Tuesday, January 27, 2015

How to run a currency Part V: Restoring hope

We come to the final installment in this series on how sovereign nations should run their national currencies. The focus has been on restoring the primacy of good "fiscal" policy; understanding its vital role in balancing the economy and developing national capital. State-money was created for the very purpose of a people "affording" those things that are in the public interest and might be otherwise unattainable. 

We will save for another day the topics of central banks, interest rates, and financial institutions (the realm of "monetary policy"). They are deliberately left out of this story because they already get too much attention! When countries have returned to running their sovereign currencies properly, they will find that they don't need to rely on them nearly as much as they want us to believe. But we can still find some small useful roles for them to play in serving the needs of a productive society. (Banks can actually play a remarkably beneficial role if they are kept on the tracks, helping evaluate good investments and creating the money for real productive assets to become reality).

Building a hope-filled future for the next generation

Just as we did with taxation, we begin should always begin discussions of government investment or spending with the setting of objectives. What do we need or want? What are we trying to achieve? There's plenty of room to debate and let our democratic process sort out what rises to the top, but let's make sure we're debating with the same fiscal rule book - the one that says "we can afford it" - then we can analyze the effects on the economy, and whether these are things we want to be financed via new injections of government money or whether they are best left to the private sector.

We should also keep reminding ourselves that government "funded" does not have to mean government "run". We can have local governments manage job programs or cities decide on their utility needs but still choose to have funds issued from the Treasury to pay for it if so desired (e.g. to lower the debt burden of cities and the tax burden of their inhabitants). 

So, are you ready to allow yourself to hope in our nation's future again? Are you willing to say to our children that they can have it better than us? I am. In fact, I'll go so far to say that this generation is the generation of hope. I am convinced that they will rebuild and restore and regenerate and reinvent: leaving the world a better place than what we gave them. I suggest we get our old flawed paradigms out of their way because they have their priorities heading in the right direction! 

What follows is a starter list for investing in a great future. Add your own ideas. Start the conversations and begin to influence the influencers. Ask your elected representatives what investments they think are important for their children and whether they are willing to begin promoting them. That's what national currencies are for!

Let me add here that I reject the Conservative-Liberal, Republican-Democrat bifurcation of issues and solutions. I don't belong to any political party. My desire is to promote solutions that are based on shared human values and that achieve our stated objectives. For me, they are heavily influenced by the life and teachings of Jesus (Isa or Yeshua to some), but each of you will have your own. We will find that there is much in common when we get the understanding of sovereign money right and then put people and our natural environment at the fore as we sort out our objectives and priorities. 

What follows is not a political party message but simply what makes sense to me as the right way to run a national currency. I've grouped them into two categories: developing human capital and developing other national capital. 

I'm sure many of you will have even better ideas - let's hear them!

Developing Human Capital
  • It's always starts with the youth - they are our future. Fund education and make it work for all. Train our future work force; our future scientists, physicians, musicians, teachers, and entrepreneurs. An educated people is essential to the progress and sustainability of any nation. Ensure we attract good educators with good pay and good schools. Remove the financial barriers so any aspiring person can learn what they need to succeed and contribute without going into debt. Let's get every mind we can educated and every skilled hand trained.
  • Invest in research and costly, long-term development of technologies and knowledge. Nations should employ every research scientist they can. By closing labs and de-funding research, what is the cost in terms of delayed medical breakthroughs, un-invented productivity gains, lack of solutions to energy and other sustainability challenges, and lost first-mover advantages for our workers? 
  • Provide work for all. A fully employed nation is a productive and learning nation, building knowledge, skill, and passing it on to others. There is never an excuse to have people being unproductive and losing employable skills through long-term unemployment. A well designed job guarantee is essential to avoid the disastrous waste of human lives and potential good they would otherwise do for the community, not to mention the positive impact it has on lowering welfare dependency, crime, and a host of other social ills.
  • Help working parents, especially those raising children alone or on low-incomes. Funding childcare makes a lot of sense to help the "working poor" and single parents to earn a good living and hold down a job while also providing their children with an opportunity for early pre-school development.
  • Fund medical care for all. Health is essential to the pursuit of happiness and the advance of productivity and prosperity. Why would we reserve it for only those of means? We don't say only the wealthy can drive on the roads or appeal to the courts. Investing in the health of our people should be a priority for all. There are ways to do it without degrading the level of care.
  • Fund the arts. Creativity, beauty, and free expression enhance the sciences and protect democracy. S.T.E.M. to S.T.E.A.M. (adding arts to science, technology, engineering and math) is proving to be a wise approach to education and innovation. The greatest civilizations advanced the arts and the arts advanced knowledge and enriched the people. 
  • If it starts with the youth, it ends with the wise. Provide for the elderly. Period. Everyone has a mother, father, grandparents. It is a shame to any society not to care for their elderly. What an amazing resource they can be for a society: mentoring the next generation, advising businesses, volunteering in not-for-profits, supporting the arts and public facilities. We have made a promise to provide income to them in their retirement years, but there are always those seeking to undermine this promise and give the financial industry control over it. Social security should be provided at a living wage along with adequate provision for housing, health services, quality food, and personal care. We can afford it. We are morally obligated to protect it. And it is a wise investment in our future. 

Developing National Capital

Banks create money when they lend, ideally to enable the creation of new productive assets. The requirement for bank lending is that there are future cash flows generated by the asset or borrower that will be sufficient to repay the loan plus interest. But what about capital assets they banks won't fund but are still valuable for a nation? What if the risks are too high or the rate of return too long or the cash flows non-existent or insufficient? Do we just live without? 

Gladly, no! Again, this is why we created sovereign currencies. We have the ability to simply create (issue) money to develop the kinds of national capital that private equity and banking won't finance. In some cases we simply deem such investments undesirable for the private sector to fund and own (perhaps because doing so would support monopolistic rent-seeking). 
  • Research and development. 
    • Governments that fund labs and research centers can invest in lengthy and expensive research projects that are beyond the ability of profit-seeking firms and their investors to manage. 
    • An incredible amount of scientific and technological breakthroughs have occurred via the government sponsorship of research, and it should be high on the list of any nation to create an environment for their best and brightest minds to stay home and advance knowledge that can become part of a nations capital.  
  • Infrastructure. 
    • What separates nations that advance and those that don't, aside from political stability and the rule of law? 
    • It is always in the national interest to build and invest in ports, navigable rivers, roads, bridges, rail, airports, electricity, communications fiber, hospitals and schools: all the real physical capital that enables the most efficient forms of productivity, expands the boundaries of commerce, and facilitates the transportation of goods and people. 
    • There is no reason sovereign nations should let their infrastructure degrade. 
    • Nor should developed countries think they can't afford to invest in the next generation, state-of-the-art infrastructure that will move their economy forward or benefit their people. 
      • National high speed rail networks? 
      • Fiber communications in every city and town? 
      • Updated water purification? 
      • Mass transit for our cities? 
      • It's only a question of whether it is beneficial to the people, and whether the nation has the labor and real resources to build them.
  • Environment. 
    • People are part of nature: markets are man-made. 
      • It seems strange to even say those words, but we've lost touch with the way all life is sustained by the planet we share. 
      • We've come to think of the economy as a "natural" force and nature's resources and unlimited production inputs to be consumed. 
      • The toll is mounting and it's not a game we can win. 
      • Our job as stewards of the remarkable gifts of life, knowledge, and consciousness is to be deliberate in designing our economy in a way that ensures all our life-giving systems are maintained and even rejuvenated. 
    • But here's the good news: we can afford to change. 
      • We can afford to invest in different forms of energy production, transportation systems, and recycling systems. 
      • We can afford to set aside national parks on land and in the oceans. 
      • We can reshape the incentives in our economy to maintain economic growth while reducing consumption of resources. 
      • Investing in a our environment is building national capital: clean water, fresh air, diverse wildlife, healthy soil. 
Of course, we've only scratched the surface here. We could expound on each of these, and go on to designing the future of livable and sustainable cities, national defense, distributed clean energy infrastructure, energy-efficient building codes, and more. 

And we should. 

This is what a nation's fiscal planning process should look like. Political debates should be over what investments are most in the interests of the public they represent, and what most helps the growth of the economy and the health of the land. 

Putting it all together

So now we know that to run a sovereign currency, we should: 

  • understand how it works and then get the language right so we know what we're doing;
  • establish a tax system that creates universal demand for our sovereign currency;
  • implement other taxes as desired to achieve objectives in our economy and for the good of the people, environment, and economy;
  • determine what investments in people and other capital are needed or desired for our shared future; and
  • direct our government to issue whatever money is necessary to effectively and efficiently meet these objectives.

This isn't about "big government", but about using the nation's money for the good of the people, the economy, businesses, and the environment. 

Whenever we have unemployed people, underutilized capital, and businesses aren't investing, it is evidence that the the private sector is experiencing insufficient sales. Businesses in the aggregate are not selling all the output so they can't keep paying for all the inputs (including labor) and don't see a reason to invest in growth.

Since all national money is connected on a giant network of balance sheets (literally through the banking system), and every transaction has two sides to it, we realize that just as exports increase sales in the private sector, so too can reducing taxes (if some of the money not taxed is then spent domestically), and also increasing government investment (people are given incomes through direct employment or businesses have increased sales). 

It becomes very clear that the ability to balance our economy and help the private sector thrive is completely within the control of a sovereign currency-issuing nation

There are no more excuses. 

We can certainly choose not to use the system well, but let's not pretend then that we also care about ending unemployment, reducing poverty, providing for the needs of our elderly, or caring about the impacts of climate change. By not adding flows of money into the economy when its needed, we are deliberately affecting human lives and futures. 

There isn't an alternative way, despite our decades of failed attempts at finding one. 

Let's also not pretend that we really want a robust economy, with thriving businesses and entrepreneurs if we leave the private sector in the sorry state we have for the past seven years, doing nothing to fill the massive gap in incomes and spending.

If we did, we'd do something about it because we have the ability to do whatever we have the human ability and real resources to do. And in reality, most of us do care. Most of us do hope. Most of us do seek for a prosperous and healthy future for all children. 

The incredibly good news is that mankind has innovated a most remarkable solution to compliment capitalism for the benefit of all: a sovereign currency that is of and for the people. 

Let's use it!

Sunday, January 25, 2015

How to run a currency Part IV: Developing national capital

A nation's capital is comprised of its resources that are available to be used productively to generate wealth and "the pursuit of happiness". The concept of capital, versus consumed resources, is that they can be used repeatedly to produce other goods, services, or otherwise provide value to the people. I use the phrase "the pursuit of happiness" to broadly encompass concepts like liberty, justice, and security which can be seen as necessary or desirable to its achievement. 

  • A highway or an airport is national capital: used for a nation's commerce or the public's pleasure. 
  • An educated and trained adult is part of a nation's "human capital": providing a life of productivity, invention, service, or artistry that contributes to society.
  • A navy and air force is capital: used to defend the nation's shores, protect its civilian or commercial shipping, or provide assistance during natural disasters. 
  • A national park is capital: providing a wealth of enjoyment to the people and the preservation of vital ecological systems that nurture the environment and sustain life. 

In our previous posts in this series, we have set out to rediscover how sovereign-state money actually works. We exposed the poor use of misleading terms like "debt" and "deficits" that don't apply to sovereign governments, and defined new terms that are more useful to us as we seek how to apply our national currency for the greatest good.

This led us to taxation. After dispelling the notion that taxes fund currency-issuing governments, we outlined the principles that should guide a people-centric tax policy and then applied this framework to come up with new approaches to our out-dated tax policies. 

We're now ready to learn the final part of running a modern sovereign currency in a way that is of and for the people.

Bid adieu to Tax and Spend!

Tax and spend. These words have been drubbed into our minds so often, we just accept them as fact. They always go together, taxes must come first, and spending must be limited by taxing and debt. Right? 

Wrong! It makes no sense at all when you stop and think, but who's going to take the time to do that? Even the "non-partisan" Congressional Budget Office is stuck on stupid and perpetrates myths that are learned and repeated by all our elected representatives. 

We desperately need to reorient our thinking, and it's going to take a bit of collective work from all of us to educate a new generation and overthrow the mountain to politicized economic garbage that is served up every day in the media, in town halls and throughout the blogosphere. 

What makes our re-education challenge harder is that for regional and local governments, or even some nations that have given up their sovereignty by using a currency they don't issue, taxing actually does fund their spending. 

So it's true in some cases but not in others... yeah, I know, no one said this was going to be easy! But then again, who said liberty and justice ever come easy? Let's get it right so we have a fighting chance!

We've covered taxing in some detail, and we now know it now has nothing to do with funding government. Federal government "budgets" need to be a thing of the past. We must separate our fiscal decisions into their respective categories and debate their merits independently. 

  • Tax for tax reasons alone with no consideration to "paying for" anything. 
  • Separately, debate and establish national objectives and invest accordingly.
  • Pay attention to the effect each action has on the economy to avoid unwelcome inflation or market distortions.

Honestly, it's not all that hard once we get the best minds focused on the right problems. 

So now you may be wondering why this final post isn't about spending. After-all, that is the final piece we're missing to run a currency, right? Well, is it?

Why do we have a national currency?

Let's try to go back to the beginning: to the birth of a nation. What are we trying to accomplish, and how does a form of national money fit into it? 

A group of people, perhaps of common language, seek to live in freedom, improve their lives, protect their domain from those who might seek to conquer or take advantage of them, and sustain this so that future generations can build upon it for their own futures. 

They desire to live in peace, prosper and pursue happiness - whatever that means for each individual, family, or social unit. To get there, they must establish rules for their society, rules for their commerce, rules for good conduct: hence the establishment of representative government that is of and for the people. 

But there's more: they need to accomplish certain things together to improve their lives, protect their land, expand their commerce, expand their knowledge, and lift the next generation on their shoulders and encourage them to reach higher still. They aspire to achieve great things together, while still protecting the rights and liberties of each one.

And that's where the national currency comes in. It was invented to enable a people, through their representatives, to accomplish their collective goals without the dictator's whip and sword. The use of State money enables a nation to engage the wheels of commerce to build up that nation's capital stock for the betterment of all. 

How? Simply by issuing the nation's money in payment to business or individuals. Once the currency has become established in the country (remember Part II), it can be issued on demand to deploy resources for the common good. Ideally, it is largely deploying underutilized of unemployed resources, but in critical circumstances, it might need to take resources that are productively employed (such as in WWII).

Generally though, the issuance of new money to deploy resources is geared toward the improvement of the nation and a better future for its people: in other words, developing national capital. When done well, the new money creates future productivity or other forms of value desired by the people.

We've become used to language of givers and takers; of the productive and the unproductive. But we tend to create the world we speak of, and so we destroy rather than build up. Our language becomes self-fulfilling. That's why I don't consider government "spending" to be the right final piece to our currency puzzle. Spending doesn't explain what we are trying to accomplish. We are investing in our present and our future: investing in ourselves and our descendants. 

  • I don't see providing income to our elderly as welfare, but as an investment in our society. 
  • I don't see providing work and skill training to the unemployed as welfare but an investment in national human capital and future productivity and societal well-being.
  • I don't see paying workers to repair roads as government waste, but as an investment in infrastructure capital.
  • I don't see providing health services to all as a burden on the economy but rather a stimulus to it, as more people are healthier, happier, productive, and able to spend, save and invest.

Why did we stop investing?

It's quite simple, really. We just got scared by big accounting numbers and a very clever marketing strategy. 

  • Some very wealthy people with a certain agenda began to spend a lot of money to convince the world that the accumulation of new government money in an economy inevitably leads to horrible outcomes such as national insolvency or hyper-inflation. 
  • They added up the amount of government money that people have saved and that sits in interest-earning accounts at the Central Bank, and they called it "unsustainable debt", forgetting it was the people's desire to save that led to it being there in the first place. 
  • They built "national debt clocks" to scare the populace, and developed "think tanks" (propaganda special units) to push the message far and wide under the guise of sound economics and a pretense of academia. 
  • They wave their arms about screaming "Weimar" and "Zimbabwe" whenever the government injects more money into the economy, forgetting that our nation has enormous underemployment and underutilized productive capacity that needs to be deployed - in stark apposition to the plight of those nations.
  • Myths became facts; lies became truth. 

What happens when we take off the blinders and realize that we have no fiscal challenges? That our nation can never go bankrupt? That "the economy" and "free markets" don't rule us? That we don't have to choose between a sustainable, life-giving planet and a robust economy? That we're not second-fiddle to China when it comes to building our nation's future infrastructure? That we don't have to beg Wall Street for the money to repair a bridge, build new sewer and water treatment plants for our cities, or invest in state-of-the-art mass transit systems. 

What do we demand of our elected representatives when we end the deceit and simply tell the people, "we can afford whatever we can do with the resources we have"?

It starts with removing the self-imposed constraints in our minds and our politics, and defining our shared objectives: then let's put our sovereign currency to use to solve our real-world problems and invest in the rapid development of national capital.

What do you think that could look like? Give it some thought as we save that for our final post in this series! 

Monday, January 19, 2015

How to run a currency Part III: Tax reform that's of and for the people

There is a lot of discussion these days about tax reform, and there are plenty of folks ready to parade out their solution to the problem of funding government and tax "fairness".

Wait, did we say funding a sovereign currency-issuing government? What do taxes have to do with that? Well, as we've gone over already, absolutely nothing! Which is probably why we tax almost everything wrong! How many of our economic and societal troubles stem from bad tax policy? I hazard a guess that it's not an insignificant quantity.

When you start with an outdated and obsolete understanding of how our national currencies work, then you end up with counterproductive (at best) or outright destructive policies that hurt the economy and society as a whole. It seems to me that there is no cohesive economic framework (
but there's no shortage of ideology) behind the ideas currently being debated by our politicians and political interest groups. 

All parties approach the subject from the faulty perspective of raising money for the government to spend, and much less thought is given to: 

  1. what objectives we are trying to achieve with each and every tax; 
  2. what effects our tax policies have on the decisions of individuals and businesses;
  3. how do these effects fit into the picture and health of the entire economy, considering the net flows between the private sector and the government, our trade balance, and the levels of private debt; and
  4. what are the impacts to society and the maintenance of our liberty and democratic ideals.

The previous post attempted to reorient our thinking about why we tax and what principles should guide us as we think about tax reform. These principles are based on a careful understanding of how our monetary system functions in the real world, so that we can understand the implications on the economy of our current and proposed approaches to tax policy and tax rates. 

Applying taxes to the real world

Remember that our approach to what to tax and how much to tax is guided by our real-world objectives: the will and desires of the people; the health of the economy; the stewardship of the land we inhabit; the availability of real resources; the development of national capital. Simply maximizing the number of its own IOUs the government collects back from the people (e.g. the concept behind the so-called Laffer Curve) is irrelevant and counterproductive to achieving our priority objectives.

What are our national objectives?

  • A sovereign currency that provides maximum policy space for our nation?
  • An economy that provides meaningful work at a living wage for all who desire it?
  • An economy that doesn't disproportionately favor the rich and powerful to the detriment of the poor and weak?
  • An economy that provides incentives for innovation and entrepreneurs?
  • An economy that grows and rewards productivity and progress that benefits all?
  • An economy that is in balance with our environment and that sustains & rejuvenates life in all its diverse forms?
  • An economy that encourages giving?
  • An economy that encourages saving?
  • An economy that protects the democratic process and the voice of the people?
  • An economy that respects other nations and seeks trade arrangements that are mutually beneficial?

We could go on... the point is that defining collective objectives should be part of our public discourse and political process.

Once we have our objectives, we can determine whether the way we tax is helping or hurting our ability to successfully realize our goals. I am (thankfully!) no expert in the intricacies of the tax code. But let’s try to apply our principles and see how we would rethink our tax system to achieve certain goals*.

Social Security taxes and Trust Funds

Here we have a classic "pay for" error. We have implemented a tax on incomes under the guise that we can collect government money and hold it for the future so that those who worked hard today can get some income after they retire. There were political reasons why Roosevelt did this at the time, but I suggest it's time we remove the veil of deception. The greatest assurance of its protection isn't pretending that the people put in the money to pay themselves back later, but rather that the government never has any excuse that it can't afford to pay.  
  • Our objective is to provide adequate incomes for retirees so that our elderly are not living destitute or in poverty. Fine - we can always credit bank accounts with whatever amount of newly issued money we deem adequate for the purpose. We don't need taxes for that. Not today and not 40 years from today.
  • What is the effect of our payroll tax? It reduces the income today of all our workers, which means they have less money to spend or save or give away, and this also means businesses have less customers and sell less product.
  • What could we do differently? Eliminate the Social Security taxes and the so-called Trust Funds, and replace it with a constitutional promise: the government will guarantee all future social security payments forever. Period. And we can make sure the amount paid adjusts as needed to ensure it is adequate for the needs of our elderly.
  • What is the effect of this change? People have more income to spend, which means businesses will expand and more jobs will be added to the private sector. The Government's positive fiscal flows will increase and the net financial savings of the private sector will also increase.
  • The same concept applies to Medicare taxes.

Income taxes

Here we usually make the error of considering this as a primary source of revenues for the government. Why do we want to tax incomes? Are they "bad"? Do we need to?
  • There are some possible valid objectives for income taxes: 
    • reduce the spending capacity of the private sector to give "space" for what we want the government to do so it isn't competing for scarce resources and driving up prices (the mass of unemployed and underutilized resources today tells us we have the opposite problem - taxes are too high); 
    • reduce the incomes of certain sectors of the economy more than others (such as high income earners versus the poor) to avoid excessive inequalities that harm the economy, the political process, and the social structure of the nation; 
    • maybe income taxes are one of the taxes we should use to create universal demand across the economy for the nation's currency; 
    • it is an easier tax to collect since employers take it directly out of paychecks, whereas other taxes might be harder or costlier to enforce and collect; 
    • perhaps it can be useful as part of our automatic stabilizing function since as incomes fall, tax receipts fall, which is counter-cyclical to the economy.
  • The question economists should study is whether this tax is the optimum solution (or part of it) to the universal tax need and counter-cyclical flows, and if so, at what level.
  • We should also study the effects of income taxes on various income brackets to see how income taxes affect spending and investing decisions, and its impact on the poor. Progressive taxation is not about taking from the rich to give to the poor. It is about achieving objectives such as reducing inequality or placing a governor on excessive wealth concentration because due to the threat such concentrated power has to the political process, the fair representation of the people, and the health of the economy.
  • How could we do it differently? We could lower the income taxes to the minimal amount needed, change the tiers by income levels, or replace it entirely with alternatives that achieve the same or better societal and economic results. Today, I believe a lower tax overall and some adjustment to the tiers would be an improvement. 
  • An alternative to relying on taxing income as our base tax, which could also be "progressive" in an environmental or carbon sense, would be to have a property tax based on square feet of space (or even cubic feet of space as suggested by L.R. Wray). The idea being that those that own larger living and business spaces are using more energy and producing more carbon emissions. Combine this concept with credits for energy savings and renewable energy, and ensure the minimal living income for the poor is sufficient to cover any resulting increase to their rents.
  • Remember, the amount the government collects is irrelevant for its own needs - it is the effect on the economy that matters.

Business profits & Capital Gains

Liberals love to talk about taxing businesses more so that they "pay their fair share". Conservatives love to justify low taxes on capital gains and dividends due to "double taxation" (the business profits get taxed first and then we tax the distributed dividends). But why do we tax business profits at all? Why not just tax the distributed income or capital gains from a sale and treat it all the same?

  • In an economy that has capitalism at the core we generally want a profit incentive. Taxing businesses disadvantages then to foreign companies and reduces their ability to grow. Why would we want to discourage profits? Eventually, all business profits have to end up being either reinvested in something or paid out as dividends. 
  • If our objective is to provide incentives for entrepreneurs and investments in productive businesses and technologies, then taxing profits only takes away from the ability of businesses to reward risk-taking investors and to reinvest profits into R&D or growth. 
  • Capital Gains and dividends are often the only sources of income for the very wealthy so why does it make sense that their incomes are taxed at such lower rates than the lower-income workers that produce the gains for the capitalists? Do we want to give incentives for the growth of a "rentier class" that makes money from money without being productive or enhancing the nation's capital stock? Low capital gains and dividends tax rates versus higher income tax rates contributes to growing wealth inequality.
  • What could we do differently? 
    • Eliminate all taxes on corporate profits, and just tax all income, capital gains and dividends in the same manner.
    • A carefully designed progressive tax rate or alternative concepts such as energy-based or property-based taxes could be applied to find the right incentives and disincentives based on what best produces a healthy economy and society (see income taxes above).
    • There's plenty of room to find the right balance that doesn't dampen the investment appetite for entrepreneurs, businesses owners, and capitalists. 
  • Now businesses have more money to invest of expand, which is good for economic growth and jobs, but if they choose to distribute funds to investors, those are taxed as ordinary income. 
  • There would likely be additional benefits of simplifying the tax code but also bringing to light special interest group treatment: any subsidies for businesses would have to be out in the open not hidden in the tax code in the form of credits, depreciation allowances, etc.
  • Impact on investors decisions and portfolio choices of such an approach should be carefully studied. 

Gas taxes and the Highway Trust Fund

By now we all know that we don't need to sock money away in the trust fund drawer in order to have it available for future needs. We can always create money on demand when we need it. And taking it out of the economy today hurts the economy today. It's simply irresponsible management of the people's currency. Put it to use today for our real needs. 

  • Let's separate our objectives into two parts: the trust fund and the gas tax.
  • We have no need to save money to pay for future road improvements, so we can eliminate this one. Let's leave that money in the economy where it can do good today instead of putting it on the sidelines.
  • However, we may decide that we want the cost of gasoline to be higher than the market price to provide a disincentive: use less gasoline.
  • If we take this approach, we should study whether the marginal increase in taxes on gasoline has any real impact on demand for gasoline in the economy, and secondly, how that impact is distributed over our income demographics. 
  • Are we disproportionately taxing the poor because they spend a higher percentage of their income on gasoline and have less efficient cars? Do they have an alternative if the cost goes up or are we just hurting their disposable income and contributing to their poverty? Are the wealthy ambivalent to what they pay for gasoline at these marginal price ranges?
  • What could we do differently? Obviously, eliminate the trust fund and just commit to maintaining gear roads for the nation's commerce and leisure needs. If we tax gas use, consider providing offsets to the poor and investing in alternatives such as public transportation. As an alternative, consider larger incentives for alternative transportation technologies to drive positive change rather than just punishing the use of oil. And invest heavily in public transportation systems that move away from oil dependency and provide options for the lower income and general public to use less gas.


We have structured into our tax code all kinds of incentives for saving money, much of which ends up in the hands of money managers. 401-k retirement plans, IRAs, 529 college savings plans, pension funds, etc.

  • What is our objective? Saving is considered virtuous and prudent by society. On an individual level, we all recognize the value of saving money. But was also know that in the aggregate, saving hurts the economy unless more spending power comes from outside to make up for the reduced spending that results from our saving.
    So it's great to provide an incentive for saving more as long as we simultaneously provide for supplementing aggregate spending in some way so that businesses can sell all their goods and we maintain full employment. 
  • What is the effect or tax-free saving? When the portion of our income that we save is free from payroll taxes, we are deliberately driving down aggregate spending in the economy. Would prudent savers save anyway? These issues need to be studied.
  • Are we doing this for savers or for Wall Street? If we are driving large quantities of tax-free savings into existing stocks, we may be doing more to drive up the prices of existing assets and not contributing as much to the stimulation of new productive investments. 
  • What could we do differently? Firstly, we should ensure that any incentives to save don't harm full employment. The Job Guarantee may be the best approach to this fallacy of composition problem. If Social Security is turned into a constitutionally guaranteed living income for the elderly, and higher education were an investment by the State in its youth, then the incentives to save today become much less critical, and we could study the effects of reducing or removing such tax incentives. 
  • This would have an effect of potentially increasing aggregate spending in the economy and shifting investment portfolios. 
  • In general, we should be increasing the incentives for new, productive investments and reducing the incentives for the exchange of existing assets (e.g. stocks, real estate) which lead to booms and busts. 

Energy & environment

Full disclosure, my business is developing large-scale renewable energy projects. The science of anthropomorphic climate change is quite straightforward, although the politics and corporate influences on the discussion are disappointing. Why? In my view, it comes down to economics. No politician can stay in office if they are perceived by voters as hurting the economy, and no one seems to understand that we can have economic growth while solving environmental and climate challenges.

  • We have many tax incentives across the spectrum of energy production and distribution, from nuclear to oil and gas, to coal, to wind and solar, to bio fuels. Most are there because of lobbying efforts, not because we have a well thought through national energy policy, and certainly not because of any environmental or climate policy or objectives.
  • This needs to change. 
  • Debates on tax policy for energy focus on issues like job creation and how it "pays for itself". As we've seen, neither of these are valid approaches to tax policy. We can make jobs out of anything, and tax incentives never need to be paid for.
  • What is the effect of our policies? We continue to provide incentives for questionable investments in fossil fuel energy extraction without careful evaluation of the impacts and regulation of the activities to ensure water and air protection. We implement poorly designed and inefficient tax incentives for new energy solutions, such as tax credits, which provide above-market returns for banks and distort energy markets. 
  • What could we do differently? You begin to see how these issues tie together. If corporate taxes were eliminated and income taxes reduced, tax credits (which were always inefficient) become less useful. We could eliminate them entirely and just provide direct subsidies for the things we want more of, which adding taxes on the things we want less of. 
  • Remember, these are not tied together! We don't tax oil companies to pay for renewable energy companies: we tax because we want to raise the cost and lower the demand for something we decide is harming us, and we provide subsidies if we think the market is not adequately stimulating the development of necessary resources or to protect businesses and consumers from the cost of such products if they are currently higher than existing ones.
  • When viewed this way, subsidies can keep energy costs low while adequate investments are made to move our nation's energy portfolio to one that reduces carbon emissions and doesn't pollute the land, air or clean water resources.
  • Real resources need to be stewarded in a way that is sustainable and even regenerative (where we have degraded them below a healthy regenerating state). Tax policy can be a useful tool to find this balance, by redirecting investments and resources. 
    • As described above, one proposed solution is to bring our primary tax policy in line with environmental stewardship, so that we encourage a sustainable relationship between human needs, economic activity, and the rest of the biosphere that provides us with life and health. 
    • Moving toward a tax based on carbon-based, non-renewable, and polluting energy use makes a lot of sense, but should also be carefully constructed to avoid being regressive in nature and a burden to the poor.
    • In a capitalist system, incentives can often be more effective than disincentives, and we must always caution against thinking of taxation as a means for paying for things - it is just a means to an objective.
    • Investing in the "goods" should be emphasized at least as much as taxing of the "bads" - let's focus our nation's political energy on the right investments that build our shared future, not the tearing down and demonizing of past decisions

States, Counties and Municipalities

Finally, a brief word about those parts of our government that are not currency-issuing but are rather currency-using. 

  • In the United States, much is made of the importance of State and local governments, and the need to keep the federal powers to a minimum and drive as much as we can to the local level. 
  • However, the more we push down to the local level, the more the local level has to potentially fund, and since they don't issue their own currencies, they have to tax or borrow in order to pay for what they are required to do for the people. 
  • Shifting the burden to the States or municipalities or counties adds a tax burden to the people, and creates a strong disincentive for appropriate funds to be spent on important priorities such as roads, regional infrastructure, city services, education, and more. 
  • For example, if we say states should have responsibility for health care, then they must raise taxes to pay for it. If the federal government had the responsibility, new money could be issued to pay for it without additional taxes. 
  • Across our nation we have aging city water and sewage systems, inadequate urban mass transportation infrastructure, and many other areas where we could all agree improvements could and should be made for our children's future. 
  • There's an alternative.
  • There is no reason there has to be a direct link between the federal government paying for something and the federal government doing something. 
  • We could very easily direct some portion of funds to the various local governments, perhaps on a per-capita basis, and perhaps by simply making certain major infrastructure projects the fiscal responsibility of the federal government. All planning and decisions could be made locally, but the burden of taxation and funding is lifted from the local governments, freeing their budgets up for the truly local and discretionary government decisions. 

We've obviously just scratched the surface. Tax reform is greatly needed, but not for the reasons most are talking about, and certainly not in the manner in which it is being proposed. Start with the right framework of how money functions, and then we can rethink our entire tax policy in a way that balances our national priorities. 

Separate taxing from spending. Place the people and the environment at the top of our priorities. We can then solve for a prosperous economy. Reversing the order: making "The Market" our god, removing a proper investing and balancing role for fiscal policy, and leaving people and the environment to suffer the consequences, can only be detrimental to our future prosperity. 

Let's build the national awareness and corresponding political process where we can use the people's national currency to fund all the things that we know will make for a better nation and world for the next generations; challenging them to outdo us when we pass the baton.

*The ideas presented here are intended to provoke discussion on how to use the tax system in an appropriate way, based on how it actually works. While some of these ideas I do support, some have not been researched enough for me to say I would recommend them versus other approaches. Let's get tax experts and economists studying these to find optimal solutions. 


My writing is based upon the work of leading economists and scholars in the field of modern money, including (but not limited to) Randall Wray, Warren Mosler, Stephanie Kelton and Bill Mitchell. I don’t claim to originate the ideas contained herein, but hope to contribute to the dissemination of them to a broader audience. I will undoubtedly have statements that are near quotes of their works, for which they deserve full credit. I would include them if I could find them, but I write as an amateur from my thoughts collected over years of reading and listening – alas, I am not a disciplined academic footnote-keeping author. Any errors in fact or logic are my own. Comments and feedback are always welcome, especially if they help find the new and constructive ways to bring others along the journey of discovery.

I urge all readers to participate in helping educate others in this remarkable and hope-filled vision of a shared prosperous future for all. This generation will see a transformation in economics – be a part!

Saturday, January 17, 2015

How to run a currency Part II: Taxation for dummies

In Part I, we summarized the basics of how monetary systems actually work in the real world, and in doing so, found that we needed a new glossary of terms to describe many of our familiar government monetary/fiscal operations so as to avoid confusing ourselves. Our old familiar terms simply don’t make sense and make us think that our monetary system works in ways that it really doesn't (they made more sense when we were on a gold standard or perhaps for nations using the Euro).

Sovereign currency-issuing nations are very different from “non-sovereign” nations (“non-sovereign” in the sense that they have given up their national currency or promise to exchange their currency at a fixed rate to, or otherwise created fiscal dependency on, a currency or commodity they cannot produce at will).

If we were to consider an “ideal” sovereign nation (like Freedonia), it would have a government that is “of the people and for the people”, but also a currency that is “of the people and for the people”. In other words, the ability to issue that currency at will for public purpose. Neither the government itself nor the nation’s money should be separate from or not under the direction of the will of the people. It’s theirs to use for their collective needs and desires, via their representatives in government.

  • It’s not the banks’ money.
  • It’s not the politicians’ money.
  • It’s not “The Economy’s” money.
  • It’s the people’s money!  

So how do they do it?

After a sovereign nation is formed, a monetary unit is defined so as to be used throughout the nation to account for all debts, obligations, contracts, valuations and transactions in the country (e.g. “Liberties” in Freedonia, or a Dollar in the US). The people then grant their government a monopoly on the issuance of money that is denominated in that unit. Note: the people don’t have this money so it can’t be first taken from them by the government – it is created and flows into the economy when the government pays for things.

Why? For the expressed purpose of providing the nation with the ability to afford things it otherwise couldn't! The very reason we invented State money is to enable the nation to afford things! We can recruit and pay soldiers to fight off invaders, invest in big infrastructure projects, pay for government employees like judges and air traffic control workers, build schools and universities, fund costly science research, and whatever else the people determine is in their interests.

Now the trick is to get the population to accept this newly created money when the government wants to buy something or pay wages for labor. That’s where taxes come in, at least from a historical perspective. Why would Freedonia accept Liberties? Why would US citizens accept Dollars? These State currencies would all be essentially worthless* until the people of these nations imposed upon themselves, through their representative government, a sufficient form of tax that could only be paid by returning to the government some of its newly issued money. Voila! A national currency has been born! As long as the government maintains some taxation, there will be need for the government’s money.

Economists like to say “taxes drive money” – they create the sufficient condition for a brand new currency to take over and become the nation’s sole form of money. And once it circulates businesses will accept the new government money for products, services, or contracts, and people will accept it for wages and other payments. Each time this happens, new money is created and flows into the economy mostly via credits to bank accounts done through a computer. It’s that simple!

The rest all follows from there

  • Nations direct some portion of their real resources (labor, goods, etc.) because they wish to invest in their nation and people: to develop the nation’s “human capital”, to develop productive capital and infrastructure for commerce and leisure, and to ensure the protection and well-being of the land. Continual investment is essential for a nation to advance, grow, and prosper in a sustainable way.
  • This is accomplished when the people authorize their governments to hire people, procure resources, perform research, build expensive projects, provide incomes for elderly, preserve nature, and much more; all of which is done via the issuance of the nation’s money, not by taking money first from the people. 
  • In responsible and well run governments this authorization should happen via an open and accountable fiscal planning process to ensure that the money is being invested prudently and that proper controls are in place to ensure that the effects of the government’s procurement of resources and labor don’t have negative consequences that outweigh the desired outcomes. And there’s plenty of room for debate and compromise in the rough-and-tumble of democratic processes: it’s unlikely that fiscal planning ever achieves perfection or optimization, but with transparency, accountability, and fair representation the people can have their influence on the outcomes.
  • The government’s spending/investing/paying create positive fiscal flows of new money into the economy, building up the nation’s capital while providing incomes to businesses and individuals.
  • Since the people desire to save some of the government money for future needs, the government allows some to stay in the economy and it accumulates there in banks as net financial savings of all the people and businesses in the nation (and other countries through trade).

So what about taxes? 

Some of the government-issued money, of course, is required to be taken back by the government in taxes, as explained above, to drive the universal demand for and acceptance of the State money as and when it is issued. Note, taxation simply takes back what was first injected into the economy. It is NEVER used or needed to fund the government’s investments.

There may be no greater invention than the sovereign currency-issuing government. It provides a society with the most remarkable of powers: the ability to organize their nation’s labor and resources to do ANYTHING that is feasible. If the people are available to work and have the necessary skills, and the required real resources are available in that nation, the government can ALWAYS issue the money required to pay for the thing to be done. It doesn't mean we should use it for anything and everything, but it means the limitations on our needs are never a question of affordability, but rather relate to the availability of real resources.

Think about how this changes how we view our national choices and the kind of future we can build and legacy we can leave for our children’s children.

Rethinking taxation

It should be clear by now that a sovereign government never taxes to obtain money. Sovereign government don’t have “income” or “revenues”. These terms are unhelpful vestiges of the days of gold standards and mercantilism.

Money is simply the governments IOU that they issue into the economy via spending, and they promise that IOU be returned in payment for the tax obligations imposed upon the people. Payment of taxes is simply a return of the IOU. It’s not income. New IOUs can be issued whenever they want to, so those collected back have no value other than to “warehouse” and re-use to save printing costs (as in the case of paper money).

A sovereign government never needs taxes to cover its investments, spending, retiree payments, interest on bonds, etc. (Of course, any non-sovereign government such as municipalities and states must still tax or borrow to cover their expenditures).

So how should we think about taxation? The following are some general principles to guide us.

  1. First, let’s get the language right.
    • Break all the links between taxing and spending! No more “trust funds” for Social Security or Transportation.
    • End references to governments saving their own money units.
    • Eliminate the words “taxpayer-funded” from our lexicon when referring to the national government.
    • Remove the concept of “pay for” from the discussion of what we should and shouldn’t do with fiscal policy.
    • End the “budget scoring” process. There is absolutely NO reason for government decisions of taxation to be part of discussions of what to invest.
    • This will take some effort to re-train our minds and politics, but it’s essential to restoring a right approach to using our currency and running a government of and for the people.
  2. Set policy and economic goals, and then solve for the right fiscal policy.
    • We have made fiscal policy about foolish accounting methods that have no application to sovereign currency-issuing nations. Toss it all out.
    • We are not balancing taxes with spending – we are balancing the economy as a whole, solving national challenges, investing in our nation’s future, preserving our land and resources, and fostering a prosperous, safe and happy future for our people.
    • Fiscal policy is about the government representation of the people using the currency to efficiently and effectively implement the people’s desired outcomes.
    • The starting position is to define the desired outcomes, then set the tax policy that best achieves them.
  3. Recognize that some form of universal or at least very broad taxation in a nation is what drives the demand for and universal use of the government money in an economy.
    • Maintaining taxation of some kind is important, even if we have progressed so much that the currency is very widely adopted.
    • The key question then becomes what is the best type of tax for this purpose.
  4. Taxation is just one part of the total net inflows or outflows of money from the government into the nation’s economy, along with how we authorize government to make payments.
    • Usually the amount taxed is a bit less than the amount injected. We usually call this the “budget deficit” – I prefer to say positive fiscal flows so we don’t get hung up with the wrong metaphor again and link taxes and spending like households – remember, governments have no income.
    • These flows directly impact the private sector economy – if the positive flow increases the private sector sees a gain. If they drop or become a negative fiscal flow (what we call a government “budget surplus”), the private sector has to see some other area grow or its economy will stop growing or enter recession.
    • If we tax too much or have too small of a net fiscal flow, there will be unemployment and the economy will lose productivity and fall below its potential.
    • So the total level of taxation matters. Economists should be paying much more attention to the net fiscal flows and how they can be optimized for the health of the economy rather than fretting over relatively meaningless accounting ratios like debt-to-GDP ratios and imaginary concepts like trust fund account balances.
  5. Taxation has an effect on the economy. 
    • The questions we should be asking in determining taxation are: i) what is the effect of the tax? ii) Is the effect desired? iii) If not desired, is the effect understood and permitted for the sake of achieving some other outcome.
    • Since taxation reduces disposable incomes it affects the amount of spending power in the economy, for both individuals and businesses.
    • Changes in spending will vary across types of businesses and individuals in different income brackets since their propensity to spend varies considerably.
    • Taxation can cause shifts in investments & portfolios as investors evaluate the after-tax yields or returns.
    • Taxation can affect the level of savings and the how that varies by age and demographics. 
  6. Taxation can be a useful tool to direct or redirect resources in the economy that may be in the public interest but that are not being recognized appropriately through market economic forces. They can be structured to provide incentives and disincentives for spending and investment decisions.
    • For example, the US currently provides significant tax incentives for various capital investments which benefit the very wealthy, while the taxes on the wages of the average worker reduces their spending power and ability to save or invest.
    • Increasing taxes on “bad” things and reducing them on “good” things is a generally accepted principle to help in issues of public health and safety, environmental concerns, or to address societal and economic inequalities.
  7. Political processes are not optimized for tinkering with the economy.
    • It can be difficult for a political process to be counted upon to make necessary adjustments in a frequent manner to help the economy in the way the Central Banks believe they can. 
    • Political processes may not come up with the best answer and they may not be able to react very quickly. 
    • This suggests that much careful analysis should go into designing approaches to fiscal policy, especially taxation but also certain types of spending, to enable the net fiscal flows of the government sector to automatically adjust in a counter-cyclical way to the private sector economy. 
    • Such a “buffer” will result in less taxation and increased spending/investment during times of economic downturn, and vice versa. 
    • This does happen already to some degree (tax receipts go down when incomes and profits fall), but much more can be done to achieve a better outcome. 
    • Many of us would suggest that the primary desired outcome is that the economy maintains full employment of workers, but other outcomes can also be designed in.
  8. And one more time for good measure: not one taxation principle here relates in any way to paying for government spending, financing government, or raising funds to balance budgets. 
    • Throw away that textbook and let’s focus on a balanced economy!

Next, we will put this into practice by rethinking our approach to many of our common tax policies.


* Some nations did create money pieces that could circulate in the country out of commodities such as gold and silver coins which may have helped give confidence to the people that the new money had real value, especially when the nation was young, the government weak, and the imposition and collection of sufficient taxes was insufficient or deemed undesirable. The appearance of a link between a commodity and a currency’s value in history is, in fact, much more dubious and has given rise to much confusion. See the references under "More reading on the history of State money" at the bottom of this link.


