MMT Revisited: National Capital Investment Accounts
This article aims to offer a solution to the weakness in consumption, productivity deficit and debt burden of the country. No small task.
The answer I offer to our ills is to create an investment account for every voting member of society (i.e. they must vote, not simply be registered to vote). That investment account is credited with a gift from government which may only be spent on newly created investment capital (i.e. not pre-existing securities). The scheme is centrally administered (not necessarily by government or by one firm) and allows for trading on a dedicated exchange. Capital gains and dividends accrue to the holders and are taxed on an unrealised basis. All registered businesses may apply to issue capital in the form of shares, not debt, and in exchange must submit accounts which are available through a central records database which is open to public scrutiny (not just the shareholders).
The money given to voters is not required to be repaid and hence not private debt. It is financed by specific central bank lending to government. Due to being a scheme designed to add to long term productive capacity, foreign investors should not take flight and the currency should not suffer in value.
The problem with government, GDP and existing forms of modern monetary theory
I’ve always been frustrated by governments’ continual focus on GDP as an indicator of the country’s prosperity. GDP is more a record of activity and says little for the prospects of a country’s future or for how income and wealth are shared. It is a strange mix of spending (government and consumer) and investment.
Consumption only satisfies today’s wants and needs, it is non-productive. The UK’s scheme of ‘eat out to help out’ is a form of modern monetary theory. Government spending, currently part-financed through central bank purchases, is being aimed at cafes and restaurants in dire need of custom whilst the coronavirus social distancing rules remain in place. This will help maintain jobs in the hospitality industry but this industry is low in the ranking of adding productive capacity to the economy. Whilst it creates jobs, it relies on an expansion in bank lending and the multiplier effect to expand economic wealth. And since the banking sector is operating with a near flat yield curve they are not incentivised to lend.
The US scheme of simply handing checks to people was even less targeted and short sighted in nature. I do however appreciate immediate help was needed as such a scheme as I am suggesting will take time to design.
Focusing on consumption however is not a long term solution. Far better to develop an economy which is rewarded for adding to productive capacity. The great advances in wealth were built on each last round of technological development. In recent history, this has included the factories of the industrial revolution, the train network and the telephony and internet revolutions. Capital investment creates jobs but also creates a more efficient and hence productive environment in which entrepreneurs can develop the next round of productive capacity. Each round also throws off new and improved consumer products and services which enhances our lives and adds to the nation’s well-being. Only investment has the capacity for adding to a country’s wealth and hence should be the focus.
Central banks and the national deficit
At this time, central banks around the world are buying their government’s debt. Their argument is by keeping yields low they encourage borrowing and investment and hope also to create wealth through increasing asset prices. In reality of course, borrowing for investment is constrained due to high debt levels and rising asset prices increases wealth inequality due to assets being held by a subset of society.
The central bank ambition of creating inflation is not being fulfilled due to the money they are creating remaining in the financial economy and not the consumer economy (often referred to as the ‘real economy’). The central bank can expand its balance sheet in this way for an indefinite period as long as foreign investment does not lose confidence. But buying government debt in issue (as is currently the central bank strategy) is limited by the government’s choice in how to spend the money; i.e. central banks buy the debt post-issuance and hence cannot influence how the money is spent.
Central banks are of course constrained by their focus on maintaining inflation. For me, the creation of inflation should not be the aim. Moderate inflation is not the cause of a healthy economy but just one mark. Inflation should be considered as a by-product of an active society whose aim is to create productive capacity. Instead central banks should focus on full long term employment. Whilst this is part of the Fed’s mandate, many other countries would need to amend their central bank’s mandate since they focus only on stable prices.
The requirements for the solution are many-fold. It must add to long term productivity, it must be cohesive for society (i.e. considered fair), it must create employment, not distort investment decisions (i.e. be wasteful) and it must not add to private debt. Since, if it succeeds, it will create inflation and add to productivity, government debt will erode over time.
At this time we face a lack of demand, not just from the virus. Since the 1970s conquering of inflation, interest rates have been cut to encourage demand. But such demand is constrained by the burden of debt. Consumers cannot raise capital unlike corporations and hence the current central bank policy of low interest rates is self-defeating. Consumption erodes the wealth of the nation (I am aware we need to enjoy life and do not advocate zero consumption!) and when financed through debt, it must by definition either result in reduced future consumption or default. Either way, it is not productive.
Demand must therefore be financed through wages. As a nation we must encourage both an increase in employment (adding workers) and an increase in high value-added (productive) employment which attract higher wages. We must not however fall into the trap of ignoring the benefits of a cohesive and inclusive society. Spending on health and education should also be factored in since this adds to both current and future wealth. Whilst difficult to measure, those benefits should be measured and included in monetary terms. Consumption is not bad but we must do more to encourage productive investment.
The answer is to give each participating member of society a credit in their investment account which they are free to invest in the shares of any participating business. Only those who vote are rewarded in this way to encourage people to take an active role in the governance of their country. Any business can participate with the proviso they must be incorporated to ensure legal security over the asset of the business. This also aids the trading of capital on an exchange which will require known legal rights and benefits. In itself this will create a national enthusiasm and pride which will breed confidence, current consumption and inflation.
The problem with handing people cash to invest in pre-existing securities is that this is not productive. It simply increases the demand of securities in issue, resulting in increased prices.
Whilst central banks can freely create capital, a poorly designed investment scheme could lead to a misallocation and hence waste of natural resources including labour. Businesses may act fraudulently to acquire capital with no intention to invest. This is why businesses must be required to register, file accounts and minimum information about their business as well as be open to public scrutiny and debate. As capital (shares) are freely traded on the exchange (both long and short) there will be an incentive to root out fraud.
A very poorly designed scheme may encourage someone to establish and register a business only to collude with people to take in their capital. The business owner may promise to hand back 50% of the capital invested in cash and keep the other 50% for non-productive means. Again, registration alongside due diligence by the public will ensure that any fraud is duly prosecuted and hence discouraged. Monies raised should flow through registered bank accounts and material amounts can be investigated. Whilst no-one can be prosecuted for poor investment decisions, the FCA currently monitors for securities fraud and hence a base exists which can be expanded appropriately for monitoring.
Whilst a gift in voucher or cash form may lead to immediate consumption and hence helps to maintain existing employment, this national investment scheme does not. It will lead to future employment as the capital is deployed. The intention is to encourage long term productive employment due to the benefit of increased dividend and capital gains to investors than would otherwise be the case investing in a less productive business.