The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to avoid being deceived by economists.
Unemployment—the basic economic problem—is the root of most of the problems our civilization faces. It is the direct cause of stress, poverty, racial tension, disease, lack of education, violence, crime, corruption, even terrorism. You name any problem and it is simple to trace it to the existence of unemployment. And yet, economists—the supposed experts—tell us that there is no way to eliminate unemployment; that the best one can do is to be patient until the ‘business cycle’ picks up again and businesses stop laying off and start hiring more people; then we will return to the ‘natural’ level of unemployment (6%). After living my entire life (almost seven decades) with the consequences of these misconceptions about unemployment, after careful and lengthy study of economics, and after writing two books on economics, I beg to differ with those experts.
The Four Worst Fallacies
If unemployment is the cause of most of our problems, what are the causes of unemployment?
After writing the outlines of The Denver Plan and listening to the comments of thousands of people in Denver and neighboring cities—while collecting petition signatures—I have reached the conclusion that unemployment has been built into our way of life by four fallacies, or misconceptions, we have been taught to believe by our experts, the economists. The four most destructive fallacies are:
- Government has the sole power to create money, and it is therefore the sole cause of inflation.
Wrong: Financial institutions are the major source of new money.
- Inflation is the biggest threat to our well-being.
Wrong: Recessions are a bigger threat—Central banks have learned to control inflation; recessions are uncontrollable.
- The government spends our hard-earned money, and must be restrained.
Wrong: The government produces the public goods we need to thrive, and in the process gives us the money we need to pay our taxes.
- Open trade benefits us all.
Wrong: Open trade is unequal trade; it benefits the net-exporters at the expense of the rest.
Since its creation in 1913, the Federal Reserve (Fed) has issued less than one trillion dollars in U.S. currency, of which less than one half circulates in the U.S.; in contrast, banks and other financial institutions have so far created about $50 trillion. Every year, the Fed creates about $20 billion, while the financial institutions create around $3 trillion. It is this massive creation of ‘financial money’ that causes the periodic downturns in our economy.
It is the lopsided ratio of financial money to currency that characterizes our financial system, and it is the cause of business cycles.
But as long as the media, the politicians, and the economists believe that the Fed is solely responsible for creating money, they will continue to allow the financial firms to issue and control the all-important Flow of Credit into the economy.
In fact, government should have that constitutionally granted power, but with the present financial system, the Fed doesn’t have any control.
The specter of inflation is raised by economists, politicians, and the media every time government urges new spending, or whenever the fiscal deficit goes up.
As explained above, inflation is caused by the excessive creation of money by our private financial system, but an ‘inflation alarm’—the Fed’s perception that inflation is about to break out—can also occur whenever unemployment drops below economists’ expectations; and when any of those things happen, the Fed’s only option is to raise interest rates for everybody, including those industries whose prices had remained stable. Those interest rates are kept high until the economy goes into a recession, as occurred in several of the recessions prior to the present one.
The idea that government spends our ‘hard-earned money’ is so widespread that calls to reduce taxes and to ‘shrink government’ are periodic occurrences. The Tea Party movement is the most recent materialization of this misguided approach to fiscal sanity.
Few of the tax protesters understand that money does not simply disappear; when the government spends to produce the public goods we all need and demand, the money flows to the private sector.
We, as private producers, receive the entire government outlay; the more the government spends, the more money we receive.
The taxes we are required to pay are only a fraction of what we receive from the government, and that is the main reason for the existence of fiscal deficits and the huge accumulation of our national debt.
The idea that government takes money out of the private sector is an anachronistic concept. Finally,
Our fixation with the idea that “in the long run, free trade benefits us all,” ties our hands and exposes us to the destructive practices of the net-exporter countries, which can keep their workforce employed in producing goods for the U.S. market, while our own workers cannot find jobs.
Does it make sense? Only to the people who are opposed to a balanced trade agreement. See chapter VII for a more detailed proposal for fixing the trade deficit without fear of retaliation from the net-exporter countries.
The Reform of Economics
Economics is an inquiry into the nature and causes of the income of nations.
The main purpose of the economic science should be to solve the ‘economic problems’ for ALL the people, not just for the elite, or even the majority.
As you may surmise from the above, the problem of unemployment—the basic economic problem in the U.S. and in the world—is in the end caused by the ignorance and mistaken beliefs of our economic experts.
People who are slaves to the four fallacies just described cannot possibly understand, much less apply, the solutions presented in this book. I have therefore begun a parallel effort to reform economics.
The purpose of this book is to give you, the reader, enough information so you can send your questions to the media, which would then feel obliged to ask the economists, who would not be able to ignore the reform movement any longer and may decide to enter the grand debate.
A Preview of the Plan
The plan presented in this book is based on a new conception of economics, which I describe in my two previous books.[i]
Unemployment is a complex problem, but I believe it can be eliminated if all those factors that affect it are also dealt with in an integral fashion. It would not happen right away, even if all the causal factors are successfully eliminated; but within a few years of that happening, we should begin to see unemployment dropping, salaries going up, governments able to balance their budgets, and slowly, perhaps more slowly than we would like, we would begin to feel that the struggle for life is easing, not just for most people, but for ALL.
The Denver Plan consists of eight proposed new government policies:
- Freed-money—based on Full Reserve Lending
- A Cap on Salaries
- A Cap on Incomes
- No Taxes on Business Activities
- A Balanced Budget
- No Competition with Private Business
- Balanced Trade
- A U.S. Bank for global trade–Creation of a U.S. Monetary Fund
Full reserve lending would make the Fed the sole creator of U.S. money. Once this policy is implemented, no bank or any financial institution would be allowed to lend their deposits or their private money; all lending funds shall be provided by the Fed, at the lowest interest rate compatible with low inflation. Currently, this interest rate is below 0.25%, but in normal times it is about 4%.
All deposits to any financial institution shall be kept as reserve at the Fed; and would receive an interest rate similar to those existing for savings accounts. ‘Freed-money,’ as this new money technology is called, would also include the new power of the Fed, to lend money to all levels of government.
The nationalization of the Federal Reserve Banks, among other reforms, would be a requirement; this is a trivial matter which would hardly affect the operation of the Fed.
A cap on salaries is necessary to stop the relentless arms-race-like competition for executives among large firms, which pulls up all other executive and managerial salaries, reducing the number of available executive positions and depleting payrolls for ordinary workers. Without a salary cap—or maximum salary—all the gains to the economy from the application of the previously mentioned policies would flow toward the high earners, increasing the power of large corporations to hoard the newly created business opportunities.
After the cap on salaries is applied, owners will continue to pocket the extra earnings of the firm, which would, in a sense, defeat the purpose of the cap. Thus, a cap on incomes becomes necessary to avoid the rich becoming even richer. The economic effect of greed is the relentless rise in the cost of financial services, health care, housing, and even elections; witness the millionaire campaign races in California. Let’s hope that in Colorado the determining factor for getting your vote becomes rather how well candidates address the economic issues. But only history will tell.
The application of taxes on business activities, such as sales taxes and payroll taxes, should be recognized as a deterrent to the economic activity on which our prosperity is based. With the Denver Plan in place, payroll taxes may become unnecessary, as enhanced government revenues and shrinking social obligations would allow social security payments from the ordinary fiscal budget.
With a balanced budget, the government won’t need to borrow anymore. Why then collect payroll taxes? These taxes are an impediment to business.
A more progressive taxation would mean, gradually, in the course of a generation, recovering most of the money now in private hands—the result of decades of fiscal deficits and tax cuts for the rich.
In order to have a balanced economy, with sustainable growth far into the future, we must balance the flow of money between the government and the private sector; this means whatever government spends on the domestic economy must be recovered through government taxes and other revenues; otherwise, money would accumulate in the private sector, mostly in the top few percent of the population, causing inequalities in most of the important spheres of society, such as politics, business, education, influence, and power in general. The new proposed policy calls for high and increasing tax rates on incomes above several hundred thousand dollars, going as high as about 90%, or more, on incomes above a few million dollars. Taxes on incomes below average should not be raised.
I believe that government should not compete with private businesses in the production of certain goods. There are two categories of goods that people need for living: public goods, and non-public goods. By their own nature, public goods are not amenable to production by private companies. Ordinary or non-public goods can be produced by any private firm, usually in competition with others.
A global trade agreement would allow the U.S. to achieve balanced trade with the least possible disturbance to world trade. The biggest trade surplus countries may not agree to reduce their trade surplus, much less eliminate it altogether, thus, the U.S. must be prepared to balance its trade on its own. Since a sizeable amount of imported goods is produced by U.S. companies operating abroad, it may be possible to persuade them, in one way or another, to locate some of their offshore businesses in countries with which the U.S. enjoys a trade surplus, or to bring their operations back to the U.S.
The trade imbalance is responsible for millions of U.S. jobs lost, therefore its correction would, in due time, reduce the number of jobless people in the country.
Finally, as the U.S. trade becomes more balanced, the amount of dollars circulating abroad may be reduced, thus making U.S. currency perhaps too scarce in many countries. The capacity of the U.S. government, through the Fed, to lend at low interest rates, would eliminate this problem, while at the same time enhancing the prestige and influence of the U.S. throughout the world. This can be more easily accomplished through the creation of a U.S. Bank for International Trade, to be located in most of the large capitals of the world, thus replacing private U.S. banks located abroad.
In the international arena, the Denver Plan would give the U.S. government the financial power it requires to effectively assist our allies and other countries in need, and to spread goodwill throughout the world.
[i] The Origin of Wealth and Poverty (2007), and The Coming Age of Freed Money (2010).