Category: Role of Government in the Economy

Inefficient and Ineffective Monetary Policy

Posted on by Lawrence

Waste and inefficiency are not consistent with conservative values. In its limited role, government must always strive to get the most bang for the buck. Using a very inefficient system is not helpful in this regard. When excessive inflation has too much money chasing too few goods, Federal Reserve policy needs to efficiently and effectively decrease demand and increase supply. The Fed needs to encourage, not discourage, supply, and get the greatest reduction in demand for each dollar spent.

Many retail firms borrow money to operate throughout most of the year and, finally, in the holiday season at the end of the year, they cover their costs and make a profit. Without relatively inexpensive loans to see them through the less lucrative seasons, they would have to close down their operations. Farmers may have a number of marginal fields that are only worth cultivating if low-cost loans are available to see them through the cost of plowing, planting, fertilizing and watering until harvest time when they can sell their crops to cover costs and make a profit.

When the Federal Reserve faces excessive inflation and wants to slow the economy, it increases the cost of borrowing. Wealthy people do not have to borrow money to buy a car or buy a house. It is the poor and middle class people who have to adjust their spending from things that require a loan to less expensive things that don’t require a loan. Saving money is not a good option because money is rapidly losing value in real terms (i.e., purchasing power) in times of excessive inflation.

Unfortunately, when the Fed raises the cost of borrowing to stop excessive inflation, banks realize that the Fed is trying to slow the economy and start to worry about many possible loan defaults in the face of a slowing economy. At such times, banks cut back on loans and typically have excess reserves. Paying out additional interest on savings is just an unnecessary expense that banks don’t need and don’t want. They don’t want additional money because they are cutting back on loans. Consequently, most banks will not offer a savings rate sufficient to cover the excessive inflation, so any money you hold in savings will typically be losing value in real terms.

Without additional Congressional authorization, the Federal Reserve is stuck with a cost-of-borrowing tool that just transfers demand from things that require a loan to things that don’t require a loan. In other words, while it decreases demand for automobiles, houses, and students loans, it just transfers that demand to many other everyday items that people need. Overall demand is not reduced.

On the other hand, raising the cost of borrowing can discourage production and reduce supply, which is exactly the opposite of what is needed during excessive inflation when too much money is chasing too few goods. Retailers, farmers and other businesses that require loans to operate cut back on production, which means reducing worker hours and laying off some workers. Since workers cannot spend money they don’t have, the suppression of business activity ultimately results in an overall reduction in demand for goods and services. Excessive inflation is eventually eliminated, but only through a very slow and inefficient process.

The most important economic variable that is ignored in this process is the marginal propensity to consume. When people have more money than they need, their spending tends to flatten out since they can only wear one pair of shoes at a time, or drive one car at a time, and buying more that a couple of vacation homes or a lot more cars becomes a burden in maintenance and upkeep. Consequently, wealthy people tend to save and invest their money, especially if there are somewhat more risky investments that will cover inflation and offer a premium above the rate of inflation. Investors have to be able to ride out the ups and downs of the stock and bond markets to get sufficiently high returns on their savings.

The bottom line is that wealthy people have the lowest marginal propensity to consume because their needs are basically already met with their current spending patterns. If you are already going out to eat at expensive restaurants three times a day, it makes no sense to increase such eating to four or five times a day. What is left is to bid up the price of Picasso paintings or exclusive properties, but such increases in what economists call “rents” doesn’t directly increase the production of goods and services.

Whether one is trying to slow the economy to stop excessive inflation or stimulate the economy to get out of a recession, it makes much more sense to target the people with the highest marginal propensity to consume. The poor and the lower middle class people have by far the highest marginal propensity to consume. A high interest rate that provides a sufficiently high return on savings to not only cover inflation but offer a sufficiently high return above and beyond the rate of inflation is what is needed to get less well-to-do people to cut back on spending and save some money.

But the amount of savings that earns that high return must be limited to some relatively small amount (say, no more than $10,000) in order to avoid paying rich people for just moving their money around without cutting back on their demand for goods and services. Targeting the poor and lower middle class people, who are the ones with the highest marginal propensities to consume, provides the most bang for the buck in reducing the demand for goods and services to stop excessive inflation when too much money is chasing too few goods.

The Federal Reserve typically earns hundreds of billions of dollars each year from its operations and those of its twelve regional banks. It would not cost the tax payer a penny for the Federal Reserve to take responsibility for setting up and operating savings accounts at every post office. In times of excessive inflation the Fed’s postal savings accounts could offer a high savings rate to cover inflation and provide a premium above the inflation rate to attract as much money as possible from the people with the highest marginal propensity to consume (i.e., lower income people).

For example, a sign at the entrance of every post office offering 10 percent on savings could encourage people to save as much money as they could. Building up the savings of lower income people would not only help them when their hours were cut back or they lost their job, but would also provide an automatic stabilizer for the economy as a whole. The high savings rate would only apply to amounts up to a set amount, such as $10,000, so that more wealthy people would not bother moving large amounts of money around to take advantage of such a high interest rate on savings.

Conversely, in the event of a recession, the Federal Reserve could target the lower income people who are the ones with the highest marginal propensity to consume, instead of moving large amounts of money into the New York financial markets which primarily benefits the wealthy people, who are the ones with the lowest marginal propensity to consume. By sending money directly to each person with a Social Security number, the Federal Reserve would get a much greater bang for the buck than sending enormous amounts of money into the financial markets with the hope that some money would trickle down to bring about an increase in the demand for goods and services.

Congress needs to authorize the Federal Reserve to work directly with the people who have the highest marginal propensity to consume and stop wasting money in the financial markets to finally create a system that works efficiently, effectively and quickly to overcome excessive inflation or recessions. Post office savings accounts and direct Federal Reserve payments would greatly enhance our monetary policy system.

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Modest money flow to aristocracy becomes extreme money flow to meritocracy

Posted on by Lawrence

Modest money flow to aristocracy becomes extreme money flow to meritocracy

Prior to 1960 America’s large corporations were dominated by an aristocracy that in some ways resembled the old English nobility. In fact, prior to the American Revolution, the King of England granted land in America to certain elite families. Wealthy east coast families dominated in America for a lot longer than most people realize or are willing to admit. Legacy was the key to success.  It was legacy, not good grades, that got you accepted into elite colleges and universities. Before 1960 even an average grade of C in your prep school was not a problem in gaining admission to an elite university if your father, grandfather, uncle, or brother had attended.[1] 

( There is an old joke among economists that the most important decision you make in life is your choice of parents. You want to choose rich, well-educated parents. We like to think of America as the land of opportunity, but there is still a lot of work to do to create that level playing field. )

Graduating from Yale, Harvard, Princeton, or any of the other elite schools was sufficient for finding a reasonably well-paid executive job at a leading American corporation. The noblesse oblige rules among the early English settlers were simple: (1.) stay out of politics, (2.) keep your name out of the news (except for the social register), and (3.) don’t give yourself an oversized salary. When excessive wealth is not based on merit or hard work, memories of the French revolution can be poignant. We do not want to see the rope over the platform designed for the hanging of Vice-President Mike Pence on January 6 replaced by a guillotine. Most wealthy English settlers understood the need to avoid alienating the masses. 

Around 1960 Harvard James Bryant Conant led the way in introducing SAT and ACT scores into admission decisions. Scholarships were introduced to aid applicants to elite prep schools and colleges who were not from wealthy families.[2] Once ability and achievement potential became important and a geographical distribution preference was introduced to discriminate against certain high achieving non-WASP[3] ethnic and cultural groups from the New York City area and the Boston area, the entire nature of the ruling class changed. Discrimination was still present, but a new meritocracy of sorts was allowed to gradually take over. 

Business schools and law schools in general, and economics departments in particular, promoted the “greed is good” philosophy, where businesses competing with one another to produce better quality products at lower prices (Adam Smith’s invisible hand) was said to justify the single-minded pursuit of one’s own self-interest even if that ultimately led to resetting the rules (e.g., tax loopholes, etc.) to benefit the nouveau riche of the new meritocracy. In recent decades, increased efficiencies due to network effects and economies of scale have been used to justify the concentration of market power even when most of the gains have gone to profits.

Underpaid government lawyers were no match for the new business and legal elite whose ability and achievements resulted in an accumulation and concentration of wealth far greater than ever desired or achieved by the old aristocracy. Adam Smith’s left invisible hand has now been countered with increased economic power which serves as a right invisible hand to block entry and drive up profits, as competitive markets have been replaced by monopolistic and oligopolistic ones. Tariffs are used to block competition from abroad. Economies of scale, network effects, patient laws and first-mover advantage are among the many effective means of suppressing competition.

The new meritocratic elite re-rigged the rules in every sphere of life to their own advantage. Rather than lowering the bar for others to follow, they raised the bar to keep others out. This diverted the money flow away from most Americans and toward the top one percent wealthiest elite.[4] The new meritocracy worked in theory to raise all boats, but failed in practice, either because the new elite either didn’t understand the implications of their exclusionary tactics or chose to ignore them. Social mobility was suppressed, instead of enhanced, with fewer low socio-economic people able to break out of the middle-class trap. The new elite made sure to give their children the best possible education and the socio-economic connections needed to establish and maintain their comparative advantage.  Instead of improving upward socioeconomic mobility, the new meritocracy at best kept it from rising and at worst suppressed it even more than before. 

This money flow diversion was a very fundamental and a very important change in the US economy, starting around 1973.[5] Before 1973, labor productivity and wages were highly correlated. After 1973, labor productivity continued its rise, but real, inflation-adjusted, wages flattened out as rising revenues were siphoned off as profits. Such profits piled up in the financial markets as money flowed in a circular loop as stock buybacks, dividends, and interest payments, that the wealthy then just reinvested back into the financial markets where the accumulating pool of money drove interest rates ever lower. In this case, the velocity of money just meant the speed at which these dollars were traveling around and around in the financial markets as market speculators bought and sold new and exotic financial products at ever increasing rates. There has also been a dramatic drop in the number of publicly traded companies in recent decades that has dropped from around 7,000 firms to less than 4,000 firms today. This reduction in the supply of stocks has driven up their prices by the power of the law of supply and demand. See Petrou (2021) for more details on the widening wealth gap and its causes including the major role played by the Federal Reserve.[6] Also, see “The Lords of Easy Money” (Simon & Schuster 2022) by Christopher Leonard on how the Federal Reserve has undermined our economy by pumping too much money into the New York financial markets.

The changes in the money flow, that weakened aggregate demand were due in part to this change in the ruling class and part as a result of focusing on maximizing shareholder value (including profits from dividends and stock buybacks) by increasing financial capital (the value of stocks and bonds, etc.) at the expense of labor and real capital (physical and intellectual investments). For decades inflation ran rampant in the financial markets with little benefit in the real economy where productivity and real economic growth slowed.  For a deeper understanding of how over-rewarding passive investors is not justified either legally or operationally, read the book “The Shareholder Value Myth” (Berrett-Keehler Publishers, Inc. 2012) by Lynn Stout, the distinguished professor of corporate and business law at the Clarke Business Law Institute at Cornell Law School.

Simcha Barkai (2020)[7] calculated the capital costs for the US non-financial corporate sector over the period 1984 to 2014 and found that while labor’s share has dropped by 11 percent, the share of real capital has declined 22 percent. Neither labor nor real capital were rewarded, as most of the money flowed to pure profits. As the wealthy grew wealthier, the rest got by with an ever-increasing private debt burden, reinforced with an ever-greater federal debt burden, both being enabled and encouraged by low interest rates.

In the absence of adequate aggregate demand to employ all available American workers, politicians called for tariffs to block low-priced imports that compete with American products and take jobs away from Americans. The politicians have fallen for what economics call The Lump of Labor Fallacy where somehow there is a fixed number of jobs for the world to fight over. However, proper fiscal and monetary policies can increase or decrease the number of available jobs while tariffs just block competition and raise prices for everyone including elderly living on limited Social Security payments. A better approach is to redirect the money flow from Wall Street back to Main Street so that there would be enough consumer demand on Main Street to employ both international workers making products for Americans as well as all Americans who are willing and able to work at good wages. Trade can be and should be a win-win situation where everyone is made better off. Getting high quality, low-priced products from abroad should not in any way prevent Americans from getting good jobs that pay well. Tariffs are just an excuse for not properly addressing the money flow diversion from Main Street to Wall Street within the United States.

Blocking overseas competition is associated with a dramatic increase in industrial concentration where one-by-one competitive industries have been turning into duopolies or monopolistic competition where one firm or a handful of firms controls the market. Keynesian and Austrian economists recognized the inevitability of economic downturns, but the Austrians saw such downturns as a cleansing process where weak and inefficient firms were driven out of the market in what Austrian economist Joseph Schumpeter called “creative” destruction, but with larger firms undercutting or buying up weaker ones should more accurately be called “competition” destruction. Firms that survive economic downturns are not necessarily more efficient, but just have more cash reserves to ride out a downturn. A popular and efficient local restaurant may not survive an economic downturn such as the one associated with the COVID-19 pandemic while a larger company with lots of cash on hand may be able to get away with running some aspects of its business inefficiently in both good times and bad. When Amazon started up, it ran in the red for an extended period without facing bankruptcy, because it had lots of cash on hand. Tepper and Hearn (2019) reveal the surprising number of noncompetitive industries and quasi-duopolies in the United States in their book The Myth of Capitalism which could have been more specifically titled The Myth of Competition.[8] 

For example, consider the market for eyeglasses. Glass and plastic should be very cheap. After all, we throw a lot of glass and plastic into recycling bins every week. But instead of two or three dollars, eyeglasses typically cost about one-hundred and thirty dollars or more. In reality eyeglass manufacturing is basically a duopoly with only two eyeglass manufacturers dominating the market. In the eyeglass market, Adam Smith’s first invisible hand of competition has been suppressed by Adam Smith’s second invisible hand of market power where he said: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the publick, or in some contrivance to raise prices.”

Government is often dismissed as inefficient, partly because it may have goals other than profit maximization, and also because, unlike private businesses, the government’s operations are subject to close public scrutiny such as under the Freedom of Information Act and the Open Meetings Act. But large businesses can be and often are even more inefficient than government. For example, Saluto Pizza started as a small pizza place in St. Joseph, Michigan. Its pizzas were so popular it started freezing them to sell to people to take home to reheat for consumption later. The frozen Saluto Pizzas became so popular that a frozen pizza manufacturing plant was created to produce them to sell to grocery chains around the nearby region. Their popularity was such that another factory for making the frozen Saluto Pizzas was created in Birmingham, Alabama. Then General Mills bought out Saluto Pizza. But following the financialization strategy of cutting costs, the Saluto Pizzas were then made with cheaper ingredients which made them unpopular. Before long the Saluto Pizza brand was discontinued. Such cost cutting and removal of unpopular products is then described as enforcing efficiency in private business, in contrast to alleged government waste and inefficiency. The executives who cut costs and cut out unprofitable products were probably rewarded and promoted. By contrast, so-called government “bureaucrats” who serve the public are seen as unproductive and wasting the taxpayer’s money. 

America thrives when entrepreneurs such as Steve Jobs and Elon Musk focus on creating new products. But productivity and economic growth are suppressed when companies focus on financialization by excessive cost cutting and shareholder payouts, instead of investing in new products that capture the imagination and desires of both their existing customers and potential new customers. When business fails to generate sufficient economic growth to employ the available workforce, government has to step in and increase the national debt using tax cuts and expenditures to generate enough demand for goods and services to avoid recessions.

John Locke’s original conception of gaining ownership of land and other forms of capital through the sweat equity of labor quickly reverted back to ownership of capital by an elite class (i.e., the nobility). Labor saving technologies such as automated vehicle production and mountaintop removal in coal extraction have dominated over labor augmenting technological change provided by computers generating a need for computer programmers or Amazon’s need for delivery drivers (soon to be replaced by driverless vehicles). Future economic prospects remain bleak for unskilled and semi-skilled labor. However, it is important to note that real capital has not won. As Simcha Barkai (2020) has revealed, the ultimate winner is profits (especially profits in the form of financial capital in the stock and bond markets). The shares of labor and real capital have declined significantly while that of profits has increased substantially.   

Today the huge pile up of wealth at the top of the wealth pyramid has flooded the financial markets with money and has driven interest rates down toward zero.  But this money has not primarily gone into productive investment in real capital, but instead has driven up stock and bond prices as alternatives to investment in the real economy. Why invest in improvements in real productivity when you can make a lot more money in the financial economy?  Ultimately the financialization of our economy has become a drag on productivity and not a catalyst for it.

[1] Brooks, David. Bobos in Paradise. New York: Simon and Schuster, 2000.

[2] At prep school and college reunions, it is interesting to note that the scholarship students are more likely to show up driving expensive, prestigious vehicles than their former classmates from wealthier families, who were taught to hide their wealth to some degree, or at least not flaunt their wealth publicly.

[3] WASP = White Anglo-Saxon Protestant.

[4] Brill, Steven. Tailspin: The People and Forces Behind America’s Fifty-Year Fall — And Those Trying to Reverse It. New York: Alfred F. Knopf, 2018. 

[5] Data from Economic Policy Institute: https://www.epi.org/productivity-pay-gap/

[6] Petrou, Karen. Engine of Inequality: The Fed and the Future of Wealth in America. New York: John Wiley & Sons, 2021.

[7] Barkai, Simcha. “Declining Labor and Capital Shares,” Journal of Finance, 2020, vol. 75, issue 5, pp. 2421-2463.

[8] Tepper, Jonathan with Denise Hearn. The Myth of Capitalism: Monopolies and the Death of Competition. Hoboken, NJ: John Wiley & Sons, 2019. 

Should We Fear the Replacement of Cash with Digital Currency (CBDC)?

Posted on by Lawrence

Most Americans believe in the rule of law. They assume that most of the time our laws will be enforced as written and applied in a fair and judicial manner. I don’t mind if the police spy on me, as long as I get to spy on the police (through police body cameras). But what about eliminating cash and making all the details of my transactions available to the government through the introduction of a central bank digital currency (CBDC)?

A while back, economists at The Bank of England asked me to present my paper on “A New Digital Currency (CBDC) Monetary Policy Tool to Stop Inflation Without Causing a Recession” in their session at the American Economic Association annual meeting.  Lately a lot of people have expressed concern about the privacy issue associated with the creation of a central bank digital currency (CBDC) and how to keep the government from misusing the account information.  In my paper I noted that it would be easy to keep the transactions information separate from the account ownership information, connected only through alpha-numeric codes as done for the cryptocurrencies such as Bitcoin, Litecoin, Ethereum, et cetera. A judge could decide whether suspicious ( illegal ) transaction activity (drug dealing, money laundering, etc.) in a particular account was sufficient to warrant allowing government officials access to the account’s ownership information.

Most people think that a bank just loans out the money that people deposit in that bank. This is a complete misconception of how our banking system works. The bank does not loan out the money you deposit, but instead uses that money to loan out as much as ten times the amount of money you deposited. Where does your bank get all that money? It just creates it out of thin air. The banks creates a loan by creating an account for the person or business that is to receive that loan and then typing in the amount of the loan as the account balance. That is it. The bank creates that loan money out of thin air! Your deposit just provides your bank with the authorization under our fractional reserve banking system to create and loan out ten times as much as you have deposited.

It is important to know that at least 90 percent of currency in the United States is already digital and has been created by the private banking system under our fractional reserve banking system.  Most money is in checking accounts, savings accounts and credit cards, which the private banking system monitors.  The Federal Reserve Bank can adjust the amount of money in our economy on the margin to fight inflation (raise interest rates and reduce available money) or to stimulate the economy (lower interest rates and increase available money). But most of the money in our economy has been created by private banks.

Wells Fargo took advantage of people by giving them features or accounts they didn’t ask for and charging them for those features or accounts.  The law eventually caught up with Well Fargo.  Several of its leaders were forced to resign and the bank was heavily fined.  The rule of law must be adhered to to prevent private banks and government autocrats (mainly politicians) from violating our rights under the law.

Many young people don’t even bother carrying cash now that even vending machines accept credit card payments.  I was in NYC at a Times Square hotel to present my paper at the Eastern Economics Association meeting when I noticed a sign in the hotel lobby near the hotel restaurant that said: “We do not accept cash.”  I thought that this was just the hotel, but I went to a nearby Starbucks and saw the same sign: “We do not accept cash.”  Eliminating cash avoids wasting time making change and the occasional robbery. The bus is going nowhere and the passengers all have to wait patiently while the bus driver is busy with cash transactions. Why bother with it. Some newer vending machines don’t accept cash. Some of the older vending machines accept cash in theory but not in practice. Sending workers around to all the vending machines to add or remove cash is such a waste of time. Credit card transactions can be sent electronically to the vendor. Cash is (becoming) trash! Well, actually you may want to hold on to some of these strange pieces of paper and coins to show your grandchildren and great grandchildren. In reality, money is going digital one way or another whether we like it or not.

The fear of government access to our transaction information by replacing cash with a Federal Reserve issued digital currency is part of a broader concern about the potential use of government power to violate our privacy to control and manipulate people. Politicians clearly have an interest in rewarding their followers and undermining their opponents in order to ensure their re-election. But why would so-called government “bureaucrats” have any interest in manipulating people? What would be their motivation?

Many of my students were willing to forgo making the big bucks on Wall Street to instead take a job as public servants with an oath to abide by the rule of law and the Constitution.  They have worked for the IRS, the CIA, and many other key agencies in the government. They are all good people serving our country by following the rule of law and the Constitution of the United States.  If you believe in the rule of law, you will want to keep decisions about arresting and prosecuting people out of the hands of the politicians and only in the hands of dedicated public servants including police officers, judges and juries who are committed to the fair and impartial application of the rule of law.

Politicians like Donald J. Trump hate my former students and call them the “The Deep State” because they refuse to violate the law in favor of acting to promote Donald J. Trump.  Don’t hate the government and the public servants who have dedicated their lives to serving us. Just stop the politicians who want us to violate the rule of law and the Constitution. It is not the dedicated government public servants who have served America over the years who are motivated to use our information to take advantage of us, but rather it is the politicians who want to gain access to our private information in order to manipulate us for political gain.

Instead of disparaging “The Deep State“, we should be celebrating them and thanking them for following the law and the Constitution instead of following some politician who wants to violate the law to promote themselves.  The transition from cash to a digital currency that lacked adequate privacy protection could enable a rogue politician such as Donald Trump to identify and abuse his or her opponents and their followers. Strengthening “The Deep State” is the best way to keep any president from abusing his or her power. We should be honoring, not disparaging, our friends and neighbors in “The Deep State.”

One would think that conservatives would want to correct any deviations from the rule of law and the Constitution. If the Biden or previous administrations have used government power inappropriately, you would expect conservatives to propose ways to re-establish the rule of law under our Constitution. But the Trump supporters at The Heritage Foundation are proposing the opposite strategy in their Project 2025 plan entitled “Mandate for Leadership: A Conservative Promise.” The Project 2025 plan calls for Trump to dismantle any and all barriers to a president who wishes to violate the law and the Constitution to turn the presidency into a means to promote the president’s agenda of personal gain for himself.

On December 18, 2020 Trump lawyer Sidney Powell met with Trump and several of his advisers to go over the draft executive order dated December 16, 2020 which would order the defense secretary to seize all the voting machines in an effort to overturn the November 2020 election results. Ultimately the draft executive order was never carried out with Attorney General Bill Barr resigning and many others in key positions in the Justice Department threatening to resign. The lies told on Fox News claiming voting machine fraud resulted in Fox News being sued and settling out of court with Dominion voting machines for $787.5 million dollars. Trump now understands that he must replace all senior Justice Department officials and military leaders with hard-core, dedicated Trump loyalists in order to follow President Putin’s example in adjusting election results to his liking.

Trump is running to permanently take control of the government and establish an authoritarian dictatorship that might make Putin’s regime in Russia look mild and timid in comparison. One of the first laws that Trump will have the Congress pass will be to protect the presidency for those who “love our country” and from “unpatriotic, anti-American, traitors” who disparage the presidency. As in Russia, anyone criticizing the president or the policies promoted by the president will be prosecuted.

Let’s face it.  Trump had no intention of leaving the presidency at the end of the four years in his first term.  He only failed because he failed to replace the top Justice Department officials, the top military commanders, the top Capitol police commanders, and the top Secret Service commanders with people who would do whatever he said regardless of having taken an oath to abide by the rule of law and the Constitution. But now Trump’s followers know that as president he will pardon them if they violate the law on his behalf.

Trump is not running for four-more-years. He will just follow Putin’s example and have Congress change the law.  Last time he attempted to stay in power regardless of the popular vote.  He urged his followers to stop the certification of the vote. He knew that that some had guns. They made their intentions clear when they chanted “Hang Mike Pence,” overpowered the police to push through the police barricades, and smashed windows to force their way into the Capitol building. Nine people died, several police were injured trying to defend the Capitol from the insurrectionists, and several million dollars of damage was done to our Capitol Building. Trump has made clear his intention to pardon many of these “patriots.”

Trump failed to stop the certification of the vote because he didn’t replace the Justice Department, military, police and Secret Service leaders with his own loyal surrogates.  He will not make that mistake again. Trump is not running for four more years as president. Trump clearly intends to replace the rule of law and adherence to the Constitution with his own permanent personal dictatorship.

If Donald J. Trump gets back into the White House and proceeds to correct his mistake in his first term of failing to replace the Justice Department officials, the military leaders, the Capitol police leaders, and the Secret Service leaders with his own sycophants and, thereby, eliminates the rule of law and the Constitution and replaces our democratic republic with a permanent Trump dictatorship, you will have to ask yourself:  “What could I have done a year ago to prevent this tragedy from happening?”   How much money would you have given?  How much time and effort would you have put in to prevent replacing the rule of law and adherence to the Constitution with the permanent Trump dictatorship?  Should I have posted more on Facebook? Should I have taken the time to talk with my neighbors, friends, and family members? Think about this now before it is too late. There is a lot more at stake here than the privacy of your digital transactions.

Money Flow Paradigm Reverses Say’s Law

Posted on by Lawrence

Economics became widely known as what Thomas Carlyle called “the dismal science” when Thomas Malthus predicted that the population growth rate will always exceed the food supply growth rate. Therefore, there could never be too much food because the population growth would at least keep up with (subsistence) and at worst exceed (starvation) the available food supply.  Demand would always increase to consume whatever could be supplied.  This led to what has become known as Say’s Law: “Supply creates its own demand” and the basis for supply-side economics. Economic growth, according to the dismal science, was always a supply-side phenomenon. You could take demand for granted and just focus on trying to increase supply.

From population explosion to population implosion

For centuries humanity spread out across the continents and populated the far corners of the world. It seemed like humans would eventually overpopulate the planet. Eventually, we would need to find another planet to colonize to keep on growing. Population growth was a given, until it wasn’t. Almost out of the blue, the unexpected happened. As countries reached higher levels of economic development, their population growth rates dropped. You might call this a Darwinian Natural Selection Paradox where when a species becomes more dominant and powerful, instead of increasing birth rates, its has falling birth rates.

Early on a Monday morning, I was about to begin my lecture about the international income distribution to my economics class at Notre Dame. But my students were all excited. They were all talking with one another about the great football game on Saturday where Notre Dame won at the last minute with an amazing play.  I couldn’t get their attention. Finally, I said: “Today we are going to talk about birth control.” My students were shocked. “Birth control?” they exclaimed. “The professor is going to talk about birth control. This is a Catholic university. He can’t talk about birth control.” But I persisted. “What is the most effective birth control method in the world?”, I asked. The students continued murmuring in apprehension and concern. Finally, I said: “The most effective birth control method in the world is per capita income. When per capita income rises above $6,000 per capita, birth rates drop like a rock.”[1]

With rising per capita income, birth rates drop. In rich countries, they have dropped below the replacement rate of an average of 2.1 children for each woman in her reproductive years. According to data from the US Census Bureau, the population growth rate in the United States in 2021 was just one tenth of one percent, which was the slowest population growth rate since the nation’s founding in the eighteenth century. Without immigration our population would be declining.

World population declines

Japan is ahead of many other countries in the transition to an economy where an aging population is dramatically increasing the ratio of non-working elderly relative to a shrinking active workforce.   In the absence of much immigration, Japan must increase its productivity in terms of output per worker to make up for its shrinking number of workers. Japan’s population was at its maximum in 2010 with 128 million people, but shrunk to 125 million by 2021, and is expected to fall below 100 million before long. In 2022 Japan’s birth rate fell to its lowest level ever and its marriage rate fell to the lowest since World War II. Consequently, with older people living longer than ever, the elderly’s share of Japan’s population has grown substantially. The elderly generally demand fewer products and services except for health services than young families, but eventually need more personal medical services. Health costs rise while government revenues fall, and aggregate demand is sustained through massive deficit spending necessary to keep the workforce fully employed. 

Over 90 percent of the world’s countries currently have a birth rate below the population replacement rate with at least 20 countries expected to cut their native populations in half by 2100 including Japan, Italy, Spain, Portugal, Germany, Thailand, and South Korea, among others. Russia’s population peaked at around 147 million and is currently heading down toward 142 million because of an aging population, falling birth rates, relatively higher death rates including military deaths and suicides, and emigration (especially young people) exceeding immigration. China’s economy has recently reached a level of per capita income over $10,000 with its population reaching a peak and then declining significantly thereafter. Populations are increasing primarily in poor regions of Africa such as Nigeria and Ghana, where the natural resource curse[2] keeps most of the population in poverty with just over $2,000 income per capita. 

Around the turn of the millennium, millions of people in China were moving out of poverty into what for many would become what we would call a lower-middle-class lifestyle. This improvement in their economic well-being was quickly changing “the dismal science” into something not quite so dismal. As noted above, Japan had already gone through this transition and had a birth rate well below the 2.1 child per woman of child-bearing age known to be the replacement rate for maintaining a constant population. Japan, Germany, Italy, Russia, South Korea and many other developed economies already have shrinking populations. As a result of China’s historic one-child policy (which it dropped in 2016) and its rising per capita income, China’s population is reaching a peak and will start declining.

If it weren’t for immigration, the United States would have a falling population as well. To some extent American immigration has enabled the United States to offset its declining birth rate. For a given level of technology and, therefore, productivity, a declining workforce means a decline in gross domestic product (GDP) and less money from the earnings tax which funds the Social Security system. Consequently, elderly people who depend on Social Security have a vested interest in encouraging immigration, especially because they are retired and, therefore, no longer in the workforce to compete for jobs with immigrants. The elderly have a special interest in encouraging immigration or at least a guest worker program in farming such as in picking fruits and vegetables in California farms to keep the cost of food low, where food and medicine constitute a greater portion of the budgets of elderly people relative to younger people who have expanding families needing lots of basic products such as home furnishings, clothing, and cars and trucks. Of course, immigration could tend to keep wage rates low to the extent that they substitute for instead of complementing the current workforce. However, there is not a fixed number of jobs in this world to be fought over (what economists refer to as the “Lump of Labor Fallacy”). Rather, through infrastructure spending and other expenditures, governments can increase the demand for workers and, thereby, increase wage rates in addition to maintaining full employment as long as it is not so much as to cause excessive inflation.

Distorted money flow reverses Say’s Law to read: “Demand creates its own supply.”

Despite the rising deficit and health costs, and in the absence of sustained government stimulus spending over the long run, deflation with falling prices and wages threatens to dominate, rather than the widely feared and reviled inflation, as measured by the typical market basket of goods and services used to calculate the consumer price index (CPI), or, alternatively, measured as the personal consumption expenditures (PCE) index. As baby boomers die and the population declines, consumer demand shrinks, while technology expands and speeds up the global supply chain. More can be produced and moved through ever increasing automation and driverless vehicle technology. Say’s Law may have worked back in the day when populations were exploding and every crumb of supply was snatched up, but today the problem is a distorted money flow diverting money primarily to those with the lowest marginal propensities to consume (the wealthy) while leaving the poor and middle class up to their eyeballs in debt. In the United States to counter high levels of unemployment the Federal Reserve uses quantitative easing (QE) to pump money into the New York financial markets which drives up stock and bond prices to benefit the wealthy. But when inflation threatens, the Federal Reserve punishes the poor and middle class by raising the cost of borrowing, while the wealthy get a higher rate of return on their bonds and certificates of deposit. In either situation, one requiring economic expansion, or one requiring economic contraction, the Federal Reserve inadvertently acts to reward the rich and punish the poor. (See Karen Petrou’s book “The Engine of Inequality” and Christopher Leonard’s book “The Lords of Easy Money.”) The Federal Reserve is implicitly following Say’s Law and supply-side economics while ignoring the fundamental changes in globalization, productivity and population that have taken place to reverse Say’s Law to invoke demand-side economics as revealed by the money flow paradigm. Note that this is not the Federal Reserve’s fault. They have just not been given the correct set of tools by Congress to properly control the economy (as explained in my forthcoming book “Distorted Money Flow” and in earlier commentary at https://sites.nd.edu/lawrence-c-marsh/home/ ).

Workers are no longer paid the value of their marginal products

In the United States before 1976 worker compensation kept up with worker productivity, but after 1976 productivity continued increasing, but worker compensation flattened out in real terms. In other words, workers are no longer paid the value of their marginal products. Consequently, over the long run, in the face of an increasing money flow distortion where a larger and larger proportion of the quantity of money flows to the wealthiest people who have the lowest marginal propensities to consume, aggregate demand threatens to fall short of aggregate supply, because the bottom 90 percent of the population can no longer buy back the value of the goods and services they are producing unless government maintains and expands its flow of stimulus money to them, paid for through deficit spending or the pre-distribution (more money to Main Street before taxes) and/or redistribution (more money to Main Street and less to Wall Street after taxes).

Money flow paradigm reveals distorted money flow that has reversed Say’s Law

In conclusion, by following the flow of money and its effects on economies everywhere, the money flow paradigm has revealed the fundamental problem of the distorted money flow that has greatly restricted demand while providing excessive amounts of money for supply. This has reversed Say’s Law which said: “Supply creates its own demand” and replaced it in facing a reality very much the opposite where “Demand creates its own supply.” The money flow paradigm has shown that where supply-side economics made sense back in the day, it no longer applies to the world as we know it which is today better represented with demand-side economics.

[1] Historically, having a child was viewed by some people as an investment, especially after the advent of agriculture, and during the industrial revolution with the use of child labor in manufacturing. Eventually, this developed into a slave trade where the costs of raising a child were bypassed with the capture of fully grown slaves from Africa. Entrepreneurs in London could invest in the slave trade where the hard work of others provided a good return on investment. Hard work paid off, but not for the slaves. Their hard work paid off for the investors. This natural product of capitalism and free enterprise was abolished through government intervention when laws and regulations were passed banning child labor and slavery. Even today companies that follow the “I-win-you-lose” mindset treat their employees as just another factor input such as coal or fuel oil and not as team members. On the other hand, most successful companies follow the “win-win” strategy and recognize the dynamic creative potential (the agency) of their employees.

[2] Ironically, countries with large deposits of natural resources, which can cause an excessive demand for their currencies, are unable to produce and sell other products at competitive prices given the high value of their currency. This has been labeled the “Dutch disease” by The Economist magazine in reference to the high price of the Dutch guilder when Dutch natural gas and oil were in great demand before the Netherlands adopted the Euro as its official currency.

Adam Smith’s Invisible Hand and Your Money Flow

Posted on by Lawrence

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.

Use More Creativity in Funding Government

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USE MORE CREATIVITY IN FUNDING GOVERNMENT
Get your name on buildings, streets, programs and positions.

How did America create and pay for the best teaching and research universities in the world? What can government learn from this success story? When both carrots and sticks are known to motivate, why restrict funding to sticks (tuition or taxes) when carrots (donations and endowed chairs) could also provide money?

In my recent book (“Optimal Money Flow”) I proposed the taxpayer appreciation program (TAP), which would allow the naming of a taxpayer supported institution or edifice after those who pay an especially high estate tax. For example, at some point in the future, and with the approval of the appropriate board, a primary school in Omaha, Nebraska might be named “The Warren Buffett Elementary School.” Of course, you only get to die once so under TAP you could only get one institution or edifice named in your honor.

However, there is no reason that such naming should be limited to estate taxes or taxes in general. Universities allow donors to have their names attached to campus buildings, programs, scholarships and professorships. Whatever people are willing and able to fund might be considered for approval. Why shouldn’t the public sector explore this approach as well? Voters or their representatives could approve a particular donor to have their name attached to a building or road. You might be able to pay to have “Union” in Union Station or “Country” in Country Lane replaced with your name.

But what about funding actual government positions as endowed chairs? A donor named John Smith could donate a few million dollars to make Mayor Bill de Blasio the John Smith Mayor of New York City. If several wealthy people want to bid for naming an official government position, the naming of the position could be auctioned off. Of course the funding for these positions need to be large enough to pay both the future salaries and operating expenses of the named position. This would free up tax money to pay other expenses, or that tax money could be earmarked for a reserve fund to be used in an economic downturn instead of cutting back services or going into the red.

If having individual donors pay to have their names associated with key positions seems unseemly, with the approval of her family and next of kin why not create a “Go Fund Me” page to create a Ruth Bader Ginsburg Justice of the Supreme Court? The nation as a whole could show their respect and appreciation along with that of her important and wealthy friends and colleagues by funding a Supreme Court position in her honor. One of Georgia’s senators could be named the John R. Lewis Senator of Georgia. Endowed positions could eventually be created for every position in the Congress of the United States.

As the wealthiest Americans accumulate more and more money, they may wish to use their money more creatively than just investing it all in the stock market. Not every wealthy person has the ability and ambition to create an Amazon or a Tesla so offering them another way to get their name out there may be just what they were looking for. Alternatively, a “Go Fund Me” page for honoring our fallen heroes may be exactly what we need to reestablish our sense of commitment and unity as a nation. Let’s hope that our leaders will have the courage to give it a try. It has got to be more popular than raising taxes or running up the national debt.

Minimum Wage Promise and Pitfalls

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One aspect of the minimum wage that has been widely ignored is not the impact on overall employment, but on the actual low-wage workers themselves. The question that has been largely ignored is what happens to low-wage workers who are not as good as alternative workers who do not enter the labor force to displace the low-wage workers until the minimum wage is raised?  

Think of a local McDonald’s where at a low minimum wage the workers may not be those with the best social skills. They may not get along well with their colleagues or be very nice to the customers. They do only the minimum required to keep their jobs. Not all low-wage workers have poor social skills, but for obvious reasons workers with poor social skills are over-represented in low-wage jobs. 

Then the minimum wage is raised. A stay-at-home parent may decide that the increased pay makes it worthwhile for them to work when their children are at school. Elderly retired workers may be willing to come back to work when offered higher pay. A college student may decide that the wage is high enough to make it worthwhile to take that McDonald’s job after all. Workers with better social skills may get along better with one another and with the customers, and they may be more willing to pick up trash in the parking lot and keep the restaurant looking nice by cleaning and straightening chairs, etc.  

What the debate about the minimum wage is missing is an analysis of what happens to the original, low-quality workers when better workers show up? With the higher minimum wage, it may be worth the while of the higher-quality workers to enter the labor force and take the jobs away from the low-quality workers. But the low-quality workers are the very ones that need the most help.  

We are fooled into thinking that the minimum wage has no effect when the level of employment does not fall. McDonald’s may employ just as many people for just as many hours as before. But the low-quality workers may have lost their jobs nonetheless. Yet these are the workers who typically are the poorest and need the most help.  

The problem is that we tend to analyze one economics policy tool at a time. But there are times when two tools need to be used in concert with one another to solve a problem. When you try to tighten a bolt and it just goes around and around without tightening, you take a wrench to hold the nut while you use the screwdriver to screw in the bolt. In the same way it is sometimes necessary in economics to use more than one tool at a time. Raising the minimum wage may work well if at the same time unemployment insurance is increased to help the lowest-quality workers.  

From the supply-side point of view, giving money to unemployed workers just encourages them to remain unemployed. But demand-side economics sees workers differently. From the demand-side point of view, more money going to unemployed workers is a good thing, especially if it causes them to hold back on taking a job until a higher wage is offered. The unemployment insurance check helps ensure that workers will not sell out for too low a wage. Even in the absence of a union, a higher unemployment insurance payment can lead to higher wages relative to profits.  

When aggregate demand is too weak relative to aggregate supply, higher unemployment payments will help divert the money flow from the financial markets where it piles up inflating stock and bond prices and depressing interest rates to money flowing to workers who have higher marginal propensities to consume than the investors on Wall Street. When demand is weak, Wall Street investors can’t find real business projects to invest in. In such circumstances diverting profits to worker paychecks through a combination of a minimum wage increase and an increase in unemployment insurance helps create real business opportunities by increasing the demand for goods and services. This produces a healthier economy with greater economic growth from which we all benefit. 

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Federal Reserve individual “My America” smartphone bank accounts

Posted on by Lawrence

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From pages 149-153 in “Optimal Money Flow: A New Vision on How a Dynamic-Growth Economy Can Work for Everyone” by Lawrence C. Marsh. (Avila University Press, 2020)

Have Fed Create Individual “My America” Accounts

The Federal Reserve can stop excessive inflation quite effectively by raising interest rates. However, as mentioned earlier, when the economy is in a recession, the lowering of interest rates by having the Federal Reserve purchase Treasury securities in the New York financial markets is sometimes referred to as “pushing on a string,” in not being very effective in quickly stimulating demand for goods and services. To provide the Federal Reserve with the ability to inject monetary stimulus more quickly and more directly into the far reaches of the economy, every person over the age of 18 with a Social Security number would be assigned a bank account directly with the Federal Reserve Bank. Such accounts could be called “My America” prosperity accounts to encourage their use. An initial $1,000 would be placed in each account, which would be treated as a minimum deposit that could not be withdrawn until after age 70. To help people become familiar with their account, all Internal Revenue Service (IRS) tax refunds would be deposited into these accounts. An individual could deposit additional money into their account up to a maximum annual limit, which could be adjusted from year to year depending upon the state of the economy.

To avoid disrupting commercial banking and to focus on the less affluent, the interest rate would only be applied to the first $10,000 of the account value. Funds above $10,000 would earn no interest. Most people have checking accounts with very little money in them, so the banks would not lose much in investible funds in phasing out paper checking accounts. At this point the $1,000 initial amount and the $10,000 upper limit are arbitrary. These numbers may be changed after more careful analysis and remain subject to change depending on economic conditions.

Each smartphone would be preregistered with the Federal Reserve through any post office. Transactions would be verified by both smartphone identification and a user-selected password, as well as fingerprint and/or iris recognition using the camera on the smartphone. In addition, there would be a 60-digit alphanumeric security code generated by an algorithm unique to the user and coordinated with the corresponding algorithm for that account at the Federal Reserve. After each transaction, the 60-digit security code would change both on the smartphone and in the corresponding Federal Reserve account so that no security code would be used more than once. A blockchain across all the account holder’s communication devices (smartphone, laptop computer, desktop computer, etc.) could record each verified transaction in sync with their “My America” Federal Reserve Bank account.

Each year the IRS would deposit all tax refunds directly into these individual accounts.[1] Any money deposited by individuals into their accounts, any additional money injected into the accounts, and any interest earned could be withdrawn at any time. Only the initial $1,000 would have to be retained in the account until age 70.

This would allow for transactions between smartphones, similar to those used in Kenya’s M-Pesa system of smartphone money transfers. The interest earned could be designated as tax-free. These Federal Reserve accounts could take the place of the old, often unprofitable, paper checking accounts that are holdovers from the 20th century. Eventually, these accounts could also replace cash, as smartphones replace wallets in people’s pockets.

The Federal Reserve could then inject money directly into these accounts to provide stimulus as needed whenever a downturn developed, and recession threatened. These bank credits would be created by the monetary authority of the Federal Reserve out of “thin air”—with no taxation required. There would be no addition to the debt, because there would be no government securities issued. As long as the economy has unused capacity, the injection of cash would not trigger inflation. These cash payments could be referred to as tax refund equivalence payments, although everyone would get them, even those who paid no taxes. These accounts could be used to implement the late economist Milton Friedman’s proposal of a negative income tax, which would especially help the poorest Americans. Such an approach would make the “My America” accounts very powerful in stimulating consumer demand using the least amount of money, because the poorest Americans have the highest marginal propensities to consume.

Not surprisingly, Wall Street bankers prefer to have the stimulus money given to them, which they typically use to buy more stocks and bonds, which inflates stock and bond prices but does little to increase consumer demand for ordinary goods and services. During Japan’s economic slump, Federal Reserve chair Ben Bernanke suggested that the Japanese government provide direct cash payments to Japanese citizens to stimulate demand. By implication he raised the idea of direct cash payments to consumers as an alternative to giving money created out of “thin air” to Wall Street bankers by buying Treasury securities during an economic downturn. Wall Street supporters responded to the idea of giving cash payments directly to consumers by coining the phrase “helicopter Ben,” as if such a plan was equivalent to dropping money from helicopters. To belittle such “helicopter money” further, the bankers and their supporters posted “helicopter Ben” videos on YouTube. But the critics of quantitative easing (known as QE) and other Federal Reserve injections of cash into the economy warned of a great inflation that never happened. The critics were wrong! Not only did QE help revive the American economy without significant inflation, but also a substantial proportion of the Fed’s bond purchases was from European banks, so the Federal Reserve helped revive the Eurozone as well.

Direct cash payments through “My America” accounts would have a much quicker and bigger impact on consumer demand and require much less money than giving a lot of money to Wall Street bankers by having the Federal Reserve Bank buy Treasury securities in the New York financial markets. Consequently, it makes more sense to bypass the Wall Street bankers and give the money directly to the American people who know best how to spend the money and, thereby, directly stimulate the economy by increasing the demand for goods and services.

Conversely, when inflation threatened, these individual “My America” bank accounts could offer attractive interest rates to absorb funds directly from the public to take money out of the economy and reduce excess demand. The high interest rates would cause people to put off consumption now for the prospect of greater consumption sometime in the future. At the same time, the Fed could pursue a mixed strategy to stimulate business investment by lowering the federal funds rate (discount rate) that banks pay for overnight loans, as well as the interest rate the Fed pays on the reserve funds that banks have at the Fed. Offering higher interest rates to consumers would reduce excess demand, while the lower rates on bank funds would make investment money available for expansion of plant and equipment, which would also help ease price pressure by increasing the supply of goods and services. Together the reduction in demand and increase in supply (over time) can ease pressure on prices and fend off inflation. The Fed can also engage in open market operations to buy or sell government securities. Econometric analysis can provide the Fed with guidance on getting exactly the right mix of these policy tools to achieve the Fed’s objectives.

[1] Such accounts could also be used to deliver a universal basic income (UBI) if a UBI law is passed by Congress and signed by the president.

Redirect Money Flowing Inexorably to Top of Wealth Pyramid

Posted on by Lawrence

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       Optimal Money Flow addresses the pile up of money at the top of the wealth pyramid which has driven up stock and bond prices and driven down interest rates toward zero. The low interest rates have discouraged savings and encouraged a large build up of debt for middle class and working class households. With high debt and little savings, a job loss, accident or illness can throw a household into financial distress with a sudden drop in consumption creating, in the aggregate, economic instability.
         In an economic downturn the Fed’s response of buying Treasury securities in financial markets boosts stock and bond prices but does little to stimulate investment in the real economy when businesses already cannot sell all they are producing in existing lines of production. The additional money flows into stock buybacks and dividends with little trickling down to the real economy.
       The money flow paradigm views the flow of money to the top of the wealth pyramid as inherent, inevitable, and inexorable to the free enterprise system. This paradigm requires that government assume its rightful responsibility to direct sufficient money flow from the top to the bottom (like a heart pumping blood throughout the body) in order to maximize employment, economic growth, and efficient resource allocation. In a healthy economy, the money then flows naturally back up to the top in a circulatory flow.
       Thus, the money flow paradigm that sees government as the heart of the free enterprise system where it does and should play an active part. Previous economic paradigms such as the neoclassical, Keynesian and monetarist paradigms saw government as an external, alien force outside of the system that was only called upon in response to an unexpected breakdown in the free market system.
        Optimal Money Flow calls for the creation of Federal Reserve smartphone bank accounts for every American, where the Fed can give money directly to consumers.  Using algorithms from machine learning and artificial intelligence the Fed can vary the amount of money flowing to consumers based on current and developing economic conditions.
          Conservatives appreciate that consumers, not government, will decide how to spend the money, which will not require an increase in taxes or add to the national debt, and will involve a lot less money to stimulate the economy, because the average consumer has a much higher marginal propensity to consume that the average Wall Street banker, who is more likely to put additional money right back into the financial markets or buy exclusive properties, rare paintings or expensive jewelry with little increase in new products or services. With more bang for the buck, much less money is needed to keep unemployment low without triggering excessive inflation.
            The author has agreed to forgo book royalties so that the entire book price will go for student scholarships when Optimal Money Flow is purchased through the Avila University Press website at:  https://www.avila.edu/aupress/optimal-money-flow-by-lawrence-c-marsh