Chapter 18
THE SOURCES
OF FUNDING FOR THE SYSTEM OF DISTRIBUTION
One of the major questions remaining is
where the money will come from for
the independent agency’s purchase of the index mutual fund shares. It has been best to leave this question until
after our discussion of free market ideology.
New-money creation:
New
money is created more or less constantly by the central bank as it expands the
money supply to match a growing economy.
(Often, it expands the supply more than that, creating a “bubble.”) During Alan Greenspan’s tenure as chairman of
the Federal Reserve in the United States, he once told how “at its February
meeting, the Federal Open Market Committee reaffirmed the provisional ranges
set last July for money and debt growth this year: 1 to 5 percent for M2, 2 to
6 percent for M3, and 3 to 7 percent for the debt of domestic nonfinancial
sectors.”[1] (The references to M2 and M3 are to different
types of money as defined by monetary economists.)
Economist
William R. Allen explains that “most money is created by bank lending –
commercial banks create the deposits they lend.
Banks are required to hold reserves equal to a minimum fraction of their
deposit liabilities… An increase in reserves can come from bank borrowing from
the Fed… The dominating thing is ‘open market operations.’… The Fed often
enters the government securities market.
If the Fed buys securities from bond dealers, it thereby directly
creates money dollar-for-dollar equal to the value of the purchase… There will
be additional reserves, on the basis of which banks can create a multiple of
new checking deposits. There has long
been an extremely large correlation between Fed purchases and sales of
government securities, on the one hand, and the money supply, on the other.”[2]
For a
“shared market economy,” we should consider an alternative to such FOMC
purchases of government securities from bond dealers. This would involve abandoning the FOMC “open
market operations” money-creation and instead having the independent agency buy
the index mutual fund shares it needs by using similarly-created money. The agency itself, the FOMC, or the national
Treasury could be given the legal power to create money and, instead of buying
government securities with it, to buy the fund shares. This could put the same amount of new money
into the business system as before, providing capital to business in general
and having the same effect on the price level.
The money would simply enter the system at a different place. The result would be that the enterprises
forming the economy would receive their billions of extra dollars, while at the
same time the independent agency would come into ownership of billions of
dollars a year worth of index mutual fund shares – all without a penny being
taken from anyone through taxation or otherwise. It simply adapts a mechanism that is already
in use and taken for granted as part of the normal operation of the market
economy. Purchases in the amounts
mentioned by Greenspan would come to billions of dollars per year. The effect would be cumulative, with the
shares purchased one year being added to those purchased previously.
Much of
the expansion of the money supply from open market operations comes not from
the initial purchase of government securities, but from the multiplier effect
within the banking system as new accounts are created. This means that the agency purchase of fund
shares (if the same amount is used for their purchase as the FOMC would have
used for its government bond purchases) will be in a dollar amount that is
smaller than the total increase in the money supply would have been. If it were thought desirable to have the
entire increase in the money supply result in purchases for the
distribution-fund, the amount of newly-created money could be increased to what
the total expansion would have been under the present system of infusing the
money into banks. In such case, it would be worth considering going to
100%-reserve banking, taking the banks entirely out of the business of creating
new money themselves through the present practice’s multiplier effect. The entire increase in the money supply would
come from fund purchases by the independent agency. This may have considerable advantage in
addressing the problem of the business cycle, which is a separate issue than we
have been discussing, but nevertheless a very important one. The economist Irving Fisher advocated
100%-reserve banking for that purpose.
I have
recently become aware that the idea of shifting the direction of newly created
money was advanced in the 1920s. An
article by Stephen M. Goodson in 2009 says that “one of the 20th
century’s foremost monetary reformers, Major Clifford Hugh Douglas… advocated
the transfer of the money creation process from private banks – which create
money out of nothing as an interest-bearing debt – to the state. This government-created money he termed
Social Credit. He favored the payment of
a basic income or national dividend to each citizen.”[3] This
is similar to our thinking here, although without the “shared market economy”
feature.
Taxation:
It is
worth noting that Douglas went further along the lines favored here, accepting
and expanding upon Henry George’s point (which we have discussed in various
connections) about how the “unearned increment” in an economy should be used
for the common benefit. He spoke of “the
unearned increment of association” coming from “the cultural inheritance”
passed down through successive generations.
“The ownership of these intangible factors vests in the members of the
living community… Ethically, because it is an inheritance from the labours of
past generations of scientists, organisers, and administrators, and
pragmatically because the denial of its communal character sets in motion
disruptive forces….”[4] This unearned increment can provide a vast
source for taxation without violating the classical liberal principle that
someone should be entitled to keep what he has earned (subject only to ordinary
taxation).
We
recall that Henry George spoke primarily of the “unearned increment” on rising
land and mineral values, and said it could be fully taxed and used for public
needs (such as, in a shared market economy, for fund purchases).
There
is, however, a necessary qualification.
This relates to how the "unearned value" of
something like land or minerals can be taxed away in today's society without in
effect expropriating the present owners.
Those owners have paid for the property when they have acquired it, so
the unearned value has gone to the sellers (and actually to their predecessors
in a long chain of title). In dealing with the current owner, there is no
justification for taking the portion of the value of the land represented by
the purchase price. It will only be just to the present owners to tax the
unearned increment occurring after the
shared market economy is introduced.
It is enough just to tax the unearned
increment that arises in the future.
Assume, for example, that someone buys land for $100,000 and it
increases in value to $200,000 as the city grows up around it, and that none of
that increase is due to improvements made on the land. This increase, as adjusted for the inflation
that may have occurred during the period the increase in value has occurred,
could (and should) be considered as accruing to the community as a whole.
As
Henry George argued, the rise in values attributable to increasing population
(or to changing technological demand or other factors that aren’t related to
the owner’s efforts) are rightly an asset of the general community. George envisioned this as a huge source of
public funds. Whatever it is judiciously
concluded to amount to, it can be used for fund purchases or other public uses.
Looking
to the future, there will be vast unearned increment going to any person who
earns income in the future economy. As
we noted in Chapter 14’s conceptual critique, that income will be partly due to
the value added by the individual or the firm, but will also be significantly
due to the enormous accretion of technology and scientific knowledge from the
past (as well as to the entire infrastructure of civilization that creates the
context for the earnings). The latter is rightly the asset of the entire
community.
How
much of a given sum of earnings is due to the one, and how much to the other,
has no conceptual answer, and will have to be determined by the society on an
on-going basis. The division should be
one that balances the rightful claims of the community against the need to
provide the participants in the market economy a fully ample incentive in light
of their risk and contribution. Whatever
part is taken for the community can, if that is the choice, be put into fund
purchases.
Contrary
to the strongly held conviction of free market conservatives and libertarians
up to now, there will be a valid rationale, consistent with a classical liberal
point of view, for progressive taxation. The inheritance taxes that are
necessary to prevent the rise of a hereditary caste can also go into fund
purchases. An important concern will be about a possible flight of people and
capital from a given country to avoid its taxation, however rightful that
taxation may be. National laws and
international compacts may be necessary to prevent that from happening.
The many present-today expenditures that
will be made unnecessary:
Subject to complex details of transition, all
money going to Social Security for its various purposes that include old age
and disability assistance, now and in the future, could go instead to index
mutual fund purchases by the agency. The
distribution through the agency would provide people with income for all
periods of their lives. There would be
no need for both systems.
The
same would apply to the money now spent for welfare and the many forms of
assistance to the poor. A news report in
1997 said that “this year, welfare spending will hit $412 billion, or 5 percent
of the total
People
of differing viewpoints vary as to how much a general system of income support
will reduce crime, if at all. To the
extent it does, the billions of dollars spent on the many parts of the justice
system can be shifted to pay for fund purchases.
The money
that firms and employees now put into pension savings, supplemental retirement
annuities, and IRAs (“individual retirement accounts”) for retirement can go
into the fund purchases or into extra forms of savings to supplement the
general distribution. The same can be
said for what people spend on life insurance to protect spouses and children
from destitution. Nor will people need
to purchase insurance policies for nursing home and home health care in their
old age, although they may find desirable supplemental savings or insurance for
needs of that sort that may well cost more than they can afford from their
receipt of the common distribution. Much
that is now spent by charities for those in need will no longer be necessary,
and the many programs for the hungry and the homeless can eventually be
disbanded.
With
these many sources at hand, there will be little problem finding the means to
create the fund for distribution, except problems of transition.
For all of this to happen in the
Any
challenge to this stranglehold is derided as “populist.” For a purported “democracy,” such an epithet
is fatuous. The ideal, voiced by
The
hurricane-force winds of change that have raised the issues addressed in this
book will create enormous tensions. In
their absence, the stranglehold would likely continue. With them, who is to say what is possible?
ENDNOTES
[1] . Testimony of
Alan Greenspan, Monetary Policy
Objectives, Federal Reserve Board Summary Report,
[2] . William R. Allen, The
[3] . Stephen M. Goodson, Impact, April/May 2009.
[4] . Excepts from
[5] . Wichita Eagle,