Owen Pickford noted this week on Twitter:

So. These additional charges are bullshit.

The thing is, restaurants incur expenses all the time. It’s the price of running a business in a civilization: we demand that eating places follow worker safety and food safety guidelines, for instance, so nobody gets hurt. We demand that they follow labor standards because we don’t want children to work when they should be in school.

And we insist that businesses follow certain standards that we agree on as a community. These standards can and do change over time. Seattle voted to eliminate smoking in restaurants, for instance, because it was a public health concern. Believe it or not, some bar owners argued against the smoking ban because they thought it would hurt their business, but we had to proceed with the ban despite the cries of a few regressive voices.

So picture a hypothetical situation for a moment: Based on a regulation from the Americans with Disabilities Act of 1990, a restaurant with a steep staircase leading to its front door is required to add a ramp to its entrance. Now imagine that business added an “ADA surcharge” to the bottom of its checks, along with a passive-aggressive note explaining that the fee is to pay for the installation of the ramp.

Customers would understandably lose their minds. There would be a very real, very loud—and very deserved—furor over the owner’s business decision. Instead of the above example, you can imagine any number of moronic surcharges added to a bill: the Water Sprinkler Installation Surcharge, the Compost Handling Fee, the Indoor Plumbing Charge. And that’s what is happening here.

Look: businesses raise their fees all the time. It’s why hamburgers don’t cost 15 cents anymore. They never advertise these increases—you don’t see signs on the front of a pancake house advertising “NOW WITH 1.7% HIGHER PRICES!”—but they happen on a regular basis.

Rather than just raising prices naturally, these restaurant managers are making an overtly political statement when they add minimum wage surcharges to their menus. They are protesting the fact that they have to pay their workers a living wage. As Working Washington pointed out on Twitter, the Garage’s owner donated $500 toward an attempt to repeal the $15 minimum wage, which would pay the surcharge on over $25,000 worth of food at the Garage.

(As an aside: it’s interesting that restaurants are the only business that feels as though they can get away with this kind of fee structure — you don’t see minimum-wage retailers adding a baseline to the bottom of your checks, for instance. I’m not sure exactly why this is; perhaps tipping culture makes owners feel more emboldened to get away with this kind of action?)

Whether they intend to or not when they put those itemized fees on menus, managers and owners are publicly stating that they don’t believe their workers are worth the minimum wage that they pay them. I have a hard time imagining what other purpose the public announcement of these charges could be, other than to turn the public against the minimum wage.

So say you’re eating out and you notice a minimum wage charge on your bill. What can you do about it?

If you should find one of these alerts on your bill when you’re out for lunch, the first thing you should do is make sure the restaurant is charging tax on the surcharge. If they’re not collecting tax on their extra charges, they areviolating Washington State’s tax code.

The next thing you should do is make the surcharge publicly known on social media. This can sometimes pay off very quickly: the W Hotel backed down the same day that Civic Ventures founder Nick Hanauer called them out on Twitter, for instance. If you’re looking for a signal boost, you can alert us here at Civic Ventures, let our friends at Working Washington know, or contact your favorite local journalist. Make yourself heard.

This is more than just a customer complaint on Yelp. When we support a high minimum wage in Seattle, what we’re really saying is that we want an economy of high-quality employers. High-quality employers create high-quality goods and services. And employees who earn more spend more in their local economy, which is good for everyone.

I get it—change is difficult. It’s not easy or fun to ask business owners to modify their model. But people who decide to run their own business are smart, capable individuals, and they survive because they learn how to adapt. Once a business does the right thing and removes the fees from their menus, you should reward them with your business again. Everybody makes mistakes; the important thing is that we’re building something great together here in Washington, and we don’t want to leave anyone behind.

https://civicskunk.works/what-to-do-when-a-restaurant-puts-a-minimum-wage-service-charge-on-your-bill-2183699e4186

I wonder to what extent the proponents of raising the minimum wage did not expect prices to consumers to rise. Price levels virtually always rise to compensate for any increase in costs.

Suppliers and providers of retail products and services also tend to raise prices in anticipation of an increase in effective demand (i.e., wages), so that workers pay more in real terms even before they get their increases. Customers resist paying more for the same products or services workers produce, decreasing demand, and thus decreasing the need for workers — which also hits any business with high fixed costs . . . such as workers with high wages. The solution is either to get rid of workers (sometimes you can’t), go bankrupt, or go out of business before you lose what you have.

. . . or you could shift compensation from fixed wages to variable profits, which not only doesn’t increase costs, it gets the workers more than with fixed wage increases in most cases, so they benefit three ways: they have more money to spend when prices aren’t going up, the company stays in business, and they don’t lose their jobs.

That’s what Capital Homesteading is designed, in part, to do.

Support the Capital Homestead Act (aka Economic Democracy Act) at http://www.cesj.org/learn/capital-homesteading/, http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-a-plan-for-getting-ownership-income-and-power-to-every-citizen/, http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-summary/ and http://www.cesj.org/learn/capital-homesteading/ch-vehicles/.

The Basics Of Basic Income

In the March/April 2017 issue of Intereconomics, John Kay writes:

Basic income is a fashionable topic. A proposal to introduce one in Switzerland was put to a national referendum in 2016, although it was soundly defeated. Finland has recently introduced a modest experiment for 2,000 households.1 The current interest is mainly on the political left; for example, Bernie Sanders, Hillary Clinton’s rival for the Democratic nomination in 2016, and Britain’s John McDermott, Jeremy Corbyn’s Shadow Chancellor, have expressed enthusiasm for the concept of unconditional basic income.2 Benoit Hamon, the Socialist Party’s candidate for the French presidency, has made the proposal a principal plank in his platform.3 The Scottish National Party, which recently announced plans for a second independence referendum, is also strongly in favour.4 Basic income, at its roots, is a plan to replace all or most existing state benefits by a single payment, made unconditionally to all citizens (or perhaps residents) of a country.5 There are three principal strands of argument for such a proposal. The first deduces an entitlement to such income from some a priori moral principle. Such an assertion of rights goes back at least to Thomas Paine (1737-1809),6 and it has also attracted other philosophers, such as Bertrand Russell. More recently, the case has been put forward most vehemently by Philippe Van Parijs.7

A different rationale arises from concern that technology will increasingly eliminate low-skilled work, depriving a sector of the population of the prospect of employment. Some technology enthusiasts, led by the Y Combinator group and Elon Musk,8 see the provision of a universal basic income as a solution to this problem. A related strand of thought, influential in the Swiss debate, seeks to eliminate “bullshit jobs” – unskilled work which offers little in the way of either remuneration or job satisfaction.9 In a modern economy, with immense technological potential, it is unnecessary and undesirable for people to be employed in this way. Or so the argument goes.

A third, more mundane, argument for basic income observes that social welfare systems across the world have become extremely complex. Proponents of basic income argue that the scheme can achieve the objectives of welfare systems more effectively and at much reduced administrative cost.10 In this paper, I will not evaluate the moral reasoning or prognostications of technological apocalypse behind the first two groups of assertion. I shall focus instead on the fiscal arithmetic of basic income and ask if it is possible to devise a practicable scheme which would meet the objectives of these advocates of a universal basic income.11

All established tax and benefit systems make use of both contingent and income-related information. Contingent information refers to verifiable characteristics of individual (or household) circumstances – including age, employment status, sickness and possible disability. Income-related information measures the total resources (which may also include capital resources) available to an individual (or household). Some benefits are paid on the basis of contingency (e.g. old age), while others require evidence of income resources, or lack of such. Means-tested benefits are generally both contingency and income-based, such as the provision of free or subsidised medical or social care if income is below a certain threshold.

All welfare systems rely on income-related information, if only to raise the taxes which pay for them. The simplicity of a pure basic income scheme arises because it considers only one income-related element – the income tax – and only one contingency – personhood. Thus, there is an equivalence – which many people find surprising – between basic income and a “negative income tax”, which is a superficially different plan that would eliminate all contingent benefits and offer welfare through one, and only one, mechanism – the calculation of individual or household income for tax purposes. The negative income tax is a scheme in which individuals (households) with incomes below the income tax threshold receive rather than send payments. Every citizen is a taxpayer, even if some have negative liabilities.

Basic income is therefore at the opposite end of the spectrum of welfare systems from schemes which find their origins in the social insurance concept pioneered in Bismarckian Germany. Social insurance eschews means-testing and distributes benefits in the event of contingencies which are likely to give rise to needs. Modern versions of such schemes are often described (in the UK) as “back to Beveridge” proposals, referring to the widely applauded (but never fully implemented) scheme devised by Sir William Beveridge for the UK during the Second World War.12 Beveridge’s plan would have paid benefits unconditionally on occurrence of any of the “insured” contingencies – including unemployment, sickness and retirement.

Typically, the terms “basic income”, “citizen’s income” or “demogrant” have been used by those on the left of the political spectrum, while “negative income tax” has been used by those on the right. The late 1960s and early 1970s saw a flurry of interest in such proposals. In the US presidential election of 1972, Nobel Laureate James Tobin urged Democratic candidate George McGovern to propose basic income policies,13 while fellow Laureate Milton Friedman advocated a negative income tax to Republican candidate Richard Nixon.14 Although Nixon won, his attempt to put forward a version of Friedman’s scheme made little headway.15

Following Tobin, the arithmetic of basic income can be summarised as t = x + 25, where t is the average tax rate (as a percentage of GDP) necessary to finance x, the planned basic income (as a percentage of per capita GDP).16 The rationale of this expression is as follows: payments of basic income must be tax-financed over the long term, while 25% is the approximate figure for the share of GDP required to fund non-welfare related public expenditure (health, education, public administration, debt, military and police expenditures, etc.).

Table 1 sets out base data for six countries: the four largest Western economies – France, Germany, the UK and the US – and two states, Finland and Switzerland, which have been at the forefront of the basic income debate. In all six countries, average earnings of full-time employees are similar to, but slightly less than, GDP per head (on average, around ten per cent less). This relationship arises because of two roughly offsetting effects: labour income is only part of GDP, but all of that income is earned by that portion of the population which is in employment. As the labour share of GDP and the participation rate are fairly similar, approximate equivalence is argued to hold.

Table 1 (back to the text)
Monthly per capita earnings, 2014

in euros

FRANCE GERMANY UK US FINLAND SWITZERLAND

GDP per capitaa

2,801

3,130

3,033

3,560

3,259

5,607

Average wage
(full-time employees)b

2,603

2,620

2,795

2,961

3,094

5,103

Median wage (full-time employees)c

2,205

2,343

2,326

2,687

2,797

4,734

Statutory
minimum waged

1,445

1,440

1,301

920

n.a.

n.a.

Basic income (proposed)e

750

664-1,500

430

1,307

560

2,059

Sources: a: OECD; b,c: Eurostat (EU Structure of Earnings Survey), US Bureau of Labour; d: Eurostat; e: drawn from various articles available at www.basicincome.org and www.basicincome-europe.org; Green Party (UK). Average 2014 US dollar exchange rate from IRS.

In all six countries, median earnings are somewhat less than average earnings, reflecting the skewed distribution of incomes (more people receive below-average than above-average incomes). The median is the 50th percentile of the earnings distribution – equal numbers of people earn more and less than the median, and therefore it may be thought of as a measure of representative earnings. Thus, the median provides a natural reference point for judging the appropriate level of minimum or basic income. Four of the six countries in Table 1 have statutory minimum wage levels. In France, Germany and the UK, the legally prescribed floor is between half and two-thirds of the median wage (see Table 2). The US federal statutory minimum wage is much lower, at 34% of median income, but this figure is generally acknowledged to be insufficient to fulfil the objective of ensuring an adequate standard of living for those in full-time employment. The federal minimum has been increased only once since 1997, and many states and municipalities have imposed higher minimum wages.17

Table 2 (back to the text)
Incomes relative to median earnings and GDP

in %

FRANCE GERMANY UK US FINLAND SWITZERLAND

Statutory minimum as % of median

66

61

56

34

n.a.

n.a.

Proposed basic income as % of median

34

43*

18

49

20

43

Proposed basic income as % of GDP per head

27

32*

14

37

17

37

* Approximate mid-range of proposals (€1,000/month).

Sources: OECD; Eurostat (EU Structure of Earnings Survey); US Bureau of Labour; Eurostat; various articles from www.basicincome.org and www.basicincome-europe.org; Green Party (UK). Average 2014 US dollar exchange rate from IRS.

Figures for basic income come from a variety of sources. The French figure is the minimum stipend of €750 per month proposed by Hamon,18 and the Swiss figure is that which was put forward for the 2016 referendum.19 The US proposal of $1,250 per month was suggested in 2008 by Joseph Kennedy, a former chief economist of the US Department of Commerce.20

The lowest figures for basic income cited in Table 1 are those from the UK and Finland. This is no accident because, in contrast to the other proposals, the British and Finnish figures are not plucked from the air. The UK figure is based on the Green Party’s 2015 election manifesto, which is derived from a conscientiously conducted cost appraisal by the Citizen’s Income Trust.21 The Finnish figure is that used in that country’s current experiment. Each therefore represents a realistic proposal.

In both countries, the level of basic income is below 20% of median full-time earnings. In the case of the UK, this necessarily follows from the attempt to establish a fully costed and broadly revenue-neutral proposal. Currently, total welfare spending by the UK government (excluding personal social services), together with the cost of the personal income tax threshold (the provisions of which might be replaced by a basic income), total around 15% of GDP, which is consistent with the financing requirements of a basic income of 18% of median earnings, as described in Table 1. Pensions account for about half of this welfare expenditure. The Tobin formula thus implies an average tax rate of about 40%. The actual tax take at present is somewhat less than this (around 33% of GDP), because the personal allowance in the income tax system is currently treated as a reduction in tax (amounting to around three per cent of GDP) but would be classified as an expenditure under basic income, and because the UK government at present runs a substantial deficit (around four per cent of GDP).

Any increase in the level of basic income as a proportion of median earnings above 18% would lead to a similar, though slightly smaller, increase in the required aveage tax rate. For example, basic income at 30% of median earnings would require an increase of ten percentage points, from 40% to 50%, in the implied average tax rate. To set a target of 40% of median earnings (still below most judgements of a reasonable minimum wage)22 would require all existing tax rates to be increased by more than 20 percentage points (i.e. 50%). These calculations assume behaviour would be unchanged. While this is unlikely, labour market responses would likely make the arithmetic worse, not better.

While the details of such calculations would vary from country to country, the essentials remain the same, and the conclusions inescapable. The provision of a universal basic income at a level which would provide a serious alternative to low-paid employment is impossibly expensive. Thus, a feasible basic income cannot fulfil the hopes of some of the idea’s promoters: it cannot guarantee households a standard of living acceptable in a modern society, it cannot compensate for the possible disappearance of existing low-skilled employment and it cannot eliminate “bullshit jobs”. Either the level of basic income is unacceptably low, or the cost of providing it is unacceptably high. And, whatever the appeal of the underlying philosophy, that is essentially the end of the matter.

How to rescue basic income

I shall not consider further the variety of fanciful suggestions that basic income could be financed, for example, from the assets of the rich, by eliminating tax avoidance by multinational companies, through administrative savings and a drive against waste, by diverting funds from quantitative easing, and even by the distribution of basic income from the sky as “helicopter money”. While there is some possibility of revenue from some of these sources, the scale is frequently exaggerated, and the political and practical obstacles in securing them are not in any significant degree affected by any proposed introduction of a basic income scheme.

The basic income scheme can be rescued only by reintroducing additional contingent elements into it – tailoring benefits more closely to individual or household circumstances. The most obvious contingent discriminator is age. In a developed economy with stable demographics, about 20% of the population is aged 16 or below. If children received half or less of adult basic income, the overall cost of the scheme would be reduced by 10-20%. Provision for young people over the age of 16 will need to be integrated with whatever additional support is given to those in tertiary education.

An income that is less than 20% of the average income is significantly below existing levels of “pillar one” (basic national provision) of retirement provision in most countries and wholly inadequate for the reasonable needs of people who cannot be expected to engage in paid employment. If people below normal working age can be paid less than a standard level of basic income, people beyond normal working age may need to be paid more. And if basic income for pensioners is set at a level sufficient to meet such expectations of retirement income, it is difficult to resist arguments for the provision of comparable benefits for those who are excluded from employment due to disability or chronic illness.

Housing costs are the largest component of the budget of almost all households and a particularly large proportion of the budgets of poor households. But housing costs vary substantially depending on household composition. Two cannot live as cheaply as one, but their housing costs are substantially less than the housing costs of two separate households. Housing costs also vary considerably by region and city. As a result, most welfare systems make specific provision for housing costs, either as a component of benefits or through the availability of publicly subsidised housing for low-income households, or often through a combination of both.

One possibility might be to introduce location as a contingency and pay a higher level of basic income to those whose addresses imply above-average housing costs, e.g. an enhanced basic income for Londoners. The absence of such provision would cause hardship – think of widows now living alone in large city centre properties or young professionals searching for their first employment – and create economic problems, since metropolitan areas need teachers and nurses, not to mention waiters and street cleaners. But to deal with the issue of variable housing costs through basic income alone is expensive and very poorly targeted. Most people who live in London have above-average incomes for their professions, and many London residents have incomes well above average. These differences in employment incomes are both cause and effect of high London housing prices.

The largest issue in applying further contingent discriminators to basic income is whether to propose a lower payment of basic income to those in full-time employment. To do so potentially reduces the cost of basic income provision substantially, but it does so at the price of undermining the founding principle of basic income itself. Such discrimination also reintroduces significant disincentives to work.

A further difficulty with such a provision is that it is not possible to regard full-time employment as a well-defined contingency. In the six countries reviewed here, between a quarter and a third of the workforce is either in part-time employment or self-employed (Table 3).

Table 3 (back to the text)
Labour force participation, 2014

in %

FRANCE GERMANY UK US FINLAND SWITZERLAND

Overall participation

55.4

60.4

62.7

62.2

58.8

68.7

Of which:

Full-time employees

75.6

68.9

65.3

73.5

75.6

63.0

Part-time employees

12.7

20.2

19.9

11.0

10.5

21.9

Self-
employed

11.7

11.0

14.7

15.5

13.8

15.1

Source: OECD (common definitions); author’s calculations.

The self-employed category includes a minority of highly paid professionals, such as doctors and lawyers, but also many who are either semi-retired or otherwise unable to engage in full-time employment. There is therefore no practical means of defining full-time employment, other than by reference to the income derived from it. By the time these adjustments have been made, the welfare system starts to look very much like the one most countries already have.

On examination, basic income cannot fulfil the aspirations of its proponents. Nevertheless, there is considerable scope for improvement of the current tax and benefit systems. These systems have grown in piecemeal fashion and largely independently of each other. Both basic income and negative income tax proposals attempt to merge the resources tests of the benefit system and that of the income tax into a single integrated mechanism. While these schemes are unrealistic, they do have many attractions: potential administrative simplification, lower compliance costs, particularly for low-income households, and a rationalisation of the all-too-often capricious interactions created by the combination of progressive income tax rates and the implicit tax rates created by the withdrawal of means-tested benefits.

The UK has perhaps gone furthest in attempting to achieve integration of tax and benefit systems, beginning with the tax credit scheme proposed by Arthur Cockfield, a former tax collector turned businessman turned politician who became a cabinet minister under Margaret Thatcher (and then, as European Commissioner, was a principal architect of the Single Market).23 Cockfield’s innovations were extended by Gordon Brown, Labour Chancellor of the Exchequer, after 1997.

Two fundamental problems in the integration of tax and benefit systems became evident almost from the outset. I have used the terms individual and household almost as if they were interchangeable, but of course they are not. There is tension between the claims of individuals to be treated as such and the requirement for a just tax and benefit system to reflect the whole of an individual’s circumstances – which plainly include the circumstances of the household in which that person lives. Both these principles are persuasive but are simply irreconcilable with each other.

Tax and benefit systems have always incorporated both an individual and a household basis of assessment. There has been a partial shift from household to individual in recent decades, particularly in the tax system, as a result of changing social attitudes. Even though many countries continue to tax the joint income of spouses, most have incorporated considerable elements of individual taxation within that framework. Proponents of basic income generally appear to assume that a wholly individual basis is appropriate, which is a significant shift, both philosophically and operationally.

But it is hard to imagine a just system which would make no distinction between the millionaire’s spouse who routinely enjoys lunch with her friends while a nanny looks after the couple’s children and the single parent who must stay at home with her (or, occasionally, his) young and needy children, even though the other personal circumstances of the two may, in a formal sense, appear more or less identical.

A second difficulty is that the time horizon over which well-off households budget is generally considerably longer than that of poorer households, which struggle to make ends meet on a weekly basis. Income tax is imposed everywhere on an annual basis, but the relevant timescale for benefits is much shorter. Tax systems reconcile the need to collect most tax by deductions from regular earnings with an annual basis of assessment by over-withholding and processing refunds, a solution which is simply not available in the payment of benefits to poor claimants. Both these problems have proved significant in the implementation of tax-credit arrangements, and while there are methods of overcoming them, these add further to complexity.

Any method of reorganising tax and benefit systems which is even approximately revenue-neutral has winners and losers – if it did not, the outcome would reproduce the status quo and the reform would have little purpose. Analysis of this redistribution is strikingly absent from almost all discussion of basic income: who is it that receives too much under current arrangements and who too little?

If reform is revenue neutral, in the sense that the overall amount spent on welfare is to remain broadly unchanged (including for these purposes the foregone tax from the initial allowance and any substantially reduced lower bands of income tax as welfare payments), then the redistribution would be primarily amongst poor households. The nature of such redistribution depends critically on the details of the scheme – what allowance, if any, is made for sickness, disability, the reasons for low income, housing costs, the relationship of child to adult basic income, etc. These factors are relevant because of the elaborate plumbing of welfare systems, designed to match resources with needs, which the advocates of basic income would sweep away. In the absence of considerably more detail in the presentation of the schemes, it is not possible to specify what these redistributive effects would be. Two things are certain, however. One is the political reality that those who lose from reform will be louder in their complaints than the gainers in celebrating their good fortune. The second is that extensive transitional measures would be required to alleviate immediate hardship for the already needy households.

The alternative is to raise taxes on wealthier households sufficiently to ensure that almost no households would lose. In the UK, a “benefits cap” was introduced in 2013 to prevent households from receiving more than the median income in welfare benefits and a single person from receiving more than around 70% of the median income. Despite provisions designed to exempt those who might suffer particular hardship, the cap was applied in 59,000 cases in the first year.24 Thus, even basic income in the range 50-70% of median income would involve a loss of benefits for a significant number of households. But the tax cost of such provision would approach half of GDP, a level which, given other claims on public expenditure, is impossible.

Conclusion

Attempting to turn basic income into a realistic proposal involves the reintroduction of elements of the benefit system which are dependent on multiple contingencies and also on income and wealth. The outcome is a welfare system which resembles those that already exist. And this is not surprising. The complexity of current arrangements is not the result of bureaucratic perversity. It is the product of attempts to solve the genuinely difficult problem of meeting the variety of needs of low-income households while minimising disincentives to work for households of all income levels – while ensuring that the system established for that purpose is likely to sustain the support of those who are required to pay for it. I share Piachaud’s conclusion that basic income is a distraction from sensible, feasible and necessary welfare reforms.25 As in other areas of policy, it is simply not the case that there are simple solutions to apparently difficult issues which policymakers have hitherto been too stupid or corrupt to implement.

http://archive.intereconomics.eu/year/2017/2/the-basics-of-basic-income/

Let me address what is avoided in all articles about a universal basic income – alternatives.

While a Universal Basic Income sounds appealing to those solely dependent on a job or welfare, there is a far better way for EVERY child, woman and man to EARN more income by providing equal opportunity to acquire personal ownership in future wealth-creating, income-producing capital formation using insured (lending protection) capital credit, repayable out of the future earnings of the investments. This would not require anyone to pledge as collateral (past savings/equity as security for repayment).

Using such new owner-creation financial mechanisms would enable EVERY citizen to contribute productivity to the economy, create demand for a higher standard of living, while not taking from those who already are capital owners through taxation to support otherwise non-productive citizens.

We should be looking at how “the rich are getting richer,” not on how we can take and redistribute the earnings of the rich and middle class. Obviously, the distinction between the rich and the non-rich is that the rich OWN wealth-creating, income-producing capital assets, the very essence of technological progress, and the poor only have their labor to sell to the wealthy capital ownership class.

The fact that the core function of technological invention and innovation is to invent “tools” to reduce toil, enable otherwise impossible production, create new highly automated industries, and significantly change the way in which products and services are produced from labor intensive to capital intensive, should surprise no one who is conscious and who has even causally observed the constant shift to non-human productive inputs in the manufacturing, distribution, and sales of products, as well as the delivery of services, that has been occurring during their lifetime.

The urgency is to figure out means for people to earn an income without dependency on jobs. The focus should not be on a pro-job growth future but an alternative to wage dependency as economists across the board predict further losses as AI, robotics, and other technologies continue to be ushered in.

Such future invention and innovation should be financed using mechanisms that create new owners simultaneously with the growth of the economy, while respecting the private property rights who now own, and ensuring that any further concentrated capital ownership acquisition will be abated.

The fundamental challenge to be solved is how do we reinvent and redesign our economic institutions to keep pace with job destroying and devaluing technological innovation and invention so not all of the benefits of owning FUTURE productive capacity accrues to today’s wealthy 1 percent ownership class, and ownership is broadened so that EVERY American earns income through stock ownership dividends so they can afford to purchase the products and services produced by the technology economy.

A National Right To Capital Ownership Bill that restores the American dream should be advocated by the progressive movement, which addresses the reality of Americans facing job opportunity deterioration and devaluation due to tectonic shifts in the technologies of production.

The question that requires an answer is now timely before us. It was first posed by Kelso in the 1950s but has never been thoroughly discussed on the national stage. Nor has there been the proper education of our citizenry that addresses what economic justice is and what capital ownership is. Therefore, by ignoring such issues of economic justice and capital ownership, our leaders are ignoring the concentration of power through monopoly ownership of productive capital, with the result of denying the 99 percenters equal opportunity and access to become capital owners.

The question, as posed by Kelso is: “how are all individuals to be adequately productive when a tiny minority (capital owners) produce a major share and the vast majority (labor workers), a minor share of total goods and services,” and thus, “how do we get from a world in which the most productive factor—physical capital—is owned by a handful of people, to a world where the same factor is owned by a majority—and ultimately 100 percent—of the consumers, while respecting all the constitutional rights of present capital owners?”

There is a solution, which will result in double-digit economic growth and simultaneously broaden private, individual ownership so that EVERY American’s income significantly grows, providing the means to support themselves and their families with an affluent lifestyle. The Just Third Way Master Plan for America’s future is published at http://foreconomicjustice.org/?p=5797.

The solution is obvious but our leaders, academia, conventional economist and the media are oblivious to the necessity to broaden ownership in the new capital formation of the future simultaneously with the growth of the economy, which then becomes self-propelled as increasingly more Americans accumulate ownership shares and earn a new source of dividend income derived from their capital ownership in the “machines” that are replacing them or devaluing their labor value.

The solution will require the reform of the Federal Reserve Bank to create new owners of future productive capital investment in businesses simultaneously with the growth of the economy. The solution to broadening private, individual ownership of America’s future capital wealth requires that the Federal Reserve stop monetizing unproductive debt, including bailouts of banks “too big to fail” and Wall Street derivatives speculators, and begin creating an asset-backed currency that could enable every man, woman and child to establish a Capital Homestead Account or “CHA” (a super-IRA or asset tax-shelter for citizens) at their local bank to acquire a growing dividend-bearing stock portfolio to supplement their incomes from work and all other sources of income. Policies need to insert American citizens into the low or no-interest investment money loop to enable non- and undercapitalized Americans, including the working class and poor, to build wealth and become “customers with money.” The proposed Capital Homestead Act would produce this result.

The end result is that citizens would become empowered as owners to meet their own consumption needs and government would become more dependent on economically independent citizens, thus reversing current global trends where all citizens will eventually become dependent for their economic well-being on the State and whatever elite controls the coercive powers of government.

Support Monetary Justice at http://capitalhomestead.org/page/monetary-justice.

Support the Capital Homestead Act (aka Economic Democracy Act) at http://www.cesj.org/learn/capital-homesteading/http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-a-plan-for-getting-ownership-income-and-power-to-every-citizen/http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-summary/ and http://www.cesj.org/learn/capital-homesteading/ch-vehicles/.

 

With A Basic Income, The Numbers Just Do Not Add Up

On May 31, 2016, John Kay writes on FT:

Swiss voters will decide in a referendum on June 5 whether to introduce a “basic income”. In proposed reforms to the social welfare system, all residents would be entitled to a guaranteed income of SFr30,000 ($30,275) a year from the state — unconditionally.

The concept of basic income has been discussed for decades. It has attractions for people at both ends of the political spectrum. For the left, it offers a simple and comprehensive answer to concerns about poverty and inequality. For those on the right, the plan discharges social obligation with minimum intrusion into personal affairs. The renewed popularity of this idea is part of the general revulsion against mainstream politics that is sweeping the west. Bernie Sanders, a candidate for the Democratic presidential nomination, has expressed sympathy for basic income while stopping short of endorsement. Yanis Varoufakis, the former finance minister of Greece, is a proponent. The scheme gains credibility from loose association with Brazil’s widely praised, but wholly different, bolsa família, which transfers cash to poor families with children in return for a commitment to keep their offspring in school. Yet simple arithmetic shows why these schemes cannot work. Decide what proportion of average income per head would be appropriate for basic income. Thirty per cent seems mean; perhaps 50 per cent is more reasonable? The figure you write down is the share of national income that would be absorbed by public expenditure on basic income. The Swiss government reckoned spending on social welfare would approximately double. To see the average tax rate implied, add the share of national income taken by other public sector activities — education, health, defence and transport. Either the basic income is impossibly low, or the expenditure on it is impossibly high. Most advocates of basic income prefer to keep the argument at the level of general principle rather than engage in the grubby practicalities of numbers. The Swiss proponents explain that basic income “arises from a general fundamental democratic right, the Right to Life”. But even they temper ideals with realism. Obviously children would receive less. Sadly this does not help with the basic maths: even 50 per cent of average earnings for children is insufficient for their support and the same is true for the elderly.

The Swiss supporters of the referendum solve this dilemma by saying that you are not entitled to basic income if you already receive SFr2,500 a month from an employer. Not only does this dramatically reduce costs but it would also have social consequences about which proponents wax lyrical: “Wages in the private sector would be liberated from securing the livelihood of the employee.” Perhaps the writers do understand the radicalism of this proposal. There could be no low-paid or part-time positions. Few work as refuse collector or shelf stacker for the love of the job. So such employment must pay more than the guaranteed basic income. Higher unemployment and radical redistribution of income would follow. Back in the real world, there are two ways to assess household needs for welfare. Contingent benefits target causes of poverty — old age, unemployment, disability, large or broken families. But it is costly and inappropriate to subsidise Warren Buffett, Rupert Murdoch and the Queen just because they are elderly. Income-related benefits address poverty more directly but diminish incentives to work. Social welfare systems everywhere make use of both types of information — contingent and income-related — to balance cost and effectiveness. That is why they are, inevitably, complex.

https://www.ft.com/content/65e606d8-270c-11e6-8ba3-cdd781d02d89

Let me address what is avoided in all articles about a universal basic income – alternatives.

While a Universal Basic Income sounds appealing to those solely dependent on a job or welfare, there is a far better way for EVERY child, woman and man to EARN more income by providing equal opportunity to acquire personal ownership in future wealth-creating, income-producing capital formation using insured (lending protection) capital credit, repayable out of the future earnings of the investments. This would not require anyone to pledge as collateral (past savings/equity as security for repayment).

Using such new owner-creation financial mechanisms would enable EVERY citizen to contribute productivity to the economy, create demand for a higher standard of living, while not taking from those who already are capital owners through taxation to support otherwise non-productive citizens.

We should be looking at how “the rich are getting richer,” not on how we can take and redistribute the earnings of the rich and middle class. Obviously, the distinction between the rich and the non-rich is that the rich OWN wealth-creating, income-producing capital assets, the very essence of technological progress, and the poor only have their labor to sell to the wealthy capital ownership class.

The fact that the core function of technological invention and innovation is to invent “tools” to reduce toil, enable otherwise impossible production, create new highly automated industries, and significantly change the way in which products and services are produced from labor intensive to capital intensive, should surprise no one who is conscious and who has even causally observed the constant shift to non-human productive inputs in the manufacturing, distribution, and sales of products, as well as the delivery of services, that has been occurring during their lifetime.

The urgency is to figure out means for people to earn an income without dependency on jobs. The focus should not be on a pro-job growth future but an alternative to wage dependency as economists across the board predict further losses as AI, robotics, and other technologies continue to be ushered in.

Such future invention and innovation should be financed using mechanisms that create new owners simultaneously with the growth of the economy, while respecting the private property rights who now own, and ensuring that any further concentrated capital ownership acquisition will be abated.

The fundamental challenge to be solved is how do we reinvent and redesign our economic institutions to keep pace with job destroying and devaluing technological innovation and invention so not all of the benefits of owning FUTURE productive capacity accrues to today’s wealthy 1 percent ownership class, and ownership is broadened so that EVERY American earns income through stock ownership dividends so they can afford to purchase the products and services produced by the technology economy.

A National Right To Capital Ownership Bill that restores the American dream should be advocated by the progressive movement, which addresses the reality of Americans facing job opportunity deterioration and devaluation due to tectonic shifts in the technologies of production.

The question that requires an answer is now timely before us. It was first posed by Kelso in the 1950s but has never been thoroughly discussed on the national stage. Nor has there been the proper education of our citizenry that addresses what economic justice is and what capital ownership is. Therefore, by ignoring such issues of economic justice and capital ownership, our leaders are ignoring the concentration of power through monopoly ownership of productive capital, with the result of denying the 99 percenters equal opportunity and access to become capital owners.

The question, as posed by Kelso is: “how are all individuals to be adequately productive when a tiny minority (capital owners) produce a major share and the vast majority (labor workers), a minor share of total goods and services,” and thus, “how do we get from a world in which the most productive factor—physical capital—is owned by a handful of people, to a world where the same factor is owned by a majority—and ultimately 100 percent—of the consumers, while respecting all the constitutional rights of present capital owners?”

There is a solution, which will result in double-digit economic growth and simultaneously broaden private, individual ownership so that EVERY American’s income significantly grows, providing the means to support themselves and their families with an affluent lifestyle. The Just Third Way Master Plan for America’s future is published at http://foreconomicjustice.org/?p=5797.

The solution is obvious but our leaders, academia, conventional economist and the media are oblivious to the necessity to broaden ownership in the new capital formation of the future simultaneously with the growth of the economy, which then becomes self-propelled as increasingly more Americans accumulate ownership shares and earn a new source of dividend income derived from their capital ownership in the “machines” that are replacing them or devaluing their labor value.

The solution will require the reform of the Federal Reserve Bank to create new owners of future productive capital investment in businesses simultaneously with the growth of the economy. The solution to broadening private, individual ownership of America’s future capital wealth requires that the Federal Reserve stop monetizing unproductive debt, including bailouts of banks “too big to fail” and Wall Street derivatives speculators, and begin creating an asset-backed currency that could enable every man, woman and child to establish a Capital Homestead Account or “CHA” (a super-IRA or asset tax-shelter for citizens) at their local bank to acquire a growing dividend-bearing stock portfolio to supplement their incomes from work and all other sources of income. Policies need to insert American citizens into the low or no-interest investment money loop to enable non- and undercapitalized Americans, including the working class and poor, to build wealth and become “customers with money.” The proposed Capital Homestead Act would produce this result.

The end result is that citizens would become empowered as owners to meet their own consumption needs and government would become more dependent on economically independent citizens, thus reversing current global trends where all citizens will eventually become dependent for their economic well-being on the State and whatever elite controls the coercive powers of government.

Support Monetary Justice at http://capitalhomestead.org/page/monetary-justice.

Support the Capital Homestead Act (aka Economic Democracy Act) at http://www.cesj.org/learn/capital-homesteading/http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-a-plan-for-getting-ownership-income-and-power-to-every-citizen/http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-summary/ and http://www.cesj.org/learn/capital-homesteading/ch-vehicles/.

What’s Wrong With UBI? –– Universal Basic Income Can’t Solve The Problems Of A Post-Jobs Society

On April 24, 2017, Calum Chace writes on Linkedin.com:

One out of three ain’t good

Universal Basic Income (UBI) is a fashionable policy idea comprising three elements: it is universal, it is basic, and it is an income. Unfortunately, two of these elements are unhelpful, and to paraphrase Meatloaf, one out of three ain’t good.

The giant sucking sound

The noted economist John Kay dealt the edifice of UBI a serious blow in May 2016 in an article (here) for the FT. He returned to his target a year later (here) and pretty much demolished it. His argument is slightly technical, and it focuses on UBI as a policy for implementation today, so I won’t dwell on it. But if you are one of the many who think UBI is a great idea, it is well worth reading one or both articles to see how Kay demonstrates that “either the basic income is impossibly low, or the expenditure on it is impossibly high.”

To put it more bluntly than Kay does, if UBI was introduced at an adequate level in any one country (or group of countries) today, there would be a giant sucking sound, as many of the richer people in the jurisdiction would leave to avoid the punitive taxes that would pay for it.

UBI and technological unemployment

But what happens a few decades from now if a large minority – or a majority – of people are unemployable because smart machines have taken all the jobs that they could do? We don’t know for sure that this will happen, of course, but it is at least very plausible, so we would be crazy not to prepare for the eventuality. Kay explicitly ignores this question, but tech-savvy and thoughtful people like Elon Musk and Sam Altman think that UBI may be the answer.

Imagine a society where 40% of the population can no longer find paid employment because machines can do everything they could do for money cheaper, faster and better. Would the 60% who remained in work, including those in government, simply let them starve? I’m pretty sure they wouldn’t, even if only because 40% of a population being angry and desperate presents a serious security threat to the others.

Many people argue that UBI is the solution, and will be affordable because the machines will be so efficient that enormous wealth will be created in the economy which can support the burden of so many people who are not contributing. I describe elsewhere a “Generous Google” scenario in which a handful of tech firms are generating most of the world’s GDP, and in order to avoid social collapse they agree to share their vast wealth by funding a global UBI.

 

I suspect there are serious problems with the economics of this. Exceptional profits are usually competed away, and companies which manage to avoid that by establishing de facto monopolies sooner or later find themselves the subject of regulatory investigations. But putting that concern to one side, in the event of profound technological unemployment, should we ask the rich companies and individuals of the future to sponsor a UBI for the rest of us?

This is where Meatloaf comes in. (Yay, Meatloaf!)

Universality

The first of UBI’s three characteristics is its universality. It is paid to all citizens regardless of their economic circumstances. There are several reasons why its proponents want this. Experience shows that many benefits are only taken up by those they are intended for if everyone receives them. Means-tested benefits can have low uptake among their target recipients because they are too complicated to claim, or the beneficiaries feel uncomfortable about claiming them, or simply never find out about them. Child benefits in the UK are one well-known example. There is also the concern that UBI should not be stigmatised as a sign of failure in any sense.

But in the case of UBI, these considerations are surely outweighed by the massive inefficiency of universality. In our scenario of 40% unemployability, paying UBI to Rupert Murdoch, Bill Gates, and the millions of others who are still earning healthy incomes would be a terrible waste of resources.

 

Basic

The second characteristic of UBI is that it is Basic, and this is an even worse problem. “Basic” cannot mean anything other than extremely modest, and if we are to have a society in which a very large minority or a majority of people will be unemployable for the remainder of their lives, they are not going to be happy living on extremely modest incomes. Nor would that be a recipe for a stable, happy society.

Many proponents of UBI think that the payment will prevent everyone from starving, and we will supplement our universal basic incomes with activities which we enjoy rather than the wage slave drudgery faced by many people today. But the scenario envisaged here is one in which many or most humans simply cannot get paid for their work, because machines can do it cheaper, better and faster. The humans will still work: they will be painters, athletes, explorers, builders, virtual reality games consultants, and they will derive enormous satisfaction from it. But they won’t get paid for it.

If we are heading for a post-jobs society for many or most people, we will need a form of economy which provides everyone with a comfortable standard of living, and the opportunity to enjoy the many good things in life which do not come free – at least currently.

Income

UBI isn’t all bad. After all, it is in part an attempt to save the unemployable from starving. And the debate about it helps draw attention to the problem that many people hope it will solve – namely, technological unemployment. So UBI isn’t the right answer, but it is at least an attempt to ask the right question.

Perhaps we can salvage the good part of UBI and improve the bad parts. Perhaps what we need instead of UBI is a PCI – a Progressive Comfortable Income. This would be paid to those who need it, rather than wasting resources on those who have no need. It would provide sufficient income to allow a rich and satisfying life.

Now all we have to do is figure out how to pay for it.

https://www.linkedin.com/pulse/whats-wrong-ubi-calum-chace?trk=eml-email_feed_ecosystem_digest_01-hero-0-null&midToken=AQGiRe1jz01n1A&fromEmail=fromEmail&ut=3hTQudD5IRKnI1

Canada Has Unveiled the Details of Its Highly Anticipated UBI Program

Let me address what is avoided in all articles about a universal basic income – alternatives.

While a Universal Basic Income sounds appealing to those solely dependent on a job or welfare, there is a far better way for EVERY child, woman and man to EARN more income by providing equal opportunity to acquire personal ownership in future wealth-creating, income-producing capital formation using insured (lending protection) capital credit, repayable out of the future earnings of the investments. This would not require anyone to pledge as collateral (past savings/equity as security for repayment).

Using such new owner-creation financial mechanisms would enable EVERY citizen to contribute productivity to the economy, create demand for a higher standard of living, while not taking from those who already are capital owners through taxation to support otherwise non-productive citizens.

We should be looking at how “the rich are getting richer,” not on how we can take and redistribute the earnings of the rich and middle class. Obviously, the distinction between the rich and the non-rich is that the rich OWN wealth-creating, income-producing capital assets, the very essence of technological progress, and the poor only have their labor to sell to the wealthy capital ownership class.

The fact that the core function of technological invention and innovation is to invent “tools” to reduce toil, enable otherwise impossible production, create new highly automated industries, and significantly change the way in which products and services are produced from labor intensive to capital intensive, should surprise no one who is conscious and who has even causally observed the constant shift to non-human productive inputs in the manufacturing, distribution, and sales of products, as well as the delivery of services, that has been occurring during their lifetime.

The urgency is to figure out means for people to earn an income without dependency on jobs. The focus should not be on a pro-job growth future but an alternative to wage dependency as economists across the board predict further losses as AI, robotics, and other technologies continue to be ushered in.

Such future invention and innovation should be financed using mechanisms that create new owners simultaneously with the growth of the economy, while respecting the private property rights who now own, and ensuring that any further concentrated capital ownership acquisition will be abated.

The fundamental challenge to be solved is how do we reinvent and redesign our economic institutions to keep pace with job destroying and devaluing technological innovation and invention so not all of the benefits of owning FUTURE productive capacity accrues to today’s wealthy 1 percent ownership class, and ownership is broadened so that EVERY American earns income through stock ownership dividends so they can afford to purchase the products and services produced by the technology economy.

A National Right To Capital Ownership Bill that restores the American dream should be advocated by the progressive movement, which addresses the reality of Americans facing job opportunity deterioration and devaluation due to tectonic shifts in the technologies of production.

The question that requires an answer is now timely before us. It was first posed by Kelso in the 1950s but has never been thoroughly discussed on the national stage. Nor has there been the proper education of our citizenry that addresses what economic justice is and what capital ownership is. Therefore, by ignoring such issues of economic justice and capital ownership, our leaders are ignoring the concentration of power through monopoly ownership of productive capital, with the result of denying the 99 percenters equal opportunity and access to become capital owners.

The question, as posed by Kelso is: “how are all individuals to be adequately productive when a tiny minority (capital owners) produce a major share and the vast majority (labor workers), a minor share of total goods and services,” and thus, “how do we get from a world in which the most productive factor—physical capital—is owned by a handful of people, to a world where the same factor is owned by a majority—and ultimately 100 percent—of the consumers, while respecting all the constitutional rights of present capital owners?”

There is a solution, which will result in double-digit economic growth and simultaneously broaden private, individual ownership so that EVERY American’s income significantly grows, providing the means to support themselves and their families with an affluent lifestyle. The Just Third Way Master Plan for America’s future is published at http://foreconomicjustice.org/?p=5797.

The solution is obvious but our leaders, academia, conventional economist and the media are oblivious to the necessity to broaden ownership in the new capital formation of the future simultaneously with the growth of the economy, which then becomes self-propelled as increasingly more Americans accumulate ownership shares and earn a new source of dividend income derived from their capital ownership in the “machines” that are replacing them or devaluing their labor value.

The solution will require the reform of the Federal Reserve Bank to create new owners of future productive capital investment in businesses simultaneously with the growth of the economy. The solution to broadening private, individual ownership of America’s future capital wealth requires that the Federal Reserve stop monetizing unproductive debt, including bailouts of banks “too big to fail” and Wall Street derivatives speculators, and begin creating an asset-backed currency that could enable every man, woman and child to establish a Capital Homestead Account or “CHA” (a super-IRA or asset tax-shelter for citizens) at their local bank to acquire a growing dividend-bearing stock portfolio to supplement their incomes from work and all other sources of income. Policies need to insert American citizens into the low or no-interest investment money loop to enable non- and undercapitalized Americans, including the working class and poor, to build wealth and become “customers with money.” The proposed Capital Homestead Act would produce this result.

The end result is that citizens would become empowered as owners to meet their own consumption needs and government would become more dependent on economically independent citizens, thus reversing current global trends where all citizens will eventually become dependent for their economic well-being on the State and whatever elite controls the coercive powers of government.

Support Monetary Justice at http://capitalhomestead.org/page/monetary-justice.

Support the Capital Homestead Act (aka Economic Democracy Act) at http://www.cesj.org/learn/capital-homesteading/http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-a-plan-for-getting-ownership-income-and-power-to-every-citizen/http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-summary/ and http://www.cesj.org/learn/capital-homesteading/ch-vehicles/.

 

 

They Just Get Bigger: How Corporate Mergers Strangle The Economy

On February 19, 2017, Jordan Brennan writes on Economics:

The determinants of economic growth have long ranked as one of the most important questions in the history of economic science, along with such puzzles as price formation and income distribution. Over the past generation, the rate of economic growth in advanced Western democracies has slowed markedly, which raises the old (but now fashionable) spectre of secular stagnation. Secular stagnation is a particularly acute macroeconomic problem insofar as it has a direct connection to improvements in the national standard of living, whether tabulated using objective benchmarks like life expectancy or subjective metrics like happiness.

Larry Summers appears to be the man responsible for resurrecting the term, but there are echoes of the concept stretching back more than a century. In its contemporary formulation, secular stagnation manifests itself in the anemic GDP growth witnessed over the business cycle resulting from depressed levels of business investment, particularly in machinery and equipment. There have been variegated explanations for secular stagnation, but Summers flags a few crucial variables, including an expansion of the technology frontier, slower productivity growth and an aging population. As Summers sees it, these factors have contributed to an imbalance between savings and investment. The proclivity to save has outpaced the desire to invest, which pushes interest rates down, depresses demand and decelerates growth.

And while this narrative may have some truth in it, there is an important process that is omitted, namely the explosion of mergers and acquisitions after 1990. The past quarter century has witnessed a historically unprecedented shift in business investment towards consolidation, and this shift—which has not received the attention from researchers that it deserves—has altered the structure and functionality of American capitalism. Before exploring U.S. merger activity, it is important to document the deep history of U.S. economic performance so that the phenomenon under investigation is clearly discernable.

Documenting the Slowdown in Investment, Job Creation and GDP Growth

Let’s begin with business investment in non-residential structures, machinery and equipment, which is plotted in Figure 1 as a percentage of GDP over the postwar era. Following the massive demobilization in 1945, business investment in fixed assets steadily rose from eight percent of GDP in 1946 to 13 percent in 1981 before trending sharply downward, having hit a postwar low of seven percent in 2010 before rising to nine percent in 2015. The two linear trend lines moving through the series clearly depict the postwar ‘golden age’ investment boom, which petered out in the early 1980s, and the declining investment share of national income—the ‘investment bust’—in the neoliberal period that followed. The (producer price index-adjusted) average growth rate was more than halved between the two periods, having fallen from 5.6 percent between 1945 and 1980 to 2.2 percent between 1980 and 2015. So while many commentators have claimed that secular stagnation has afflicted the United States since the Great Recession of 2008-09, the data tells us that the deterioration of investment began much earlier and may be associated with neoliberal economic policies. What have been some of the consequences of this slowdown in business investment?

For the ordinary citizen, ‘the economy’ is first and foremost their job and what their household income affords them in the way of purchasing power. And while there is a non-linear relationship between income and overall life satisfaction (meaning the latter rises up to a point with the former), higher income people are better off than lower income people when it comes to both life evaluation and emotional well-being. This is why the growth rate of job creation and personal incomes are such important policy issues: they have a direct connection to the quality of human life, and by extension, the value of democratic citizenship.

Figure 2 plots the decade average growth rate of GDP (adjusted for inflation) and employment from 1890 through 2015. Unsurprisingly, the two variables are closely associated and register a Pearson correlation coefficient of 0.66 over 125 years. In the Keynesian era (1930s through the 1970s), the rate of job creation and GDP growth were both comparatively high and/or rising. In the neoliberal era (late 1970s to the present) both metrics were lower and/or decelerated. This periodization is very broad, of course. Some periods after 1980 contained exceptionally high levels of growth (say, the expansion between 1995 and 2001), but when we compare the 15 years since 2000 with the previous half-century, we find that the growth rate of both job creation and GDP were roughly halved.

It has long been understood that business investment in machinery and equipment is closely associated with job creation, productivity improvements and economic growth (see here and here, for example). So it comes as no surprise that the cyclically-adjusted growth rate of GDP and employment was relatively higher in three decades prior to 1980 than in the three plus decades afterwards. Accounting for this slowdown is tricky. Conventional explanatory variables include a relative aging of the population and weak productivity growth. What is omitted from this story, however, is the way in which resources are being channelled through the U.S. corporate sector, especially large firms.

Off the Chart: The Recent History of Mergers and Acquisitions

For expansion-oriented businesses, there is a basic calculus to be made: build new industrial capacity in the form of fixed asset investment or buy existing industrial capacity on the market for corporate control (via mergers and acquisitions—M&A hereafter). Given that the former process is closely associated with job creation and GDP growth, it may validly be thought of as falling under the category ‘Production’. M&A is an entirely different process insofar as it does not add to industrial capacity. In fact, M&A is often associated with the reduction of both industrial capacity and net employment, as duplicated functions within the newly merged enterprise are eliminated. Because M&A is a process that merely shuffles control of existing productive capacity between proprietors, it is best conceived as falling under the theoretical category of ‘Distribution’.

Figure 3 plots the deep history of fixed asset investment and M&A in the United States, both as a percentage of GDP. Three features about the chart command attention. First, with the exception of the depression-laded 1930s and State-led war mobilization of the 1940s, the downturn in U.S. business investment since 1990 has been exceptional. The fixed asset investment share of GDP has averaged 10 percent over the past 125 years, and the past two decades has seen investment levels consistently below that long-term average.

The second feature to note is the wave-like pattern of M&A. The narrative around the development of M&A is one of a series of ‘waves’, with each wave leading to different organizational forms and market structures. The first U.S. merger wave began after the depression of 1883 and lasted until 1904. The major form that M&A took was ‘horizontal’, meaning that firms combined with competitors in their own industries to form monopolistic market structures. The second U.S. merger wave lasted from 1916-1929 and was christened the ‘oligopoly wave’ by Nobel laureate George Stigler because vertical mergers—combinations in the same sector amongst firms that stand in a buyer-seller relationship—predominated. The third U.S. merger wave lasted from 1965-1969 and was baptized the ‘conglomerate wave’ because large firms diversified their holdings by acquiring firms in unrelated sectors. The merger wave after the 1980s has been increasingly global in scope, with large firms absorbing rivals in other jurisdictions.

The third and most important feature to note is the surge in M&A activity since 1990. In the past, merger waves were relatively infrequent and, aside from the peak of the wave itself, the scale of merger activity was comparatively insignificant. After 1990, M&A activity is sustained at historically unprecedented levels. Over the past 12 decades, annual M&A as share of GDP averaged less than three percent. However, the average level of M&A more than quadrupled in the quarter-century after 1990 compared with the century prior to 1990. And prior to 1990, M&A activity never came close to eclipsing the value of fixed asset investment (save just one year—1899). After 1990, the scale of M&A begins to rival, if not outpace, that of fixed asset investment. Clearly this is a historic shift in American capitalism.

This creates a set of puzzles. Why did the historic pattern of M&A break down after 1990 and what have some of the macroeconomic consequences been? At a minimum, explanations for M&A usually try to account for two things: merger motives (causes) and post-merger outcomes (effects). Growth and efficiency (the latter often described as operating of financial ‘synergies’) are two of the most common motivations cited for M&A activity, but from a heterodox perspective the larger relative firm size and attendant market power that greater size bestows is the real amalgamation prize.

Market Structure and Market Power

By capturing the overall position of large firms in the corporate universe, many heterodox economists have utilized aggregate concentration as a broad proxy for power of oligopolistic firms. Figure 4 contrasts the scale of merger activity with aggregate asset concentration, the latter measured as the total assets of the top 100 U.S.-listed firms as a percent of the corporate universe. In this chart, merger activity is benchmarked against fixed asset investment, thus capturing the ‘buy or build’ decision. Theoretically, sustained periods of M&A should restructure the corporate sector in a way that elevates asset concentration. Sustained periods of fixed asset investment, by contrast, should lead to a dispersion of corporate asset ownership, as new firms enter the industrial space. The two series in Figure 4 are tightly and positively intertwined over six decades, both on a year-over-year basis (Pearson correlation value of 0.78) and when adjusted to capture the secular (10-year moving average) first difference (a correlation of 0.58). This adds considerable empirical support to the theoretical claim that that amalgamation tends to concentrate corporate asset ownership.

In tandem with the conglomerate merger wave of the late 1960s, asset concentration increased by one-half between, rising from 8 to 12 percent of total corporate assets. Merger activity remained relatively low between 1970 and 1990. Theoretically, then, the fixed asset investment in those two decades should have led to a diffusion of corporate asset ownership. The facts support this interpretation. Between 1970 and 1990, asset concentration fell by one-quarter. With the onset of the most sustained period of merger activity in U.S. corporate history, asset concentration more than doubled, rising from 9 percent in 1990 to 21 percent by 2006. There are millions of registered corporations in the U.S., but the 100 largest firms control one-fifth of total corporate assets, which is a remarkably high degree of concentration.

Is there an empirical relationship between market structure and market power? The fact that sustained periods of M&A are closely associated with the creation of a concentrated market structure implies that the drive for market power is one possible merger motive. However, the fact of enhanced market power would add considerable weight to this claim. I have pursued this line of inquiry in a more fulsome way for the United States (here and here) and for Canada (here and here, for example) and found there to be a linear relationship between amalgamation and aggregate concentration, on the one hand, and aggregate concentration and the market power of oligopolistic corporations, on the other. Does it follow that the concentration of corporate ownership leads to an increase in the size-adjusted profitability of the top 100 U.S.-listed firms—the latter understood as a proxy for market power?

We would assume that as corporate assets concentrate, the top firms would claim a larger share of corporate profit. By adjusting for firm size we approximate what Mancur Olson called the ‘cartelistic power per capita’ of an organization, thereby getting a view into the market power of large firms. Figure 5 contrasts aggregate asset concentration (market structure) with the pre-tax profit per employee (market power) of the largest 100 U.S.-listed firms, ranked annually by market capitalization. The two series are tightly synchronized and register a year-over-year correlation of 0.89 over six decades and a secular first difference correlation of 0.71, which strongly supports the notion that market structure and market power are linked.

The size-adjusted profitability of the largest firms remained relatively stable between 1950 and 1990, ranging from a low of $23,000 per employee in 1954 to a high of $43,000 in 1974 (the tail end of the conglomerate merger wave). Profitability soared after 1990 in tandem with the largest merger wave in U.S. history, rising from $31,000 per employee in 1990 to $80,000 per employee in 2006. This statistical relationship helps explain the motivation to merge. After all, concentration for its own sake is a questionable goal. But if concentration leads to an increase in market power and this market power enables firms to increase their (size-adjusted) profitability, then this provides the business rationale for M&A. In a recent study, the Federal Reserve Board concluded the same thing, namely that M&A is positively associated with market power, but is statistically unrelated to improvements in productivity.

Is there a Shortage of Investment?

Rounding back on the issue of secular stagnation, it seems clear that depressed levels of fixed asset investment play an important role in the slowdown of GDP growth. The claim I want to make here is that the historically unprecedented redirection of funds away from industrial expansion (fixed asset investment) in favour of corporate ownership redistribution (via M&A) has led to a perceived shortage of investable funds. The American corporate sector has ploughed enormous resources into amalgamation, which has led to a highly concentrated market structure and elevated levels of market power. Let’s imagine that all the business spending on M&A was instead ploughed into fixed asset investment; what would the pattern look like over the past century?

Figure 6 combines fixed asset investment with M&A as a share of GDP. This ‘notional’ total investment series indicates the different ways that firms can deploy available assets for the sake of growth. The notional investment series shows that if the corporate sector had spent all its M&A resources on fixed asset investment, the investment boom between 1945 and 1980 would have been a good deal more modest, in relative terms, than it actually was. And rather than the U.S. economy having experienced a deterioration of investment after 1980, it would have witnessed a historically unprecedented investment boom.

Actual fixed asset investment peaked in 1981 at 13 percent of GDP, but notional total investment peaked in 1999 at 26 percent of GDP and, as of 2015, stood at 22 percent. Given that investment in machinery and equipment is a key driver of employment and economic output, it seems reasonable to suppose that the explosion of M&A activity after 1990 is at least partly responsible for the downward pressure on GDP growth. These facts are obviously not meant to be conclusive; instead, they are meant to shine light on a phenomenon that has not received the scholarly attention it deserves. A macroeconomic problem as complex as secular stagnation would almost certainly have multiple causal elements. It seems that soaring M&A is one such element.

They Just Get Bigger: How Corporate Mergers Strangle the Economy

 

 

Trickle-Down Economics Is Not True Capitalism

On August 10, 2015, Eric Beinhocker writes on Economics:

“Four men sat at a table. Raised sixty floors above the city, they did not speak loudly as one speaks from a height in the freedom of air and space; they kept their voices low, as befitted a cellar.”

The four men in this early scene from Ayn Rand’s Atlas Shrugged are magnates of the steel, mining, and railroad industries who along with their lobbyist meet in “the most expensive bar-room in New York” to foil the book’s entrepreneurial hero, Hank Rearden, and protect their oligopolies. They conspire to use their influence in Washington to stitch up markets, crush competitors, and stifle innovation. They cynically clothe their plot in arguments that they are protecting “the public interest” and promoting a “progressive social policy.”

Ayn Rand would likely be deeply unhappy with the state of American capitalism today. Not just because of an overweening state, large budget deficits, and interventions in the economy such as Obamacare—the issues that so excite her disciples in the Republican Party today—but also because of the morphing of the U.S. economy into a playground of crony capitalism recognizable from the pages of Atlas Shrugged. Rand would have seen the growing reliance of businesses on Washington for corporate welfare, and of politicians on businesses for campaign contributions, as an unhealthy codependency that distorts the free market she so admired.

The profits of firms in more than 40 percent of the U.S. economy—in sectors such as agriculture, financial services, real estate, oil and gas, health care, education, and defense—are deeply intertwined with and at least partially dependent on policies in Washington. Various studies show enormous returns on investments in lobbying—for example, the pharmaceutical industry reaps a return of 77,500 percent on lobbying versus 8 percent from actually making drugs. While Rand would have had many differences with the Occupy Wall Street protesters, she would have found common cause with their objections to the power of the K Street lobbyist-industrial complex.

The Rise of the Rentiers

Economists use the phrase “economic rents” to describe extraordinary profits that arise from distorted, uncompetitive markets. In a truly free and competitive market, there are no “rents,” only market returns. Rentier capitalism is a system in which the focus is not on creating, making, investing, and building, but on distorting, protecting, skimming, and getting a slice. Rand’s villains were just as often rentier capitalists as welfare “moochers.” The rise and continued support of rentier capitalism is perhaps the final remaining point of bipartisan cooperation in Washington. Democrats and Republicans alike dole out spending, preferential treatment, and regulatory gifts to favored industries and constituents, all oiled by ever-looser campaign finance rules. This creates space for horse-trading—a defense contract for my district in exchange for support of your regulatory break for financial services. Such horse-trading cuts by interest group rather than along party lines.

Fortunately, however, objections to the growing distortions in American capitalism are also increasingly bipartisan. Since the Lehman Brothers crash in 2008, the left has vociferously criticized the cozy relationship between the financial-services industry and Washington—from Matt Taibbi’s memorable Goldman Sachs-vampire squid analogy in Rolling Stone, to the self-immolation of Bush Administration officials in the documentary Inside Job, to the megaphones of Occupy Wall Street.

But perhaps the most extensive argument against rentier capitalism has come from the right. In his 2012 book, A Capitalism for the People, University of Chicago economist Luigi Zingales makes the attention-grabbing argument that the United States is increasingly becoming like his native Italy, where success isn’t based on what you know but who you know. We may not be having bunga-bunga parties in the White House yet, but Zingales leaves one feeling they can’t be far off. Zingales describes himself as a “pro-market populist” and argues for lobbying limits, financial reform, regulatory simplification, tax reform, reinventing antitrust law, greater transparency, and more equality of opportunity. There is much in his agenda for both the center-right and center-left to agree on.

In a similar vein, Charles Koch (as in “the Koch Brothers”) published an op-ed in The Wall Street Journal titled “Corporate Cronyism Harms America.” While his language is not as colorful as Taibbi’s, his overall point is essentially the same—when business and government interests collude in a corrupt system that distorts incentives, bad things happen. The Journal chose to illustrate Koch’s piece with a cartoon of a grinning Uncle Sam and a corporate fat cat carving up a large turkey together. Standing to the side is a lean and hungry-looking man holding out an empty plate. He might well have been labeled “The Middle Class,” for it is the middle class that has lost the most in the great American turkey carve-up.

Failing to Invest in the Middle Class

The facts about the decline of the American middle class are increasingly familiar, though startling nonetheless. After growing almost continuously since World War II, U.S. median income stagnated at the end of the 1980s and then, beginning in 2000, declined 11 percent. Middle-class incomes today are no higher in real terms than they were in 1987.

Much of the debt that caused the crisis was accumulated by the middle class as people tried to compensate for stagnant incomes by mortgaging up their homes and running up their credit cards. Then the debt bubble burst and the median family lost nearly $50,000, or 40 percent of its net wealth, from 2007 to 2010. For the typical middle-class family, the crisis wiped out 18 years of savings and investment. With too much debt before the crisis and their modest savings hammered by the downturn, many middle-class baby boomers are facing a major decline in living standards as they age. On the other side of the generational divide, this will be the first cohort in modern American history whose children will quite possibly be poorer than their parents.

So what do the rise of rentier capitalism and the hollowing out of America’s middle class have to do with each other? It is too simple to say that one directly caused the other. But they are more tightly linked than might be expected. The usual explanations for the woes of the American middle class point to big tectonic forces—namely globalization and technological change. At a superficial level this argument is correct—competition from low-wage countries has depressed wage growth in certain sectors, and technology has eliminated some manufacturing and middle-management jobs. But what this analysis leaves out is what we didn’t do—we didn’t make the long-term investments that would have helped us better adapt to these tectonic shifts.

One of the great historical strengths of both American capitalism and the American political system has been their adaptability. When the Industrial Revolution threatened America’s largely agricultural economy, America adapted and went one better, leapfrogging European industrial production by the early twentieth century. When industrialization then unbalanced America’s political system and strained its social fabric, Teddy Roosevelt unleashed a wave of political and social innovation, busting up trusts and introducing protections for consumers and workers. In the depths of the Depression, another Roosevelt responded with rural electrification, the creation of Social Security, and financial regulation that kept the system stable for 70 years. When the Soviet Union challenged America in the Cold War, we made massive investments in technology, education, and the National Highway System. The benefits of these innovations and investments flowed broadly in American society, not least to the middle class.

Where are the innovations and investments that will enable today’s middle class to meet the challenges of our own era? While government spending has risen relentlessly over the past decades, what we have not been spending on is our future. The Economist Intelligence Unit, the research arm of The Economist, recently ranked U.S. education performance seventeenth out of 50 developed economies. If one takes out spending on the War on Terror, government investment in R&D as a percentage of GDP has declined over the past two decades, while Chinese investment has more than tripled and will pass ours in the next decade. And according to the OECD, the United States now ranks sixteenth in broadband penetration, speed, and price. Flying from run-down John F. Kennedy Airport in New York to Beijing’s gleaming new airport terminal, one wonders which is the developing economy.

One should not see this short-termism as only a problem of government. The private sector has also lost much of its ability to think and invest for the long term. Starting in the 1980s, elite business schools began teaching future managers and investors that the only metric that matters is shareholder value. This was a dramatic change, as throughout most of its history American capitalism had operated on a stakeholder model in which managers sought to balance the interests of multiple stakeholders, including investors, customers, employees, and local communities. The shareholder-value revolution created a short-term quarterly earnings culture, a bias toward sweating assets versus building them, a view that employees are a cost to be managed rather than human capital to be invested in, and a love of debt. It also made CEOs and their top managers immensely rich by showering them with stock options. While CEO compensation shot upwards, corporate debt levels climbed, R&D spending dropped, and employee churn and temporary work rose.

Some might reply, what about Apple, Google, and Facebook? Don’t we still have plenty of innovative companies? Yes, we still have Silicon Valley and other pockets of entrepreneurship that are the envy of the world. But it is important to note that Silicon Valley was built by and continues to live off of the long-term investments of an earlier era—whether it was the government contracts that enabled Fairchild Semiconductor to launch the microchip revolution and spawn companies such as Intel, or DARPA’s invention of the Internet that made Google and Facebook possible, or Bell Labs’ early investments in cellular communications that lurk beneath every Apple iPhone. And yet Silicon Valley does not an economy make. Facebook, the most successful startup of recent times with a market value $60 billion, employs fewer than 5,000 people. Most of Apple’s job creation has been in China.

So it is true that America’s middle class has been under pressure from global competition and technological changes. But it is also true that America has not been investing enough in education, infrastructure, and technology to equip our middle class to compete in a more challenging world. Short-term rent-seeking and political gain have been driving out long-term investment.

Middle-Out Economics—True American Capitalism

Ayn Rand would have deplored this mutation of American capitalism. It is the opposite of the entrepreneurial, risk-taking, meritocratic capitalism she celebrated. In a twist of historical irony, the narrative that justifies this mutation is one of free-market conservatism. Just as Rand’s villains in Atlas Shrugged justified their market carve-up with cynical arguments about “social progress” and “public service,” today’s rentiers justify their actions by citing Rand, Hayek, and Friedman, claiming it is “the free market at work.” So when a bank threatens to trade against its own client unless the client steers it new business with fat fees—something Tony Soprano might have called “protection”—bankers call it “the efficient market at work.” Or when the clubby board pays its CEO handsomely despite mediocre performance, it claims it just reflects the “global market for talent.” Or when a lumbering corporate giant gets a tax break, it calls it “promoting entrepreneurship.”

Perhaps the most insidious narrative has been that of “trickle-down economics.” It has created the myth that helping powerful plutocrats is somehow the same as encouraging the free market. Orwell would have admired the doublespeak. But the true history of American capitalism has not been “trickle down,” it has been “middle out.” More than a century of private- and public-sector investments made American workers the most productive in the world. As labor productivity rose, so too did wages, creating the largest and most prosperous middle class the world has ever seen.

Middle-out economics is a principle that Henry Ford understood when he decided to pay his workers enough so they could afford to buy his cars. Entrepreneurs start companies not because of tax breaks, but because there are consumers out there who want and can afford what the entrepreneurs make. And most entrepreneurs don’t start rich; most start in the middle class or below. Steve Jobs’s father, Paul, was high-school educated and his mother was a payroll clerk—they struggled to send Steve to college. Sam Walton’s father was a farmer, and Walton started his business with $5,000 saved from his Army pay and a loan from his in-laws. Neither of these entrepreneurs would have benefited from tax breaks for the rich. Think of all the potential Steve Jobses and Sam Waltons who didn’t make it because their parents couldn’t afford to send them to college or because they couldn’t get a small-business loan. Government doesn’t make entrepreneurs, but it can help them help themselves.

Trickle-down economics may work in textbook economic theory with ivory-tower assumptions about perfectly rational people and perfectly efficient markets. But in the real world of politics and interests, it simply provides a cover story for rentier economics. It dresses up anti-market behavior in free-market rhetoric.

Other have presented Middle-out economics as a progressive argument—but it can just as easily be presented as a conservative argument. It is a call for a return to a truer form of American capitalism. It is an argument for going back to the values that have described American capitalism since de Tocqueville—competition, meritocracy, equality of opportunity, innovation, risk taking, and reward for hard work, self-improvement, and fair play. Both Randians and modern conservatives such as Koch claim to disdain rentier capitalism and celebrate these values. But what Rand’s acolytes, Koch, and the Tea Party fail to see is the constructive role government must play if these conservative values are to be made real. This is not the heavy-handed interventionism or disdain for markets by socialists or the far left. This is the enabling and investing role of government supported by generations of both centrist Republicans and Democrats.

Rand argued that the masses need elites. But elites also need the masses. In Atlas Shrugged, a grasping state causes the elite to go on strike, with dire consequences for the world. In America’s current case, a grasping elite is in danger of strangling the middle class, with consequences potentially as dire as Rand’s dystopian vision. It will take deep reform and a reassertion of the political center, but America can move away from rentier capitalism and return to the middle-out capitalist model that has served it so well. If not, there are a billion middle-class Chinese, Indians, Brazilians, and others who will only be too glad to take over America’s lead.

Trickle-Down Economics is Not True Capitalism

This is an excellent article that perfectly describes the correct role of businesses to contribute to society by creating and making available products and services that improve people’s lives in tangible ways. But still Eric Beinhocker and Nick Hanauer couch this purpose in the ability of businesses to “provide employment that enables people to afford the products and services of other businesses.” Unfortunately, this is limited one-factor thinking––jobs and labor input––that fails to acknowledge the far more powerful engine of creating and making available products and services––productive non-human capital assets––the result of constant technological invention and innovation. Face it, employment is not sufficient enough to secure economic prosperity for the majority of Americans when the reality is that tectonic shifts in the technologies of production eliminate jobs and devalue the worth of labor. What is essential to redefine capitalism is to empower EVERY citizen to become an owner of the wealth-creating, income-producing capital assets that result in the creation of products and services that improved people’s lives.

The system, as presently structured, prevents Americans without savings and equity––the 99 percent––from participating as a productive capital owner contributor and from acting fully as a “customer with money” for the products and services produced by physical assets––advanced tools, machines, super-automated processes, robotics, computerized operative asset, etc.

The capitalism practiced today is what, for a long time, I have termed “Hoggism,” propelled by greed and the sheer love of power over others. “Hoggism” institutionalizes greed (creating concentrated capital ownership, monopolies, and special privileges). “Hoggism” is about the ability of greedy rich people to manipulate the lives of people who struggle with declining labor worker earnings and job opportunities, and then accumulate the bulk of the money through monopolized productive capital ownership. Our scientists, engineers, and executive managers who are not owners themselves, except for those in the highest employed positions, are encouraged to work to destroy employment by making the capital “worker” owner more productive. How much employment can be destroyed by substituting machines for people is a measure of their success––always focused on producing at the lowest cost. Only the people who already own productive capital are the beneficiaries of their work, as they systematically concentrate more and more capital ownership in their stationary 1 percent ranks. Yet the 1 percent are not the people who do the overwhelming consuming. The result is the consumer populous is not able to get the money to buy the products and services produced as a result of substituting machines for people. And yet you can’t have mass production without mass human consumption. It is the exponential disassociation of production and consumption that is the problem in the United States economy, and the reason that ordinary citizens must gain access to productive capital ownership to improve their economic well-being.

Under a reformed system paradigm with the focus on creating a democratic growth economy, the ownership of productive capital would be spread more broadly as the economy grows, without taking anything away from the 1 to 10 percent who now own 50 to 90 percent of the corporate wealth. Instead, the ownership pie would desirably get much bigger and their percentage of the total ownership would decrease, as ownership gets broader and broader, benefiting EVERY citizen, including the traditionally disenfranchised poor and working and middle class. Thus, productive capital income would be distributed more broadly and the demand for products and services would be distributed more broadly from the earnings of capital and result in the sustentation of consumer demand, which will promote economic growth. That also means that society can profitably employ unused productive capacity and invest in more productive capacity to service the demands of a growth economy that can produce general affluence for EVERY citizen.

Eric Beinhocker and Nick Hanauer, influential economists and business leaders, as well as political leaders, should read Harold Moulton’s The Formation Of Capital, in which he argues that it makes no sense to finance new productive capital out of past savings. Instead, economic growth should be financed out of future earnings (savings), and provide that every citizen become an owner. The Federal Reserve, which has been largely responsible for the powerlessness of most American citizens, should set an example for all the central banks in the world. Chairman Janet Yellen and other members of the Federal Reserve need to wake-up and implement Section 13 paragraph 2, which directs the Federal Reserve to create credit for local banks to make loans where there isn’t enough savings in the system to finance economic growth. We should not destroy the Federal Reserve or make it a political extension of the Treasury Department, but instead reform it so that the American citizens in each of the 12 Federal Reserve Regions become the owners. The result will be that money power will flow from the bottom up, not from the top down––not for consumer credit, not for credit that doesn’t pay for itself or non-productive uses of credit, but for credit for productive uses to expand the economy’s rate of growth.

 

 

It’s Time for New Economic Thinking Based On The Best Science Available, Not Ideology

On January 31, 2017, Eric Beinhocker writes on Economics:

If 2008 was the year of the financial crash, 2016 was the year of the political crash. In that year we witnessed the collapse of the last of the four major economic-political ideologies that dominated the 20th century: nationalism; Keynesian Pragmatism; socialism; and neoliberalism. In the 1970s and 80s the centre right in many countries abandoned Keynesianism and adopted neoliberalism. In the 1980s and 90s the centre left followed, largely abandoning democratic socialism and adopting a softer version of neoliberalism.

For a few decades we thought the end of history had arrived and political battles in most OECD countries were between centre-right and centre-left parties arguing in a narrow political spectrum, but largely agreeing on issues such as free trade, the benefits of immigration, the need for flexible efficient markets, and the positive role of global finance. This consensus was reinforced by international institutions such as the IMF, World Bank, and OECD, and the Davos political and business elite.

In 2008 that consensus was rocked, last year it crumbled. Some will cling on to the idea that the consensus can be revived. They will say we just need to defend it more vigorously, the facts will eventually prevail, the populist wave is exaggerated, it’s really just about immigration, Brexit will be a compromise, Clinton won more votes than Trump, and so on. But this is wishful thinking. Large swathes of the electorate have lost faith in the neoliberal consensus, the political parties that backed it, and the institutions that promoted it. This has created an ideological vacuum being filled by bad old ideas, most notably a revival of nationalism in the US and a number of European countries, as well as a revival of the hard socialist left in some countries.

History tells us that populist waves can lead to disaster or to reform. Disaster is certainly a realistic scenario now with potential for an unravelling of international cooperation, geopolitical conflict, and very bad economic policy. But we can also look back in history and see how, for example, in the US at the beginning of the 20th century Teddy Roosevelt harnessed populist discontent to create a period of major reform and progress.

So how might we tilt the odds from disaster to reform? First, listen. The populist movements do contain some racists, xenophobes, genuinely crazy people, and others whom we should absolutely condemn. But they also contain many normal people who are fed up with a system that doesn’t work for them. People who have seen their living standards stagnate or decline, who live precarious lives one paycheque at a time, who think their children will do worse than they have. And their issues aren’t just economic, they are also social and psychological. They have lost dignity and respect, and crave a sense of identity and belonging.

They feel – rightly or wrongly – that they played by the rules, but others in society haven’t, and those others have been rewarded. They also feel that their political leaders and institutions are profoundly out of touch, untrustworthy, and self-serving. And finally they feel at the mercy of big impersonal forces – globalisation, technology change, rootless banks and large faceless corporations. The most effective populist slogan has been “take back control”.

After we listen we then have to give new answers. New narratives and policies about how people’s lives can be made better and more secure, how they can fairly share in their nation’s prosperity, how they can have more control over their lives, how they can live with dignity and respect, how everyone will play by the same rules and the social contract will be restored, how openness and international cooperation benefits them not just an elite, and how governments, corporations and banks will serve their interests, and not the other way around.

This is why we need new economic thinking. This is why the NAEC initiative is so important. The OECD has been taking economic inequality and stagnation seriously for longer than most, and has some of the best data and analysis of these issues around. It has done leading work on alternative metrics other than GDP to give insight into how people are really doing, on well-being. It is working hard to articulate new models of growth that are inclusive and environmentally sustainable. It has leading initiatives on education, health, cities, productivity, trade, and numerous other topics that are critical to a new narrative.

But there are gaps too. Rational economic models are of little help on these issues, and a deeper understanding of psychology, sociology, political science, anthropology, and history is required. Likewise, communications is critical – thick reports are important for government ministries, but stories, narratives, visuals, and memes are needed to shift the media and public thinking.

So what might such a new narrative look like? My hope is that even in this post-truth age it will be based on the best facts and science available. I believe it will contain four stories:

  • A new story of growth
  • A new story of inclusion
  • A new social contract
  • A new idealism

This last point doesn’t get discussed enough. Periods of progress are usually characterised by idealism, common projects we can all aspire to. Populism is a zero-sum mentality – the populist leader will help me get more of a fixed pie. Idealism is a positive-sum mentality – we can do great things together. Idealism is the most powerful antidote to populism.

Finally, economics has painted itself as a detached amoral science, but humans are moral creatures. We must bring morality back into the centre of economics in order for people to relate to and trust it. All of the science shows that deeply ingrained, reciprocal moral behaviours are the glue that holds society together. Understanding the economy as not just an amoral machine that provides incentives and distributes resources, but rather as a human moral construct is essential, not just for creating a more just economy, but also for understanding how the economy actually creates prosperity.

In short, it is time to forge a new vision that puts people back at the centre of our economy. To paraphrase Abraham Lincoln, it is time to create an economy that is “of the people, by the people, for the people.” We are truly at a fluid point in history. It could be a great step backwards or a great step forwards. We must all push forwards together.

Based on remarks originally delivered to the OECD New Approaches to Economic Challenges workshop, December 14, 2016, Paris.

It’s Time for New Economic Thinking Based on the Best Science Available, Not Ideology

America has tried the Republican “cut spending, cut taxes, and cut ‘entitlements,’ eliminate government dependency and shift to private individual responsibility” and the Democratics “protect ‘entitlements,’ provide tax-payer supported stimulus, lower middle and working class taxes, tax the rich and redistribute” through government brands of economic policy, as well as a mixture of both. Republican ideology aims to revive hard-nosed laissez-faire appeals to hard-core conservatives but ignores the relevancy of healing the economy and halting the steady disintegration of the middle class and working poor.

Some conservative thinkers have acknowledged the damaging results of a laissez-faire ideology, which furthers the concentration of productive capital ownership. They are floundering in search of alternative thinking as they acknowledge the negative economic and social realities resulting from greed capitalism. This acknowledgment encompasses the realization that the troubling economic and social trends (global capitalism, free-trade doctrine, tectonic shifts in the technologies of production and the steady off-loading of American manufacturing and jobs) caused by continued concentrated ownership of productive capital will threaten the stability of contemporary liberal democracies and dethrone democratic ideology as it is now understood.

Without a policy shift to broaden productive capital ownership simultaneously with economic growth, further development of technology and globalization will undermine the American middle class and make it impossible for more than a minority of citizens to achieve middle-class status.