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.

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.

Tax reform or monetary reform? Which is most important?

The meshing together of Georgism with monetary reform remains a challenge, especially for ardent individuals who claim their cause to be the most critical. I have heard monetary reformers say Georgism is irrelevant and I have even heard a Georgist describe monetary reform as “heresy” and declare it must be “exorcised” at all costs. Then there are the moderates who say Georgism is more important than monetary reform but willingly acknowledge monetary reform is needed. Critics come in many varieties. Regrettably there is a tendency for advocates from both sides tend to promise a growing list of wonderful results from their reform. Maybe Henry George School people only see landlords as “the enemy,” and to mention money, credit and bankers confuses them. Do we see people on both sides arguing that the others should just get off their territory?

Recently I heard a Georgist argue that if you transfer land into community ownership then the money issue disappears.

So let’s tease this one out. To some extent he is right, but he misses several vital factors. For instance he doesn’t appear to understand the growth imperative will still be present, so he needs to work out where the excess money will go, and follow the results to their logical conclusion.

Take the important book Money and Sustainability, The Missing Link, a Club of Rome Report by Bernard Lietaer, Christian Arnsperger, Sally Goerner and Stefan Brunnhuber. The authors say there are five results of creating money as interest-bearing debt – amplification of boom and bust cycles, short-term thinking, compulsory growth, and devaluation of social capital where selfish behaviour replaces co-operative behaviour.

Or take another example of monetary reformers overpromising. While we can’t tell if she actually believes it herself or not, monetary reformer Amanda Vickers lists their extravagant promises. She writes in the Otaki Mail, “Sovereign money advocates extrapolate further that the outcome would also be far-reaching throughout our economy and our lives. They say it could also improve: the inequality gap, child poverty, housing bubble control, student debt, state asset sales, job security, local businesses performance (due to the 10% higher output gains), budgets for local community projects and facilities, health care and education.”

Positive Money in their little video says money is created every time someone takes out a mortgage. The money doesn’t come from someone else’s saving but is new money just created. The bank enters your debt as an asset on their accounts then enters the same amount in the liabilities column of their books, your deposit. The entire money supply is on loan from the banking system. When they charge interest on this money creation £200 billion a year is transferred from the public to the financial sector every year in UK. Since money is created as interest-bearing debt, if we all pay off our debts the current economic system would collapse. There would be no money in the system.The debt can never be repaid. The money creating power needs to be transferred to some democratically accountable body and spent into existence instead. He mentioned it has been pumped into property bubbles and financial markets.

They claim it would reduce inflation and that you would also be able to move towards a low carbon society this way.

dscn1459So what I take out of this is that Positive Money people, by not addressing tax reform, may think that if you create money by spending it into existence you will avoid rising land prices. By creating a monetary authority to control inflation they give their new monetary authority magic power to stop money going into a land bubble. It simpley wouldn’t happen this way.

So let’s go back to the Georgist’s claim that when you have land in community ownership the money issue disappears. Not so. If you continue to create money as interest bearing debt, then money still moves from the public to the financial sector. Though there is always the personal desire to pay off your debt the money supply would disappear if everyone did this. Moreover, there is always the mathematical imperative for the money supply to grow in order to pay off the debt with interest. That is what we don’t want on a finite planet.

It is true that when there is either no cost or little cost on the holding of land AND money is created without interest or with low interest, you get money pouring into land inflation. Anyone who has paid a mortgage knows that when interest rates decline, there is what they call a housing bubble (it is really a land price bubble). This is undesirable. And if you take land out of the market entirely money won’t go into a land bubble, but it will go into some other form of monopoly.

When Karl Fitzgerald of Prosper Australia did his 2013 study Total Resource Rents of Australia, he subtitled it “Harnessing the Power of Monopoly.” The list includes Land Residential, Land Commercial, Land rural, Land other, Subsoil Minerals, Oil and Gas, Water Rights, Taxi Licences, Airports, Utilities, Fishing, Forestry, Gambling, EMS, Satellite Orbit Rights, Internet Infrastructure, Domain Name Registration licence, Banking Licences, Corporate Commons Fee, Patents, Parking fees, Public Transport, Liquor Licences, Vehicle Rego Licences, Sin Taxes on Tobacco and Alcohol, Carbon Taxes, Non Tax Revenue (sale of goods). That’s quite a list of the things you can claim a monopoly right on. “Land” in its widest sense is actually a list this long and longer.

So if we just deal to land by taking it out of the marketplace, you just put your money into monopolising another part of the commons. You could buy a much desired personalised number plate. The plate “F1” fetched £14 m and the number plate with the number 1 was bought by an Emirati businessman for £7.25m in 2008. Perhaps you could buy a domain name? Sex.com sold in Nov 2014 for $10m and insurance.com in 2010 for $35.6m.

Or the extra money could go into the financial sector including securities, commodities, venture capital, private equity, hedge funds, trusts, and other investment activities like investment banking). Nothing productive here. Yale economics professor Robert Schiller says, “The classic example of rent-seeking is that of a feudal lord who installs a chain across a river that flows through his land and then hires a collector to charge passing boats a fee (or rent of the section of the river for a few minutes) to lower the chain. There is nothing productive about the chain or the collector. The lord has made no improvements to the river and is helping nobody in any way, directly or indirectly, except himself. All he is doing is finding a way to make money from something that used to be free. If enough lords along the river follow suit, its use may be severely curtailed.” Yet that is where a lot of money and activity is going.

In June 2015 the Guardian reported that “Adair Turner, the former chair of the Financial Services Authority, gave a memorable critique of the UK financial services industry in the wake of the credit crisis when he said that some of the activities carried out by the City’s finance firms were “socially useless”.”

There are many places where the excess money can go if there is tax reform but no monetary reform. We haven’t even touched on fishing quotas, art investments, oil and gas, utilities, or forestry. Leaving the growth imperative firmly in place by leaving money created as interest bearing debt will invite trouble and plenty of it.

However there is no doubt that land price inflation would disappear if all land was owned communally and leased from a public entity instead. While the boom-bust cycles would exist for other parts of the commons that remain in the market place, these cycles would no longer be present for land prices.

As Professor Michael Hudson explains “In a nutshell,land rent today is paid out as mortgage interest. Ditto for oil and gas, and monopolies.In terms of reform, financial and tax reform must go together. What is not taxed will be capitalized into bank loans. That’s the basic message.”

In one of Michael Hudson’s papers he quotes from Tolstoy when discussing the issue with Henry George. “The land cultivator in a bad year, not being able to pay the rent exacted from him by force, would have to enslave himself to the man with money in order to keep his land and not lose everything.”
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The Tree issue in Titirangi is an example of why land should move to public ownership

11358921The architects who own the two Titirangi sections with the precious kauri and rimu trees on them should have their land bought by the Local Board and the rent should be reduced because of the restrictions they suffer in building, according to the New Economics Party.

Spokesperson Deirdre Kent said the tree issue in Titirangi is a graphic example of why land ownership should progressively move into public ownership. Local Boards should have power to create a second national currency to buy up community land. And if the use of the land is restricted because of historic building, conservation of trees or building height limits, the rent should be reduced as the part of the land already serves a public purpose.

The land rent should be in lieu of rates and the revenue shared by other levels of government.
She said if the Auckland Council (preferably the Local Board if it had the power) buys this land destined for low cost housing there will be four beneficial outcomes:
1. The trees can be saved
2. the housing produced will be genuinely low cost because the cost of the land will not be included into the cost of the housing
3. the citizens Auckland will enjoy a dividend from the land rental in perpetuity
4. The citizens of New Zealand will enjoy a more bouyant economy as lower cost of housing results in lower mortgage payments therefore less interest payments and less bank profits streaming across the Tasman to Australia.
“The financing of land purchase on a large scale is eminently possible. It is only political will that is needed to create a second national currency that can be spent into existence through land purchase by councils,” said Ms Kent

For further comment phone Deirdre Kent 06 364 7779 or 021 728 852

Combining resource (including land) taxes, monetary reform and basic income is the political challenge of our time

My name is Deirdre Kent and I am the co-founder and co-leader of the New Economics Party New Zealand.

We have been working for three years to try and design a new economic system which is going to work for all life on our planet and in our country. We have decided we need to bring together three different movements – the monetary reform movement, (including reforming the national currency and having a whole range of complementary currencies), the tax reform movement to move towards land and other resource taxes and away from income tax and sales tax, and thirdly the movement for a basic income, giving an unconditional, basic income to all people where paid work may not be available for all people.

So – how do we do this? Well you can’t actually do one thing then do another and then do another because everything is interconnected. So we have to think about it as a whole system. A whole system hyperconnected globally. And we are saying that you have to look at the two things which change the system most, where you get the greatest “bang for your buck” by tweaking it just a little bit. We are saying you have to change the money system and the tax system. Those are the two paradigms we have to change. Secondly we have to change the goal of an economy. The goal of an economy is not just ‘to grow’, which is impossible on a finite planet and we all know that. And now we have got climate change because we have been so foolish.

So pulling those three things together we decided we would end up leaving the current system alone. We have got a very bad tax system. Over 80% of our taxes are on labour, enterprise or sales. Nonsense! Those are things we want to encourage as long as the goods are the right sort for a post fossil fuel age. So that is a major change in our tax system.

Secondly we want to change the money system. How on earth do you do that when we are so dependent on banks and banks are so powerful? So we are saying leave the current system alone. It is going to fall over, it is going to decay. It’s unstable, we have got deflation coming, huge debt. Goodness knows what is going to fall over next and what is going to trigger the next Global Financial Crisis.

We are saying you have to start a second national currency in parallel. But this one is designed differently. It is spent into existence at local level to buy land, and then the revenue stream from the land rental (which is quite significant) will be passed to higher levels of government and occasionally it is shared with the all citizens over a year old through a Citizens Dividend.

Right at the very start of this new currency we would pass a raft of new tax laws governing it. A full land tax, a full carbon tax and full mining tax. So it would be ruled by a different set of tax laws.

And this new economy would grow in an entirely different way. It would be a thriving dynamic economy for a post fossil fuel age.

Now we realise this is almost a preposterous proposal. And yet in Germany when they had a crisis in 1923 they set up a new national currency and it was backed by land. Ours is an improvement on theirs because we are putting it into existence without interest. It you allow the banks to create the money as interest bearing debt, then you are always going to have a growth imperative built in. It’s a mathematical certainty that you have to keep growing the money supply, and growing the economy and that causes a growth imperative leading to climate change.

And we have to stop it. We have to design an economy not dependent on a growth imperative and that is for the sake of our children.
So Germany successfully stalled their huge crisis in about a week. The farmers released their food for the towns and social unrest stopped.

Now we went through several stages and you can see that on our site. We went through the stages of covenants on land, we went through various names for the new currency. But on this site you will see plenty to read.

We ask you to join us in thinking and working to design a sustainable economic system.

We are going to have a conference on the last two days in May and the first day of June in New Zealand and we invite you to come. More information on the website soon.

So thank you very much and good luck!

Petition asking for a Parliamentary Enquiry on Bank Stability declined

Our petition on Bank Stability Dismissed 31 July 2014

The New Economics Party is disappointed that their 877 strong petition asking for a Parliamentary Enquiry on bank stability has been declined.

Spokesperson Deirdre Kent said they were not just disappointed with the outcome (which was expected) but also by the process where the Select Committee met behind closed doors.

“There is so much at stake with banks playing in the derivatives casino, that the issue should be taken more seriously. The public is being kept in the dark as to what is going on internationally in the credit blowout. Their reply suggesting that they had it all in hand was by no means reassuring yet they have gone to the trouble of setting up a system whereby ordinary depositors will have their accounts confiscated in the event of a bank collapse.”

Ms Kent said “I don’t remember the Reserve Bank predicting the Global Financial Crisis, so why should we have faith in them now?

“The fact that the Select Committee meets behind closed doors is a big worry. We weren’t invited to give oral evidence, we didn’t get to eyeball them and we don’t know which politician said what. When Parliament has legislated 22 years ago for local authorities to have all their meetings in public without a good excuse, they continue to meet in behind closed doors. Such a process is unfair, undemocratic and not in line with their stated policy of open government.”

For further comment phone Deirdre Kent 06 364 7779 or 021 728 852

A Christchurch currency would help solve the budget problems and avoid asset sales or rates rises

chch-cbd-plan-620How can Christchurch City Council solve its financial woes with a $534 million shortfall in its budget. I sit watching the television and think, “I wonder if the people of Christchurch know that money is a human invention?” and “I wonder if they know how money is created and by whom?”

I suppose I am one of a handful of people who, through my life circumstances and choices, have studied money creation and especially local currencies. I spent seven years researching and writing a book on the topic, studying community currencies and national currencies throughout human history. Money is an agreement to accept something for payment. It is a social contract. We accept money because we know that other people trust it. Its value rests on a belief about a belief.

But what gives money its value? We need to choose something that we all have to pay so that we know the next person will trust it. That means taxes, or it could mean rates, insurance or food. The national currency we all use is trusted because everyone knows that in the end the Treasury will accept it for payment of taxes.

So how is Christchurch’s problem solved? None of the options given by the official report sound good to me – reduce the rebuild costs, increase rates, cut spending, borrow more, ask Government to pay more, or sell public assets.

But we can create our own money. It’s just that currently the banks have that privilege and government allows them to create money as interest bearing debt. I won’t go into the many and dire consequences of this destructive practice, but I will say this: Banks create money when they lend it into existence mostly to get the security on some land. They like it that way.

Everyone knows how much they owe their bank on their mortgage and when they see our big four Australian owned banks making huge profits, they know their mortgage payments go off to Australia and beyond.

It doesn’t take long to discover the staff from the restructuring firm who wrote the official KordaMentha report come from traditional university training in finance, accounting, law or business. And you can bet your bottom dollar that not one of them has had more than minimal teaching on how money is created and by whom. They don’t get taught the history of economics. Few (if any) will have studied the existence of complementary currencies or even know they exist. So they aren’t likely, any more than are Auckland City Council’s consultants, to offer a solution which includes any of this knowledge.

My proposal is for a land backed currency created by the Christchurch City Council, spent into existence without interest, dated and acceptable for rates by that date. The currency is created to gradually buy bare land in the inner city. Iwi and hapu should be involved to exclude sensitive land, and where relevant the titles checked by the Maori Land Court. The Government must also legislate to allow trades in this currency to be free of income tax and GST, for Christchurch City Council to be able to accept the local currency for rates, and for the Council to share its land rental revenue with Government. The Government must also legislate to allow the Christchurch Land Dollar to be acceptable for the payment of rates. City Council staff and contractors must be persuaded to accept part of their payment in Christchurch Dollars. This is the first way of many ways the Council will save precious national dollars. Gradual buy up is needed to avoid inflation.

Another thing I noticed was that central Christchurch isn’t thriving and a developer on television was almost begging for tenants to move in. The reason is the land in the centre of the city is only given value by the community. When infrastructure is built, businesses move in, and community facilities buzz with action, people will want to buy there and the price of land rises. This windfall is publicly created and should not be privately captured. Hence the need for full land rentals. Probably the best method is Council ownership of land with fair lease arrangements for both parties. The rental should preferably set by auction, with rents adjusted annually according to a new rental index for the area. Rents rise as the city rises and that solves the rating problem. The more facilities are built the higher the rental revenue. To ensure future Governments do not subvert the process by reducing the rents for electoral purposes as the 1970 Gorton government did in Canberra, the legislation should be enshrined. This suite of safeguards avoids the worst pitfalls of leasehold purchases. Speculators can then not benefit from Christchurch’s pain and loss.

Although this proposed solution will allow Christchurch city to thrive, it is unlikely to be taken seriously. But I can tell you this: In previous economic crises people have solved grave problems by novel methods. We can look at how Germany solved its hyperinflation problem in late November 1923 and learn a valuable lesson. They started a new bank and it issued a new currency and the hyperinflation stopped dead in its tracks. Or we can look to a small Austrian town called Wōrgl in 1932 and see how a local currency solved its unemployment problem and a situation where people weren’t paying their local rates. In a very short time they turned this around. The city built infrastructure, unemployment declined dramatically and people paid their taxes early.

Conventional economic thinking has been the cause of ever deeper holes that we find ourselves trying to dig out of. The only economists to see the GFC coming were largely the ones who recognise the privilege of private banks to create our money supply and the structural problems this system creates. By freeing our monetary system from this broken design, we can start to get the upper hand in dealing with a whole range of pressing matters – not the least of which is getting the city and citizens of Christchurch back on their feet without making them poorer in the bargain.