The impact of the new money creation system on government programs

The impact of the new money creation system on government programs starting with Social Security, Unemployment Insurance, and other income maintenance and supplement programs


Most, not all, government programs making direct and periodic payments to individuals to maintain or supplement personal income can be phased out or simply eliminated. Since citizens will be receiving around $12,000/year (this figure is not set in stone, it is a first approximation for discussion as invariably the amount will become a stumbling block, so this is just for discussion) as new money is created, all those whose combined receipts from all government programs, say food stamps, rent subsidies, unemployment stipends and the like can simply be switched from those payments to the new system. Since those programs are designed to provide resources for folks who otherwise would have none, receiving newly created money would provide them with needed income.


The same is true of Social Security, SSI and the like. The initial impact will be to remove present and future obligations for unemployment insurance, old age pensions, income for workers who become disabled and can no longer work from the federal government’s budgetary obligations. At the same time add no further people to those programs. Hence, what we now know as old age pensions, disability (SSI) and economy caused (unemployment) emergency assistance will no longer be necessary and can be phased out. For every citizen will have an income from their political participation-voting.


For those currently on federal income, food and shelter assistance whose combined individual federal payments exceed $12,000/year, simply reduce the existing federal subsidy/welfare payments to the amount in excess of new money creation those individuals will receive. Again, no new people will be placed on the rolls of these programs.


Indeed, a government safety net or a social welfare security system, often confused with a socialist approach to government will be a shadow of its former self. Largely, it will remain only necessary to provide assistance for the most extreme cases, for example assistance for those with severe physical, intellectual and emotional disabilities. For most infirmities, programs already exist. It would make sense to examine those programs with an eye to providing the fullest assistance to integrate those qualifying individuals into the greater society; and, with the intent to continue assistance to make sure that these individuals can make the fullest participation and contribution that they wish. However, if these individuals participate politically, vote, they should receive new base money as any other participating citizen.


Currently both employees and employers pay taxes to support retirement and unemployment programs. Under the plan to create new money through political participation, neither set of taxes would be required and should be phased out as soon as it is feasible to do so. Indeed, state and federal agencies devoted to food and rent subsidies, unemployment insurance and job searches will be retired as well.


Generally what are considered transfer payments will become a thing of the past.


Monetary Policy & Fiscal Policy


Monetary policy refers to central bank (the Feds) operations to increase and decrease the money supply. Those operations include buying and selling securities (normally US Treasury obligations) from and to banks and security dealers, setting reserve levels for banks, operating a discount window (where banks can borrow funds, normally as a last resort), and setting the interest rate that banks can charge each other on overnight loans. In addition, the Feds make periodic statements that are intended to signal financial and business components of the economy what those components should be doing (jawboning). All of the activities attempt to impact the economy at large in attempts to promote growth and employment and maintain a stable dollar (keep inflation in check and deflation at bay).


The economy feels the impact of Fed actions after a delay. It takes months for new base money to impact the economy. Ironically the term trickledown economics applies to Fed attempts to stimulate or dampen economic activity in the economy. The Fed deposits new base money into a bank’s account. The bank processes loan applications and makes loans. The borrower, if a business, undertakes, say, an expansion. Then months later new hires at the business start getting pay checks.   Then, and only then, are the new hires in a position to start spending. Remember, and this cannot be over stated, consumers drive the economy! So until money is in the hands of consumers the Fed’s attempt at stimulating the economy does not actually have any success. The converse is also true if the Fed’s attempt to slow growth by selling Treasuries or calling in bank loans, there is a lengthy delay until consumers feel the pinch with lost jobs and stop or slow down buying. (Notice here that decreasing the money supply costs people jobs. This is not well understood for it is “awkward” to acknowledge the pain and toll of lost jobs (which also means lost livelihoods and abilities for those loosing their jobs to support themselves and their families).


The way monetary policy works under the present system is an attempt to indirectly manipulate overall economic activity with a 12 to 18 month delay in the impact for any given manipulation. Monetary policy attempts to manage the entire new base money supply and through it the multiplier of bank money.   It is not clear that the entire money supply needs to be involved to attempt to influence business and financial activity. Rather, marginal adjustments in the money supply might be more appropriate. Marginal adjustments to the money supply might focus on specific uses of bank money. Yes, more regulation of banks. However, the Fed would only regulate new base money after the fashion that banks use to regulate consumers-collateral. Say the Fed wants to stimulate building houses. Then it might require banks to demonstrate, with mortgage contracts that it is making such loans to continue receiving and using new base money supplied by the Fed. On its other deposits the bank would not be so constrained. Hence, the Fed would be operating at the margin in a specific sector of the economy. By the same token, the Fed might require banks to change their loan portfolios (asset mix) to qualify to use new base money. Or, the Fed could use differential rates for loans for differing purposes. If all of this sounds familiar it is because it is close to what banks require of their loan applicants. In short, the Fed would be using monetary policy at the margin and incrementally rather than as the blunt instrument it currently is.


Fiscal Policy


Fiscal policy in the use of government expenditures and revenues (taxes) to influence aggregate demand in the economy. There are side issues of resource allocation (stimulating home ownership with tax breaks/deductions), and income distribution or redistribution (taxing those with incomes to make direct and indirect payments to those with little or no income-welfare, for example). However, the main focus of the elected branches fiscal policy efforts is attempts to influence aggregate demand in the economy.


While aggregate demand should be a goal in an of its self, economists and policy makers muddy the waters by asserting that striving to manipulate aggregate demand is to achieve all or some of other objectives: price stability, full employment and economic growth.   Notice the similarity of the goals of fiscal policy with those of monetary policy. It is important to keep in mind that actual laws that comprise fiscal policy often impact or are intended for other policy reasons. For example a tax deduction for interest paid on home mortgages increases aggregate economic demand (and specifically demand in the housing market) but it also encourages more citizens to have a larger stake in the political system. Let us look at each of these supposed goals in turn.


Price stability is a euphemism for near zero inflation. Inflation is deemed to be bad because it erodes savings, is a viscous cycle of price-wage increases and devalues capital resources. If prices decline, deflation, another viscous cycle of price cuts-lay off occurs. Notice that wages plays a central role in these cycles. To put it another way, personal income fluctuations play a central role in these cycles. So, price stability is actually an attempt to maintain wages and their buying powers.


Full employment as a goal of fiscal policy manipulation of aggregate demand is a recognition that if all actors in the economic system have income, the system will function better. Full employment is not the goal, citizens all having livable levels of incomes that allow all to participate in economic transactions is the goal.   Since income is simply cash flow, full employment represents the case where almost all economic actors have sufficient cash flow to participate, spend or consume. Full employment also represents a close to optimal production level, holding all other things constant. Optimal production levels are also closely associated with maximizing profit in a firm. Hence, the connection between full employment and profit maximization in firms is understandable to and desirable for the business world.


Unfortunately, full employment does not begin to approximate maximum profit levels for firms. However, the greater the proportion of the population that has an income that can support the individual and his or her family (dependents using tax code nomenclature, children using common sense language) and that income is both regular and dependable, the more growth the economy will exhibit. As the proportion of the population has a livable, regular and dependable (predictable) income, firms will experience increasing profits, again holding all other things such as technology and tastes constant.


That leaves economic growth as the final justification for fiscal policy to manipulate aggregate demand through government spending and taxing. An economy can grow in absolute number of transactions, the value of those transactions or by the proportion of potential actors taking part in economic transactions. Unfortunately we have historically measured growth in the value of transactions in dollars or adjusted dollars to a given base year-summarized in gross domestic product. While it is true that the value of annual transactions tends to go up-grow-as the number of economic actors increases, it is also true that the value of annual transactions can also increase in real or adjusted dollars by having a fixed number of economic actors engage in more transactions. Further, the value of annual transactions has increased as a result of fewer transactions and fewer economic actors because of “increased productivity.”


So growth, per se, is a strange and amorphous goal that can lead to price declines and employment declines. To be a realizable goal of fiscal policy, growth needs a better, more focused, definition. Tentatively growth will become defined in terms of improvement in the least advantaged sector of an economy. The late President Reagan once said “A rising tide lifts all boats.” This phrase was actually popularized by President Kennedy some decades earlier. However, if one does not have a boat, a rising tide can be the event that drowns one. It is strange that economic growth in the present system can be applauded when it causes pain and suffering in some parts of the population.


Increasing or attempting to manage aggregate demand is a legitimate goal in and of itself. First let us postulate that increasing aggregate demand involves starting where demand is weakest and increase it there first. Then, increase it where it gets stronger and stronger. In effect we need to increase demand the most where it currently exists the least. In effect that would be to increase demand at the margin. If a person has $5 and he or she receives an additional $5 that person’s demand for goods and services is likely to double. However if a person has $100 and he or she receives an additional $5 that person’s demand is only going to increase incrementally. And if a person has $1 million, receiving an additional $5 has no effect on that person’s demand and is likely to be a bookkeeping nightmare for that person. So, depositing an equal amount of money in every voter’s bank or credit union account will increase both aggregate demand on a regular basis and increase demand differentially. The more wealthy voters become the less aggregate demand will stimulate the economy. Voters’ marginal propensities to consume is a built in break on wild economic growth.


This work recommends an income for every citizen of $12,000/year. That may not be sufficient. It may require more. Politically it may end up with less. Some will recommend less. Regardless, it is unlikely a citizen’s income from new base money deposits by the Fed will satisfy everyone’s wants and needs unless economists have been dreadfully wrong about people having unfulfillable wants.


Minimum wage laws


Since people generally want more, a base income of $12,000/year is unlikely to dissuade many from working. In the State of Washington, at this writing, the minimum wage is just under $10/hour. If a person in Washington were employed full time at minimum wage, his or her annual income would be close o $20,000/year. So, the proposal of depositing $12,000/year in voter’s accounts would mean that a person currently employed at minimum wage in Washington State would double his or her income (recall the $12,000 deposited in a voter’s account is not taxed). However, a person currently working for minimum wage presumably does so because he or she cannot get a higher paying job. The person also presumably needs the income his or her minimum wage job provides for his or her livelihood. So, with the cushion of $12,000/year in base money deposited in his or her account, would the person work for more, less or the same wage he or she is presently earning? I, quite frankly, do not know. What about you? What would be the practical impact on you wage or salary demands in the market place? However, I will speculate further.


Minimum wage laws protect the worker from some exploitation by employers. Since the median worker is dependent on his or her income, he or she could be coerced into taking less; or, he or she could simply be terminated and replaced with someone willing to work for lower wages. Essentially, minimum wage laws set a floor on wages that minimizes coercive labor practices by employers. So, would those laws need to remain on the books as currently written? I suspect not. But, they will become superfluous; for, employee’s base income from voting will make it possible for employees to walk away from employers using predatory practices. Indeed, with the elimination of unemployment premiums and social security taxes, it is likely that employers will be more willing to pay slightly higher wages initially.


Then too, since every citizen has a “cushion” it is likely that wages will have to increase to entice citizens to enter (reenter) the work world. Indeed, given the stimulus to aggregate demand, employers will need to find ways to attract and retain employees. So, minimum wage laws will go by way of the blacksmith–become a small and seldom used part of the employment environment.


At this writing (2012) the US economy is in the fourth year of a contraction. The unemployment rate is around 9%. News stories report that employers with job openings are asking only people currently employed to apply! It is as if unemployment were contagious and if one hired a formerly unemployed person the hiring firm would go out of business because of the contagion. Could it be that employers are afraid that the unemployed workers caused their former employers to go out of business? This is an interesting way to dodge management responsibility.




2 thoughts on “The impact of the new money creation system on government programs

  1. You make valid reference to the fact that economic growth is not always the best thing, for all people. As you rightly say, it can lead to unemployment, and falling prices. Despite the headline-grabbing prospects of a flourishing trade gap, experience has shown that this eventually forces down prices at home, and leads to staff being laid off. I think that it is best known over here as a ‘Boom and Bust’ economy. Something we have experienced on a few occasions, in my lifetime.

    One thing that concerns me about your notional $12,000 dollars, is that for the low-paid and minimum-wage earners, I would not trust employers to pay the better wages your theory assumes, as they will undoubtedly take into account that the employee is already receiving the extra $12,000 for doing nothing, and adjust salaries accordingly. I feel that this aspect would have to involve laws and regulation, to be at its most effective.

    There is a book here, Theo, most definitely.
    Best wishes, Pete.


  2. I have thought about the need for minimum wage laws in the context of the proposed creation of money into the hands of citizens. You could be right, that employers will attempt to gouge workers. After all, that is what some of them do. The wage squeeze that employers face is only part of their struggle to make a profit in. say, a tight industry where profit margins are slim. But, what if my “guess” that the new money will stimulate business is correct? In that case, it is likely that trying to squeeze blood out of workers will not be at the top of employers’ lists of things to do. Since they will be generally operating in a business expansion they may need more workers not just more “productivity” from the workers they have.
    I forget the statistics on how many workers live paycheck to paycheck and how many would go belly up if they missed a pay check. However, the numbers are rather large and similar at various income levels. This means employees who are this close to the edge are dependent upon their jobs (employers) and have no flexibility at all—only the “shame” of going on welfare. I suspect that given an independent source of income, those same workers would have sufficient flexibility to stand against unreasonable employer demands to the point where they could walk away. I should think it would be difficult to intimidate such employees into taking a pay cut.
    I should think it may drive up the wages of undesirable occupations and drive down wages in more desirable ones. Desirable here would relate to whatever the potential worker deems desirable and heaven know what that would be. Consider what a garbage collector would want to be paid and what a garbage collection firm might have to be willing to pay to get workers. Then think sewage lagoon workers.
    Let’s go the other direction and assume you are right in that employers would be successful in paying next to nothing for workers. In that case, in a very short time China will need to look out, for we would undercut its wage advantage and steal back contracts from Apple, and every other firm which currently outsources.
    I am not sure I have adequately addressed your issue. I do need to point out that rather than making changes at the margin or around the edges, I envision a need for a wholesale replacement of large chunks of public policy as a result of changing how new money is created. One change that stands out in my mind is we would no longer think in terms of wholesale income transfers via taxes. I think it possible to eliminate the lion’s share of what we think of as the welfare state.
    A book, yes. At this point, however, these ideas need a great deal more organization and overall structure.


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