Bill Gates’ Solution To Income Inequality

19th International AIDS Conference Convenes In Washington

On October 15, 2014, Chris Matthews writes in Fortune Magazine:

The billionaire philanthropist wants to distinguish between the wealthy who are using their money for good and those who are merely consuming it.

It might not come as a surprise to many that Bill Gates, whom Forbes’ magazine ranks as the second wealthiest man in the world, doesn’t agree with the ideas of French economist Thomas Piketty.

It’s Piketty, after all, who made a big splash this year with his book Capital in the 21st Century, which argued that it is a fundamental law of capitalism that wealth will grow more concentrated absent destabilizing events like global wars. Piketty’s solution? A global tax on capital that could help governments better understand how wealth is distributed and stem the tide of inevitably increasing inequality, which Piketty believes is socially destabilizing.

If you believe the Forbes list, there is nobody in the world besides Carlos Slim who has more to lose than Bill Gates if Piketty’s global tax on wealth were to be instituted. ButGates’ critique of Piketty’s work, published Monday on his personal blog, isn’t completely self-interested. After all, Gates has already pledged to give away half his fortune over the course of his lifetime, a much larger amount than the 1% or 2% wealth tax, proposed by Piketty, would confiscate. His problem isn’t with the idea that the super wealthy should spread their fortunes around, but ratherwith Piketty’s mechanism and the incentives it would create:

“Imagine three types of wealthy people. One guy is putting his capital into building his business. Then there’s a woman who’s giving most of her wealth to charity. A third person is mostly consuming, spending a lot of money on things like a yacht and plane. While it’s true that the wealth of all three people is contributing to inequality, I would argue that the first two are delivering more value to society than the third. I wish Piketty had made this distinction, because it has important policy implications.”

Gates shares Piketty’s goal of spreading wealth, yet he doesn’t want to discourage the uber wealthy (like Gates) who are taking risks, investing in value-creating businesses, and helping the world through philanthropy. Gates’ solution? Shift the American tax code from one that taxes labor to one that taxes consumption. Now, this sounds like standard, right-wing economic theory. Consumption taxes are usually favored by the wealthy and by conservative economists because they tend to be regressive in nature. Since everyone—rich and poor—have to consume some amount of goods and services, and because the proportion of income spent is much higher for the poor than the rich, consumption taxes like state and local sales tax burden the poor more than the rich.

But this doesn’t necessarily have to be the case. Economists like Cornell University’s Robert Frank have long advocated for progressive consumption taxes that could do much to solve what they perceive as the ills of growing income inequality. As Frank writes:

“Under such a tax, people would report not only their income but also their annual savings, as many already do under 401(k) plans and other retirement accounts. A family’s annual consumption is simply the difference between its income and its annual savings. That amount, minus a standard deduction—say, $30,000 for a family of four—would be the family’s taxable consumption. Rates would start low, like 10 percent. A family that earned $50,000 and saved $5,000 would thus have taxable consumption of $15,000.

“Consider a family that spends $10 million a year and is deciding whether to add a $2 million wing to its mansion. If the top marginal tax rate on consumption were 100 percent, the project would cost $4 million. The additional tax payment would reduce the federal deficit by $2 million. Alternatively, the family could scale back, building only a $1 million addition. Then it would pay $1 million in additional tax and could deposit $2 million in savings. The federal deficit would fall by $1 million, and the additional savings would stimulate investment, promoting growth. Either way, the nation would come out ahead with no real sacrifice required of the wealthy family, because when all build larger houses, the result is merely to redefine what constitutes acceptable housing. With a consumption tax in place, most neighbors would also scale back the new wings on their mansions.”

As you can see, one of the strategies behind this tax regime is to reduce the incentive to consume. With less conspicuous consumption, the poor would suffer from the negative effects of having less than those around them. As many behavioral studies have shown, relative wealth has more of an impact on personal happiness than absolute wealth.

Such a regime could appeal to both the right and left sides of the political spectrum. For those on the left, who are sometimes uncomfortable with the effects of a culture based around consumption, this tax would discourage such behavior. Meanwhile, a regime that encourages savings and investment would appeal to conservatives.

But for a progressive consumption tax to be truly progressive, there would need to be a hefty estate tax to prevent the rich from simply letting their wealth grow over generations through interest income. But Gates argues this is not a problem, because we have the ability to institute estate taxes, a policy which he is a “big believer” in.

What is upsetting about Bill Gates’ views is that he completely ignores the issue of OWNERSHIP concentration of wealth, yet he knows very well that the reason is wealthy––the second wealthiest according to Fortune––is because he is an OWNER of a massive diversified capital asset portfolio, including Microsoft.

Gates also knows from first-hand experience that increasing concentration of wealth (the ownership of valued assets) feeds on itself, assuring that the already wealthy will just get wealthier.  Gates  fails to focus on the necessary policies to broaden OWNERSHIP participation in the economy. even while the  bottom 90 percent struggle to make ends meet on stagnant incomes. It is impossible for them to accumulate savings. which sadly is the requirement for being able to invest and benefit from a growing portfolio of wealth assets. 

Gates needs to realize that the problem of income inequality and wealth inequality is rooted in the archaic notion that savings are required to finance economic growth and attain ownership of valuable productive capital assets.  Bill Gates, Chris Matthews,  Federal Reserve Chairwoman Janet Yellen, other Federal Reserve Board members, influential economists and business leaders, as well as political leaders, should read Harold Moulton’s “The Formation Of Capital, ” in which he argues that it makes no sense to finance new productive capital out of past savings. Instead, economic growth should be financed out of future earnings (savings), and provide that every citizen become an owner.

The Federal Reserve is the instrument that can abate wealth inequality by providing capital credit loans at zero “0” percent interest to local banks who would in turn lend this interest-free money (at no additional cost, except for minimum administration fees) for the specific purpose to finance the creation of new wealth-creating, income-producing capital assets to grow the economy. Who should benefit from such interest-free capital credit should be EVERY child, woman and man, who would then be empowered to acquire over time significant portfolios of self-liquidating capital asset investments in the American economy with the capital credit loans repaid out of the FUTURE earnings of the investments.

Broadening capital ownership would “increase the pay of the least advantaged workers” (and non-workers) who would be contributing their productive capital to the expansion of the the economy.

Gates is focused on consumption taxes to encourage savings and investment and redistributive policies such as higher taxes  on inheritances.   He completely ignores the necessity to broaden capital OWNERSHIP as part of an incentive package that eliminates corporate and capital gains taxes in exchange for creating new owners and, as a substitute for inheritance and gift taxes, imposes a transfer tax on the recipients whose holdings exceeded $1 million, thus encouraging the super-rich to spread out their monopoly-sized estates to all members of their family, friends, servants and workers who helped create their fortunes, teachers, health workers, police, other public servants, military veterans, artists, the poor and the disabled.

As the economy continue to grow, even at present-day anemic rates, people are going to OWN the non-human factor––tools, machines, robotics, computerization, etc–– of any economic expansion, which as time progresses will continue to be the MAJOR input factor in ANY economic expansion. Gates knows this. His recommendations will not abate wealth inequality.

What Gates should be advocating is the passage of the Capital Homestead Act. That would enable every child, woman and man to gain equal access to capital credit for generating their own earned ownership income to engage in what Aristotle called “leisure work.” Saez and Zucman and other academics and politicians should take the time to study seriously the Louis Kelso-Mortimer J. Adler paradigm as presented in the free down-loadable books and articles on the Center for Economic and Social Justice “virtual library” at http://www.cesj.org. Then hopefully Saez and Zucman will come to understand that a growing percentage of every citizen’s income and wealth accumulation could conceptually result from the Just Third Way’s reforms to democratize personal opportunities to participate as an owner of future capital growth and non-coercive transfers of existing capital’s ownership opportunities. The Just Third Way strategy would enable a growing number of citizens to be educated, participate in and thus earn a sufficient and increasing capital income. As the market economy continues to become increasingly capital-intensive, more and more citizens would become economically liberated to engage voluntarily in the unpaid and unlimited work of civilization. This would also reduce the cost of education at all levels, and certainly, when implemented increase family choices over education and health benefits.

What is needed and necessary is a new policy direction specifically aimed at creating new capital owners simultaneously with the growth of the economy. The financial mechanisms used MUST NOT REQUIRE past savings and instead be available as a unique and exclusive opportunity for American citizens to access insured, interest-free capital loans for the specific purpose of acquiring newly issued full-dividend earnings payout stock in corporations growing our economy. In other words, we need to use a credit mechanism by which the loans are paid for with the future earnings generated by the creation of new capital assets, which result in products and services needed and wanted by Americans, which then further propels the economy’s growth. Such a policy program is what the Capital Homestead Act would achieve.

The Federal Reserve, which has been largely responsible for the powerlessness of most American citizens, should set an example for all the central banks in the world. Chairwoman Yellen and other members of the Federal Reserve need to wake-up and implement Section 13 paragraph 2, which directs the Federal Reserve to create credit for local banks to make loans where there isn’t enough savings in the system to finance economic growth. We should not destroy the Federal Reserve or make it a political extension of the Treasury Department, but instead reform it so that the American citizens in each of the 12 Federal Reserve Regions become the owners. The result will be that money power will flow from the bottom up, not from the top down––not for consumer credit, not for credit that doesn’t pay for itself or non-productive uses of credit, but for credit for productive uses to expand the economy’s rate of growth.

The Federal Reserve needs to stop monetizing unproductive debt, and begin creating an asset-backed currency that could enable every child, woman and man to establish a Capital Homestead Account or “CHA” at their local bank to acquire a growing dividend-bearing stock portfolio to supplement their incomes from work and all other sources of income. Steadily over time this will create a robust economy with millions of “customers with money” to purchase the products and services that are needed and wanted.

Our leaders need to put on the table for national discussion this SUPER-IRA idea and the necessary reform of our tax policies that would incentivize corporations to pay out fully their earnings in the form of dividend income and issue and sell new stock to grow. The CHA would process an equal allocation of productive credit to every citizen exclusively for purchasing full-dividend payout shares in companies needing funds for growing the economy and private sector jobs for local, national and global markets,

The shares would be purchased on credit wholly backed by projected “future savings” in the form of new productive capital assets with future marketable products and services produced by the newly added technology, renewable energy systems, plant, rentable space and infrastructure added to the economy.

Risk of default on each stock acquisition loan would be covered by private sector capital credit risk insurance and reinsurance (ala the Federal Housing Administration concept), but would not require citizens to reduce their funds for consumption to purchase shares.

Essentially, the pressing need is for everyone in a position of influence to encourage President Obama to raise the consciousness of the American people by making his NUMBER ONE focus the introduction of a National Right To Capital Ownership Bill that restores the American dream of property ownership as a primary source of personal wealth.

This is the solution to America’s economic decline in wealth and income inequality, which will result in double-digit economic growth and simultaneously broaden private, individual ownership so that EVERY American’s income significantly grows, providing the means to support themselves and their families with an affluent lifestyle. The Just Third Way Master Plan for America’s future is published at http://foreconomicjustice.org/?p=5797 and the platform of the Unite America Party is published by The Huffington Post at http://www.huffingtonpost.com/gary-reber/platform-of-the-unite-ame_b_5474077.html as well as Nation Of Change at http://www.nationofchange.org/platform-unite-america-party-1402409962 and OpEd News at http://www.opednews.com/articles/Platform-of-the-Unite-Amer-by-Gary-Reber-Party-Leadership_Party-Platforms-DNC_Party-Platforms-GOP-RNC_Party-Politics-Democratic-140630-60.html.

The Capital Homestead Act (http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-a-plan-for-getting-ownership-income-and-power-to-every-citizen/ and http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-summary/) would grow the U.S. economy faster in a non-inflationary way, create new private sector jobs, finance new productive capital and provide capital incomes for all Americans from the bottom-up by enabling them to own trillions annually in new capital formation and transfers in current assets . . . without taking private property rights away from billionaires and multi-millionaires over their existing assets.

http://fortune.com/2014/10/15/bill-gates-income-inequality/

 

U.S. Income Inequality Is Bad, But Wealth Inequality Is A Bigger Problem

On October  24, 2014, Michael Hiltzik writes in the Los Angeles Times:

Emanuel Saez, that assiduous tracker of economic inequality in the U.S., has been shifting his attention away from income inequality to a broader, thornier and more intractable issue: wealth inequality. As he observes in a paper published this week at the blog of the Washington Center for Equitable Growth, wealth inequality is “exploding,” constituting “a direct threat to the cherished American ideals of meritocracy and opportunity.”

Saez, an economics professor at UC Berkeley, wrote his paper with Gabriel Zucman of the London School of Economics. A longer, more technical version of their post can be foundhere. They draw a line from “Capital in the Twenty-First Century,” the magisterial book by Saez’s frequent coauthor, Thomas Piketty, to point out that increasing concentration of wealth feeds on itself, becoming ever more difficult to remedy.

Saez and Zucman find that current sharp uptrend in wealth inequality is a reversal of nearly a half-century of “democratization of wealth,” from the 1930s through the late ’70’s. At that point, the top 0.1% owned 7% of total U.S. household wealth. By 2012 that figure was 22%. Today their share of wealth is “almost as high as in the late 1920s.” And we know how that turned out.

Among the fascinating findings of Saez and Zucman is how thoroughly the top 0.1% have shouldered their way past all other households. While their wealth share was soaring, that of the next 0.9% was barely growing, while that of the “merely rich” — those ranking in the top 10% but below the top 1% — actually shrank.

But the real victims of the trend are in the middle class. Saez and Zucman show that the wealth share of the bottom 90% grew from the 1920s through the mid-1980s, from 15% to 36%. Mostly the gain was due to the growth of pensions and of homeownership. Since the mid-1980s, however, middle-class wealth has evaporated, falling to 23% in 2012, about the same level as 1940.

The authors blame sharply rising indebtedness; of course, the collapse of stock values and home prices in recent years has destroyed a huge volume of middle-class wealth. The top 1% have been able to recover much of that wealth, but the bottom 90% have continued to fall. They’ve continued to be dependent on housing and pensions, both of which have continued to be very shaky legs of a tottering stool.

Wealth inequality is also an artifact of income inequality; the two trends work together to magnify the former. As the bottom 90% struggle to make ends meet on stagnant incomes, they’re unable to accumulate savings. “Today, the top 1% save about 35% of their income,” the authors write, “while bottom 90% families save about zero.”

Strong measures will be needed to reverse this otherwise inexorable trend, they write. “Ten or twenty years from now, all the gains in wealth democratization achieved during the New Deal and the post-war decades could be lost. While the rich would be extremely rich, ordinary families would own next to nothing, with debts almost as high as their assets.”

Among their prescriptions for the rebuilding of middle-class wealth are higher taxes on capital income — “current preferential rates on capital income compared to wage income are hard to defend in light of the rise of wealth inequality” — and on inheritances. “Estate taxation is the most direct tool to prevent self-made fortunes from becoming inherited wealth — the least justifiable form of inequality in the American meritocratic ideal.” Progressive estate and income taxation were the key tools that reduced the concentration of wealth after the Great Depression,” they write. “The same proven tools are needed today.” (N.B.: See Ed Kleinbard of USC for a related take.)

 

Modern-day conservatives will shudder at the Saez-Zucman program, but it would fit well within the world view of the Founding Fathers. Thomas Jefferson and his fellows were deeply hostile to the accumulation of great wealth, especially by inheritance. In a famous 1812 letter to the printer Joseph Milligan, Jefferson acknowledges that “the overgrown wealth of an individual [may] be deemed dangerous to the State.”

In economic terms, he wrote to James Madison, “whenever there is in any country, uncultivated lands and unemployed poor, it is clear that the laws of property have been so far extended as to violate natural right.”

And in his autobiography Jefferson wrote of the bills he had advocated or passed to form “a system by which every fibre would be eradicated of antient [sic] or future aristocracy; and a foundation laid for a government truly republican.” His goal was to “prevent the accumulation and perpetuation of wealth in select families, and preserve the soil of the country from being daily more & more absorbed in Mortmain” (that is, the perpetual ownership of real estate by a church, corporation, or other legal entity).

Jefferson was in many ways a modern man, but his goals have come to naught, in part because the very legal measures he advocated have been dismantled by conservatives acting, supposedly, in his name. The aristocracy is again on the rise, and the republic and its economy are very sick.

While Emanuel Saez points out that “increasing concentration of wealth (the ownership of valued assets) feeds on itself, becoming ever more difficult to remedy,” the  article fails to focus the necessary policies to broaden OWNERSHIP participation. The authors do though get the following realization correct: “As the bottom 90% struggle to make ends meet on stagnant incomes, they’re unable to accumulate savings. “Today, the top 1% save about 35% of their income,” the authors write, “while bottom 90% families save about zero.”

The problem is rooted in the archaic notion that savings are required to finance economic growth and attain ownership of valuable productive capital assets.  Emanuel Saez, Gabriel Zucman, Michael Hiltzik, Federal Reserve Chairwoman Janet Yellen, other Federal Reserve Board members, influential economists and business leaders, as well as political leaders, should read Harold Moulton’s “The Formation Of Capital, ” in which he argues that it makes no sense to finance new productive capital out of past savings. Instead, economic growth should be financed out of future earnings (savings), and provide that every citizen become an owner.

The Federal Reserve is the instrument that can abate wealth inequality by providing capital credit loans at zero “0” percent interest to local banks who would in turn lend this interest-free money (at no additional cost, except for minimum administration fees) for the specific purpose to finance the creation of new wealth-creating, income-producing capital assets to grow the economy. Who should benefit from such interest-free capital credit should be EVERY child, woman and man, who would then be empowered to acquire over time significant portfolios of self-liquidating capital asset investments in the American economy with the capital credit loans repaid out of the FUTURE earnings of the investments.

Broadening capital ownership would “increase the pay of the least advantaged workers” (and non-workers) who would be contributing their productive capital to the expansion of the the economy.

But Saez and Zucman are focused on redistributive policies such as higher taxes on capital income and on inheritances.   They completely ignore the necessity to broaden capital OWNERSHIP as part of an incentive package that eliminates corporate and capital gains taxes in exchange for creating new owners and, as a substitute for inheritance and gift taxes, imposes a transfer tax on the recipients whose holdings exceeded $1 million, thus encouraging the super-rich to spread out their monopoly-sized estates to all members of their family, friends, servants and workers who helped create their fortunes, teachers, health workers, police, other public servants, military veterans, artists, the poor and the disabled.

As the economy continue to grow, even at present-day anemic rates, people are going to OWN the non-human factor––tools, machines, robotics, computerization, etc–– of any economic expansion, which as time progresses will continue to be the MAJOR input factor in ANY economic expansion. Just arguing for the opportunity to subsist on the crumbs of the expansion attained through further taxation of the wealthy and expressed as jobs, much of which will be government funded from the tax extraction, is at the heart of the injustice and non-equal opportunity that pits workers (non-owners) against owners and further widens wealth inequality.

What Saez and Zucman should be advocating is the passage of the Capital Homestead Act. That would enable every child, woman and man to gain equal access to capital credit for generating their own earned ownership income to engage in what Aristotle called “leisure work.” Saez and Zucman and other academics and politicians should take the time to study seriously the Louis Kelso-Mortimer J. Adler paradigm as presented in the free down-loadable books and articles on the Center for Economic and Social Justice “virtual library” at http://www.cesj.org. Then hopefully Saez and Zucman will come to understand that a growing percentage of every citizen’s income and wealth accumulation could conceptually result from the Just Third Way’s reforms to democratize personal opportunities to participate as an owner of future capital growth and non-coercive transfers of existing capital’s ownership opportunities. The Just Third Way strategy would enable a growing number of citizens to be educated, participate in and thus earn a sufficient and increasing capital income. As the market economy continues to become increasingly capital-intensive, more and more citizens would become economically liberated to engage voluntarily in the unpaid and unlimited work of civilization. This would also reduce the cost of education at all levels, and certainly, when implemented increase family choices over education and health benefits.

Saez and Zucman and others should also be aware that artificially raising the minimum wage is a strategy that necessarily results in higher costs of production, raising prices and thus hurting the poor more than the non-poor.

What is needed and necessary is a new policy direction specifically aimed at creating new capital owners simultaneously with the growth of the economy. The financial mechanisms used MUST NOT REQUIRE past savings and instead be available as a unique and exclusive opportunity for American citizens to access insured, interest-free capital loans for the specific purpose of acquiring newly issued full-dividend earnings payout stock in corporations growing our economy. In other words, we need to use a credit mechanism by which the loans are paid for with the future earnings generated by the creation of new capital assets, which result in products and services needed and wanted by Americans, which then further propels the economy’s growth. Such a policy program is what the Capital Homestead Act would achieve.

The Federal Reserve, which has been largely responsible for the powerlessness of most American citizens, should set an example for all the central banks in the world. Chairwoman Yellen and other members of the Federal Reserve need to wake-up and implement Section 13 paragraph 2, which directs the Federal Reserve to create credit for local banks to make loans where there isn’t enough savings in the system to finance economic growth. We should not destroy the Federal Reserve or make it a political extension of the Treasury Department, but instead reform it so that the American citizens in each of the 12 Federal Reserve Regions become the owners. The result will be that money power will flow from the bottom up, not from the top down––not for consumer credit, not for credit that doesn’t pay for itself or non-productive uses of credit, but for credit for productive uses to expand the economy’s rate of growth.

The Federal Reserve needs to stop monetizing unproductive debt, and begin creating an asset-backed currency that could enable every child, woman and man to establish a Capital Homestead Account or “CHA” at their local bank to acquire a growing dividend-bearing stock portfolio to supplement their incomes from work and all other sources of income. Steadily over time this will create a robust economy with millions of “customers with money” to purchase the products and services that are needed and wanted.

Our leaders need to put on the table for national discussion this SUPER-IRA idea and the necessary reform of our tax policies that would incentivize corporations to pay out fully their earnings in the form of dividend income and issue and sell new stock to grow. The CHA would process an equal allocation of productive credit to every citizen exclusively for purchasing full-dividend payout shares in companies needing funds for growing the economy and private sector jobs for local, national and global markets,

The shares would be purchased on credit wholly backed by projected “future savings” in the form of new productive capital assets with future marketable products and services produced by the newly added technology, renewable energy systems, plant, rentable space and infrastructure added to the economy.

Risk of default on each stock acquisition loan would be covered by private sector capital credit risk insurance and reinsurance (ala the Federal Housing Administration concept), but would not require citizens to reduce their funds for consumption to purchase shares.

Essentially, the pressing need is for everyone in a position of influence to encourage President Obama to raise the consciousness of the American people by making his NUMBER ONE focus the introduction of a National Right To Capital Ownership Bill that restores the American dream of property ownership as a primary source of personal wealth.

This is the solution to America’s economic decline in wealth and income inequality, which will result in double-digit economic growth and simultaneously broaden private, individual ownership so that EVERY American’s income significantly grows, providing the means to support themselves and their families with an affluent lifestyle. The Just Third Way Master Plan for America’s future is published at http://foreconomicjustice.org/?p=5797 and the platform of the Unite America Party is published by The Huffington Post at http://www.huffingtonpost.com/gary-reber/platform-of-the-unite-ame_b_5474077.html as well as Nation Of Change at http://www.nationofchange.org/platform-unite-america-party-1402409962 and OpEd News at http://www.opednews.com/articles/Platform-of-the-Unite-Amer-by-Gary-Reber-Party-Leadership_Party-Platforms-DNC_Party-Platforms-GOP-RNC_Party-Politics-Democratic-140630-60.html.

The Capital Homestead Act (http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-a-plan-for-getting-ownership-income-and-power-to-every-citizen/ and http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-summary/) would grow the U.S. economy faster in a non-inflationary way, create new private sector jobs, finance new productive capital and provide capital incomes for all Americans from the bottom-up by enabling them to own trillions annually in new capital formation and transfers in current assets . . . without taking private property rights away from billionaires and multi-millionaires over their existing assets.

http://www.latimes.com/business/hiltzik/la-fi-mh-us-income-inequality-is-bad-20141024-column.html

http://www.latimes.com/opinion/readersreact/la-le-1031-friday-wealth-inequality-20141031-story.html

http://www.huffingtonpost.com/2014/10/20/middle-class-wealth-shrinks-1940s_n_6014874.html

http://www.huffingtonpost.com/2013/09/18/union-membership-middle-class-income_n_3948543.html

Yes, The Federal Reserve Can Reduce Inequality.

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Federal Reserve Chair Janet Yellen. (Shawn Thew/European Pressphoto Agency)

On October 20, 2014, Jared Bernstein writes in The Washington Post:

It was my privilege to attend a recent conference at the Boston Federal Reserve on the topic of inequality — specifically, the growing inequality of opportunity in America. The presentations, including one by Fed Chair Janet Yellen, made a solid case that our high levels of inequality are eroding opportunity for many on the wrong side of the wealth divide. But there was a big question hanging over the proceedings: Can the Federal Reserve actually do much to reduce inequality or raise opportunity?

For at least three reasons, the answer is “yes.” Moreover, the Fed can also worsen inequality if it gets these wrong.

First, while it’s not the case that the Fed sets the unemployment rate wherever it wants, its macro-management function plays a substantial role in both the levels and changes in the jobless rate. By using its interest-rate tools to keep the cost of borrowing down and signaling to the investor community that it is committed to keeping rates low, it can help to trigger job-creating activity — from building a factory to renovating your bathroom.

To be clear, it can’t do this alone. Increasing the supply of low-cost credit doesn’t by itself create the demand to take advantage of it. But there’s little question that it helps. For example, analysis by Fed economists finds that its asset-buying program “…may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred.”

Granted, this is a bit like asking your barber how your new haircut looks, but the Fed analysts use pretty standard methods to get these results.

Still, how do such improvements help with inequality and opportunity? By disproportionately increasing the pay of the least advantaged workers. The figure below shows the impact of a 10 percent decline in the unemployment rate on real wages for low-, middle-, high-wage workers. (BTW, that’s 10 percent, not 10 percentage points, so it means going from, for example, 6 percent to 5.4 percent.)

A good example of these dynamics came in the latter half of the 1990s, when Alan Greenspan, to his great credit, allowed the unemployment rate to fall well below the rate that was thought at the time to be consistent with stable inflation. For the first time in decades, real low- and middle-wages grew at the rate of productivity, over 2 percent per year, poverty fell sharply, and real median family income grew by 13 percent between 1994 and 1999, its fastest five-year growth rate since inequality started rising in the mid-1970s.

To be sure, once you include financial assets that were appreciating quickly as the dot-com bubble inflated, the incomes of the wealthy were still rising faster than those of the middle class, so I’m not saying low unemployment wipes out inequality. But I am saying it helps to deactivate one of its most pernicious impacts: the channeling of income and wage growth away from the middle and bottom of the income distribution.

Speaking of financial bubbles, the second way the Fed can reduce inequality is through what it calls its “macro-prudential” function, i.e., financial market oversight. Over the Greenspan era, this function was largely assumed away under the ideological assumption that rational markets would self-monitor and self-correct. Whoops.

Bubbles and busts worsen inequality in two ways. First, the recession that follows the bust is disproportionately felt by the least advantaged. Look back at the figure above. The top-earning group may not get help from lower unemployment, but that means the group doesn’t get hurt much by it either. True, its assets take a hit when the bubble bursts, but the pattern in recent decades has been for the group to recover its losses well ahead of the rest.

Second, while lower unemployment pushes against inequality, American workers’ bargaining power is so low that it takes truly full employment to force employers to bid up pay to get and keep the workers they need. The current expansion is exhibit A of this dynamic: Unemployment has actually been falling pretty sharply, but real wages haven’t moved much yet.

Doesn’t this contradict the bars in the figure? To some extent it does, showing just how weak bargaining power is in the current labor market. But if you dig a little deeper into the dynamics behind that analysis, you find that it’s not enough for unemployment to be falling. It’s got to be low and stay low for a while.

In other words, for the least advantaged to benefit from an economic expansion, that expansion has to last long enough to reach and stay at full employment. The Fed’s oversight function is thus indispensable: it must become much more vigilant in breaking what I call the “shampoo cycle”: bubble, bust, repeat.

Finally, while much of what the Fed does is excessively scrutinized by the media and the markets, some of what it does in the inequality space is not known at all. For example, Eric Rosengren, the president of the Boston Fed, presented some really compelling work on a Fed-initiated project called the Working Cities Challenge, where Fed research and expertise combines with stakeholders in troubled communities to build human and investment capital targeted at low-income households.

The program is designed to diagnose and remove the barriers blocking upward mobility in communities where opportunity has been fading for years. As such, it pretty directly targets inequality. Taking myself as an example, I can assure you that even avid Fed watchers don’t know about initiatives such as this one.

Especially in the first two examples — macro-management and financial oversight — the Fed’s impact on inequality is symmetrical. The central bank can reduce it, as Greenspan did by allowing us to get to full employment, or exacerbate it (as Greenspan also did) by ignoring bubbles.

Right now, for example, there are many voices pushing Chair Yellen and Co. to tighten preemptively to stave off any future wage or price pressures. And as you can imagine, the finance sector isn’t exactly anxious to see the Fed ratchet up its oversight.

In both cases, it must resist. While lowering inequality is not directly part of the Fed’s mandate, it is in fact an outcome of its work, at least when it gets it right.

This article exposes more short-sighted analysis by Jared Bernstein, whose primary focus is on job creation rather than OWNERSHIP creation.

How about instead of the Federal Reserve showing that it is “committed to keeping rates low, it can help to trigger job-creating activity — from building a factory to renovating your bathroom,” it can provide capital credit loan at zero “0” percent interest to local banks who would in turn lend this interest-free money for for the specific purpose to finance the creation of new wealth-creating, income-producing capital assets to grow the economy. Who should benefit from such interest-free capital credit should be EVERY child, woman and man, who would then be empowered to acquire over time significant portfolios of self-liquidating capital asset investments in the American economy with the capital credit loans repaid out of the FUTURE earnings of the investments.

Broadening capital ownership would “increase the pay of the least advantaged workers” (and non-workers) who would be contributing their productive capital to the expansion of the the economy.

But Bernstein’s focus is solely on job creation saying that “for the least advantaged to benefit from an economic expansion, that expansion has to last long enough to reach and stay at full employment.” He complete ignores the OWNERSHIP issue. People are going to OWN the non-human factor of any economic expansion, which as time progresses will continue to be the MAJOR input factor in ANY economic expansion. Just arguing for the opportunity to subsist on the crumbs of the expansion expressed as jobs is at the heart of the injustice and non-equal opportunity that pits workers (non-owners) against owners.

What Bernstein should be advocating is the passage of the Capital Homestead Act. That would enable every child, woman and man to gain equal access to capital credit for generating their own earned ownership income to engage in what Aristotle called “leisure work.” Bernstein and other academics and politicians should take the time to study seriously the Louis Kelso-Mortimer J. Adler paradigm as presented in the free down-loadable books and articles on the Center for Economic and Social Justice “virtual library” at http://www.cesj.org. Then hopefully Bernstein will come to understand that a growing percentage of every citizen’s income could conceptually result from the Just Third Way’s reforms to democratize personal opportunities to participate as an owner of future capital growth and non-coercive transfers of existing capital’s ownership opportunities. The Just Third Way strategy would enable a growing number of citizens to be educated, participate in and thus earn a sufficient and increasing capital income. As the market economy continues to become increasingly capital-intensive, more and more citizens would become economically liberated to engage voluntarily in the unpaid and unlimited work of civilization. This would also reduce the cost of education at all levels, and certainly, when implemented increase family choices over education and health benefits.

Bernstein should be aware that artificially raising the minimum wage is a strategy that necessarily results in higher costs of production, raising prices and thus hurting the poor more than the non-poor.

What is needed and necessary is a new policy direction specifically aimed at creating new capital owners simultaneously with the growth of the economy. The financial mechanisms used MUST NOT REQUIRE past savings and instead be available as a unique and exclusive opportunity for American citizens to access insured, interest-free capital loans for the specific purpose of acquiring newly issued full-dividend earnings payout stock in corporations growing our economy. In other words, we need to use a credit mechanism by which the loans are paid for with the future earnings generated by the creation of new capital assets, which result in products and services needed and wanted by Americans, which then further propels the economy’s growth. Such a policy program is what the Capital Homestead Act would achieve.

Jared Bernstein, Janet Yellen, other Federal Reserve Board members, influential economists and business leaders, as well as political leaders, should read Harold Moulton’s The Formation Of Capital, in which he argues that it makes no sense to finance new productive capital out of past savings. Instead, economic growth should be financed out of future earnings (savings), and provide that every citizen become an owner.

The Federal Reserve, which has been largely responsible for the powerlessness of most American citizens, should set an example for all the central banks in the world. Chairman Yellen and other members of the Federal Reserve need to wake-up and implement Section 13 paragraph 2, which directs the Federal Reserve to create credit for local banks to make loans where there isn’t enough savings in the system to finance economic growth. We should not destroy the Federal Reserve or make it a political extension of the Treasury Department, but instead reform it so that the American citizens in each of the 12 Federal Reserve Regions become the owners. The result will be that money power will flow from the bottom up, not from the top down––not for consumer credit, not for credit that doesn’t pay for itself or non-productive uses of credit, but for credit for productive uses to expand the economy’s rate of growth.

The Federal Reserve needs to stop monetizing unproductive debt, and begin creating an asset-backed currency that could enable every child, woman and man to establish a Capital Homestead Account or “CHA” at their local bank to acquire a growing dividend-bearing stock portfolio to supplement their incomes from work and all other sources of income. Steadily over time this will create a robust economy with millions of “customers with money” to purchase the products and services that are needed and wanted.

Our leaders need to put on the table for national discussion this SUPER-IRA idea and the necessary reform of our tax policies that would incentivize corporations to pay out fully their earnings in the form of dividend income and issue and sell new stock to grow. The CHA would process an equal allocation of productive credit to every citizen exclusively for purchasing full-dividend payout shares in companies needing funds for growing the economy and private sector jobs for local, national and global markets,

The shares would be purchased on credit wholly backed by projected “future savings” in the form of new productive capital assets with future marketable products and services produced by the newly added technology, renewable energy systems, plant, rentable space and infrastructure added to the economy.

Risk of default on each stock acquisition loan would be covered by private sector capital credit risk insurance and reinsurance (ala the Federal Housing Administration concept), but would not require citizens to reduce their funds for consumption to purchase shares.

Essentially, the pressing need is for everyone in a position of influence to encourage President Obama to raise the consciousness of the American people by making his NUMBER ONE focus the introduction of a National Right To Capital Ownership Bill that restores the American dream of property ownership as a primary source of personal wealth.

This is the solution to America’s economic decline in wealth and income inequality, which will result in double-digit economic growth and simultaneously broaden private, individual ownership so that EVERY American’s income significantly grows, providing the means to support themselves and their families with an affluent lifestyle. The Just Third Way Master Plan for America’s future is published at http://foreconomicjustice.org/?p=5797 and the platform of the Unite America Party is published by The Huffington Post at http://www.huffingtonpost.com/gary-reber/platform-of-the-unite-ame_b_5474077.html as well as Nation Of Change at http://www.nationofchange.org/platform-unite-america-party-1402409962 and OpEd News at http://www.opednews.com/articles/Platform-of-the-Unite-Amer-by-Gary-Reber-Party-Leadership_Party-Platforms-DNC_Party-Platforms-GOP-RNC_Party-Politics-Democratic-140630-60.html.

The Capital Homestead Act (http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-a-plan-for-getting-ownership-income-and-power-to-every-citizen/ and http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-summary/) would grow the U.S. economy faster in a non-inflationary way, create new private sector jobs, finance new productive capital and provide capital incomes for all Americans from the bottom-up by enabling them to own trillions annually in new capital formation and transfers in current assets . . . without taking private property rights away from billionaires and multi-millionaires over their existing assets.

http://www.washingtonpost.com/posteverything/wp/2014/10/20/yes-the-federal-reserve-can-reduce-inequality/

Print Less But Transfer More––Why Central Banks Should Give Money Directly To The People

blyth_printless

In the September/October issue of Foreign Affairs, Mark Blyth and Eric Lonergan write:

In the decades following World War II, Japan’s economy grew so quickly and for so long that experts came to describe it as nothing short of miraculous. During the country’s last big boom, between 1986 and 1991, its economy expanded by nearly $1 trillion. But then, in a story with clear parallels for today, Japan’s asset bubble burst, and its markets went into a deep dive. Government debt ballooned, and annual growth slowed to less than one percent. By 1998, the economy was shrinking.

That December, a Princeton economics professor named Ben Bernanke argued that central bankers could still turn the country around. Japan was essentially suffering from a deficiency of demand: interest rates were already low, but consumers were not buying, firms were not borrowing, and investors were not betting. It was a self-fulfilling prophesy: pessimism about the economy was preventing a recovery. Bernanke argued that the Bank of Japan needed to act more aggressively and suggested it consider an unconventional approach: give Japanese households cash directly. Consumers could use the new windfalls to spend their way out of the recession, driving up demand and raising prices.

As Bernanke made clear, the concept was not new: in the 1930s, the British economist John Maynard Keynes proposed burying bottles of bank notes in old coal mines; once unearthed (like gold), the cash would create new wealth and spur spending. The conservative economist Milton Friedman also saw the appeal of direct money transfers, which he likened to dropping cash out of a helicopter. Japan never tried using them, however, and the country’s economy has never fully recovered. Between 1993 and 2003, Japan’s annual growth rates averaged less than one percent.

Today, most economists agree that like Japan in the late 1990s, the global economy is suffering from insufficient spending, a problem that stems from a larger failure of governance. Central banks, including the U.S. Federal Reserve, have taken aggressive action, consistently lowering interest rates such that today they hover near zero. They have also pumped trillions of dollars’ worth of new money into the financial system. Yet such policies have only fed a damaging cycle of booms and busts, warping incentives and distorting asset prices, and now economic growth is stagnating while inequality gets worse. It’s well past time, then, for U.S. policymakers — as well as their counterparts in other developed countries — to consider a version of Friedman’s helicopter drops. In the short term, such cash transfers could jump-start the economy. Over the long term, they could reduce dependence on the banking system for growth and reverse the trend of rising inequality. The transfers wouldn’t cause damaging inflation, and few doubt that they would work. The only real question is why no government has tried them.

Instead of trying to drag down the top, governments should boost the bottom.

EASY MONEY

In theory, governments can boost spending in two ways: through fiscal policies (such as lowering taxes or increasing government spending) or through monetary policies (such as reducing interest rates or increasing the money supply). But over the past few decades, policymakers in many countries have come to rely almost exclusively on the latter. The shift has occurred for a number of reasons. Particularly in the United States, partisan divides over fiscal policy have grown too wide to bridge, as the left and the right have waged bitter fights over whether to increase government spending or cut tax rates. More generally, tax rebates and stimulus packages tend to face greater political hurdles than monetary policy shifts. Presidents and prime ministers need approval from their legislatures to pass a budget; that takes time, and the resulting tax breaks and government investments often benefit powerful constituencies rather than the economy as a whole. Many central banks, by contrast, are politically independent and can cut interest rates with a single conference call. Moreover, there is simply no real consensus about how to use taxes or spending to efficiently stimulate the economy.

Steady growth from the late 1980s to the early years of this century seemed to vindicate this emphasis on monetary policy. The approach presented major drawbacks, however. Unlike fiscal policy, which directly affects spending, monetary policy operates in an indirect fashion. Low interest rates reduce the cost of borrowing and drive up the prices of stocks, bonds, and homes. But stimulating the economy in this way is expensive and inefficient, and can create dangerous bubbles — in real estate, for example — and encourage companies and households to take on dangerous levels of debt.

That is precisely what happened during Alan Greenspan’s tenure as Fed chair, from 1997 to 2006: Washington relied too heavily on monetary policy to increase spending. Commentators often blame Greenspan for sowing the seeds of the 2008 financial crisis by keeping interest rates too low during the early years of this century. But Greenspan’s approach was merely a reaction to Congress’ unwillingness to use its fiscal tools. Moreover, Greenspan was completely honest about what he was doing. In testimony to Congress in 2002, he explained how Fed policy was affecting ordinary Americans:

“Particularly important in buoying spending [are] the very low levels of mortgage interest rates, which [encourage] households to purchase homes, refinance debt and lower debt service burdens, and extract equity from homes to finance expenditures. Fixed mortgage rates remain at historically low levels and thus should continue to fuel reasonably strong housing demand and, through equity extraction, to support consumer spending as well.”

Of course, Greenspan’s model crashed and burned spectacularly when the housing market imploded in 2008. Yet nothing has really changed since then. The United States merely patched its financial sector back together and resumed the same policies that created 30 years of financial bubbles. Consider what Bernanke, who came out of the academy to serve as Greenspan’s successor, did with his policy of “quantitative easing,” through which the Fed increased the money supply by purchasing billions of dollars’ worth of mortgage-backed securities and government bonds. Bernanke aimed to boost stock and bond prices in the same way that Greenspan had lifted home values. Their ends were ultimately the same: to increase consumer spending.

The overall effects of Bernanke’s policies have also been similar to those of Greenspan’s. Higher asset prices have encouraged a modest recovery in spending, but at great risk to the financial system and at a huge cost to taxpayers. Yet other governments have still followed Bernanke’s lead. Japan’s central bank, for example, has tried to use its own policy of quantitative easing to lift its stock market. So far, however, Tokyo’s efforts have failed to counteract the country’s chronic underconsumption. In the eurozone, the European Central Bank has attempted to increase incentives for spending by making its interest rates negative, charging commercial banks 0.1 percent to deposit cash. But there is little evidence that this policy has increased spending.

China is already struggling to cope with the consequences of similar policies, which it adopted in the wake of the 2008 financial crisis. To keep the country’s economy afloat, Beijing aggressively cut interest rates and gave banks the green light to hand out an unprecedented number of loans. The results were a dramatic rise in asset prices and substantial new borrowing by individuals and financial firms, which led to dangerous instability. Chinese policymakers are now trying to sustain overall spending while reducing debt and making prices more stable. Like other governments, Beijing seems short on ideas about just how to do this. It doesn’t want to keep loosening monetary policy. But it hasn’t yet found a different way forward.

The broader global economy, meanwhile, may have already entered a bond bubble and could soon witness a stock bubble. Housing markets around the world, from Tel Aviv to Toronto, have overheated. Many in the private sector don’t want to take out any more loans; they believe their debt levels are already too high. That’s especially bad news for central bankers: when households and businesses refuse to rapidly increase their borrowing, monetary policy can’t do much to increase their spending. Over the past 15 years, the world’s major central banks have expanded their balance sheets by around $6 trillion, primarily through quantitative easing and other so-called liquidity operations. Yet in much of the developed world, inflation has barely budged.

To some extent, low inflation reflects intense competition in an increasingly globalized economy. But it also occurs when people and businesses are too hesitant to spend their money, which keeps unemployment high and wage growth low. In the eurozone, inflation has recently dropped perilously close to zero. And some countries, such as Portugal and Spain, may already be experiencing deflation. At best, the current policies are not working; at worst, they will lead to further instability and prolonged stagnation.

MAKE IT RAIN

Governments must do better. Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, central banks, such as the Fed, should hand consumers cash directly. In practice, this policy could take the form of giving central banks the ability to hand their countries’ tax-paying households a certain amount of money. The government could distribute cash equally to all households or, even better, aim for the bottom 80 percent of households in terms of income. Targeting those who earn the least would have two primary benefits. For one thing, lower-income households are more prone to consume, so they would provide a greater boost to spending. For another, the policy would offset rising income inequality.

Such an approach would represent the first significant innovation in monetary policy since the inception of central banking, yet it would not be a radical departure from the status quo. Most citizens already trust their central banks to manipulate interest rates. And rate changes are just as redistributive as cash transfers. When interest rates go down, for example, those borrowing at adjustable rates end up benefiting, whereas those who save — and thus depend more on interest income — lose out.

Most economists agree that cash transfers from a central bank would stimulate demand. But policymakers nonetheless continue to resist the notion. In a 2012 speech, Mervyn King, then governor of the Bank of England, argued that transfers technically counted as fiscal policy, which falls outside the purview of central bankers, a view that his Japanese counterpart, Haruhiko Kuroda, echoed this past March. Such arguments, however, are merely semantic. Distinctions between monetary and fiscal policies are a function of what governments ask their central banks to do. In other words, cash transfers would become a tool of monetary policy as soon as the banks began using them.

Other critics warn that such helicopter drops could cause inflation. The transfers, however, would be a flexible tool. Central bankers could ramp them up whenever they saw fit and raise interest rates to offset any inflationary effects, although they probably wouldn’t have to do the latter: in recent years, low inflation rates have proved remarkably resilient, even following round after round of quantitative easing. Three trends explain why. First, technological innovation has driven down consumer prices and globalization has kept wages from rising. Second, the recurring financial panics of the past few decades have encouraged many lower-income economies to increase savings — in the form of currency reserves — as a form of insurance. That means they have been spending far less than they could, starving their economies of investments in such areas as infrastructure and defense, which would provide employment and drive up prices. Finally, throughout the developed world, increased life expectancies have led some private citizens to focus on saving for the longer term (think Japan). As a result, middle-aged adults and the elderly have started spending less on goods and services. These structural roots of today’s low inflation will only strengthen in the coming years, as global competition intensifies, fears of financial crises persist, and populations in Europe and the United States continue to age. If anything, policymakers should be more worried about deflation, which is already troubling the eurozone.

There is no need, then, for central banks to abandon their traditional focus on keeping demand high and inflation on target. Cash transfers stand a better chance of achieving those goals than do interest-rate shifts and quantitative easing, and at a much lower cost. Because they are more efficient, helicopter drops would require the banks to print much less money. By depositing the funds directly into millions of individual accounts — spurring spending immediately — central bankers wouldn’t need to print quantities of money equivalent to 20 percent of GDP.

The transfers’ overall impact would depend on their so-called fiscal multiplier, which measures how much GDP would rise for every $100 transferred. In the United States, the tax rebates provided by the Economic Stimulus Act of 2008, which amounted to roughly one percent of GDP, can serve as a useful guide: they are estimated to have had a multiplier of around 1.3. That means that an infusion of cash equivalent to two percent of GDP would likely grow the economy by about 2.6 percent. Transfers on that scale — less than five percent of GDP — would probably suffice to generate economic growth.

LET THEM HAVE CASH

Using cash transfers, central banks could boost spending without assuming the risks of keeping interest rates low. But transfers would only marginally address growing income inequality, another major threat to economic growth over the long term. In the past three decades, the wages of the bottom 40 percent of earners in developed countries have stagnated, while the very top earners have seen their incomes soar. The Bank of England estimates that the richest five percent of British households now own 40 percent of the total wealth of the United Kingdom — a phenomenon now common across the developed world.

To reduce the gap between rich and poor, the French economist Thomas Piketty and others have proposed a global tax on wealth. But such a policy would be impractical. For one thing, the wealthy would probably use their political influence and financial resources to oppose the tax or avoid paying it. Around $29 trillion in offshore assets already lies beyond the reach of state treasuries, and the new tax would only add to that pile. In addition, the majority of the people who would likely have to pay — the top ten percent of earners — are not all that rich. Typically, the majority of households in the highest income tax brackets are upper-middle class, not superwealthy. Further burdening this group would be a hard sell politically and, as France’s recent budget problems demonstrate, would yield little financial benefit. Finally, taxes on capital would discourage private investment and innovation.

There is another way: instead of trying to drag down the top, governments could boost the bottom. Central banks could issue debt and use the proceeds to invest in a global equity index, a bundle of diverse investments with a value that rises and falls with the market, which they could hold in sovereign wealth funds. The Bank of England, the European Central Bank, and the Federal Reserve already own assets in excess of 20 percent of their countries’ GDPs, so there is no reason why they could not invest those assets in global equities on behalf of their citizens. After around 15 years, the funds could distribute their equity holdings to the lowest-earning 80 percent of taxpayers. The payments could be made to tax-exempt individual savings accounts, and governments could place simple constraints on how the capital could be used.

For example, beneficiaries could be required to retain the funds as savings or to use them to finance their education, pay off debts, start a business, or invest in a home. Such restrictions would encourage the recipients to think of the transfers as investments in the future rather than as lottery winnings. The goal, moreover, would be to increase wealth at the bottom end of the income distribution over the long run, which would do much to lower inequality.

Best of all, the system would be self-financing. Most governments can now issue debt at a real interest rate of close to zero. If they raised capital that way or liquidated the assets they currently possess, they could enjoy a five percent real rate of return — a conservative estimate, given historical returns and current valuations. Thanks to the effect of compound interest, the profits from these funds could amount to around a 100 percent capital gain after just 15 years. Say a government issued debt equivalent to 20 percent of GDP at a real interest rate of zero and then invested the capital in an index of global equities. After 15 years, it could repay the debt generated and also transfer the excess capital to households. This is not alchemy. It’s a policy that would make the so-called equity risk premium — the excess return that investors receive in exchange for putting their capital at risk — work for everyone.

MO’ MONEY, FEWER PROBLEMS

As things currently stand, the prevailing monetary policies have gone almost completely unchallenged, with the exception of proposals by Keynesian economists such as Lawrence Summers and Paul Krugman, who have called for government-financed spending on infrastructure and research. Such investments, the reasoning goes, would create jobs while making the United States more competitive. And now seems like the perfect time to raise the funds to pay for such work: governments can borrow for ten years at real interest rates of close to zero.

The problem with these proposals is that infrastructure spending takes too long to revive an ailing economy. In the United Kingdom, for example, policymakers have taken years to reach an agreement on building the high-speed rail project known as HS2 and an equally long time to settle on a plan to add a third runway at London’s Heathrow Airport. Such large, long-term investments are needed. But they shouldn’t be rushed. Just ask Berliners about the unnecessary new airport that the German government is building for over $5 billion, and which is now some five years behind schedule. Governments should thus continue to invest in infrastructure and research, but when facing insufficient demand, they should tackle the spending problem quickly and directly.

If cash transfers represent such a sure thing, then why has no one tried them? The answer, in part, comes down to an accident of history: central banks were not designed to manage spending. The first central banks, many of which were founded in the late nineteenth century, were designed to carry out a few basic functions: issue currency, provide liquidity to the government bond market, and mitigate banking panics. They mainly engaged in so-called open-market operations — essentially, the purchase and sale of government bonds — which provided banks with liquidity and determined the rate of interest in money markets. Quantitative easing, the latest variant of that bond-buying function, proved capable of stabilizing money markets in 2009, but at too high a cost considering what little growth it achieved.

A second factor explaining the persistence of the old way of doing business involves central banks’ balance sheets. Conventional accounting treats money — bank notes and reserves — as a liability. So if one of these banks were to issue cash transfers in excess of its assets, it could technically have a negative net worth. Yet it makes no sense to worry about the solvency of central banks: after all, they can always print  more money.

The most powerful sources of resistance to cash transfers are political and ideological. In the United States, for example, the Fed is extremely resistant to legislative changes affecting monetary policy for fear of congressional actions that would limit its freedom of action in a future crisis (such as preventing it from bailing out foreign banks). Moreover, many American conservatives consider cash transfers to be socialist handouts. In Europe, which one might think would provide more fertile ground for such transfers, the German fear of inflation that led the European Central Bank to hike rates in 2011, in the middle of the greatest recession since the 1930s, suggests that ideological resistance can be found there, too.

Those who don’t like the idea of cash giveaways, however, should imagine that poor households received an unanticipated inheritance or tax rebate. An inheritance is a wealth transfer that has not been earned by the recipient, and its timing and amount lie outside the beneficiary’s control. Although the gift may come from a family member, in financial terms, it’s the same as a direct money transfer from the government. Poor people, of course, rarely have rich relatives and so rarely get inheritances — but under the plan being proposed here, they would, every time it looked as though their country was at risk of entering a recession.

Unless one subscribes to the view that recessions are either therapeutic or deserved, there is no reason governments should not try to end them if they can, and cash transfers are a uniquely effective way of doing so. For one thing, they would quickly increase spending, and central banks could implement them instantaneously, unlike infrastructure spending or changes to the tax code, which typically require legislation. And in contrast to interest-rate cuts, cash transfers would affect demand directly, without the side effects of distorting financial markets and asset prices. They would also would help address inequality — without skinning the rich.

Ideology aside, the main barriers to implementing this policy are surmountable. And the time is long past for this kind of innovation. Central banks are now trying to run twenty-first-century economies with a set of policy tools invented over a century ago. By relying too heavily on those tactics, they have ended up embracing policies with perverse consequences and poor payoffs. All it will take to change course is the courage, brains, and leadership to try something new.

http://www.foreignaffairs.com/articles/141847/mark-blyth-and-eric-lonergan/print-less-but-transfer-more

A Breakthrough Plan To Make Central Banking Populist


The Federal Reserve Building in Washington, D.C. (Karen Bleier/AFP/Getty Images)

On October 22, 2014, Matt Miller writes in The Washington Post:

If, like me, you’re a seeker of broadly shared prosperity, chances are you’ve been haunted by two nagging policy conundrums.

Conundrum No. 1: Why is fractional reserve banking the only way the central bank can create money in our system? In other words, instead of injecting money into the economy by indirectly goosing bank lending, why can’t the Fed just create money and give it to people directly?

Conundrum No. 2 starts with something we all know: Enormous wealth is being created in this era of globalization and rapid technological change (a good thing), but virtually all of it is ending up in the hands of a few affluent “winners” (a bad thing).

But here’s the puzzle: Shouldn’t there be some way to give everyone a modest equity stake in all this new wealth so that sagging wages for workers would be more than offset by capital accumulation? If we could figure this out, then today’s surging inequality — which undermines social cohesion as well as the broad purchasing power a healthy economy needs to function — would vanish.

These may be the two most pressing questions in macroeconomic policy, yet they have received virtually no attention. Until now.

Mark Blyth, a professor at Brown University, and Eric Lonergan, a London-based hedge fund manager and author, have tackled both conundrums (in the latest issue of Foreign Affairs) with the most innovative macroeconomic proposals I can recall.

Think of it as a breakthrough plan to make central banking populist.

Start with money creation. Since the 2008 crisis, the Fed has tried to boost growth by creating $3.5 trillion in new banking reserves in the hope that this would lift lending and spending. But buying government bonds and mortgage-backed securities on an unprecedented scale hasn’t had the desired effect. Banks haven’t lent the new reserves out as expected, either because they’re spooked about uncreditworthy borrowers or because nervous businesses haven’t sought new loans. Demand hasn’t budged much. Growth and wages remain stuck in a ditch.

Meanwhile, the toxic side effects are mounting. The Fed’s policy of holding interest rates near zero may have fueled a new bubble in stocks, as investors desperate for more than 1 or 2 percent returns search for higher yields. (In recent days we’ve seen what happens when investors wake up to the idea that it may have been a bubble all along.)

Blyth and Lonergan say there’s a better way for central banks to fight recessions. Just have the Fed give money to millions of people directly, by crediting their bank accounts with, say, $1,000 or $2,000 when recession hits and demand needs a quick boost.

Conservative icon Milton Friedman floated this notion of “dropping money from helicopters” decades ago. Ben Bernanke spoke favorably of the idea in 2002 by way of explaining how, in a fiat money system, a central bank could always stave off deflation. George W. Bush adviser Gregory Mankiw of Harvard made a similar prescription for Japan in 1999. But it hasn’t been tried.

The main objection to boosting demand in this way is that it amounts to giving people something for nothing. It’s “redistribution,” critics cry.

But money creation already involves “printing cash” from thin air; it’s just done via the complex and opaque process of banking reserves. Blyth and Lonergan suggest we think about direct central bank handouts in a recession as akin to “an unanticipated inheritance.” There’s no risk of moral hazard. As Blyth told me, “No one’s going to sit around not working in hopes that a recession will come and they’ll get 500 bucks” from the Fed.

And as for redistribution — well, sorry, but the Fed already does that on a massive scale. How else can we describe an artificially low interest rate policy that for six years has taken money from millions of savers to deliver relief to millions of borrowers? Or a policy to artificially lift the stock market in hopes that some of the paper wealth created would trickle down in the form of higher spending?

No, the Blyth-Lonergan plan is discomfiting because it forces us to confront explicitly the “mystery” of money creation, as well as the Fed’s hidden yet hugely redistributive role in our society. But we’re all adults here. If we need to boost demand in downturns, why not choose a method that is quicker, simpler and more effective at lower cost? If this feels like fiscal policy, it’s because it basically is, in different form — it would have the same impact as if Congress enacted a one-time refundable tax credit of $1,000 or $2,000 a head.

One former Fed governor, who’s open to the idea, told me that for this reason it likely requires a few lines of legislation to make clear the Fed has these powers. But why shouldn’t we put a smart new tool in the Fed’s policy arsenal instead of relying on century-old methods that aren’t working and that create unintended harms?

Blyth and Lonergan reckon that direct central bank handouts in a recession would need to be only 2 to 5 percent of gross domestic product to be effective, compared with the roughly 20 percent of GDP in new bank reserves the Fed has already “printed.” And unlike “quantitative easing,” these handouts are uncomplicated to turn off. What’s not to like? Europe, where Spain, Italy and Greece are coping with Depression-era levels of unemployment, needs this policy innovation even more urgently than we do.

Blyth and Lonergan’s second big idea — dealing with wealth inequality — is just as interesting. Today the conversation on the left mostly stresses new taxes on the wealthy. But why not get serious about lifting the bottom instead? Most economists agree that government should borrow at today’s ultra-low interest rates to fund infrastructure investment. Blyth and Lonergan make this concept more ambitious: Have the central bank issue debt to invest in a passive global equity index held by a new sovereign wealth fund. Fifteen years from now, the Fed could repay the loan and distribute the equity to the bottom-earning 80 percent of Americans. At a stroke, this would give every worker and family an owner’s stake in the gains from technology and globalization.

There are details to work out, but you get the point. These are big ideas — and, like all breaks with orthodoxy, they’re sure to be deemed impractical or worse. But history is full of economic ideas that go from unthinkable to indispensable with surprising speed, from the minimum wage and the weekend to social insurance and more. And by promoting asset ownership in creative ways that tamp down the political energy now devoted to “punishing” the rich, these ideas should appeal to far-sighted conservatives, too.

The best next step? If Ron Wyden, Elizabeth Warren, Sherrod Brown orBernie Sanders took an interest and called hearings, the discussion could move from the margin to the mainstream overnight. So hurry, Senate Democrats, act now while you still hold the gavel. With a little imagination, such hearings could seed the ground with some needed fresh ideas just as the 2016 presidential campaign starts to pick up steam.

 

http://www.washingtonpost.com/opinions/matt-miller-a-breakthrough-plan-to-make-central-banking-populist/2014/10/22/fc79c966-591f-11e4-b812-38518ae74c67_story.html?wpisrc=nl-pmopns&wpmm=1

http://www.foreignaffairs.com/articles/141847/mark-blyth-and-eric-lonergan/print-less-but-transfer-more

Yellen’s Clueless Comments On Inequality—-Let Them Eat 401Ks

On October 20, 2014, ECRI post on David Stockman’s Contra Corner:

According to the Fed’s triennial Survey of Consumer Finances, the top 10% of U.S. families are doing just fine, and those in the bottom fifth are essentially being kept afloat by transfer payments; but the inflation-adjusted median family income has shrunk by one-eighth since 2004. Quite simply, middle-class incomes are being gutted.

[C]iting that same survey, Ms. Yellen expressed concern about “lower-income families without assets” that “can end up, very suddenly, off the road.”

She therefore advised families to “take the small steps that over time can lead to the accumulation of considerable assets.” She did not, however, explain how they were to accumulate these assets, in light of falling incomes and zero interest rates.

This uncomfortable disconnect between theory and reality also came out during her Senate confirmation hearings last fall. Given the predicament of “the little person out there who is just trying to pay the bills and maybe put a buck away for retirement,” Ms. Yellen was asked to “explain to the senior citizen who is just hoping that CD will earn some money” the impact of “a policy that says, for as far as the eye can see … keep interest rates low.”

She replied: “I understand … that savers are hurt by this policy, [but] savers wear a lot of different hats… They may be retirees who are hoping to get part-time work in order to supplement their income.”

In essence, despite a zero interest rate policy that mainly helps the wealthy, struggling families with falling incomes ought to take steps to accumulate “considerable assets,” as retirees take part-time jobs to make ends meet. Let them eat cake, indeed.

To most Americans, whether low-income, working class, or middle-class––all living the condition of LACK of ownership of wealth-creating, income-producing capital assets––their ONLY source of income is a JOB, which for most people translates to “Just Over Broke.” How Janet Yellen expects ordinary people, who are without pre-existing wealth and inheritance and are capital-less or under-capitalized to accumulate enough savings to significantly invest and benefit from compound interest, shows how much she is out of touch with reality. If she expects Americans to gamble as “investors” in the casino stock market using 401(k) plans offered through their employment or purchase stock directly, history should have taught her that this is risky business.

Past savings, wether cash in a local bank or equities which can be pledge as security to secure loans to invest, is not a workable solution. This is especially true because tectonic shifts in the technologies of production will continue to destroy jobs and devalue the worth of labor––which is the ONLY means that ordinary Americans have to earn an income.

What is needed and necessary is a new policy direction specifically aimed at creating new capital owners simultaneously with the growth of the economy. The financial mechanisms used MUST NOT REQUIRE past savings and instead be available as a unique and exclusive opportunity for American citizens to access insured, interest-free capital loans for the specific purpose of acquiring newly issued full-dividend earnings payout stock in corporations growing our economy. In other words, we need to use a credit mechanism by which the loans are paid for with the future earnings generated by the creation of new capital assets, which result in products and services needed and wanted by Americans, which then further propels the economy’s growth. Such a policy program is what the Capital Homestead Act would achieve.

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

The Federal Reserve needs to stop monetizing unproductive debt, and begin creating an asset-backed currency that could enable every child, woman and man to establish a Capital Homestead Account or “CHA” at their local bank to acquire a growing dividend-bearing stock portfolio to supplement their incomes from work and all other sources of income. Steadily over time this will create a robust economy with millions of “customers with money” to purchase the products and services that are needed and wanted.

Our leaders need to put on the table for national discussion this SUPER-IRA idea and the necessary reform of our tax policies that would incentivize corporations to pay out fully their earnings in the form of dividend income and issue and sell new stock to grow. The CHA would process an equal allocation of productive credit to every citizen exclusively for purchasing full-dividend payout shares in companies needing funds for growing the economy and private sector jobs for local, national and global markets,

The shares would be purchased on credit wholly backed by projected “future savings” in the form of new productive capital assets with future marketable products and services produced by the newly added technology, renewable energy systems, plant, rentable space and infrastructure added to the economy.

Risk of default on each stock acquisition loan would be covered by private sector capital credit risk insurance and reinsurance (ala the Federal Housing Administration concept), but would not require citizens to reduce their funds for consumption to purchase shares.

Essentially, the pressing need is for everyone in a position of influence to encourage President Obama to raise the consciousness of the American people by making his NUMBER ONE focus the introduction of a National Right To Capital Ownership Bill that restores the American dream of property ownership as a primary source of personal wealth.

This is the solution to America’s economic decline in wealth and income inequality, which will result in double-digit economic growth and simultaneously broaden private, individual ownership so that EVERY American’s income significantly grows, providing the means to support themselves and their families with an affluent lifestyle. The Just Third Way Master Plan for America’s future is published at http://foreconomicjustice.org/?p=5797 and the platform of the Unite America Party is published by The Huffington Post at http://www.huffingtonpost.com/gary-reber/platform-of-the-unite-ame_b_5474077.html as well as Nation Of Change at http://www.nationofchange.org/platform-unite-america-party-1402409962 and OpEd News at http://www.opednews.com/articles/Platform-of-the-Unite-Amer-by-Gary-Reber-Party-Leadership_Party-Platforms-DNC_Party-Platforms-GOP-RNC_Party-Politics-Democratic-140630-60.html.

The Capital Homestead Act (http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-a-plan-for-getting-ownership-income-and-power-to-every-citizen/ and http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-summary/) would grow the U.S. economy faster in a non-inflationary way, create new private sector jobs, finance new productive capital and provide capital incomes for all Americans from the bottom-up by enabling them to own trillions annually in new capital formation and transfers in current assets . . . without taking private property rights away from billionaires and multi-millionaires over their existing assets.

https://www.businesscycle.com/ecri-reports-indexes/report-summary-details/yellen-let-them-eat-cake-retire-income

Yellen Says She’s ‘Greatly’ Concerned By Rising Inequality

On October 17, 2014, Greg Robb writes on Market Watch:

Federal Reserve Chairwoman Janet Yellen said Friday that she was “greatly” concerned by the extent and continuing increase in inequality in the United States.

“It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority,” Yellen said in a speech to a conference on inequality sponsored by the Boston Fed.

“I think it is appropriate to ask whether this trend is compatible with values rooted in our nation’s history, among them the high value Americans have traditionally placed on equality of opportunity,” she added.

Yellen said that some degree on inequality of income and wealth contributes to economic growth because it rewards hard work and risk taking. But the concern is that “inequality of outcomes can exacerbate inequality of opportunity, thereby perpetuating a trend of increasing inequality.”

Income inequality — as measured by what’s called the Gini index — is up 4.9% since 1993, the earliest year available for measurement, according to Census Bureau data.

In her speech, Yellen did not attempt to answer what she called the “difficult questions of how best to fairly and justly promote equal opportunity.”

Instead, she laid out a “factual basis” for further discussion using the Fed’s recentSurvey of Consumer Finances, a survey of the income, wealth and debt for 6,000 U.S. households conducted in 2013. See slideshow of Yellen’s facts on income inequality.

Two building blocks to greater income — college and owning a business — were now uncertain, she said. College costs are making it hard for young people to obtain a degree, and it is harder now to start a business, she said.

She noted that economic mobility in the U.S. is lower than in most other advanced countries.

Yellen said she was concerned the large and growing burden of paying for college may make it harder for many young people to take advantage of the opportunity of higher education.

It is also harder for less wealthy Americans to start a new business, she noted.

Chairman Janet Yellen needs to publicly advocate for the reform of the Federal Reserve focussed on financing our FUTURE using financial mechanisms (which the wealthy use) that would empower EVERY citizen to acquire ownership in FUTURE wealth-creating, income-producing capital assets. A key financial mechanism would be to provide equal access by EVERY citizen to insured, interest-free capital credit loans repayable with the FUTURE dividend earnings of the investment, without having to pledge past savings or equity or reduce one’s standard of living.

Because for the vast majority of Europeans and Americans a JOB is their ONLY source of income, millions of families are one layoff or family emergency away from going into bankruptcy, and then what? Start over with nothing and extremely poor JOB prospects.

In the United States, the American Dream is fast disappearing as people experience fewer opportunities to earn an income, and as a consequence cannot act as “customers with money” necessary to support a vibrant economy. The result is a permanent national recession at the brink of a second Great Depression.

Unfortunately directors of the Federal Reserve, our political leaders, academia, and the national media offer up ONLY the same old conventional won’t-work suggestions for the government to take the lead and arrange the marriage of private and public capital to regenerate real growth without the realization and requirement that the ownership of FUTURE wealth-creating, income-producing productive capital must be broad. No longer can we be able to achieve growth the old-fashioned way, by investing in projects that enrich our productive capacity in the name of JOB CREATION, which is expected to have a multiplier effect, when in actual reality such investment continues to further CONCENTRATE OWNERSHIP of America’s future productive capital assets.

The ONLY viable solution to the economic decline of America is for our leaders, academia and the national media to recognize that all individuals to be adequately productive cannot do so when a tiny minority (capital owners) produce a major share and the vast majority (labor workers), a minor share of total output of the economy’s products and services. The system must be reformed to create a world in which the most productive factor of the FUTURE—-physical capital—-now owned by a handful of people––is owned by a majority—and ultimately 100 percent—of the consumers, while respecting all the constitutional rights of present capital owners.

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

Those who read this and are in a position of influence should reach out to Janet Yellen, President Obama and the leadership of his Organizing for Action as well as to other political leaders, and call for them to convene a national discussion using the national media and social media, and our educational institutions, to open up a discussion on EVERY CITIZEN AN OWNER opportunity. We need fresh and inspired leaders who can educate on this issue at this time because academia, the media, and our so-called leaders are not addressing how people make money and the significance of OWNING income-producing productive capital assets. We need to get people to understand that as with today, in the FUTURE we will continue to experience tectonic shifts in the technologies of production, which will destroy and devalue the worth of jobs. This is a crucial understanding because at present for the 99 percent of the nation a JOB is the ONLY source of income to support themselves and their families. We need political leaders who will commit to a government policy focus on OWNERSHIP CREATION, not JOB CREATION, which will result and naturally follow as the economy revs up to double-digit GDP growth and fully applies technological innovation and invention to shift from unnecessary labor toil to human-intelligent machines, super-automation, robotics, and digital computerized operations.

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

The Federal Reserve needs to stop monetizing unproductive debt, and begin creating an asset-backed currency that could enable every child, woman and man to establish a Capital Homestead Account or “CHA” at their local bank to acquire a growing dividend-bearing stock portfolio to supplement their incomes from work and all other sources of income. Steadily over time this will create a robust economy with millions of “customers with money” to purchase the products and services that are needed and wanted.

Our leaders need to put on the table for national discussion this SUPER-IRA idea and the necessary reform of our tax policies that would incentivize corporations to pay out fully their earnings in the form of dividend income and issue and sell new stock to grow. The CHA would process an equal allocation of productive credit to every citizen exclusively for purchasing full-dividend payout shares in companies needing funds for growing the economy and private sector jobs for local, national and global markets,

The shares would be purchased on credit wholly backed by projected “future savings” in the form of new productive capital assets with future marketable products and services produced by the newly added technology, renewable energy systems, plant, rentable space and infrastructure added to the economy.

Risk of default on each stock acquisition loan would be covered by private sector capital credit risk insurance and reinsurance (ala the Federal Housing Administration concept), but would not require citizens to reduce their funds for consumption to purchase shares.

Essentially, the pressing need is for everyone in a position of influence to encourage President Obama to raise the consciousness of the American people by making his NUMBER ONE focus the introduction of a National Right To Capital Ownership Bill that restores the American dream of property ownership as a primary source of personal wealth.

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

The Capital Homestead Act (http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-a-plan-for-getting-ownership-income-and-power-to-every-citizen/ and http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-summary/) would grow the U.S. economy faster in a non-inflationary way, create new private sector jobs, finance new productive capital and provide capital incomes for all Americans from the bottom-up by enabling them to own trillions annually in new capital formation and transfers in current assets . . . without taking private property rights away from billionaires and multi-millionaires over their existing assets.

http://www.marketwatch.com/story/yellen-says-shes-greatly-concerned-by-rising-inequality-2014-10-17

http://www.theguardian.com/money/2014/oct/17/federal-reserve-chair-janet-yellen-inequality-gap-rich-poor

 

Venture capitalist Nick Hanauer On Redefining Capitalism And Why Entrepreneurs Who Don’t Get His Money ‘Suck’

hanauer-nicksic-620x371

Nick Hanauer at the SIC conference in Seattle.

On October 16, 2014, Austin Williams writes on Geek Wire:

Seattle venture capitalist Nick Hanauer says an economic revolution is coming, and you better get ready for it. Even as the Dow surges toward 17,000 — making the rich even richer — the rabble-rousing Hanauer says that unemployment and underemployment remains “stubbornly high.”

“Your fellow citizens are starting to notice, and they are starting to get angry,” said Hanauer, speaking today at the Seattle Interactive Conference. “And this trend, unfortunately, is going to get worse before it gets better. And they are going to get angrier and angrier at me, and at you.”

hanauer-nick33That anger eventually will turn into full-scale revolt, and Hanauer notes: “Revolutions turn out to be terrible for the technology business.”

The aQuantive co-founder and early investor in Amazon.com believes that capitalism works best when it creates incentives for people to solve real human problems — not accumulate capital.

In his keynote speech today, he looked around the room of innovators and asked a series of questions.

“What if instead of a few hundred innovators in the room here today there were 1000s? What if instead of 1000s there were millions? What if every child born on this planet with the aptitude to do what we do grew up with the same opportunity to fully participate in our economy in the way that we do? How could this not be a more richer and more prosperous world”

He contends that capitalism works, but not in the way we typically think about it.

“Where we have gone wrong is misidentifying how and why capitalism works. It is this fundamental misunderstanding that have fostered the policies that have directly led to a vicious cycle of stagnant wages and stagnant demand,” Hanauer said during his keynote speech

Echoing a familiar refrain, Hanauer said that the trickle down theory—which relies on regulations to help the wealthiest retain their wealth in hope that it eventually flows to the rest of the people — does not work. The policies only create inequality, he said.

“Rising inequality is toxic to growth,” he said. “High levels of inequality exclude people — both as innovators and customers — diminishing both innovation and demand,” he said.

Hanauer argued that that polices that maximize the participation of everyone in the economy is the only way that our economy will grow — one of the reasons why a thriving middle class is so important to a prosperous capitalistic economy.

“Prosperity is not trickled down from the top,” he said. “It is built from the middle out”

Hanauer is a big supporter of Seattle’s historic $15 minimum wage, which was approved earlier in 2014. He hopes this will give more people the resources to participate more effectively in the economy.

Hanauer — who as a venture capitalist has backed companies such as Insitu, Seeq, Modumetal and Real Self— also gave a little bit of feedback to the entrepreneurs in the crowd. He noted that capital is no longer the regulating factor to innovation, pointing out that some may find the assertion “heretical.” In the 21st century, he says capital “chases innovation.”

Furthermore, it just doesn’t take as much money to fund billion-dollar ideas as it did during the steel mill era, noting that the first venture rounds for Amazon.com and aQuantive were just $1 million.

“Just look around this conference, there is no shortage of capital. The room is stuffed with it. What we have, and I hate to say it, is a shortage of talent and ideas. I could tell you as a venture capitalist — and I mean this in the nicest possible way. I can ensure you that I don’t fund your startup, it is not because I don’t have enough money. It is because you suck. That’s mean, I know. But if you put together a good enough team around a great idea, capital will beat a path toward your door.”

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

Saying that we need to create opportunity is not enough, Hanauer needs to define that opportunity. That opportunity must primarily focus on enriching people’s financial position and income beyond a job to include significant ownership interests in the non-human capital assets that are exponentially the principle means of production. Such capital assets are the essence of corporations formed by entrepreneurs or assemblages of people. His speech is directed to entrepreneurs, who are expected to form new corporations and develop new capital asset technologies that will improve people’s lives in tangible ways. The path to entrepreneurship usually starts small and develops, if successful, into large corporate structures. While there are always jobs created in the process, the significant participants are the company owners, who benefit from the wealth-creating, income-producing capital asset technologies they own, which along with labor’s input result in new products and services to be sold in the ecnomy. And as is typical, most corporations are, as a practical matter, narrowly owned, even with multiple rounds of venture capital (money) investment. The employed workers are just that––effectively job serfs solely dependent on their wages for income as they are not the owners.

If Hanauer really wants to redefine capitalism he should advocate for the reform of the system to provide equal opportunity for EVERY American, without the requirement of savings and equity––the 99 percent––to participate as a productive capital owner contributor and become fully functioning in the economy as a “customer with money” for the products and services produced by physical assets––advanced tools, machines, super-automated processes, robotics, computerized operative asset, etc.

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

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

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

Will Having Kids Soon Be Out Of Reach Economically For Many American Families?

la-oe-schickedanz-america-children-20141017-001

Child care, on average, consumes $1 of every $5 in a family’s budget. (Los Angeles Times)

On October 17, 2014, Adam Schickedanz and Neal Halfon write in the Los Angeles Times:

Parenthood should be affordable in this country, but the cost of raising a child from birth to adulthood is now a quarter of a million dollars and projected to double by the time today’s toddlers reach their teens. Will having kids soon be out of reach economically for many American families?

A recent report from the Center for American Progress found that middle-class families are feeling an unprecedented economic squeeze — caught between stagnating wages and the exploding cost of basics like housing, healthcare and children’s education. Most families, it seems, are getting by on less and living closer to the financial edge to help their kids grow up healthy and get ahead.

The most striking growth in costs to families has been in child care, where expenses have climbed about $200 annually in each of the last dozen years, with nearly tenfold growth since the 1960s. Child care, on average, consumes $1 of every $5 in a family’s budget and exceeds the typical rent in every state.

In terms of their kids’ health, families increasingly have to choose between treating their children’s medical needs and paying household bills. Despite gains in the percentage of children with health insurance, per capita medical spending on kids has quietly ballooned faster than for any other age group, with families paying more for premiums and steeper out-of-pocket expenses.

For evidence to suggest that middle-class parents might already be getting priced out of parenthood, look to the national birthrate. It fell sharply in the recession but, unlike in previous economic rebounds, has continued to drop. This makes sense in financial context, given that most families haven’t seen their incomes grow since the recovery began and the median net worth of households has actually fallen below what it was 15 years ago. Most families today don’t have enough saved to meet basic needs for three months, let alone save for college or retirement.

For folks in the middle class, the economic calculus of raising kids must be daunting. Not only are the costs unaffordable, but parents also face a harsh ultimatum: “Keep up with the Gateses” or risk your children’s health, achievement and long-term well-being.

Higher-income families spend six times more than working-class families on child care and educational resources, such as high-quality day care, summer camps, computers and private schools, which are increasingly indispensable investments in long-term success. This spending inequity has tripled over the last four decades and is only accelerating, which is likely to widen the achievement gap, creating a vicious cycle.

The public education infrastructure, designed generations ago to drive a strong economy and give every child an equal footing for success, is crumbling from neglect — stuck between those who argue for repair and those who argue for redesign. As a consequence, it is unable to prepare most kids for the new economy. The statistics are grim: Two-thirds of preschoolers don’t have access to high-quality child care, two-thirds of public school students fail to meet math and language proficiency by eighth grade, and two-thirds of public high schoolers aren’t ready for college when they graduate.

To solve these problems we have increasingly relied on a public safety net designed to catch what used to be a small number of kids falling through the cracks. But over the last 50 years those cracks have become chasms. When funding constraints force programs such as Early Head Start to enroll just 4% of eligible children needing early intervention and half of pediatricians opt out of accepting kids on Medicaid, these are clear signs that it’s time to rethink our approach.

These economic realities are contributing to a swift loss of academic opportunity, health prospects and upward mobility among children whose parents cannot afford to spend top dollar. With this de facto economic segregation of opportunity leaving working families in the economic dust, we are risking the prosperity and social mobility of our kids for years to come.

We should be reinvesting in working families and modernizing our public infrastructure. Not only would this make parenthood more feasible, it also makes good economic sense. We know that investing early in kids yields considerable savings by reducing chronic health problems, building stable families and increasing earning potential.

The opportunity to raise healthy, smart and successful kids shouldn’t be an economic luxury. It’s time we made parenthood affordable again by investing more in kids and families. Given that what’s at stake is the success of our country, the alternative is unaffordable.

This op-ed is a sobering read that casts a dire outlook for America’s future as long as parenthood remains unaffordable at more than a quarter of a million dollars. Such costs are projected to double by the time today’s toddlers reach their teens, along with ever-escalating costs for basic necessities such as housing, healthcare and children’s education. This is resulting in a reality in which most families are living closer to the financial edge to help their kids grow up healthy, educated and get ahead.

While there are projections for the creation of new jobs, these jobs will necessitate more educated workers with the necessary education and training to meet the demand. And such jobs will only be realized with substantial economic growth.

The reality that we, as a nation, must face is that given the current invisible structure of the economy, except for a relative few, the majority of the population, no matter how well educated, will not be able to find a job that pays sufficient wages or salaries to support a family or prevent a lifestyle, which is gradually being crippled by near poverty or poverty earnings. Thus, education is not the panacea, though it is critical for our future societal development. And younger, as well as older people, will increasingly find it harder and harder to secure a well-paying job––for most, their ONLY source of income––and will find themselves dependent on taxpayer-supported government welfare, open and disguised or concealed.

All this translates to the growing reality that, in addition to low-income parents, middle-class parents will be priced out of parenthood with a correspondingly sharp drop in the birthrate.

This scenario is reflective of declining incomes and the inflationary costs of living. The solution must be to empower people to increase their level of income while deflating the costs of living.

In the United States and other countries of the Western world, we need to realize that the welfare state’s policy of full employment does not work. This is a policy of contriving toil for the sake of making men and women appear to be productive. Under the present system, a job is their ONLY means of earning an income. Yet workers are constantly confronted with the threat that tectonic shifts in the technologies of production will destroy their job or further stagnate their wages. Yet they are trapped because they have allowed the financial system to enslave them under a system of wage and welfare slavery, where they are excluded from the ownership of wealth-creating, income-producing capital assets––the non-human instruments of production that are increasingly the predominant means for producing products and services. The wealthy ownership class, those who, by accident or inheritance or in some other way, own capital and therefore have designed the system to facilitate their access to increasing quantities of newly formed capital. Thus, the rich get richer as a result of their swelling capital ownership interests. Thus, according Schickedanz and Halfon, it is the rich who are able to spend “six times more than working class families on child care and educational resources.”

Yet, as Americans, we share the underlying principle that every citizen has a natural right to life, in consequence whereof binary economist Louis Kelso states “the right to maintain and preserve one’s life by all rightful means, including the right to obtain one’s subsistence by producing wealth or by participating in the production of it. When the great bulk of the wealth is produced by capital instruments, the principle of participation requires that a large number of households participate in production through the ownership of such instruments.”

The solution to broadening capital ownership and significantly increasing the income of the vast majority of Americans who are capital-less or under-capitalized is to lift ownership-concentrating Federal Reserve System credit barriers and other institutional barriers that have historically separated owners from non-owners and link tax and monetary reforms to the goal of expanded capital ownership. This can be done under the existing legal powers of each of the 12 Federal Reserve regional banks, and will not add to the already unsustainable debt of the Federal Government or raise taxes on ordinary taxpayers. We need to free the system of dependency on Wall Street or the accumulated savings and money power of the rich and super-rich who control Wall Street. The Federal Reserve System has stifled the growth of America’s productive capacity through its monetary policy by monetizing public-sector growth and mounting Federal deficits and debt and “Wall Street” bailouts; by favoring speculation over investment; by shortchanging the capital credit needs of entrepreneurs, inventors, farmers, and workers; by increasing the dependency of with usurious consumer credit; and by perpetuating unjust capital credit and ownership barriers between rich Americans and those without savings.

The Federal Reserve Bank should be used to provide interest-free capital credit (including only transaction and risk premiums) and monetize each capital formation transaction, determined by the same expertise that determines it today––management and banks––that each transaction is viably feasible so that there is virtually no risk in the Federal Reserve. The first layer of risk should be taken by the commercial credit insurers, backed by a new government corporation, the Capital Diffusion Reinsurance Corporation, through which the loans could be guaranteed. This entity would fulfill the government’s responsibility for the health and prosperity of the American economy.

The Federal Reserve Board is already empowered under Section 13 of the Federal Reserve Act to reform monetary policy to discourage non-productive uses of credit, to encourage accelerated rates of private sector growth, and to promote widespread individual access to productive credit as a fundamental right of citizenship. The Federal Reserve Board needs to re-activate its discount mechanism to encourage private sector growth linked to expanded capital ownership opportunities for all Americans.
We need to reform the Federal Reserve Bank to create new owners of future productive capital investment in businesses simultaneously with the growth of the economy.

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

This is the REAL solution to reversing the economic squeeze caused by job eliminations, stagnate wages and growing dependence on welfare state policies and to putting America on a path to prosperity, opportunity, and economic justice.

http://www.latimes.com/opinion/op-ed/la-oe-schickedanz-america-children-20141017-story.html

Obama’s myRA Accounts Come Up Short For Savers

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Statistics show that roughly half of all workers, predominantly low earners, have yet to set aside a single retirement dollar. (Michael Osbun / Tribune Media Services)

On October 16, 2014, George Scorse writes in the Los Angeles Times:

President Obama’s legacy will probably not include retirement savings accounts, but he did point the way to a promising option this year: a government-sponsored account, aimed at the millions of workers without access to an employer plan. As with so much else in his presidency, it’s an example of high hopes trumped by mediocre execution.

The Obama creation does have some positives, starting with the clever name. It’s called myRA, shorthand for “my Retirement Account.” A lot snappier than 401(k) or 403(b).

Here’s what’s good about myRA, what’s not so good and how it could have been so much better — for retirees, for the Treasury, for the country.

Statistics show that roughly half of all workers, predominantly low earners, have yet to set aside a single retirement dollar. Turning those non-savers into savers is sound policy. Where employers make myRA available, workers will be able to open an account with a minimum deposit of $25 and automatic deductions as low as $5 per payday. All money will be invested in Treasury bonds. The accounts have no fees and guarantee total safety of principal and interest. MyRAs will close out after 30 years or at $15,000 (whichever comes first) and convert to private-sector holdings.

Now for the many shortcomings of an account the Treasury Department describes, correctly, as “simple, safe and affordable.”

The first problem is that guaranteed securities generate small returns, especially these days. Yields on Treasury paper have been sitting at or near historic lows ever since the financial meltdown. Of course, rates will eventually rise; so too will inflation, leaving real returns more or less permanently negligible.

MyRAs, scheduled to roll out by the end of 2014, could have been far more rewarding. Contributions could have gone into an index fund, tied to a broad market measure like the Standard & Poor’s 500 or the total market. The risk could have been neutralized by guaranteeing both the principal and an inflation-matching return. Such a guarantee might never have to be invoked, and it wouldn’t cost that much even if it were. The accounts are geared to small savers, and that keeps any downside small as well.

Contributions to myRAs could have been in pretax dollars, as with 401(k)s, regular IRAs and other retirement plans. Instead, myRAs were set up as Roth accounts and require contributions in post-tax dollars. This appears to raise federal revenue — for budget purposes, the upfront taxes count as a fiscal plus. In fact, Roths guarantee federal red ink far into the future: The account holders never pay taxes on capital gains, costing the Treasury untold billions in forgone revenue. Other retirement accounts ultimately pay back Uncle Sam with taxable withdrawals; with Roths, the payback never comes.

One last problem. Given the target audience, the income eligibility limits are bizarrely high. The plan is open to singles making up to $129,000 and couples making $191,000. Why would people with incomes like that choose a myRA? The financial services company Motley Fool touted myRAs as “the best place” for short-term and emergency savings. Yields may be low, but they exceed those of bank savings accounts or certificates of deposit. In addition, the principal can be withdrawn any time. That’s shrewd thinking, but it has little to do with retirement. It also suggests that myRAs could easily be gamed by the relatively well-off.

It’s good for government to help workers save for retirement, all the more so for those who need help the most. It’s not good when the help turns out to be so little or so light.

This is yet another attempt to address the fact that Americans are not saving enough for retirement. But the proposals fall far shot by “trillions” of dollars.

The “MyRA” has nothing to recommend it. It claims it offers lifetime income security funded out of current savings, meaning further reductions in consumption out of already inadequate incomes. It will not succeed in providing any real, substantial retirement security for the majority of Americans whose jobs do not earn more than substance week to week and month to month wages. The plan is designed to encourage Americans to save for retirement and require personal savings and denial of consumption.  This is unrealistic given that the Americans with the least opportunity must reduce what is inadequate consumption income in order to accumulate savings for retirement, which for most Americans will be inadequate.

Does anyone really believe that the interest rate to be paid under these programs will be sufficient and able to avert the decline in the value  of the money as the government continues to flood the economy with increasingly non-asset-based debt?

The proposal relies on the requirement to reduce consumption in the economy at a time when what is needed is expansion of the economy supported by increased consumption.

As my colleague Michael Greaney at the Center for Economic and Social Justice (www.cesj.org) states, “under the prevailing Keynesian paradigm, of course, ‘saving’ is always defined as the excess of income over consumption. If you want to save, then, the iron assumption of Keynesian economics is that you must consume less.”

The American consumer is being put into an impossible situation of being asked to consume more to drive the economy and reduce saving, and at the same time are being told they must reduce consumption dramatically in order to accumulate sufficient savings for retirement.

Of course, the whole problem would go away if we financed both retirement and wealth-creating, income-producing physical productive capital needs out of future savings, thereby increasing the capacity to consume and support the economy while simultaneously building financial security for every American citizen.

A far better and productive approach would be to create a new way for working and non-working Americans to start their own retirement savings: MyCHA. CHA stands for Capital Homestead Account. It would be a super-IRA or asset tax shelter for citizens. The Treasury should start creating an asset-backed currency that will enable every child, woman and man to establish a CHA at their local bank to acquire a growing dividend-bearing stock portfolio comprised of newly-issued stock representative of viable American growth corporations to supplement their incomes from work and all other sources of income.

We can create new asset-backed money for investment through the existing but dormant Section 13(2) rediscount mechanism of each of the 12 regional Federal Reserve banks that would be backed by “future savings” (that is, future profits from higher levels of marketable goods, products, and services).

President Obama and other elected representatives should advocate for the passage of the The Capital Homestead Act, which will process an equal allocation of productive credit to every citizen exclusively for purchasing full-dividend payout shares in companies needing funds for growing the economy and private sector jobs for local, national and global markets. The new issued shares would be purchased on interest-free credit wholly backed by projected “future savings” in the form of new productive capital assets as well as the future marketable goods, products and services produced by the newly added technology, renewable energy systems, plant, rentable space and infrastructure added to the economy. There will be no prerequisite requirement to qualify for an annual set capital credit loan other than American citizenship.

We need to encourage the insurance industry to expand their product lines to market Capital Credit Insurance to cover the risk of default for banks making loans to Capital Homesteaders under the proposed Capital Homestead Act. Under the provisions of the Act, risk of default on each stock acquisition loan would be covered by private sector capital credit risk insurance and reinsurance issued by a new government agency (ala the Federal Housing Administration concept), but would not require citizens to reduce their funds for consumption to purchase shares.

The end result is that ALL American citizens would become empowered as owners to meet their own consumption needs and government would become more dependent on economically independent citizens, thus reversing our country’s trend where all citizens are becoming more dependent for their economic well-being on the “state,” our only legitimate social monopoly.

The CHA would function as a savings and income account that effectively would build a nest egg over time, using interest-free, insured capital credit loans. A CHA would be offered to EVERY American, whether employed or not. Of course, those employed may also have additional opportunities to acquire personal ownership in their companies using an Employee Stock Ownership Plan (ESOP) trust financial mechanism.

Implementing the Capital Homestead Act would significantly empower ALL Americans to accumulate over time a viable, diversified ownership portfolio in our nation’s growth companies and create a truly unique, global-leading just and environmentally responsible Ownership Society that fosters personalism, creativity and innovation. Embarking on a new path to prosperity, opportunity and economic justice will expand growth of our market economy in ways that democratize future ownership opportunities, while building a future economy that can support general affluence for EVERY American.
In conclusion, President Obama’s MyRA program would be completely unnecessary if we had Capital Homesteading.
See two references to the proposed Capital Homestead Act at http://www.cesj.org/homestead/index.htm and http://www.cesj.org/homestead/summary-cha.htm.