There are two types of investors: (1) active investors working to create new and better products as well as greater efficiency and productivity on a day-by-day basis inside their company, and (2) passive investors who may or may not even remember that they have invested in the company either directly or indirectly through mutual funds, exchange traded funds and other such remote means. It is important to distinguish between these two fundamentally different types of investors.

Free enterprise is all about incentives to drive economic growth and productivity in a free market economy. Rewarding creative entrepreneurs and their employees is the key to maximizing the long-run profits for an individual company and to bringing about the efficient allocation of resources for the economy overall. Money diverted away from rewarding creative entrepreneurs and their employees undermines these objectives. Such diversion under the goal of maximizing shareholder value has been examined by law professor Lynn Stout in her book The Shareholder Value Myth. Stout explains that the maximization of shareholder value has been carried out under the assumption that the shareholders own the company and deserve the lion’s share of the profits. She systematically examines this claim and emphatically rejects this assumption both on legal and practical grounds. In the long run maximizing shareholder value works to reduce a company’s long-run profitability and hurt the free market’s ability to bring about the efficient allocation of resources. It is bad for the company and bad for the efficiency of free enterprise.

Doesn’t the free market take care of this by bringing about the failure and ultimately the bankruptcy of the inefficient businesses? Doesn’t Schumpeter’s “creative destruction” get rid of unsuccessful enterprises? No, not if a big firm has been successful in blocking entry by creating barriers to entry such as with economies of scale, as with Amazon, or network effects, as with Facebook. Many dominant firms buy up rivals or run them out of the market. A small, efficient family restaurant may be quite profitable during normal times, but be driven into bankruptcy during a pandemic or an economic downturn. More often than not, Schumpeter’s “creative destruction” should be called “competition destruction” when the key to survival during a recession is possessing an enormous amount of cash on hand as provided by uninformed and/or speculative passive investors. The key is to exploit first mover advantage by effectively blocking the entry of potential competitors. 

Financial markets were created to provide funds for entrepreneurs to pursue potentially profitable enterprises. The financial economy exists to supply the real economy with funds for this purpose. Passive investors typically take on considerably less risk through diversification than the active investors who are putting in a great deal of their time and effort to create, maintain and improve a particular profitable enterprise. Logically, those taking the greater risk should be receiving the greater reward. A reversal of this principle could bring about a reversal in the money flow and undermine the objectives of free enterprise both for individual businesses and the economy as a whole. Financial markets exist to provide money for real investment in productive enterprises in the real economy. A reversal of the money flow takes money out of the real economy and, thereby, reduces the money going into the creation of new products and services and improvements in productivity that require some monetary investment. 

The owners of most of the stock in the New York stock market are not a random draw from our population. They are not representative of typical Americans. Two-thirds of Americans do not have a college degree. Sixty percent are living paycheck to paycheck. Consequently, it should be no surprise that eighty-four percent of stocks are owned by the ten percent wealthiest Americans. This is important because it tells us about the marginal propensity to consume of the typical stock owner (very low) compared with the average American (quite high). Just as you can only wear one pair of shoes at a time, you can only drive one car at a time. Having more than a few cars quickly becomes a hassle in maintaining each vehicle and carrying out the required inspections and license renewals. How many exclusive vacation homes do you want to have to take care of? One or two might be all you really need or want. How many fancy restaurants do you want to frequent in the typical day? If you are already very rich and gain more money, will the additional money cause you to go out to eat at your favorite fancy restaurants more often? You would quickly hit the limit of seven days a week and three times a day.

Once you have a few million dollars, it is the relative amount of money and not the absolute amount of money that you have that matters. At that point the objective is to feel good about having more money that someone else. Perhaps the Federal Reserve chair, Jerome Powell, with a net worth of about $55 million feels good about having more money than the Treasury Secretary, Janet Yellen, whose net worth is only around $16 million, or Janet Yellen’s husband, Nobel prize winner George Akerlof, whose net worth is reported to be only $5 million. Taxing the wealthy in a fair and equivalent manner would not alter the relative ranking and certainly not prevent millionaires from going to their favorite expensive restaurant as often as they want.

People with lots of money are already consuming as much as they want so there is no compelling reason to want to or need to consume more. Aside from bidding up the price of Picasso paintings or buying up exclusive properties, what else is the typical rich person going to do as an alternative to investing in the financial markets? If there are no attractive investments, would they take their money home and stuff it in their mattress, or pile up a large number of one hundred dollar bills in the family room? If there were no place to invest their money, they would probably be willing to pay a bank to hold onto their money for them, which is why banks were created in the first place. After all, banks were created when gold miners took the gold they were accumulating in their tent at the riverside or mine site and took it to the bank in exchange for a note of deposit. Such notes eventually became transferable to become circulating money.

Do CEOs and company presidents always act as entrepreneurs or does their compensation packages sometimes lead them to divert money to artificially jack up the company’s stock price in the short-run in a manner that maximizes their short-term compensation but undermines the longer-term profitability of their company? Often their compensation package provides for a golden parachute to benefit them when they leave the company even if their decisions were not in the best interest of maximizing the long term profitability of the company. Steven Clifford, who served on a number of corporate boards, helps us better understand executive compensation in his book The CEO Pay Machine where he explains that such compensation is not the result of the free market forces of executive supply and demand, but very much the result of a rigged system. Too often corporate board members turn out to be the CEO’s golf buddies. When CEOs also serve on the corporate boards of the CEOs on their own corporate board, they reward one another by maximizing each other’s compensation. You vote to maximize my pay, and then I’ll vote to maximize your pay. Often a corporate board member’s knowledge of the company may be limited to the reports provided by the CEO that explain what a great job the CEO is doing.

Germany has recognized this problem and requires that a certain proportion of corporate boards be elected directly by the company’s employees. This requirement allows for corporate board representation from product development, production, marketing, sales, and product distribution. The United States needs to follow Germany’s example of requiring employee representation on corporate boards in order to direct more money towards improving companies and their products and away from diverting excessive amounts of money to passive investors by bidding up short-term stock prices.

A classic example of this problem would be the case of Apple, Inc. Steve Jobs created Apple to design innovative products. Earning money was a necessary side issue for him but not his primary objective. Jobs was primarily motivated by his desire to change the world for the better. He was focused on creating new and better products and not on Apple’s current share price. Then John Scully came along and essentially said: “You know Steve, you really need to focus more on Apple’s profit margin and drive up Apple’s share price.” The Apple board members voted to set Steve Jobs aside and bring in John Scully to head up this effort. Scully focused on cutting expenses. He had little or no interest in creating new and better products. As a result, Microsoft and other competitors began moving ahead of Apple in computer technology. Apple was falling behind. Once the Apple board realized their mistake, they removed Scully and brought back Jobs.

How much of a reward do these passive investors need and what are the consequences of over-rewarding passive investors and under-rewarding real entrepreneurs and their employees?

After the 2007-2008 financial crisis, the Federal Reserve poured enormous amounts of money into the New York financial markets to lower interest rates. This injection of money into Wall Street has sometimes been referred to as “pushing on a string” because very little money was trickling down to the people in the real economy on Main Street. China and other countries have also invested trillions of dollars in the purchase of U.S. Treasury securities in the New York financial markets. Most of this money has primarily gone to benefit the passive investors who have made no contributions of time, energy or creativity in an effort to improve the performance of the company. Hard work pays off. But not for the people doing the hard work. The hard work of the employees and creative entrepreneurs have paid off for the passive investors under the maximization of shareholder value mantra.

In recent decades our economy has had an average growth rate of three percent while the stock market has averaged a growth rate of ten percent. This disparity in return to investment has led many non-financial firms to invest money in the stock market rather than in creating new and better products for their customers or motivating and rewarding their employees with better pay and benefits. This diversion of money to the New York financial markets has suppressed economic growth and productivity,

Meanwhile, the maximization of shareholder value mantra has caused corporations to divert money to stock buybacks and dividends instead of creating better products for their customers or better pay for their rank-and-file employees. Before 1982 the Securities and Exchange Commission (SEC) ruled that stock buybacks were a form of insider trading and illegal. However, corporate donors convinced our politicians to pressure the SEC to allow stock buybacks starting in 1982. Congress needs to reverse this mistake and go back to forbidding corporate stock buybacks that have been aimed at unnecessarily and excessively enriching passive investors. Stock buybacks should be allowed only when the shares bought back are immediately distributed to the company’s rank-and-file employees.

All this diversion of money to Wall Street has left so little money on Main Street that the people on Main Street do not have enough money to buy back the value of the goods and services that they are capable of producing at full employment.

This distorted money flow has led to a massive increase in private debt and a big increase in public debt with Republicans passing unpaid for trillion-dollar tax cuts and Democrats passing unpaid for stimulus spending. Eliminating deficit spending without solving the underlying distorted money flow would lead to high levels of unemployment in a permanent recession. Politicians often talk about reducing the deficit but ultimately realize that they need to increase deficit spending to avoid recession and the resulting loss of votes at election time. Politicians love to complain about the national debt, but then when push comes to shove, they increase it to avoid being blamed for a bad economy. Someone has to buy all those goods and services to keep the people employed and the rich are just not up to the job all on their own. If you want to have a thriving economy, you need to make sure that enough money is flowing to poor and middle class people who will actually spend it to keep the economy at or close to full employment.

The over-rewarding of passive investors and the suppression of productivity and economic growth is not only the fault of self-serving CEOs, corporate boards and the SEC, but also reflects the increasing separation of the financial economy on Wall Street from the real economy on Main Street that has been facilitated by the Federal Reserve over many decades. Unfortunately the Federal Reserve’s powers have been limited to overseeing the twelve regional Federal Reserve Banks, dealing with the reserve funds of major banks, and the buying and selling of US Treasury securities and other financial products (quantitative easing (QE) and quantitative tightening (QT)) in the New York financial markets. The Federal Reserve needs new and better policy tools if it is to operate effectively and efficiently in stopping excessive inflation and avoiding recessions while allowing for increased productivity and economic growth in the real economy.

For many decades, but especially since the Great Recession of 2007-2008, the Federal Reserve has pumped enormous amounts of money into the New York financial markets with little trickling down to the real economy on Main Street. This inefficient and ineffective method of stimulating the economy has driven excessive inflation of stock prices on Wall Street to the great delight and benefit of passive investors without stimulating much demand on Main Street, especially relative to the fiscal policy stimulus spending by the Congress which is much more direct and cost effective than monetary policy. The problem is that the politicians in Congress cannot agree on the correct level and timing of changes in taxes and spending. The Federal Reserve Board is often unanimous in agreeing on monetary policy but does not have the proper tools to do the job efficiently and effectively.

To stop inflation the Federal Reserve currently uses a cost-of-borrowing tool that raises interest rates on loans. During excessive inflation people want to spend their money quickly to avoid its loss of value due to the rising prices. Raising the cost of loans just shifts the inflation from expensive items that require a loan to less expensive items that don’t require a loan. However, businesses that routinely borrow money to operate will cut hours, lay off employees, and close outlets when the interest rate on loans increases. Workers can’t spend money that they don’t have so they cut their demand for goods and services. This reduces inflationary pressure when too much money is chasing too few goods. But it also suppresses supply and runs the risk of driving the economy into a recession.

To impact the real economy on Main Street directly to stop inflation without causing a recession the Federal Reserve needs a new return-on-savings tool. Since prices are set on the margin and not on the average, the marginal saver is the key player in setting prices. The marginal saver may be deciding whether to buy that expensive new pair of shoes or put off buying the shoes and instead invest that money in a savings account. However, when too much money is chasing too few goods causing inflation and the Federal Reserve is trying to slow the economy to reduce excessive inflation, banks, which often have excess reserves under our fractional reserve banking system, realize the risk of an economic slowdown or even a serious recession and cut back on making loans. Under those circumstances most banks don’t really want additional money. They often offer interest rates on savings that are less than the rate of inflation and are therefore negative in real terms. They don’t like paying for money that they don’t really need.

One approach to stopping excessive inflation is for Congress to reissue the Postal Savings Act of 1910 and offer an interest rate of ten percent for amounts up to $10,000 at our 30,000+ post offices throughout the United States. The marginal saver who typically has no college degree and may make around $50,000 a year will hopefully notice the big sign at the entryway of each post office offering ten percent on savings and decide to put off nonessential expenditures in order to take advantage of the high return on savings. Allowing the Federal Reserve to run these postal savings accounts would mean that there would be no increase in taxes or in the national debt because the Federal Reserve typically makes billions of dollars in profits from its member banks and from it operations in the New York financial markets, or it could just print up whatever money it might need regardless of any profits or losses it might make in day-to-day operations. This would provide the Federal Reserve with a return-on-savings tool so that it was not totally dependent on using its cost-of-borrowing tool that threatens to send our economy into a recession.

But what can the Federal Reserve do when the economy has slipped into a recession and needs some stimulus to restore full employment? Quantitative easing (QE) is where the Federal Reserve buys debt instruments such as US Treasury bonds and mortgage backed securities to pump money into the New York financial markets with the hope that some of that money will trickle down to the average person on Main Street. This is clearly a very expensive and inefficient method that runs the risk of encouraging even non-financial firms to divert their investment funds to buy into the financial markets as stock and bond prices rise rapidly instead of investing in their own businesses. The relatively high return on investments in the financial economy suppresses productivity and economic growth in the real economy which offers a much lower return on investments. In other words, pouring money into the financial markets on Wall Street ends up suppressing economic growth on Main Street.

When the economy is in a recession, the Federal Reserve needs an entirely different tool to control the real economy on Main Street instead of trying to control everything through the financial markets on Wall Street. Right now only large banks have accounts directly with the Federal Reserve. But a number of lawyers and economists have proposed creating “FedAccounts” to directly impact the people on Main Street. If everyone with a Social Security number was issued a bank account with the Federal Reserve, the Fed could inject money into these accounts as needed to stimulate the real economy directly, more immediately, and more efficiently than trying to influence the real economy by buying securities in the New York financial markets. This money would become immediately available to spend. And it would take less money to increase the demand for goods and services. The Fed would get more bang for the buck. You could pay someone to cut your grass, rake your leaves, or shovel your snow by a simple transfer of money from your “FedAccount” to their “FedAccount.”

The maximization of shareholder value through dividends and stock buybacks has driven up stock prices as has trillions of dollars invested in the New York financial markets by foreign governments and other foreign investors. The Federal Reserve has made matters worse by further rewarding passive investors through its quantitative easing policy. Financial markets were originally created to make money available for investments in the real economy, but the rapid rise in stock and bond prices especially in the decades following the 2007-2008 Great Recession has caused a reversal of the money flow. Under the maximization of shareholder value mantra and a misguided and inefficient Federal Reserve policy, too much money has been diverted to passive investors that should have gone to reward entrepreneurs and hard working employees making new and better products in the real economy. The sooner Congress restores postal banking and creates a “FedAccount” for every American, the sooner we can achieve much higher productivity and economic growth in the real economy.

         

The earlier rise in inflation to just over 9 percent in June 2022 is no mystery. Excess demand and insufficient supply was caused by a combination of an abrupt supply disruption due to the COVID-19 pandemic and a spike in demand from the Trump and Biden stimulus expenditures. The fall in inflation more recently to between 3 and 3.5 percent is more interesting and more complicated.

On the supply side American manufacturers have learned that minimizing inventory costs following just-in-time delivery of their products that they manufacture cheaply overseas has caused them dearly in the face of the sudden supply disruption. Their revenues and profits dropped dramatically in the face of the sudden cutoff in the supply of their products. With the encouragement of the Biden administration, manufactures have created just-in-case production facilities here in America. They now want to have some manufacturing production in America that is designed to be easily expanded in the face of another overseas supply disruption. This is especially important in the face of the increasing tension between China and the United States, especially if China were to invade Taiwan.

The demand for construction workers initially put upward pressure on wages and prices. But the resulting increase in the supply of manufactured products here in America in addition to the renewed supply from overseas has put downward pressure on inflation. Economy-wide demand is also falling due to the end of the stimulus expenditures, the end of the deferment of student loan payments, and the increase in work requirements for welfare recipients recently imposed by Congress. This combination of increased supply and decreased demand is putting downward pressure on the rate of inflation. Prices are then rising at not nearly the rate that they were at the height of this inflationary cycle.

But what role has the Federal Reserve played in all this? What effect has the Fed’s raising of interest rates had on our economy? When the Federal Reserve raises interest rates, wealthy people say: “Oh, good. I will be earning more on my savings.” Poor and middle class people say: “Oh, no. I will have to pay more on my debts.” People often need a loan to buy a car, purchase a home, or get a college degree. Raising the cost of borrowing blocks these options for many people. During times of excessive inflation, people need to spend their money quickly before it loses more of its purchasing power. The longer they wait, the less their money is worth. Consequently, by raising the cost of borrowing when too much money is chasing too few goods, the Fed just shifts the inflation from things that require a loan to less expensive things that don’t require a loan.

However, raising the cost of borrowing stops excess inflation by suppressing supply in a manner that ultimately effectively suppresses demand. Many firms borrow money to operate. Some retail firms run in the red most of the year until reaching the holiday season at the end of the year where they cover their costs and make their profit. Farmers borrow to prepare fields with plowing, fertilizing and watering their crop and then pay back their loans when the harvest comes in. When the cost of borrowing goes up, firms that borrow money will cut hours, lay off workers, and close outlets. Workers get less money and some lose their paychecks altogether. They can’t spend money they don’t have, so this effectively suppresses demand and stops excessive inflation, but at the risk of creating a recession.

The current Federal Reserve strategy that relies exclusively on their cost-of-borrowing tool rewards the rich and punishes the poor for inflation. A more equitable approach that avoids the threat of recession is for Congress to reissue the Postal Savings Act of 1910 to allow the Federal Reserve to off 10 percent interest on savings for relatively small amounts (no more than ten thousand dollars) for any person with a Social Security number. As explained in introductory economics, prices are set on the margin and not on the average. Stopping inflation requires getting the marginal saver to save more and spend less. The poorest of the poor cannot afford to save any money and the richest people are just moving their money around to get the best return with little or no effect on their consumption behavior. Two thirds of Americans have no college degree and typically earn fifty thousand dollars a year or less. These are the marginal savers who have to decide whether to buy that new expensive pair of shoes or instead put that money in a savings account. A big sign at the entrance of each neighborhood post office offering ten percent on savings might be just what is needed to stop too much money chasing too few goods.

Asking your Congressional representative to support reissuing the Postal Savings Act of 1910 would provide the Federal Reserve with a return-on-savings tool that will help stop excessive inflation without causing a recession so that the Federal Reserve does not have to rely exclusively on their cost-of-borrowing tool. This will not have a big impact on banks when the Fed is trying to slow the economy because banks typically have excess reserves under our fractional reserve banking system and cut back on loans when the Fed is trying to slow the economy. Banks don’t want to be overextended with lots of loans in default as the economy slows. At such a time banks do not want to have to pay for more savings that they don’t need and don’t want. The Federal Reserve can run the postal savings accounts with its own money from the profits and fees it makes in the financial markets so reissuing the Postal Savings Act of 1910 would not cost the taxpayer a penny. Typically the Federal Reserve makes profits of fifty billion dollars or more each year. The Federal Reserve could afford to run these postal savings accounts without having to print any additional money. In any case there would be no need to increase taxes to pay for these postal savings accounts and inflation could be brought under control without punishing the poor by using this new return-on-savings tool and not relying exclusively on the Fed’s cost-of-borrowing tool.

The question as to whether the government should be allowed to issue a Central Bank Digital Currency (CBDC) really boils down to whether government should be allowed to issue a currency to begin with. Should we say “no” and go back to only allowing private banks to issue bank notes in order to preserve and enhance private bank profits? It is also the case that many online private currencies such at Bitcoin and stablecoins along with the planned introduction of Facebook’s Diem and many other stores of value and payment systems are going to disrupt the traditional private commercial banking system in any case.

However, it is still reasonable to avoid unnecessary disruption of the banking system by introducing a situation where depositors immediately sought to switch all their money from private bank deposits to a new CBDC upon its creation. Furthermore, a CBDC would offer a safer, more secure place to store wealth than that provided by any private bank. A US CBDC may be useful for international transactions as US dollars are today. Consequently, a US CBDC could charge a fee (i.e., negative interest rate) that rose as the size of the deposit increased, which would advantage those with smaller deposits.    In times of inflation, it may be especially useful to provide a positive return on savings in the form of interest payments for small deposits by individuals to encourage saving by people with a high marginal propensity to consume (e.g., low- and middle-class Americans) rather than spending money when too much money was chasing too few goods.

Banks often refuse to accept small amounts of money from potential depositors. Some banks require minimum amounts for individual deposit accounts or certificates of deposit sometimes at least $1,000 or even a minimum of $5,000. It would appear rather hypocritical for banks to complain about a CBDC offering interest on small deposits when they refuse to consider working with such small amounts of money themselves. Ironically, banks may be better off with a well-functioning financial system that is able to avoid swings of inflation and recession, or, worse yet, stagflation, than trying to squeeze pennies out of the system by using their political influence to block a more effective monetary policy system that uses interest rates on small savings accounts as a return-on-savings tool to draw money away from spending when excessive demand is driving up prices and causing excessive inflation. In times of weak demand and a threatening recession, the central bank could inject money directly into these accounts for everyone with a US Social Security number. 

US Treasury I-bonds already compete for deposits

Moreover, the United States government already offers already offers a high interest rate savings vehicle in the form of US Treasury Series-I bonds. Most people don’t even know about these government I-bonds because there is no secondary market for I-bonds, which must be purchased directly from the U.S. Treasury. However, no money can be withdrawn from these 30-year bonds during the first year and there is a three-month interest penalty for withdrawing money from the second through fifth year. These restrictions on early withdrawal make these I-bonds unsuitable for most Americans who need immediate access to their money in the event of an automobile accident, a medical emergency, a cut in work hours, a job loss, a sudden rent increase, or some other unexpected financial difficulty. However, the existence of U.S. Treasury I-bonds establishes government sponsored savings as a legitimate activity of the federal government in competition with private banks.

One thing about CBDC savings accounts and U.S. Treasury I-bonds needs to be made crystal clear. No matter how high the interest rate offered, if the people with the highest marginal propensities to consume don’t know about them, such accounts or bonds will be useless in stopping inflation. Just as War Bonds had to be vigorously promoted during World War II, these high interest rate accounts and bonds must be advertised in all the media accessed by those with the highest marginal propensities to consume. Ultimately over 50 percent of Americans purchased World War II War Bonds as a result of the widespread promotional activities which included celebrity performances and advertising during athletic contests in addition to billboard and media advertisements.

If we are serious about getting people to save money and cut back on their spending to reduce the inflationary pressure that is driving up prices, while at the same time avoiding a recession, we need to provide an equally vigorous promotional campaign to get especially lower-income Americans who are the ones with the highest marginal propensities to consume less and to invest money in CBDC accounts instead of using that money to increase consumer demand and further drive up prices during periods of excessive inflation. These CBDC savings accounts will not only provide individuals with a source of funds for emergencies but will also in aggregate provide the nation as a whole with greater economic stability by providing an automatic stabilizer.

Economists often point out that the most important decision you make in your life is your choice of parents. You want to choose rich, well-educated parents. Unfortunately this seemingly humorous commentary is based on some not-so-humorous empirical evidence from studies about a poor person’s chance of rising out of poverty and a rich person’s likelihood of falling into poverty. More specifically this is based on the income and wealth of your parents in comparison with your own income and wealth. It is asking whether your cross-generational socio-economic status has increased, decreased, or remained unchanged.

In the late 1800s and early 1900s the transition from an agricultural society to an industrial society greatly enhanced the socio-economic status of many people from relatively poor families. However, in recent decades socio-economic status in the United States has become more or less frozen. The land of opportunity has become a land more or less permanently divided between the haves and the have-nots. Celebrated cases to the contrary are merely exceptions to this well-established fact.

What makes this fact especially painful is that the United States is among a handful of countries where this is true, including China and a number of Latin American countries. At the other end of the spectrum are Scandinavian countries including Denmark, Norway, Finland and Sweden, along with Canada where upward mobility is more the rule than the exception.

In the United States the underlying cause of this problem is the extreme differences in political and economic power between the wealthy and those not so fortunate. Given the political power of the wealthy, it should be no surprise that income generated from wealth (realized investment income) is taxed at a much lower rate than income from work (earnings). You pay a higher tax rate so that the wealthy can pay a lower tax rate.

Moreover, the tax loopholes have been designed to substantially reduce the taxable income of the wealthy. For example, Internal Revenue Service (IRS) code IRC-469 allows a substantial deduction in taxable income through write-offs for property “depreciation” for property owners who spent at least 750 hours or more during the tax year on property management (or paid someone who spent 750 hours or more). Ironically, if a property has substantially appreciated in value prior to purchase, the amount claimed for “depreciation” is greatly increased. Only the wealthiest Americans and corporations own enough property to require at least 750 hours of property management each year.

Blackstone and other Wall Street firms have been buying up homes throughout the United States to turn them into rental properties to take advantage of IRC-469. Turning owner-occupied homes into rental properties denigrates our neighborhoods because renters and Wall Street property companies have much less incentive to keep those properties looking good. Perhaps you have received a call or a mailing from one of these Wall Street firms offering to buy your home.

The Supreme Court’s Citizens United decision that declared corporations to be “people” under our constitution fundamentally changed our political system from a one-person-one-vote system to a one-dollar-one-vote system. It gave corporations a lot more influence over our politicians to reduce corporate taxes and adjust regulations to do a better job of suppressing rivals, reducing competition, and blocking entry. In general the enhanced political power of wealthy corporations have enabled them to greatly lower their tax liabilities and increase their market power. Someone has to pay for the aircraft carrier. If the rich pay less, everyone else has to pay more.

The resulting monopolies, duopolies, and oligopolies reduce overall economic efficiency and productivity to reduce costs while increasing prices and lowering both quantity and quality to increase their profits. All this undermines the primary goal of economics which is to bring about the most efficient allocation of resources. This reverses Adam Smith’s invisible hand of competition that improves quality and lowers prices for everyone.

Hard work pays off. But not for the person doing the hard work. The employee’s hard work pays off for the shareholder under the maximization of shareholder value mantra. Companies focus on maximizing short-term share price through increased dividends and share buybacks instead of rewarding employees for their hard work and dedication, or investing those funds in customer satisfaction through better quality at lower prices, product development and improvements in productivity.

The fundamental problem is the composition of corporate boards. Many corporate boards essentially consist of the CEOs golf buddies. They only know what the CEO tells them and read the reports the CEO provides about how great a job the CEO is doing. Steven Clifford who has served on a number of corporate boards has written the book: The CEO Pay Machine, which explains the very non-free-market way that a CEO’s compensation is determined. Often it boils down to “I’m on your board and you’re on my board so I maximize your compensation so that you will maximize my compensation.” Satisfying customers and rewarding employees is not of much concern. The focus is on short-term share price and offering big bonuses to the corporate leadership when share price increases significantly in response to paying for expensive share buybacks and dividends that diverts the money from more important and productive uses.

Before 1982 share buybacks were considered insider trading and illegal under Security and Exchange Commission (SEC) regulations. However, politicians under the influence of wealthy corporate donors pressured the SEC to drop the restriction on share buybacks so that after 1982 corporations were free to jack up their stock price by buying back lots of their company’s stock instead of using that money to create new products or reward hard-working and industrious employees.

Creative entrepreneurs like Steve Jobs worked hard to create new, exciting, and amazing products for Apple, Inc. customers. Then John Sculley came along and said: “You know Steve, you really need to increase Apple’s profit margins and increase Apple’s share price.” The Apple corporate board set Steve Jobs aside and turned over Apple, Inc. to John Sculley. Under Sculley, Apple focused on Apple’s share price and pretty much ignored product development. Microsoft and other computer companies began to move ahead of Apple, Inc. in product development and consumer satisfaction. Eventually as demand for Apple products slumped, Apple’s corporate board caught on and removed John Sculley and brought back Steve Jobs.

Germany has recognized and addressed this problem of CEOs and their golf buddies diverting money from product development and employee compensation and requires employee representation on all corporate boards. German companies now stay focused on product development and consumer satisfaction along with incentives for employees to work hard for the corporation. The United States should follow Germany’s example and require that a significant part of corporate boards be elected by the company’s employees to represent product development, production, marketing, sales, and distribution.

Burns and McDonnell started out as a small construction company in Kansas City. It developed into a nation-wide engineering company and in recent years into a world-wide engineering company. Former Burns and McDonnell CEO Greg Graves has recently written a book about the success of Burns and McDonnell called: Create Amazing. Graves explains that Burns and McDonnell is entirely owned by its employees. Any employee that retires or leaves for any reason must sell his or her shares in the company back to the company and receive money for those shares. Company ownership by employees creates strong incentives for employees to work hard and also to make sure that their fellow employees are working hard as well. It creates a team spirit. We are all in this together. Together we can create tremendous consumer satisfaction and make big profits for our company and for ourselves. Employees that don’t share this commitment don’t last long in the company.

Essentially Burns and McDonnell and other such employee owned companies have re-established John Locke’s link between capital and labor. Employee owned companies reward an employee’s sweat equity with capital ownership. Locke (1632-1704) established the principle of capital ownership through sweat equity which created the frontier spirit in America where pioneers established land ownership through working the land. This contrasted sharply with Argentina which was at the same stage of development and economic wealth in the 1800s as the United States but allocated the land to wealthy nobility and never developed as extensively or grew its gross domestic product (GDP) as quickly as the United States.

Rewarding people for their hard work pays off both in individual enterprises and for our nation as a whole. We need more employee representation on corporate boards and more employee owned companies if we are to compete successfully on into the future and give people a chance to improve their socio-economic status so that we can again call our country the land of opportunity.

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As a new faculty member, when I arrived on the University of Notre Dame campus in 1975, I noticed that no one was using the IBM 360 computer in The Computer Center during the football games. Since this one computer was the only one that most faculty could use, I was eager to spend the time during the football games creating my punch cards and running them through the computer. I told my wife how eager I was to use the computer during the football games, but she said adamantly “No, we are going to the football games.” Oh, well. At least I was able to run my programs before and after, but not during, the football games.

In 1975 that one computer in The Computer Center had less computing power than the Apple watch on your wrist. But back then it was all we had, so we had to make the best of it. Randomized trials were created and developed to deal with situations, especially in medicine, where the sample sizes were relatively small. Regression analysis could serve as a substitute or a complement to randomized trials with larger samples. Artificial intelligence requires much, much larger samples and many simulations to be effective.

The scientific method recognizes that in any given sample, there are two types of relationships. The relationships we want to determine are the general population relationships that appear consistently in sample after sample. But in any given sample there are relationships that are unique to that particular sample and cannot be expected to appear in other samples and are certainly not the population relationships we are after.

To avoid overfitting to any particular sample, the scientific method requires that we fully specify the procedure and functional forms of any statistical method we plan to use. By prespecifying the functional form we attempt to avoid the problem of overfitting to the sample and picking up the relationships that are unique to that particular sample and do not represent populations relationships. Moreover, if you adjust the functional form to try to get a better fit, you are using the sample data to change your model and that undermines our ability to track the statistical distributions. We cannot track the statistical distributional effects of adjustments made through your head. Adjusting the functional form means not getting valid t-statistics or F-statistics that you need for determining the statistical significance of your results. Consequently, if you adjust the functional form of your model in any way to get a better fit to that particular sample, you lose track of the statistical distribution and are likely to overfit to that particular sample and not discover the true population relationships you want. Many people have lost their shirt in the stock market by overfitting to the sample data and getting great, but invalid, numbers labeled t-statistics, F-statistics and R-squared values but not getting at the true population relationships they are after. (Note: So called bootstrap methods use simulations to try to at least determine a good estimate of the variance of the distribution after functional form manipulation.)

The methods used for artificial intelligence intentionally violate the scientific method. They intentionally overfit to the data. They get away with this only by using simulations and a huge volume of data. They don’t just acquire one sample, but to as great an extent as possible, they attempt to acquire an extremely large number of samples to discover the population relationships that show up in sample after sample.

I don’t know the details of the Transformer model for A.I., but I know what strategy I would pursue. Find the word that most frequently starts a sentence about the subject of interest such as Alzheimer’s disease. Find the word that most frequently follows that word. Note the correlation. Then find the word that most frequently follows those two words. Here is where is gets interesting. You need to use the two-way correlations and the three-way correlations. As a fourth word is introduced in the same matter, you will need all two-way, three-way, and the four-way correlations. Basically you use these correlations to produce your first sentence in your summary essay. This procedure can be followed with the word that most frequently starts the second most frequent sentence that starts with that word. My paper on “Composite Dummy Variables” provides the basic ideas for understanding basic interactions effects such as used in ChatGPT with all available interaction effects as the basis for generating sentences that summarize the large literature on a topic such as Alzheimer’s disease. Follow this link to my paper in ResearchGate: https://www.researchgate.net/search.Search.html?query=composite+dummy+variables&type=publication

Several economists such as George Cooper, Ray Dalio, and Hyman Minsky, among others, have pointed out that the financial markets operate in a fundamentally different manner than the markets for ordinary goods and services. In ordinary markets, demand retreats as prices rise.  In financial markets, particularly in the stock market, rising prices induce people to buy more stock, not less. Conversely, when stock prices drop dramatically, people pull their money out of the market, making prices drop even more dramatically. While most markets exhibit a negative feedback loop where higher prices curb demand, the financial markets tend display a positive feedback loop with irrational exuberance as prices rise and a downward spiral as prices fall.

However, the Money Flow Paradigm has now revealed the full picture of how the separation of the financial markets from the real economy can reverse the flow of money, which normally flows from the financial markets into the real economy, and instead cause a backward flow from the real economy into the financial markets in a manner that can be self-enforcing, especially when assisted by major national and international movements of money into the financial markets.

This regurgitation of money from the real economy back into the financial economy is a product of the maximization of shareholder value as in maximizing short-term share stock price, often using money for stock buybacks instead of for investments in the real economy.  The GDP in the real economy has been growing at an average of three percent per year for several decades while stock market prices have averaged ten percent per year.  This has caused many non-financial businesses to invest money that would otherwise go for improving productivity and product offerings and instead invest that money in the stock market.

Before 1982 the Securities and Exchange Commission (SEC) treated stock buybacks as insider trading and forbid them. Starting in 1982 the SEC allowed stock buybacks, a change in regulations that has significantly and substantially undermined productivity and economic growth in the real economy. In the past banks made loans locally and stayed with those loans until they were paid back. More recently banks have been making riskier loans because they know they can sell off or securitize the loan in the financial markets. This has increased the instability of the financial markets and our economy overall. 

Bed, Bath & Beyond under CEO Mark Tritton is only one of many U.S. firms that have engaged in “financialization” where the focus is on saving money and investing it in stock buybacks to boost the firm’s short=term stock share price instead of in offering better products at lower prices through improvements in productivity and customer satisfaction. Tritton swapped cheaper in-house brands for the quality national brands in his financialization efforts.

Silicon Valley Bank is another example where the company invested too much money into bonds in the New York financial markets and failed to invest adequately in developing exciting new products for consumers. There is an inverse relationship between bond prices and interest rates. This occurs because bonds fix the coupon value at some initial interest rate. This coupon value does not change after the bond is issued. When interest rates rise on new bonds, the old bonds lose value so that the coupon value relative to the bond prices reflects the proper interest rate relative to price as established by the new higher-interest rate bonds. Silicon Valley Bank had overinvested in bonds in the financial markets and as interest rates rose the value of its bond portfolio fell dramatically triggering its financial crisis. 

Back in the day, our economic system rewarded customer-focused entrepreneurs such as Steve Jobs of Apple, Inc. who came up with new and innovative products.  But then John Sculley came along and told Steve that he needed a professional manager, someone who could increase profit margins and more quickly raise Apple’s short-term share price. By diverting money from product development and innovation to share buybacks and cost cutting, Sculley undermined Apple’s competitive position. When Microsoft and others began to surpass Apple in creativity and innovation, Apple’s board realized their mistake, removed Sculley and brought back Steve Jobs. Companies that forget about their customers and emphasize cost cutting over product development jeopardize their competitive advantage and future profitability.

The U.S. Federal Reserve has also played a role in the suppression of productivity and economic growth in the U.S. economy.  Back in 1996 Fed Chair Alan Greenspan complained of irrational exuberance in the New York financial markets but did little or nothing to counter it and instead contributed to the problem by having the Fed purchase more U.S. Treasury securities. Later under Ben Bernanke and subsequent Fed Chairs the pumping of money into the financial markets continued under the rubric of quantitative easing. This pumping of money into the financial markets increased the wealth gap by driving up prices in the financial markets at the expense of productivity and economic growth in the real economy as revealed by Christopher Leonard in his book “The Lords of Easy Money” and by Karen Petrou in her book “The Engine of Inequality.”

China has played a role in this suppression of U.S. productivity and economic growth along with the U.S. Federal Reserve Bank. For several decades the Chinese has taken their resources and worked hard to produce good quality products sold at low prices in the U.S.  However, instead of sending our products back in return to China, we have seen sending them pieces of paper with George Washington’s picture on it (U.S. dollars).  Ordinarily, these U.S. dollars would flow into the foreign exchange markets and drive down the value of the U.S. dollar, making our products cheaper for the Chinese to purchase and Chinese products more expensive in the U.S.  However, the Chinese government does not allow this to happen. Instead, they require that Chinese businesses turn in those U.S. dollars to the Chinese government in return for Chinese currency (yuan, aka renminbi).  China then has its sovereign wealth fund invest those dollars in U.S. Treasury securities in the New York financial markets. The Chinese government now owns trillions of dollars of U.S. Treasury securities. In effect, we gave China a lot of money in purchasing their products, but instead of using that money to buy our products, China has loaned us our money back again by purchasing U.S. Treasury securities. This has contributed to the suppression of productivity and economic growth in the U.S.  Other nations have followed China’s lead in this regard and also have trillions of dollars invested in U.S. financial markets.

Free enterprise works well when incentives are set to encourage hard work and creativity, but free enterprise can perform poorly when risk taking just for the sake of risk taking is encouraged and rewarded. A 65 year-old with only $100,000 to invest may be taking a big risk, but a multi-millionaire putting $100,000 on the line can hardly be said to be taking the same degree of risk. To say that we should always reward risk means that encouraging casino gambling, cyber-coin gambling, and stock market gambling on highly volatile stocks somehow enhances the efficient allocation of resources. It is all too clear that increasing volatility by excessive risk taking does not contribute to the efficient allocation of resources, but makes the economy more unstable and less likely to operate efficiently or productively.

The maximization of shareholder value mantra has distorted incentives by diverting money away from the real creative entrepreneurs and their workers and, instead, rewarded passive investors who may be taking very little real risk. I came to realize this personally when I recently discovered that I had obtained a seven thousand percent return on some stock that I had purchased a number of years ago. I had even forgotten that I had made the investment. I certainly deserve a descent return on my investment, but seven thousand percent makes no sense. As far as this creative enterprise (Adobe) was concerned, I was a complete deadbeat. Other than provide a little money, I did nothing to help the company. The hard work of creative entrepreneurs and their workers pays off, but not always all that much for them. Their hard work pays off for the shareholder, who gets most of the reward.

But the risk, the risk! Aren’t shareholder bearing the burden of the risk? If you are about to retire and only have $100,000 in your retirement account, then you are certainly taking a serious risk in any uncertain investment. However, eighty-four percent of the stocks are owned the richest ten percent. When you have a lot of money, the question is not whether to invest or not, but where to invest. What else are you going to do with the money? Are you going to take it home and stuff it in your mattress? You can only wear one pair of shoes at a time and only drive one car at a time. Do you really want to buy a lot of cars and have to arrange to change the oil from time to time and get all those state inspections? How many vacation homes do you want to take care of? Sure, you can bid up the price of Picasso paintings and exclusive properties, but at the end of the day investing in the stock market for most stock market investors is not a risky business that could seriously affect their lives. Losing a few million dollars here and there is no serious problem. Just give stock market investors a decent return, but not seven thousand percent. Save most of that money for the creative entrepreneurs and their hard-working employees. If you really believe in rewarding entrepreneurs and their hardworking employees in a free market economy, drop this maximization of shareholder value nonsense and get real about who is taking the real risk.

( Note: Lynn Stout in her book “The Shareholder Value Myth” provides a more complete understanding of this issue. I both bought a copy of her book and also listened to it for free at: https://www.hoopladigital.com/title/11282038 ).

Once again we are using a dysfunctional approach to stopping inflation. Inflation is when too much money is chasing too few goods. But the Federal Reserve relies solely on a cost-of-borrowing tool, which suppresses supply as well as demand, instead of using a return-on-savings tool to absorb excess demand by getting people to spend less and save more.

When I was a young boy in the 1950s, you could go to any post office and set up a savings account. The Postal Savings Act of 1910 allowed for postal savings for 56 years from 1911 to 1966. The postal savings accounts were limited in size so you couldn’t put in much money. If postal savings accounts existed today, a high return on savings could get the marginal saver to put off buying that new phone or television and save the money. Getting people to save more and spend less will slow inflation.

The Federal Reserve is raising interest rates, which is shifting demand (and inflation) from goods that require a loan (automobiles and homes) to ones that don’t require a loan. By raising the cost of borrowing, the Federal Reserve causes businesses that rely on credit to cut hours, lay off workers, and close outlets. It is suppressing supply! But it also suppresses demand, because less money to workers means less demand for goods and services. You can’t spend the money you don’t have. That slows inflation, but at a great cost to the people with the most debt – the poorest Americans. It could also push our economy into a recession.

Most poor people are too poor to save any money. The wealthy just move their money around to get the best return on savings without changing their consumption behavior. Any attempt to reduce excess demand needs to target the marginal saver, who typically earns around $50,000 a year and is among the two-thirds of Americans with no college degree. Getting marginal savers to save more and spend less will help slow inflation. To divert money from spending to saving, any opportunity for a high return on savings needs to be vigorously promoted and advertised at popular athletic contests, Nascar races, and other venues frequented by the marginal saver.

Some observers claim that 30-year U.S. Treasury I-bonds already offer a high return on savings. I-bonds work well for the wealthy, but the severe withdrawal restrictions make I-bonds a non-starter for the marginal saver, who needs immediate access to their money to deal with an automobile accident, a medical emergency, or an unexpected rent increase or job loss.

Why rely exclusively on the stick of a cost-of-borrowing tool and ignore the carrot of a return-on-savings tool? Congress needs to recreate the Postal Savings Act of 1910 and bring in the Federal Reserve to oversee savings accounts at our 30,000+ post offices. With inflation running between 6 and 7 percent, postal savings accounts could offer 10 percent on savings with a limit of no more than $10,000 per person to avoid the transfer of large amounts of money.

When the Fed acts to slow the economy, banks cut back on loans in fear of an economic downturn. You can’t rely on them at such times to offer a good return on savings. Under our fractional reserve banking system, they typically have excess reserves and don’t want more money. Banks don’t want to pay for additional deposits to get money they don’t need and won’t use.

Congress needs to act now to authorize the Federal Reserve to create savings accounts at the 30,000+ post offices throughout the United States and offer a 10 percent return on savings. Getting people to save more and spend less will slow and eventually stop inflation without causing a recession.

Once excessive inflation is fully suppressed, then the promotional advertising of postal savings accounts can be dropped and the high interest rate on postal savings can be lowered. Thus, this new return-on-savings tool can be used to counter the irrational exuberance during booms that drives inflation and the excessive contraction of the money supply by private banks during economic downturns.

Adam Smith’s invisible hand of competition has long be heralded as a mechanism for turning greed into good. Each business owner seeking their own profit works hard to make better quality products and, in competition with similar businesses, offers these products at ever lower prices. Some take this free enterprise message to an extreme and declare that “Greed is good.” Not quite. A purely greedy person, defined as someone who plays I-win-you-lose or winner-take-all, does not appreciate the need to meet the needs of others. But ultimately free trade must be a win-win situation. When you go to the store, you get what you want. But the business owner also gets what he or she wants – your money. You both win.

In some sense we all want to feel good about ourselves. But feeling good may come about through a win-win strategy of helping others or through an I-win-you-lose strategy of taking from others. A burglar may feel good about pulling off a clever burglary. The I-win-you-lose strategy tends to be a short-term strategy that more often than not fails in the long run with a failed business or an extended stay in jail.

With a very low return, your suppliers may be able to continue to supply your business with the inputs you need in the short run, but in the long run your suppliers must cover both their variable costs and ultimately their fixed costs. As long as your suppliers are covering variable costs, you may be able to pressure your suppliers to provide those inputs at a very low price. But when your suppliers’ equipment wears out or rental contracts end, your stinginess in cutting your suppliers’ profits to the bare bones may backfire as your suppliers refuse to continue supplying you at prices that fail to cover their full costs. Suppliers may choose to shift their production to supply businesses that are more reliable and willing to pay more. Business relationships matter so playing hard ball with your suppliers may not a good long-term business strategy.

Moreover, in focusing on their own money flow, individual businesses may lose sight of the bigger picture of the money flow in the overall economy. On an isolated island, a business owner that owned the only general store, bar and restaurant would quickly realize that being too stingy with their store, bar and restaurant workers and with the farmers and fishermen that supplied the food would cause their customer base to dry up. Keeping the businesses going would mean paying people enough to be able to maintain a good money flow. Increasing the money flow or velocity of money would mean raising the annual production and distribution of goods and services until the yearly limits of consumption and work effort reached their natural limits. Here again the win-win strategy wins out. Being too greedy in maximizing short-term profits may undermine the long-term profitability of the business.

Just as the sole owner of a lake understands that fish are a resource that can be destroyed by overfishing, a sole business on an isolated island may come to see money flow as a common property resource problem. But what if other businesses come to the island. As more and more businesses establish themselves on the island, each business wants the other businesses to provide the money flow to customers and suppliers but naturally wants to act as a free rider in not having to pay more itself. In other words, money flow as a common property resource exhibits the moral hazard problem of businesses losing their motivation to contribute fully to the island’s money flow to ensure full resource utilization including the full employment of the farmers, fishermen, and workers. Ironically, this common property resource problem that motivates business owners to pay as little as possible creates slack in the labor and resource markets that further enables businesses to pay less. This has been referred to as the reserve army of the unemployed. Consequently, we see that the economic conditions that work best for individual businesses do not always correspond to full employment utilization and maximum production.

Other common property resource problems include the failure of individual businesses to create and pay for interstate highways or standing armies. Even locally, maximizing productivity and overall production may require the building of roads and bridges. Electricity and water supply may require the establishment of a natural monopoly that must be regulated by government for the common good. Positive externalities in the form of vaccination for highly contagious diseases and negative externalities such as water and air pollution all provide examples of where government intervention is needed to ensure the efficient allocation of resources, which is the very essence of the economic problem.

What this all boils down to is that government plays an essential role at the heart of the free enterprise system. Without government, the system would fail to allocate resources efficiently and would fail to maximize productivity and overall production. Getting the money flowing to allow businesses to prosper means imposing taxes to benefit everyone in achieving the optimal money flow for the economy as a whole. When applied fairly and efficiently, taxes and the corresponding government expenditures can contribute to the common good as a key part of the win-win strategy that makes us all better off in the long run.

While the Federal Reserve is trying to decide whether to recommend that Congress authorize creating a central bank digital currency (CBDC) for the United States, many other countries have already committed to creating their own CBDCs to avoid having their currencies replaced by Facebook’s Diem or some other stablecoin that has established or will establish strong financial networks. Dubbed “FedAccounts,” a Federal Reserve CBDC would provide a basis for a new return-on-savings monetary policy tool.

To serve as a tool for monetary policy, a Federal Reserve CBDC would need to be account-based (“FedAccounts”) as opposed to token-based. To protect individual privacy, while still deterring criminal behavior, the names and identifying information of account holders (including some personal transactions) would be kept in a separate file from their general transaction histories. The two files would be linked by a 60-digit alphanumeric code. If authorities observed suspicious activity in the general transaction histories, they would need a judge’s permission to access the corresponding identifying information file.

In addition to the 60-digit alphanumeric code, the transaction histories file would contain a single-digit yes-or-no dummy variable indicating whether this account had an associated Social Security number. This would be important, because only accounts with an associated Social Security number could earn a high positive interest rate during an inflation and that positive interest rate would only apply to a base amount of no more than $10,000. If $12,000 were in an account with a Social Security number, only the first $10,000 would earn the high positive interest rate, while the remaining $2,000 would be subject to a negative interest rate, as would all the money in accounts without a Social Security number. Anyone in the world could use US dollars to create their own US Federal Reserve “FedAccount.” People in Zimbabwe or Venezuela experiencing very high inflation in their local currency may be glad to pay a small or modest negative interest rate for the security and safety of holding their money as US dollars in FedAccounts.

To stop inflation the Federal Reserve has been raising the cost of borrowing, which suppresses supply as well as demand. Businesses that can’t afford the higher cost of borrowing may have to cut hours, lay off employees, or close outlets. Lower income people are generally the ones with the most debt so they get hit the hardest when the cost of borrowing goes up. If the economy slows because of the rate increase, it is the lower income people who are most likely to be unable to make their mortgage payments and lose their homes to foreclosure.

The current world-wide inflation is due in large part to the COVID-19 supply disruptions which are continuing. We have forgotten when we had to absorb excess demand to fend off inflation in the face of the mother of all supply disruptions at the beginning of World War II. We suddenly had to transition from civilian cars and trucks to tanks, armored personal carriers, warplanes, and warships. We also had to send a lot of our young, male workforce overseas to fight the Nazis in Europe and Imperial Japan in Asia. We needed a way to absorb a lot of money that would otherwise go to consumer demand to ward off inflation. We did it with “Liberty Bonds.” Celebrities were singing and dancing in promoting “Liberty Bonds.” Billboards and radio broadcasts were intensely advertising “Liberty Bonds.” By the end of he war, about 50 percent of American families had purchased “Liberty Bonds.”

It would be great if we could do the same with U.S. Treasury Direct Series-I bonds. For six months ending October 31, 2022, the 30-year I-bonds were paying 9.62 percent interest. Beginning on November 1, 2022, I-bonds are now paying 6.89 percent interest. A major problem preventing I-bonds from absorbing excess demand to stop inflation is the severe withdrawal restrictions that I-bonds currently enforce. No withdrawals are allowed for the first year, and there is no secondary market for I-bonds. Withdrawals after the first year are heavily penalized up until the end of the fifth year. This does not work for marginal savers who need immediate access to their money in case of an automobile accident, a medical emergency, an unexpected increase in rent, or a job loss. Yet it is the marginal savers with relatively high marginal propensities to consume who can stop inflation by saving their money to reduce excess consumer demand.

An alternative approach would have been the postal savings accounts that existed under “The Postal Savings Act of 1910” where for 56 years from 1911 to 1966 anyone could go to any post office in the United States and set up a savings account. The amount of money allowed in these accounts was severely restricted so it was aimed at people with only small amounts of money to save. But, again, the marginal savers with relatively high marginal propensities to consume are the very ones we want to influence to save more and spend less. If these postal savings accounts still existed, they could be used to absorb excess demand to stop inflation without causing a recession by offering a very high interest rate and heavily advertising them.

To make these accounts as attractive as possible to lower-income people, any interest earned in the new CBDC “FedAccounts” should be tax free. Every baby born in the United States should be assigned a Social Security number and a FedAccount at birth with $1,000 put in it, which could not be withdrawn until age 70. However, any interest in the account could be withdrawn at any time along with any additional money put into the account. This would make these CBDC accounts as attractive as possible. With everyone having a FedAccount, whenever someone cut your grass, mowed your lawn, or shoveled your snow, you could pay them instantly with a smartphone to smartphone transfer from your FedAccount to their FedAccount.

Finally, when an economic downturn comes, the Federal Reserve can use the FedAccounts with Social Security numbers to offer small low-interest-rate loans and give stimulus money directly to the people on Main Street to stimulate the economy as necessary instead of going through the New York financial markets on Wall Street. This new monetary policy CBDC tool would provide the Fed with more bang for the buck in controlling our economy more efficiently and more effectively in avoiding both recessions and excessive inflation.

( Note: Economists at the Bank of England have asked me to present my paper entitled: “New Central Bank Digital Currency (CBDC) Monetary Policy Tool” in their Bank of England session at the American Economics Association Conference in New Orleans on January 8, 2023. If you would like to see the abstract (“View Abstract”), the PowerPoint slides (“Presentation”), or the paper itself (“Preview”), you can find them at this link: https://tinyurl.com/2wr39xak )

Larry => be sure to go into html mode in MailChimp to hyperlink both this tinyurl and the link to this ND Economist commentary.

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