Designing a new economy without addressing money system or tax system is futile

If you want to design a political economy that works, you actually have to go to the roots. That means the money system the tax system, the welfare system and the governance system. So I was shocked to read the six winning essays in The Next System’s essay competition to discover that so few of them had addressed the money system or the tax system.

It is like an engineering professor setting out to teach students without having a course on materials. “OK just let’s assume everything is built out of this one material. I have no idea what it is but it is just a given. I have no idea of its properties, but honestly, I don’t want to waste my time thinking about them. They are just here and it is what we have to work with. In fact, if I have a mental block when talking about materials. I have an excuse.”

Federal regulators are setting new rules for banks that offer deposit advances.

Yes that is how stupid it is trying to design a new political economy without thinking about money, the very exchange we use for trading between us.

Or it is like a dressmaker always having the same material available and not being in control over whether it stretches, breathes or shrinks. Dumb dressmaker always assumes that the same material in the same colour is the only one we have available.

Yet the design of money can determine our attitudes to scarcity or abundance and our attitudes to spending or hoarding. And when you realise that the money designer is also the one who decides how much will be created it is doubly worrying. What if the creator of credit pushes out a whole lot of credit at one time and then just slows up for a while? Yet this is exactly what the private banks do because then they make the most profit.

What if the creator of money also designs new instruments for gambling in that money? And they can also steer your investments in certain directions because they are investment advisers and stand to gain if you use certain funds? Yet this is what happens.

And how few of them have addressed the tax system. That is like saying to us, “Well we have got a tax system and honestly I can’t do anything about that. It just is. Well I do know you have to tax the rich more and I assume that means you will put up their income tax.”

Yes it is about as stupid as that. Thomas Piketty warned us to look at the tax system and said how critical it was. I have a quote from him in my book.

The winning essay in the open section mentions money once and tax once.

Three Distinct Crises now Point to the Urgent Need for a New Economic System

Link

The current economic system, where money is created as interest bearing debt by banks, is coming to the end of its useful life. Three distinct movements all tell us this – those concerned about climate change, those concerned about global declining economic growth (the ones who understand its connection with peak oil), and those who know that rising private debt is dangerous and sure to end in tears.

1. The Demand for Economic Growth means Climate Change is not tackled properly.

In 1972 the world’s first whole-country environmental party, the New Zealand Values Party, questioned whether economic growth was making us better and happier. Economist Richard Douthwaite in his book The Growth Illusion wrote about the need for economic growth to be at least as high as the interest rate banks charged on money. Charles Eisenstein eloquently outlined the way the growth imperative financialises and thus depletes both our natural and our social capital. “The financial crisis we are facing today arises from the fact that there is almost no more social, cultural, natural, and spiritual capital left to convert into money.” 

The politics of climate change has highlighted the unfortunate situation where, given the choice between doing something meaningful about climate change and championing economic growth, governments will always opt for the latter and claim it is a matter of “balance”. The need for economic growth always trumps the need for climate action. As a result, according to the former United Nations climate chief Christiana Figueres we now only have three more years to turn around emissions or we will not reach the targets of the Paris Climate Accord. Carbon dioxide levels are flat at the moment, but an unprecedented effort is needed from all parties in the next three years.

Naomi Klein in her ground breaking book This Changes Everything says:

“Our economic system and our planetary system are now at war. Or, more accurately, our economy is at war with many forms of life on earth, including human life. What the climate needs to avoid collapse is a contraction in humanity’s use of resources; what our economic model demands to avoid collapse is unfettered expansion. Only one of these sets of rules can be changed, and it’s not the laws of nature.” 

2. We have reached peak efficiency in getting energy from using energy

We seem to have forgotten peak oil issues. Globally conventional oil production peaked in 2005 and unconventional oil peaked in 2015. But peak oil didn’t play out as we expected. We had omitted to factor in debt; because they had to spend more energy to get energy, fossil fuel firms had to go into debt and this kept growing. Two authors worth reading on this topic are Nafeez Ahmed and actuary Gail Tverberg. The former writes articles like this. It says we need a new economic system because we can no longer get the required economic growth. This is because the energy return on energy invested (EROI) has been on the decline since the 1940s. We used to get 50 times the amount of energy out of using 1 barrel full of oil to extract it. We now get only about 15 times that amount. This number will continue to decline. And it’s the same for gas and for coal. The decline is irreversible. The consequences for the global economy are profound and widespread.

Because we need more and more energy to keep the system going, less is left for the real economy. Tverberg carefully concludes that declining productivity growth is a result and also stagnant wages. Ahmed says James D Ward of South Australia argues that, although it was widely believed we could, GDP growth cannot really be decoupled from environmental impacts. Ward says what has happened is that we have financialised the GDP through the creation of new debt without increasing material or energy throughput. (That was done by Quantitative Easing. CNBC said it was a total of $12 trillion, and you can expect that to have a huge effect on the global economy. It did.) He also notes growing inequality of income and wealth. He demonstrates that GDP cannot be sustained indefinitely.

As far as growing inequality of wealth is concerned, Ward hasn’t yet spelt out that this is caused when we have a huge blowout of credit from QE at the same time as we fail to collect the land rent on rising land prices. The huge asset bubble created by QE has blown up house prices and the sharemarket. With a tax system that fails to tax assets (or at least land and natural resources) the wealth gap continues to rise.

Those without access to land and natural resources and natural monopolies fall into poverty and homelessness. Add the fact that wages remain low, jobs precarious and a punitive benefit system, many are in abject poverty.

All these factors combine for political instability resulting in the election of Trump and in Brexit. The growing section of population with casual work or precarious work are called the Precariat. Those with low wages with house buying beyond their wildest dreams are desperate. During elections they will now be clutching at straws, as there seems no hope for progress.

So we are now getting scholars who understand the fossil fuel energy issue and its effect on global growth saying we need a new economic model. This is new.

3. The third movement is those who know about the consequences of creating money as interest bearing debt. It produces instability as outlined by economists who follow the late Hyman Minsky.  The Minsky moment is the point at which excess private debt sparks a financial crisis. Minsky said that such moments arise naturally when a long period of stability and complacency eventually leads to the build up of excess private debt and overleveraging. At some point the system collapses and it can happen quickly.

Followers of the new economics movement are generally aware that there has to be a big system change and have been saying this for decades now. However with the demand coming from three different directions, it is  just a guess as to which will prevail. Maybe with the rise of the basic income movement something may change. Those who recognise the irony of politicians who turn a blind eye to $12 trillion dollars appearing from nowhere to rescue banks yet say we can't afford a basic income will push this thing forward. Maybe environmentalists will stick to their environmentalism and monetary reformers will continue on recommending the same thing decade after decade while the planet burns and fascism threatens. . 

Summary

The New Economics Movement people who met between 2011 and 2015 to discuss a new economic system have produced ideas. These are crystallised to the best of my ability in my book The Big Shift: Rethinking Money, Tax, Welfare and Governance for the Next Economic System whose website is deirdrekent.com It can be bought here

Trying is the only way…

After many months of feeling in equal parts a) guilty for not writing a blog and b) terrified of writing a crap blog, I am taking the plunge and assuaging one emotion at the extreme risk of solidifying the other!

My terror stems from following in the wake of Deirdre Kent who knows her stuff New Economics-wise and I suspect readers of Deirdre's blogs will also know far more than I on economic matters. My guilt, however, stems also from having promised Deirdre I would do my best to keep the blogging happening, and having so far done less than my best in the face of my fear.

Although I think about changing the economic system almost constantly I feel I have a dearth of conceptual knowledge that allows me to draw on a newsworthy item, for example, and argue the new economic points in a way that might enlighten readers. Or any way at all.

What I am trying to do in my life however, is to find and realise new economic ideas and practices, and practise them.

Tonight I took part in one of my Savings Pool meetings by phone (I belong to two since I moved recently; one in Christchurch that I started with and now, as well, one in Ashburton which is nearer to where I am currently living.) During an extended conversation about a proposed change to the current way of calculating 'reciprocity points', it hit me just how much we are building this new system. We don't know how it works perfectly or even if it works perfectly, but how we figure it out is in the trying.

My Pool in Christchurch is about to knock off its first mortgage and my Pool in Ashburton is going to put up some dosh and I am going to be the conduit between Pools. Effectively some money will be lent to me and I will lend it on. It's real small fry in the financial markets, let's face it, but boy does it feel good to be doing community lending. To get that family out of paying interest to the bank and to be supporting each other. To be using money collectively to benefit each other.

And learning by doing is how a lot of this new economic stuff is going to have to happen. Abstract concepts are great until they hit the pavement - ole Einstein knew what he was on about when he told us that in theory, theory and practice are the same, but in practice, they are not!

My theory is that if I practise writing blogs more, my New Economic theory will become more practised and I might end up writing something y'all wanna read! Here's hoping...

No Bill, it is not the environmentalists who push up price of land

This week we had the extraordinary spectacle of the Prime Minister of New Zealand addressing his party Blue-Greens, claim that environmentalists push up the price of land.

OK he is getting at the over-bureuacratic interference in the planning process and cites examples of councils wanting to know about furniture layouts and positioning of plants before they grant a permit.

Pull the other leg Bill. We are not going to accept that one. Sure they are intrusive, but that can be solved. Probably councils are desperate for revenue and central government gets far too much of the public revenue.

No Bill, land only has value because of community activity. You don't put a factory out in the wop-wops where there is no electricity, no internet, no sewerage or water supply, let alone the transport to get the goods out. You put it where it is near to all the infrastructure, suppliers and markets. You site it near rail, near ports. It is all the government expenditure on infrastructure, and all the businesses and community that makes a certain site desirable. Land which is well serviced has more value than land which is isolated and poorly served.









The value of land is increased by five things:

1. Infrastructure provided by government – rail, roads, schools, hospitals
2. Infrastructure provided by local government – water, storm water, sewerage, streets, lighting, parks, community halls, street enhancement.
3. Businesses and industry – manufacturers, maintenance, retail, warehousing, commercial centres
4. Community organisations and individual housing – clubs, organisations, neighbours.
5. Nature – proximity to rivers, seas, views, good soil, good weather

Given that Auckland has all these, and you have seen immigration as a way of increasing the GDP, making government look good, it is no wonder Auckland prices have been rising for so long. Then again, the international trend to very low interest rates has been a huge factor (not something you can take credit for Bill though you try I know).

And all this before the big one – the fact that the tax system favours buying houses for investment as those who own 2, 5, 20 houses have much to gain and precious little tax to pay. That is on your plate Bill, don't dodge it. The Green Party tries to recoup a small proportion of the capital gains for the public purse and the Opportunities Party collects it all, but you only collect a miniscule amount of this unearned income. Shame on you. And double shame for then turning round and blaming environmentalists. Get real.

So Bill, if you want to blame bureaucracy or environmentalists demanding good tree planting, please see it in the full context of what actually raises the price of land.

Summarising our whole system shift for a new economy

Designing a new economy has major challenges politically. We want two major changes that actually aren't politically realistic in the current world where eight individuals own as much wealth as the poorest 50%. There is too much concentrated power.

If we want monetary reform it is unavailable at national level because there are simply too many bank lobbyists in the world's capitals who are spending far too much for any public interest lobbyists to match. Then again, if we want to replace

Then again, if we want to replace income tax with land tax, forget it. Not a goer either from a practical political viewpoint. No self respecting politician will touch it if taxing land reduces its market value and threatens a politician's votes.

What about getting a Basic Income and replacing the intrusive welfare system? Well that depends on how you would fund it. The problem is most of the current solutions are a drag on the economy. You must not fund it from GST which is regressive or from income tax which is a drag on the economy.You must fund it by sharing the rent on land and other monopolies.

Well where do we go then? You have painted a dismal picture.

Most respond by saying "Oh well bring A or B in gradually". That takes ages and moreover when A is implemented it affects B and C. So the idea of just imposing a 1% land tax and bringing it up gradually is quite impractical. We have to think in terms of whole systems. It is a whole system shift we need. Redesign the political economy from scratch.

The fact of the matter is that we must be politically savvy to come up with a solution. Many economists might agree that land tax is the most logical tax, but unless they are standing for office, they don't have to face the public. It is one thing to be an economist and another to be a politician. Victoria University's 2010 Tax Working Group which was stacked with economists from many government departments as well as consultants and academics, proposed a land tax. Did the government listen? Not that I can recall. I don't remember their recommendations on land tax being discussed in the public arena for more than a day.

What about Positive Money and all its followers saying that money should be spent into existence not lent into existence? They make a very good case, you can't fault it. And yes, the British Parliament took it seriously enough to have a parliamentary debate. But do you believe it will go further? You only have to read Nomi Prins book 'All the Presidents Bankers' to get an idea how close presidents have been to the big bankers for over a century. Hilary Clinton's campaign was funded by investment bankers and Trump has six Goldman Sachs bankers in his cabinet. He has already moved to get rid of the weak regulations they now have.

When considering the political feasibility of putting in the idea of Michael Kumhof and Jaromir Benes' Chicago Plan Revisited, a plan making bank debt illegal, Lietaer, Arnsperger, Goerner and Brunnhuber listed five reasons for not recommending it.[1]
"1.Replacing a monoculture with a monoculture is not the way to generate diversity in exchange media.
2. While it is true that a Chicago Plan reform would eliminate risk of widespread banking crashes and of sovereign debt crises, there would still be monetary crises.
3. If governments were the only ones in charge of creating money there might be a risk of inflation. Such a risk is real and demonstrated in 2009 by the hyperinflation crippling the Zimbabwean dollar after President Mugabe instructed the central bank to print its currency by the trillions.
4. The fourth reason can be summarised as ‘political realism’. Any version of the Chicago Plan will be fought to the death by the banking systems because it threatens both its power base and its business model. Even after the excesses triggering the 2007-8 collapse, or in the middle of the Great Depression of the 1930s, the banking lobby managed to deflect the implementation of any significant changes. In 2010, for every elected official in Washington, there were three high-level lobbyists working full-time for the banking system. The financial services industry including real estate spent $2.3 billion on Federal campaign contributions from 1990 to 2010, which was more than health care, energy, defence, agriculture and transportation industries combined." (In USA, according to Gar Alperovitz, in 2010-11 the FIRE section (finance, insurance, real estate) section spent nearly $1 billion in lobbying against bank regulation.)

"5. The final argument is about risk. Nationalising the money creation process cannot be done on a small pilot scale. It must be implemented on a massive, national scale or, in the case of the euro, a multinational scale. Any change always involves the risk of unintended consequences. Logically, large scale change involves greater risk."

Yes, there is a way to go. The ideas came from the permaculture teachers in our new economics movement. Reform the very structure of governance to give quite substantial powers to  local government, turn governance upside down as well and then we might have a chance. The centralised governance structure must be replaced with distributed governance. Then we need to rethink the powers given to or claimed by local governance. In fact central government is not going to give very local government big powers like money creation, land ownership or revenue raising power, so they have to claim it themselves. This is where rebellion must be focussed. 

So we have proposed spending money into existence at the very lowest level of government (in New Zealand that would be the Community Board). That money will gradually buy up land. The Community Board would then receive land rent from the property holder and pay the rates (local taxes) of that property holder. This process happens gradually, while closely monitoring inflation. If there is a sign of inflation, the rate of decay of money can be adjusted or the money spent at a higher level of governance.

So the Community Board claims the right to issue money, to buy land with that money, to receive public revenue. It could also impose certain resource rents to be determined.

With the growing revenue from land rent the Board would be able to distribute regular Citizens Dividends and build and maintain essential infrastructure.

There would have to be participatory budgeting so that the balance between infrastructure and dividends was maintained and the public was behind the Board.

Now if we are going to reclaim the right to issue money, we might as well design it properly while we have the chance. It is there we look to history and read Bernard Lietaer. He cites a period of 2000 years of a decaying Egyptian currency which had huge social, educational and economic benefits, 200 years of European currencies in the central middle ages that resulted in an age of prosperity, equality, high education and more leisure and finally a period in 1932-3 in a small Austrian town during the Great Depression. Each of these had a decaying currency, much as goods decay.

So the new money would be designed to decay. In practical terms, it would keep its face value but attract a regular payment to keep it valid. The local Board would develop a more equal relationship with its local Council who would inevitably end up accepting the new currency for rates. This would eventually pass on to central government who would have to accept it for taxes.

So what we propose is a new currency that soon is accepted by central government for taxes. This means it is a new national currency. They way this works out is that each local board keeps its currency from inflation so all are on a par. They flow into a stream that flows into a river towards central government.

Naming the book that comes from ideas in this website






I need help. I have struggled for a long time with a suitable name for the book I am writing, a book that is based on the contents of this website.

I have already submitted an essay to an international competition for called What's your Alternative? I called my essay A New Political Economy. Boring title but it gives the crux of it.

I know naming a book is very important and I have a designer ready and waiting to design a cover. So I have been reading a marketing book called Platform: Get Noticed in a Noisy World by Michael Hyatt. He seems to classify good titles under one of four categories, PINC.

P stands for Titles that make a promise
I stands for titles that create intrigue
N are titles that identify a need e.g.Fearless: Imagine your life without fear
C are titles that simply state the content.(which was what I did in my essay)

Going through titles for TED talks I find lots of I titles and P and N titles and even C titles.

So here first is the elevator pitch for the book:
What is your book about? It's about designing an innovative political economy. We need a completely new money system, a completely new tax and welfare system and a completely new governance system. Leave the old system alone. Then incorporate the big changes into a genuinely new package. We can't just tweak the old system, we need disruptive innovation.

I know it is a nerve to take on such a task, but this book designs a system for a country, not the entire planet! But honestly the system we have is broken, we have passed peak oil and our system is designed for growth, and we can't get that now. We are in real trouble and the old system is just not going to serve us any more. Almost all economists just want to tweak the old system. This book says we need to start again with a completely new model and so it proposes one.

Would you help me? The ones I have thought of so far are the following (I have had a Facebook group on the topic but I think the people there are getting a bit sick of the problem). Note: there would be subtitles too, bit longer.

The Big Shift to a Natural Economy
The Big Shift to a New Economy
Three Big Shifts
Whole System Shift
Designing a Better Economy

Now having re-read Platform and been through those TED talk titles, I am submitting:

Disrupt! A New Political Economy redesigned from scratch
Stand Aside Economists: We need a completely New System
The Big Shift to a Surprising New Economic System

I am open to anything and await advice from innovators, linguists, disrupters, comics, originals, advertisers, marketers, publishers

Later: The book is going to be called The Big Shift: Rethinking Money, Tax, Welfare and Governance for the Next Economic System. A hard copy will be ready in mid March and a kindle after that.