Friday, September 17, 2010

On money

Get ready to ramble!

First, the financial crisis and the national debt. Everyone has an opinion on it but most are woefully underinformed. To understand the economy and its problems, you need to understand the monetary system, and most people just don't. This is partly because people with an interest in keeping us ignorant spend a lot of money ensuring we are clueless, and because a lot of commentators who pretend to be well informed have no idea what they're talking about.

Sometimes, to show people what money is, I ask them where they think a bank gets the money it gives out in loans. If a bank lends you 100K, where does it get the 100K? Uniformly, they say, from its deposits of course. But this is not so. It gets the money from thin air. When a bank loans you 100K, it credits your account with 100K and creates the money. When you pay it back, it does not just put the money in its coffers. It just writes down your account. It keeps the interest. (If you don't pay, it has a real loss, but that's not important to my discussion here.)

Similarly, when the government spends money, it credits accounts. It does not dip into a pile of money that it has accrued. It doesn't use taxes. It just creates the money. This is hard to believe, but it's true. In a fiat money system, government money is not backed by anything at all. It is just money because the government says so. Many years ago, when we were on the gold standard, money was backed dollar for dollar by gold. But now, for governments that have freely floating currencies, money is not backed by anything, and government spending is not restricted by revenue. A government does not have to gather money to spend it. It can spend whatever it wants whenever it wants.

So why tax? There are two major reasons. The first is that it taxes to give value to its currency. You need Australian dollars because the Australian government will only accept its dollars for the payment of taxes. The second is to manage liquidity in the economy. You can't just pump money into the economy. You must also take some back out. But the taxes do not get put into a coffer, any more than your repayment of a bank loan does. They are simply destroyed.

So why do governments try to balance budgets, and why do they borrow money they don't need? They balance budgets for purely political reasons. They aren't constrained to and there's no economic reason to. Most governments (the US government by law, although the law could easily be repealed) have an artificial constraint that they should "fund" spending. And they issue debt because people want to save, not because they need to borrow. Government bonds are a safe and lucrative investment. They are particularly safe because a government that issues its own currency cannot go bust! It can always pay its debts simply by marking up bank accounts. When we hear horror stories about our debts to foreigners, somehow the people trying to scare us forget to mention that our debts are in our own currencies, and we can repay them simply by ringing up our respective payment authorities and telling them to mark up the Chinese account by however many billion it is.

It just isn't true that the national debt is a problem. Yes, we waste some resources on paying interest, but this is only a problem because we artificially balance our books. If we dissociated spending from taxation, as we easily could, it would not matter that part of our spending was on debt. In fact, we could (and probably should) not bother issuing debt at all. It is only issued so that people who want to can save: we do not have to provide that facility to them. You should remember that when we talk about the national debt, the money is largely owed to ourselves. It's simply saving by the private sector that the government funds. If it didn't, the major outcome would be that rich people would have to find other places to invest. They might apply pressure then to banks to ensure that "safe" investments actually are safe, not simply shit loans engineered to look like good bonds.

So it should be clear that it doesn't matter either that we run a deficit. The way the economy works is fairly simple. People want things, goods and services, and other people supply them. If they want enough things, everyone is employed providing them. If they don't, resources, including people, are not fully used, factories stand idle and there is unemployment. This will happen if people don't spend enough, which can happen for various reasons: they are scared about the economy and save instead; they are paying down debt; they are not being paid enough. The government can make up the shortfall by spending more. So long as there are resources for it to buy, the government can spend.

Doesn't this cause inflation? No. Inflation is not caused by more money. It's caused by more money chasing the same goods. Say the government is building a highway and wants to use Joe's Asphalters. If Joe is at full capacity and the government is competing with other users of Joe's services, this will tend to push Joe's prices up. But if Joe would otherwise not be using his roadgang, the government is simply improving the economy. If Joe has to hire new workers, the government spending directly reduces unemployment, not just because Joe has new guys he's put on, but because those guys can now buy other goods and services. The government will lessen the impact of the increased liquidity by taxing everyone involved!

Second, Australia, like other industrialised countries, particularly the UK and the States, has an unnecessarily complicated benefits system. This is quite easily fixed with a simple, commonsense solution (which rich people hate, so don't expect it to come into effect any time soon). Scrap all benefits and the tax allowance, and give all citizens a cash amount every week. I don't know the figures for Australia, but I think in the UK it's 140 quid for every adult, and something like 50 for a child, more for pensioners. Then tax income from the first dollar and have a fairer progression of taxes. People don't really understand marginal taxation and they are easily conned into believing that if you pay 40% over $100,000, you pay $40,000 if you earn $100,000. This is not the case. If the rate is 20% below $100,000, you pay $20,000, and only pay 40% on dollars above 100K. $100,000 is a lot of money. You can ask, in terms of equity, why a person should earn that much more than others. It is not in society's interest to allow huge disequities in income. It has nothing to do with reward. Even if you believe a lawyer is "worth more" than a sewage worker (and I'd certainly argue they are not), they are not worth four, five, six times more. You are not punishing "hard work". Lawyers don't work any harder than shift workers. They may in some cases work longer hours, but they're not necessarily more productive for it. Long hours for some professions are not about productivity but are simply a means of creating a barrier to entry. You can't be an articled clerk if you're not willing to work your arse off. Fair enough, but you are doing that work in our society. You use our common wealth, our common resources. The money you are paid represents a share of our resources. It's not unfair or unjust that we regulate how much you get. I know this concept is lost on rightists because they have a philosophy that exists to entrench and maintain privilege, but we do not have to oblige ourselves to allow them to do so. When they whine that they will go overseas if they are taxed more, we should suggest that they do exactly that. We do not have a shortage of people who want to be lawyers or bankers, and few of them have skills or talents that most decently intelligent people could acquire. We can easily break the mystique of the professions.

A universal income raises several questions. One, wouldn't lots of people just bludge off the dole? Well, some would, but that isn't actually a problem and we are not talking great numbers of people. When the economy booms, unemployment falls very rapidly. At full output, unemployment would likely only be about 2%. Some of these are people who cannot work; relatively few are people who don't want to. Quite simply, most people prefer to work and have more money than to live on benefits. Some do, there's no denying it, and it makes news in the papers. But while we get ferociously upset by people who sponge off the dole, we are not at all upset by "investors" who live off the income from shares. They contribute nothing at all to society. They don't even pay a full rate of tax on their income. When you sell a share to another person, any profit you make goes to you, none to the company whose share it is. Its share price may rise but this is not a benefit to the company in the general course of things. Again, the income you receive represents a share of our common wealth, which cannot be used for any other purpose.

Two, wouldn't people have lots of kids if they got decent money for them? Again, some would, but anyone who has kids will tell you that they cost a lot more than you ever receive in benefits. The correct way, in my view, to prevent young women from having kids just so they can get more state money is to educate them better, to provide better alternatives and to make it clear that they would get the same money in work as they would out of it.

Three, what about rent assistance and housing benefit? The state should not provide either. This is one of the biggest scams in our age. The state transfers our resources to private landlords. Rentseeking is a scourge in an economy. (Rentseeking is not just renting out houses! It's also what "investors" with shares do: they attempt to gain economically without providing anything to the economy, and use their influence with government to maintain a favourable environment for doing so. Nothing has been so catastrophic for housing for the less well-off than buy-to-let.) The government should instead build houses. Lots of them. We know how many people need housing, and we can project how many will need it in five, ten years. The government is not revenue-constrained, so it can simply build as many houses as it wants. In the current economy, with resources 20% underused, it could build a million houses, sustaining the economy, putting people in work and providing housing for everyone who needs it. I don't need to tell you which pressure groups oppose that! Landlords who have lived off our backs, having us pay their mortgages, hate the idea of decent government housing. Rent assistance suits them much better.

Although the government is not constrained by revenue, it does need to remove liquidity and its spending on housing would need to be funded at least somewhat because if it soaked up the unemployed and the economy approached full output, inflation would become an issue. This is not problematic though. Currently, income is overtaxed and property very much undertaxed. This is easy to fix. We can tax property at its improved value. By this, I mean that we can tax properties according to the value added by society. A house near a train station is worth more than one that has no rail line near it; a house near a good school worth more than one near a bad one. These utilities are provided by us; we have a right to charge for them. A land value tax would help equalise the inequitable distribution of property. It is not right that one person has six houses and another none (and no hope of acquiring one). An outcome of the fiscal policy I am suggesting would be low interest rates (I'm not going to explain why; you'll have to take that on trust), so fair land value taxes would help avoid a property boom. Yeah, it's nice when your house goes up in value, but it's not socially desirable. It has been part of the cause of the current crisis: people have borrowed on the increased values of houses, using debt to prop up the economy. The current recession is partly caused by the unwillingness or inability of consumers to fund further spending with debt. They are not willing to take out another remortgage for that nice new car because they are scared they won't have a job to pay it back with and could lose both house and car anyway.

Three, importantly, women who want to join the workforce after having children would lose out. Whereas a single young man of 25 who has been unemployed has a lot to gain by taking up work, even part-time work, in a system that does not penalise him by taking back his benefits, his (generally) female contemporary who has a small child will lose most of the benefit in childcare. This is not only a disbenefit to the economy (because otherwise productive workers are discouraged from joining or rejoining the workforce, wasting the investment in their skills as well as their potential output) but it's very inequitable to the (mostly) women concerned. I would resolve this by reorganising the provision of education. Children today begin formal schooling at four, which several studies have found to be too young. There's no need for it. Kids can start school at seven, as they do in countries like Norway, with very good outcomes. They "burn out" less, they are mentally better equipped for formal learning and they are old enough to accept more structure and discipline in their daily life. Between two and seven, the government could and should provide universal nursery places. It does not have to do this entirely on its own: it could undertake public-private partnerships. No one would make much money in this system, but why should they? If public provision was actually well funded, and of high quality, there would be no place for people who want to make huge profits from our kids. It's only the lack of provision that provides them with the ability to do so.

We have not made a good transition from the Victorian working world to the modern one. We could improve on it though. We can accept the realities of our world and create a society that didn't leave people behind. I know we're not going to. Even though the things I suggest are a net benefit for most of us, a few people lose out. Those people are disproportionately influential and they have reasons not to want others to gain. They like high unemployment because they can drive wages down. They like rent assistance because they own property. They like restraints on government because they do not want the ordinary people to share the benefits of a wealthy country. They want it all for themselves. It's no use being rich if being rich is not a country mile better than being poor. But nothing in what I suggest prevents you from gaining from hard work. Far from it: a stable economy at full output allows businesses to flourish; a government that makes up for shortfalls in spending prevents recessions that can rob you of your wealth. Talent is not wasted. People like me, who want to work but can't get any, are not underemployed, wasting the investment in our education. Lessening poverty, incentivising work properly and supporting women in poverty are routes to lessening crime. People steal because they are desperate much more than they do because they enjoy a life of crime. This has always been the case. An equitable society would be better for most of us. It's a pity so many of us, who would gain a lot from it, think only in terms of the hard dollar and put no value at all in other gains that would ultimately accrue to us.

1 Comments:

Blogger Arleen said...

I don't understand everything you've said regarding the whys and wherefores of money and how the government can just make it whenever they want without needing revenue, but I can sure get behind the ideas you have for making things more equitable for society as a whole.

September 19, 2010 at 7:32 AM  

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