Same Economy, Way Better Outcomes for Society

because surely, if only I can explain it well enough, people will start advocating for this idea

Photo by Vlad Busuioc on Unsplash

[This is not my first time trying to explain this here in Medium.]

Today, almost every nation on the planet has a market-based, profit-driven economy that is ‘managed’ by the central bank and the central government working (hopefully) in tandem. The goal is an economy that is stably growing at a ‘sufficient’ rate with ‘minimal’ unemployment and ‘modest’ inflation.

The single most important element in any nation’s economy is the money. Money is the fuel of the economy. It is people’s source for material well-being. It is also a necessary ingredient for the attainment of that which lies beyond a merely sufficient level of material well-being: personal wealth.

So the single most important part of any economic system is its monetary system: the ways and means of supplying it with money. The purpose of this article is to introduce a proposal for a different way of supplying the economy — any nation’s economy — with money (as currency). Its irrefutable, unequivocal, unassailable benefits for society are astonishing.

One point must be emphasized before going any further. This is a proposal for a different way of supplying the existing economy with money (as currency). As will be shown herein, it would change for the better all outcomes for society, but even so, the ‘nature’ of the economy would not change: a market-based, profit-driven economy would still be that.

In, again, most nations on the planet, money is created at present in two ways. A very brief summary of how it is created might help people who are unfamiliar with monetary economics to understand this proposed paradigm.

One way money gets created at present occurs when banks make loans. When they do that they do not actually loan out money, but ‘extend credit’. Those receiving that credit use it to make purchases. When they do that it becomes income for the sellers of those goods and service: that credit has become part of the money supply of the economy. It gets mixed with those sellers’ other money for use in making purchases, making payments on any debt they might have, paying taxes, etc. [It is called ‘fractional reserve banking’ because banks must have in reserve an amount of money that is some fraction of the total amount of credit they have extended that has not yet been repaid — or ‘written off’, in the case on non-repayment; what that fraction is to be is decreed by the central bank.]

So most of the money in the economy is credit — ‘IOU’s’ people, businesses, and not-for-profits owe banks — being used as money: weird, but true. Importantly, that credit-as-money remains in the economy even after the loan has been repaid (or if it never gets repaid). It might be sitting in an account somewhere — in the global economy the equivalent of trillions of U.S. dollars (in all the various nations’ currencies) are sitting in accounts at any point in time — or be in a safe or under a mattress, but in the current system once money is created it remains in existence forever. That is why economists fear so much the ‘future inflationary effects’ of creating money in this system.

[There are three reasons for the little (or no) inflation of recent years despite vast infusions of money into the global economy: (1) there is a shortage of money in many nations that are not allowed to create money (by order of the IMF and World Bank, as terms for getting loans); (2) money is being hoarded on vast scales — trillions of dollars by large corporations alone; and (3) there has been tremendous inflation in asset markets, but only housing as an asset gets counted in official measures of inflation (and it is lightly weighted in those measures because relatively few people are in the market for housing at any point in time).]

The other way money gets supplied to the economy at present is in the form of actual money: currency. That happens when money is created for the central bank to use to purchase new debt that has been issued by the central government. [In the recently invented practice of ‘quantitative easing’ (QE) money is created for the central bank to use to purchase other debt, and even other kinds of assets, but we don’t need to be concerned specifically about that.]

Normally, very little of the debt issued by the central government is purchased that way. Most of it is purchased with money that already exists. Still, that is one way the supply of money for the economy can be increased — if the central bank, for whatever reason, chooses to have money created for that purpose. That money (and the money for QE) is actual money: currency (though these days it is digital, not physical cash/coins). [To be clear, no government ever borrows from a bank the way people, businesses, and not-for-profits do; government borrows money by selling bonds (also called ‘bills’ or ‘notes’, based on length of time to maturity) — which individuals, businesses (including banks), etc. may buy.]

As far as the functioning of the economy is concerned, there is no difference between money in the form of credit and money in the form of currency. It is impossible, for that matter, to distinguish one from the other. (Cash and coins are simply some of that comingled, indistinguishable money that is provided in a physical form for convenience — though with debit cards that can be used in place of checks, cash has actually become the less convenient way of conducting most transactions.)

As noted, the purpose of this article is to propose a different way of supplying the economy with money — as currency. (The money-as-credit created by banks when they make loans would continue as at present.) Instead of a relatively small amount of currency being created now and then at the discretion of the central bank, a very large amount of currency would be created regularly. That money would be used for two things: to pay an income to (eligible) citizens of the nation and to fund government (all government, from central to local).

This way of supplying the economy with currency could be administered by either the existing central bank or a newly created Monetary Agency. That choice would have no bearing on how this new way of supplying the economy with currency would impact the economy. The former would certainly be the simpler option.

As for that income, it would not be paid to all citizens, but any (adult) citizen could become eligible for it. In that way it would become the absolutely, positively guaranteed — ‘bulletproof’ — minimum income. Since any (adult) citizen could become eligible for the income, it can be called a ‘democratically distributed income’ (DDI).

The rate of pay would be the same for everyone being paid the income. The amount of money to be created for that income would therefore be determined by one thing, and one thing only: the number of citizens who were eligible for it. No person or committee could change the amount of money to be created for that purpose.

The amount of the income is something to be decided, but it should be based on the current median or average income. At most, it might be based on the current per capita GDP. The idea is for it to be enough so that everyone being paid it would be above the existing poverty level, but to have it related to the existing structure of incomes. In the U.S. the minimum that income should be is $15/hr.; $600/wk.; $2,600/mo. — a tad more than the median income was before Covid hit. Again, the money for that income would be created as needed: it would be free; it would not involve taxes; it would not involve taking anything from anybody.

The amount of money created to fund government would be determined by the size of the population of the nation. It would be equal to the amount of money being spent by all government in a nation in a year at present divided by the current population of the nation (i.e., the current per capita level of total government spending) multiplied by the population of the nation (citizens plus non-citizen ‘permanent residents’) at the start of any given year.

So initially there would be no change in the amount of money provided for government to spend. Over time, the amount of money provided for government to spend would change in response to one thing and one thing only: changes in the size of the population of the nation. Again, no person or committee could change the amount of money to be created for that purpose.

All of that money would go first to the central government. Any money not spent there would be apportioned to intermediate then local governments (or directly to local governments where no intermediate level of government exists), based on population.

So there would be no need for taxes or public debt as long as government was limited to spending that amount of money. If more money were desired for government to spend (at any level) resort would have to be made once more to taxes/public debt.

Together, those two streams of money (the DDI and the funding of government) would provide the means to change most profoundly the outcomes for society of the existing economy. It would become utterly stable (completely self-regulating), with no unemployment or poverty (at no cost to anyone, without having to redistribute anything), no taxes (of any kind), and no public debt (at any level of government) — provided, again, in the case of the last two, government kept within its budget. Sustainability would be increased (even without additional regulations or any changes in behavior) because total output would be governed, passively but effectively, by demographics. There would be no unemployment or poverty at any level of total output. There are, as will be related below, built-in protections against inflation. It could be instituted in any nation with a single legislative Act.

This is a big idea, but there are only two more essential parts of it that remain to be related at this time. That should provide sufficient information for people to decide whether or not this proposal is worthy of further consideration and public discussion. The first of those parts is eligibility for the DDI. The second will be the built-in protections against inflation in this proposed paradigm.

Three categories of citizens would be eligible for the DDI. Those three categories would make it available for any adult citizen. The first two are straightforward; the third requires a bit of explaining.

The first two categories of citizens who would be eligible for the DDI would be those who had reached the retirement age and citizens of working age who were unable to work any job — whether as a permanent condition or for any temporary period of time. So it could serve as pay for ‘sick leave’ as well as maternity/paternity leave. It could also be paid in the case of citizens being unable to work due to a natural disaster — to include a pandemic (though presumably fairness to those still working would have to be somehow addressed). In fact, as an option, this monetary platform could be used to pay all citizens who were temporarily unable to work (as opposed to being unemployed for other reasons) their normal income. With or without that option, the DDI would replace Social Security in the U.S. (solving that whole problem) and similar programs in any other nations. [If the U.S. or any other nation desired a Monetary Agency, the SSA or its equivalent could be extracted from government to become it.]

The third category of citizens being paid the DDI would be those employed in minimum-pay positions. In other words, that income would be the minimum income for employed citizens. It could be paid as an hourly wage or a salary; it could be prorated for part-time work. As the incomes of citizens employed in minimum-pay positions, it would not come from their employers, but from the issuer of the DDI. (All people making more than the minimum income would continue to be paid in full by their employers, as at present.)

Still, such labor would not be free to the employer. In a free labor market, employers would have to compete for minimum-pay employees.

That neatly reverses the ‘possession arrow’ in that market. In a free market it makes all the difference whether one controls that for which others are competing or one is among those competing for something controlled by some other(s). Up till now in capitalism, all people have been required to compete for jobs controlled by (potential) employers. In this paradigm employers would be competing for minimum-pay labor controlled by (potential) employees. (People desiring to make more than the minimum pay would continue competing for such jobs.)

Employers would do that by offering benefits. For somewhat arcane economic reasons that need not detain us at present, those benefits would have to be in-kind, not monetary (as in allowances and such), but they could take any form: insurance, housing, education, transportation, entertainment, travel, etc. While the amount of the DDI would be the same for everyone being paid it, benefits would reflect local economic conditions.

In order to make the DDI universally available it would be necessary to guarantee a job for every citizen who was willing and able to work. Citizens could choose not to work, but the only money available for them would be private charity. Also, people could be employed at something yet be poor, such as the proverbial ‘starving artist’ who labors at one’s art for (so far) meager monetary returns. Every citizen who wanted a ‘regular’ job, however, would have to be guaranteed to have a job. That could be achieved by using government as an employer of last resort, in jobs in which the employees were paid the DDI.

In a market-based economy, to be guaranteed a job that job must be cost-free. That means these jobs offered by government could not require any additional investment or receive any benefits. The people employed in them would receive the DDI, but no other remuneration. That would make the jobs cost-free. Such jobs could replace ‘unemployment benefits’: people who had left one job could work in such a job until they found another job. (Without benefits, such jobs would not represent competition for employers in the private sector for minimum-pay employees.)

Finally, it would be as easy as not to pay the DDI to one parent or legal guardian in a home with at least one dependent child living there. The income would be the same no matter how many children were present. That would have a profound effect on the labor market, but it is an option worth considering. Raising children is the second-most important job there is in civilization. (Producing food is the most important.) [People who are wondering how people will get paid an income in societies so technologically advanced that the need for human beings in the production of goods and services will be greatly limited might take special note of that option: it could eventually be paid to two parents/guardians.]

With this proposed monetary paradigm in place the only possible macroeconomic problem would be price inflation. Three built-in protections against it would exist.

1) To prevent inflation the DDI paid to employed citizens would have to start at the current minimum income and be gradually raised to whatever amount it was decided it would be. (It would be paid from the start in its full amount to people of retirement age and adults unable to work.)

2) Also, people and businesses would be allowed to retain pools of money in their accounts in banks. For people, the amount they could retain would be a percentage of their income (the same percentage for everyone). For businesses, it would be based on their maximum historical profitability. The goal would be for no person (which does after all include even CEO’s) to have any money collected. (Businesses could also be allowed accounts for accumulating money to acquire ‘fixed’ capital — plant and equipment — and for paying off bonds that had been issued, with the proviso that any money put into those accounts would be unavailable for any other purpose whatsoever, no matter what.)

3) Finally, ‘excess’ money over the amount people and businesses were allowed to retain would have to be returned to its point of origin (whether that was the central bank or a Monetary Agency). Unlike taxes, however, with this paradigm no money would be collected from any person or business before it could be used for consumption or investment. (The details related to timing do get a tad complex, but accomplishing that is perfectly feasible.) Importantly, the amount of money that would be returned its point of origin would be determined by the functioning of the economy, not decisions made by any person or committee. For individuals, that would come at the end of each month; for businesses, it would come at the end of each quarter.

So allowing people and businesses to retain pools of money would be one built-in safeguard against inflation. Money sitting in an account cannot contribute to inflation. Returning to its point of origin any money over the amount people and businesses were allowed to retain in their accounts at their banks would be another protection against inflation. To be absolutely clear, however: to avoid having money collected it could be spent on any (legal) thing, including investments. Re. investments, it can be noted that the less money people and businesses were allowed to retain, the more investment, including investments in new, innovative start-ups, would be encouraged.

Not-for-profits and government would presumably not be hoarders of money. That is what we are talking about here: a limit on hoarding money. Holding onto money is a hedge against risk and uncertainty. This paradigm all but eliminates both for the economy as a system and for established businesses. Effectively, only very successful, established businesses would be affected by this limit on hoarding money.

Monetary bonuses could not be allowed. There would be no limit on how much a position could be paid, but pay would have to be limited to that amount of money. Otherwise, the necessary process of returning money to its point of origin would become hopelessly problematical. That does not affect in-kind benefits in any way.

The ban on monetary bonuses does imply that stocks could not be used for remuneration of that or any other kind. For established corporations, issuing stocks is tantamount to printing money. (It can cause the price of the stock to fall, but stock would never be issued that would allow the price to fall to zero — or anywhere near it—so newly issued stock will always come into the world worth some amount of money.)

A ban on using stocks as bonuses suggests another issue regarding speculation — which is intrinsic to a market-based, profit-driven economy. To start a new business is a speculative venture. Even to expand an existing business is a speculative act. Any kind of investment is a form of speculation.

Still, we can distinguish between ‘productive speculation’ and ‘unproductive speculation’. The latter is purely profit driven. It is not intended to serve any purpose but to seek a profit for the speculator.

[Defenders of such speculation will insist that it ‘makes markets more efficient’, but all that means is that money moves in and out of markets at ever-increasing rates of speed and that smaller and smaller differences in prices can be opportunities for profits. Such microscopic scales have no bearing on the operation of any business other than a business in the business of unproductive speculation.]

Many forms of unproductive speculation are harmless to the economy as a system. Buying a painting (or any rare object) in hopes that it can be sold for a profit in the future is one example of it. So is buying existing stocks (in what is called the ‘secondary market’). Buying newly issued stocks does provide a corporation with an infusion of (liquid) capital, but very little of what happens on a stock exchange involves that; buying and selling existing stocks is nothing but unproductive speculation — though as such it is harmless enough (except for when such large ‘bubbles’ are created that their bursting causes widespread economic distress).

There are, however, three targets of unproductive speculation that are intrinsically dangerous for the economy: real estate, commodities (to include energy), and the currency. All of those are integral to the operation of the economy. Unproductive speculation in them is inherently problematic for the economy. Actually, whether this new monetary paradigm were to be adopted or not, unproductive speculation in real estate, commodities, and currencies needs to be severely constrained.

Finally, any nation could go it alone in adopting this paradigm, but it could easily be adapted for a group of nations to use it to establish a common currency. (The nations in the group would gradually raise the initial amount of their DDI until they all equaled that of the nation with the highest initial DDI.) This would be a way of establishing a common currency that would in no way compromise any nation’s sovereignty. It could eventually be a single currency — and level of minimum income — common to every nation on the planet.

So this proposed paradigm is revolutionary, but it is not radical. It does not require tearing down any part of the existing institutional structure; it would not change the nature of the existing economy. It does present a way for any nation — or any group of nations , even all nations together— to transform the societal outcomes of the existing economy for the better.

further reading:

A more thorough explication of this paradigm is available on my Web site (such as it is): ajustsolution.com (Page: real justice /economy); scroll down to the relevant essay.