Newconomics, Revised

NOTE: Original version, posted July, 2012

BACKGROUND CONSIDERATIONS:

Over the last century, the countries of the world have doggedly kept experimenting with one or another political solution along the left-right, communist-capitalist continuum.  When it became clear neither extreme was endurable—Stalin’s Russia and Pinochet’s Chile, as examples—every imaginable mixture of the two was tried.  But, alas, none have entirely avoided economic distress of one degree or another.  Inflation, deflation, depression, recession, currency fluctuation, financial panic, social disorder, and the like have plagued every attempt to find a consistently workable system.

Not surprisingly, the result of these traumas has been flip-flop political change as disillusioned populations in the third world seek succor in alternative economic arrangements.  Having learned from experience the crippling disadvantages of socialism, they turn to capitalism that just as surely disappoints and returns then, a naïve generation later, to another try at a command economy.  The volatility in the developed world may be somewhat less pronounced but the phenomenon is much the same as liberals and conservatives cycle in and out of power  leaving unenviable records in their wake.

A century of such experiences should be long enough, I would think, to force us to own up to reality—i.e., that not only did none of the alternatives tried work very well, the stark fact is none could possibly do so.  If this were not the case, then surely generations of highly-intelligent economists would have, by now, laid our economic problems to rest.  No, ladies and gentlemen, there can be no solution to our economic woes until we abandon the present irrational, over-simplified monetary system that all of our past experiments have had in common.  It’s time we recognize that an entirely new economic system is in order.

It’s safe to assume that were any such novel system proposed, it would promptly be dismissed as radical and impractical (nevermind the proven impracticality of the present system.)  Upon reflection, however, a second thought might arise, parallel with the first, that “radicalism” would be a necessary component of any serious attempt to break from the past.

In this connection, the reader is urged to recall Niels Borh’s response to a fellow physicist’s proposal at a quantum-mechanics colloquium, “We are all agreed that your theory is crazy. The question which divides us is whether it is crazy enough to have a chance of being correct. My own feeling is that it is not crazy enough.”

All of which is a cautious introduction to “newconomics,” a system hypothesized by a professional engineer gone astray.

TAKING INSPIRATION FROM NATURE

An understandable conclusion drawn from our past experience with economic systems is that their inherent contradictions had been inevitable given the necessity of satisfying rival interests competing for limited resources—that given the nature of the beast, the best that can be done is mitigate its acknowledged shortcomings and, as it were, “suck it in.”  And I would be sympathetic to this argument were it not for the examples nature sets before us of ecologies that have worked smoothly for millennia despite being replete with competition.  Hence in constructing a new system from scratch, it only made sense to observe her techniques and consider their applicability to what became newconomics.

1) Within any given environment, nature allows her creatures individual choice of action.  Thus, in newconomics, freedom is a nature-given right.

2) Nature prohibits spontaneous creation.  Newconomics disallows the bestowal of what is referred to as money’s “store of value” attribute.  No institution can legitimately contend that the paper it has run through a printing press is possessed of a substantive characteristic any more than it can magically conjure matter out of thin air.

3) Nature makes frequent use of substances called catalysts that assist in transactions and afterwards return to their original state.  Thus, under newconomics, money is treated as a financial catalyst restricted to facilitating transactions.  By definition, then, money is kept in motion or held temporarily in reserve as part of a circulating cycle analogous to the way condensers work in electrical circuits.

4) Whereas under normal circumstances nature does not create matter, it does allow changes in “state” when required by changes in external conditions.  For example, dependent on temperature, ice can turn into water and water into steam.  By the same token, newconomics considers that the appropriate behavior of money in a commercial setting is so different from that in a private setting that a change of “state” is mandatory.  For example, it is self-evident that the accumulation of large pools of money are necessary in the former but are often deleterious in the latter leading to outsize income disparity with its class conflict consequences.  Similarly, the imposition of taxes on the former damages economic activity whereas their imposition on the latter can convey societal benefits with little effect on the economy.  Based on the above, newconomics erects a Chinese wall separating the commercial and private sectors and provides each with its own currency called “yen” and “dollars” respectively.  A discussion of each sector is provided later in this essay.

5) Whereas nature allows her creatures considerable latitude with regard to their biological choices and behaviors, she does impose limits on them in the form of competition from other species, the supply of food sources, and so on.  Similarly, newconomics is equipped with refined means of imposing mechanically-activated regulatory limits at various points in its monetary cycles.

6) Nature’s rules are applied universally.  Therefore newconomics rules out arbitrary distinctions between those subject to its provisions such as race, income differentials, and social considerations.

OBJECTIVES

Assuming that general prosperity is one of evolutionary aims mankind has chosen for itself, newconomics starts with a list of characteristics that would help advance that objective.

1) to reduce the impact of boom/bust, inflation/deflation cycles

2) to enhance the vitality of the free market

3) to reduce income disparity and class envy without discouraging incentives

4) to mainly rely on the taxation of idle wealth for it is the only financial asset that can be assessed without weakening economic activity

5) to relieve taxpayers of paperwork drudgery

6) to create an economical, ultimately fair tax collection system that imposes no paperwork burden on the payer

7) to eliminate the possibility of tax cheating

8) to keep the planet’s money supply constant

9) to prevent budget deficits

10) to encourage thrift

11) to create a sustainable system—that is to say, one whose cycles are in accord with nature’s own.

THE WORKINGS OF THE COMMERCIAL SECTOR

All commercial activities ranging from self-employed artists to individual proprietorships to family-owned businesses to professional groups to large-scale enterprises are conducted under the same corporate umbrella.  In all cases the only owners of the enterprise are its existing employees.  Consequently, there are neither public shares nor stock markets.  During their employment, workers acquire non-transferable shares for every year on the job.  Upon leaving a company, workers must liquidate their stakes at book value.  For simplicity, all businesses are referred to herein as “corporations.”

HOW EMPLOYEES ARE COMPENSATED:

All employee compensation is paid in yen which can be utilized, in whole or in part, four ways:

1) by being directly converted into dollars which are automatically transferred to the employee’s single bank account in the private sector (see “the workings of the private sector” below)

2) by remaining in yen and investing in any of the many corporate bonds on the market.  Such bonds have maturities of three to ten years and are non-renewable.  Upon maturity, the proceeds are automatically converted to dollars and deposited in the owner’s bank account,

3) by purchasing a yen-denominated annuity plan.  Upon retirement, payments out of such plans are made in dollars deposited in holder’s account and are designed to provide a comfortable life style; government imposed ceilings  prevent too luxurious a one.  The annuities have no cash value and therefore have no residual value upon the holder’s death.

4) by remaining in yen and investing in employee’s own start-up operation

Which option or combination of options proves most rewarding to any particular employee depends on his ambitions, work habits, talent, etc. and, of course, blind luck.  In all cases he is bound to heavily weigh the benefits of keeping his money in non-taxable yen that cannot be spent for personal items versus taxable dollars that can be spent in any manner.  Conversion from yen to dollars is always one-way and, normally, is in the range of one-to-one.

It should be noted that, since most workers hold some amount of yen deposits, these act to buffer the economy in times of economic slowdowns.

HOW  CORPORATIONS ARE MANAGED:

The number of shares held by each worker is dependent solely on his seniority.  Thus a salesmen who has been with a firm for twenty years exerts more influence in company-wide elections than, say, a senior manager with ten years tenure.  Whereas this simple formula may fail to reflect the relative contribution each employee has made to the company, it is the most practical that can be instituted.  One, it sidesteps subjective and potentially divisive considerations; two, it  simplifies  bookkeeping, (an employee holding multiple positions over his job history); three, it encourages company loyalty and; four, it provides a knowledgeable cross section of company know how—the salesman, likely, having a more realistic picture of the company’s true competitive position in the marketplace than some ivory-tower executive.

Larger corporations are run by professional managers selected by the workers.  Typically management teams serve renewable five-year terms but, in the case of gross mismanagement, can be forced out at any time by worker initiative.  Management under these conditions tends to be conservative eschewing mergers and risky initiatives outside the firm’s expertise.  Bankruptcies are not unheard of but rare.  Unions, needless to add, are superfluous.

A legitimate question could arise as to whether an employee-selected management team would, in difficult times, make the hard, but necessary, decisions such as cutting the work force and/or closing a plant. Presumably, a good team, jealous of its reputation, would keep the company workers well apprised of such situations well in advance and, thereafter, count on their continued support.  Between a management subject to the short-term interest of stockholders versus one subject to the long-term interest of workers, I would give the latter the better chance of success.

Executive salaries and bonuses are restrained under the watchful eye of worker committees.  More surprisingly, worker compensation is also restrained by the predominant votes of the more senior workers whose priorities are conservative strategies and job security as opposed to immediate raises in their paychecks.

Corporations participate in a free, highly competitive, highly innovative, laissez faire  marketplace unhindered by any form of taxation and a minimum of government intervention.  Government regulations set standards but leave it up to the companies as to how those standards are to be complied with.  Mergers and acquisitions generally win quick approval.

BANKING IN THE COMMERCIAL SECTOR:

Commercial banks operate in a manner similar to those in the United States handling company accounts, lending money, distributing corporate bond issues, and, in general allocating capital to where it can be put to its most profitable use.  At the banks’ discretion, loans can be made to corporations owned by a single individual, provided the loan proceeds are used exclusively for business purposes.

To prevent over-leveraging, banks can invest in corporate bonds but only up to a set percentage of their equity.  Moreover they are required to maintain a conservative ratio of outstanding loans-to-equity.  And, to prevent institutions that are too big to fail, they are restricted to one physical location and cannot exceed a fixed size.

Commercial banks and banks in the private sector operate independently of one another.

THE WORKINGS OF THE PRIVATE SECTOR

Every individual is provided one and only one lifelong bank account.  There being no cash, all transactions—both income and expenses—must flow electronically in and out of this one account whether it be the purchase of a newspaper or the deposit of salaries earned in the commercial sector.  Obviously, all transactions are accompanied by both the sellers’ and buyers’ identification numbers as is the case with our present credit card transactions.

TAXES:

Governmental income is derived entirely from two taxes, a wealth tax and a consumption tax, both levied by monthly, mechanical withdrawls from individual accounts in the private sector.

The wealth tax skims the same fixed percentage off all bank balances.  There are no exceptions to this procedure whether out of consideration of income, age, profession, or any other sort of favoritism.  The percentage amount is determined by simply dividing the previous month’s budget deficit by the sum total of the assets on deposit.  Thus public indebtedness is extinguished as quickly as it arises.  (Consumption tax receipts are applied to the government’s expenditures thereby reducing the deficit and, consequently, the level of the wealth tax assessment .)

Were the assessment to average 1.5%, for example, then bank balances would be reduced by roughly one-half every four years.  Thus a million dollar fortune left untouched in the bank shrinks to little more than one-hundred thousand in a dozen years and to about $15,000 twelve years thereafter.  Needless to add, most depositors elect to promptly expend their savings rather than see them ground down by the government’s remorseless machinery.  The typical effect, then, is to incentivize people to earn good, steady incomes over their entire working lives in order to achieve the highest standard of living possible for as long a period as possible.  Nothing prevents wealthy parents from giving their growing children every advantage they can afford, but the wealth tax prevents them from passing on hefty inheritances to their grown progeny.

Any temptation to hide wealth by buying fixed assets is thwarted by an equally taxed subaccount containing those assets.  To ensure tax compliance in this regard, every retailer must sell either consumables or non-consumables—never both.  For example, were an individual to purchase a yacht, its seller’s identification would automatically alert the bank’s computer as to the asset nature of the purchase and the yacht’s selling price would accordingly be accumulated in the buyer’s subaccount leaving his tax liability unchanged.  At the same time, a depreciation schedule is appended to the purchase.

In the hopefully rare case in which there is insufficient cash in a person’s regular account to cover taxes owed on his subaccount, the government is entitled to liquidate whatever items are in it to satisfy the obligation.

The consumption tax is based on a tally of each individual’s purchases at the end of each month.  Since each purchase is coded with the class of item bought, the banks’ energetic computers are able to apply different rates to different classes.  Thus food staples, for example, are very lightly taxed, if at all, whereas fossil fuels carry a very heavy burden.  In short, the consumption tax enables the government to fine tune the consumers’ spending habits so as to conform to the nation’s best interest—all without the necessity of enacting a host of special legislation and without the necessity for coercion or administrative expense.

Each month, the system provides the consumer with a written statement showing how much he has paid in taxes and how they were distributed so that he can modify his financial strategy if he so chooses.

CREDIT

For all practical purposes, credit in the private sector is infeasible because newconomics’ prevailing negative interest rate, which when added to the lender’s rate, makes such transactions prohibitive.  This enforced frugality is, of course, a good thing. Families must save enough cash before buying the living-room set of their dreams as opposed to incurring years of indebtedness under a “pay later” plan.

Needless to add, newconomics avoids the well-trodden road that begins with the conservative extension of credit and ends in a flurry of over-heated, over-leveraged business activity culminating in a recession or worse.

But what of the virtuous family who crave no more than a home of their own in which they could raise their kids, keep a dog, and mow the lawn?  Were they so ignorant of the rules of newconomics as to appeal to their banker for a mortgage, he would, I imagine, take the greatest pleasure in berating them for their audacity and reminding them that in newconomics mortgages are, like cash, relics of the past.  Their actual choice is to rent from one of the many housing companies offering a wide range of abodes, or, if their income permitted, to accumulate enough yen in the commercial sector to cover the full cost of the home they desire.  No doubt the newconomics landscape would be blighted by fewer mac-mansions than in today’s suburbs, but this would, I contend, represent a bearable sacrifice.

CRIME

Given the ingenuity of the criminal class, one cannot say flatly that corruption would be impossible in a newconomic system, but what one can say with confidence is that crooks would have their work cut out for them.  Bear in mind, they could not hand out cash under the table or carry around suitcases stuffed with it for the simple reason cash does not exist.  All currency-exchange transactions are handled by the central bank.  And every deposit into a personal account and every withdrawl from it is tagged with the third party’s identity.  Picture also big-data systems constantly sniffing around in this pile of data for possible fraud and the like.  Whatever their inclination, newconomic mothers would be advised to not raise their children as thieves.

THE MONETARY CYCLE

It is simplest to think of the monetary cycle as a two-stage process although, in reality, the transactions described are, of course, all happening simultaneously.  For descriptive purposes, then, think of the first stage as the conversion by a central bank (the only bank that is entitled to handle both dollars and yen) all yen salaries into spendable dollars in the hands of consumers.  Obviously, this leaves the bank with a surplus of yen and a deficit of dollars.

Next, think of a second stage in which all these same dollars are spent buying goods and services from corporations who have no use for them until the central bank converts them into yen.  Thus, the central bank is able to expunge its yen surplus and reconstitute its balance of dollars.  And so on as the cycles repeat themselves.

Whereas this may at first seem more cumbersome than a purely dollar system, it is a more natural one in that it affords more control.  For example, adverse economic conditions in the real world can be fed back into the system where slight modifications of the two, dollar-yen exchange rates can set things aright.  In short, the choice is between the sophistication of newconomics versus the endless complexity and frustration of our existing hodgepodge of fixes.

CONCLUSION

No observer of our present economic system would dare argue that it is capable of meeting the conditions that began this essay.  On the other hand, I would strongly contend that rather than wringing our hands over this predicament, we need to design a system from scratch that has the potential of meeting those conditions, model it in a virtual world, keep tweaking it until if worked and then, in an evolutionary way, work toward it.  Newconomics is meant to be at least a faltering step in that direction.

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