Continuing with our revised proposal, then:
3. A one year moratorium on taxation of any kind. The government(s) will retain a sizable portion of the monetary wealth of the nation: in the US, 10% of the available gold would remain with the federal government under what I have proposed, and another 10% would be distributed pro-rata to the state governments. Thus, between them, the governments will start out with 20% of the dollars in existence. They know how many “dollars” they have, in other words, and they can easily determine from there what they will need to make it through a year of operations assuming no new revenue from taxation.
This, then, is what the governments must do. The private economy will have endured such an incredible shock from the jubilee event that it will need time to recalibrate, free from the concern that it must fund the government as well through the payment of taxes.
Also, there is an important corollary effect of the government’s determinations regarding how it will fund itself for a one year period out of a finite pool of money with no new revenue coming in: the dollar numbers the government comes up with will suggest – not dictate, obviously, but suggest – beginning wage and price levels in the wider economy.
So in that sense, this is another important public service the government can perform in monetary matters, to ease uncertainty and facilitate trade and commerce generally.
And continuing on to the last two steps:
4. A five year moratorium on evictions for non-payment. Speaking of reducing the burdens on a shocked economy and populace, it strikes me as being very desirable that for a relatively longer period of time no one has to worry about their family being kicked out onto the street or their business being shuttered and closed down, simply because they haven’t paid some monthly revolving sum to a landlord who, in all likelihood, will have been relieved (through the jubilee) of having to pay any debts on a parcel of real property that he now owns free and clear. This measure will effectively be a moratorium on charging rent, or on the mortgaging of real property, since neither will be effectively enforceable during that five year period.
Note, real property (i.e., land and buildings, etc.) can still be traded, bought and sold, and there could be title disputes. But anyone coming into any court saying: “I want him out because he agreed to pay rent and he hasn’t paid it.”, will not have a claim for the five year moratorium period.
Perhaps this should be a permanent feature of the new economy: no more “rent seeking”. I don’t know. What I do know is that for some substantial time after a jubilee this should be the law.
And finally, a related step:
5. The government should be empowered to lend money through its central banking system at no interest.
Let me explain why you would do this. As I have noted elsewhere, there is a lot of complaining about “fractional reserve” lending and, for the moment accepting for purposes of discussion that reducing or eliminating the practice is desirable, absolutely no one, so far as I know, has come up with any decent proposal to do that.
Another first for me, in other words.
If the government lends money at no interest, then other things being equal people will borrow from the government rather than pay interest to a different lender, and lending at interest will more or less dry up, including of course any fractional reserve lending. Will this eliminate the practice entirely? Probably not, but it would be greatly discouraged and stigmatized: if your desire for a loan is worthwhile then the government will lend to you at no interest. If you had to go to someone else and pay interest, this would mark you as a fool or a gambler, or both. People, not liking such connotations of themselves, would be extremely reluctant to borrow from anyone except the government, to the degree that they would even want to borrow at all.
The big problem with this final step is: where does the government get the money to lend?
After the first post jubilee year, of course, taxation can resume. So the government can loan whatever revenue it doesn’t otherwise spend. I was also thinking that the government would be well advised to become a fairly major gold producer itself, so that it can perform its important public services, such as lending what it produces at no interest.
Let me point out something important here. The fourth and fifth steps are related in a “real economy” way, and should appeal to those who regard themselves as politically left leaning or even “Marxist” as that is usually understood. The common thread is to discourage the deriving of ongoing income from ownership of land or from money itself. Income would be solely the product of labor, of profit from buying or selling – in other words, the product of real economic activity of some kind in the present.
So let’s recap from the political feasibility point of view. Originally, I proposed a jubilee, a return to the gold standard, and abolishing the central bank. This is almost entirely what most would regard as “right wing” thinking. Not the jubilee, perhaps.
The revised proposal is: a jubilee, gold redeemability but no fixed “standard”, as such (although there would be a dollar price cap), and preserving a central bank with the authority to adjust the money supply through changing the dollar-gold ratio subject to the cap restriction, and also the authority to lend money on behalf of the government at no interest. As corollaries to all this, there would also be an adjustment period of no taxation and a moratorium on any evictions from real property owing to non-payment.
Overall, these revised proposals might be what you would call decidedly more left-leaning, to put it in political terms, although I hasten to add that I believe it is structurally completely consonant with the idea of a free market under the rule of law.
But in the end I don’t think this is a partisan political problem in the usual sense. We’re all in this together. And we’re going to sink or swim together.
Thoughts and comments appreciated.
Lawyers on Strike 
I think you go off the rails a bit with #4 and #5.
Barring rent for five years would have all sorts of negative consequences. For example, who would build apartment complexes if you can’t get any return on investment? What makes you think we have the optimal amount of housing right now so as to freeze supply in place? And how often do you think a landlord will make repairs if there’s no incentive to keep up the place? The lack of adequate housing the and unwillingness of landlords to make repairs, which leads to urban blight, are both well-documented features of the housing markets in jurisdictions with rent control. Hell, even leftists like Paul Krugman agree on this. See http://www.pkarchive.org/column/6700.html. (As an aside, the term “rent seeking” is a term of art used by economists. It doesn’t refer to exchanging of money for possession of a dwelling—what we typically refer to as “rent”—but rather to using the political process to extract unearned incomes through the legal system).
I also think you’re underestimating the social value of interest. Indeed, loans and interest allow for the more efficient coordination of production. For example, you might have someone with a relatively low time preference who might willingly lend to someone with a relatively high time preference. Or a productive company might need credit to pay their employees today so that those same employees can produce tomorrow. The interest rate is what induces the person with the relatively low time preference to lend to the person with the relatively high time preference. Banning or discouraging such coordination would do more harm than good. Finding worthwhile projects and investors to sink money into those projects is a prerequisite for the type of “real” economic activity that you want to encourage.
And using the central bank to enforce a 0% interest rate would simply change people’s time preference to make them more present oriented—why save and worry about tomorrow when you can get “free” money today? Such an easy money policy, moreover, would encourage a lot of the same activity underlying the financial crisis: you could leverage the hell out of any investment seeing how you’d have zero borrowing costs. And I’m a bit unsure as to how you’re suggesting the Government could and should financing that policy: if you tie the currency to gold, there’d be a finite supply of loanable funds but a virtually insatiable demand for those funds on the part of borrowers. It seems to me like the politically connected could get their hands on the funds at a 0% interest rate, deplete the loanable funds reserve, and then lend that money out at interest. Which would give rise to the very same problems with fractional reserve banking.
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Very good comment. Thank you for it. I’ll try to stay on the rails.
One thing to keep in mind about all this is: don’t make the perfect the enemy of the good. Everything that is proposed, including the jubilee itself, has positive and negative consequences. The question is not whether negative consequences can be avoided altogether, but whether the negative consequences that are incurred are preferable and more manageable than the ones we will have otherwise.
The five year moratorium on rent is primarily a transitional mechanism to ameliorate the effects of the profound uncertainty in wages and pricing that will attend the change in the monetary system. It will eliminate the worst of these – that large numbers of people will not be able to afford rent or a place to live otherwise and will be made homeless. It seems to me that this is essential for some period of time until things settle down monetarily, no matter what the other negative consequences might be, some of which you identify. But it also wouldn’t be true that there would be no possibility of a return on investment connected to real estate, because real estate could appreciate in price, and generally commands at least some price.
I can’t see how I’m using the central bank to “enforce” a 0% interest rate. I am generally of the opinion that fractional reserve lending is a bad thing. Lots of people think that, but I’ve never run across a proposal that could even marginalize the practice. The idea isn’t that you could ever enforce 0% interest absolutely, but rather that by having 0% money available for loans, lending at interest would be stigmatized and discouraged. The problem of the politically connected being able to game the system is certainly present, but it is also present now. It could be made a condition of borrowing in the first place that the money would not be re-lent at interest – perhaps that would address the problem somewhat. I am sensitive to the idea that there is a strong inclination towards lending and borrowing in a developed economy but we are now experiencing frightful consequences of the practice that call for as much curtailment of it as is practicable.
I agree the “insatiable demand” for borrowed funds would also be a problem especially where funds available for the purpose would seem to be quite limited. I think funds could only be provided through taxation after the year moratorium is expired, or by the production of gold, which I do think the government should do directly in an effort to address this problem. It is possible that major gold production facilities and mines should be nationalized, but I haven’t thought that one through yet at all.
I don’t deny the positive aspects of lending at interest that you identify. I think they are outweighed by the negative ones, which are less noticeable at first but become crippling and insurmountable system wide later, as they have become now.
Thanks again for the comment.
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You might appreciate the significance of the idea of “seigniorage”, which is the subject of a post today, at least insofar as it might address the problem of the “insatiable demand” for loaned funds.
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I will assume both of you (the Poster of the Blog) and the (Poster of the first comment) are both Caucasian. Now with that out of the way I will give you two a historically oppressed person’s perspective = Black Man
A Debt Jubilee would be one of the best things to happen to all Americans in American History. For a majority of time in this economy African-America’s fortunes have been tied to fractional reserve banking and fiat currency (The Dollar) system which was used as mechanism in the current crisis to put them in sub-prime loans and other high interest (usury) products for the basics of life in our economy. Unless you live in Chicago or New York, you’re public transportation options are not good enough to live without a car. Companies will not hire you in many places if you have to depend on public transportation. I know this from personal experience. So you need to either own a home near the city (higher cost + higher payments + high interest = usury) or buy a car (lower housing cost + higher transportation cost + high interest car loans (usury) = permanent working poor or low wealth accumulation.
Combined with a 60 year old unemployment problem in communities with People of Color in which case even the best unemployment rate during LBJ which was 4%, it was still double for African-Americans (8%).
That’s why allowing a debt jubilee would give my parents ownership of their home. Allowing them to save their pensions. This would allow them to make improvements and updates to the home (replace the windows, redo the bathrooms, replace the carpet, install solar panels and bringing the backroom to code) Increasing its value, also increasing their net worth.
Why is JMRJ concerned about land owners? Again from personal experience, even when all the renters pay their rent on time, property owners of said apartment complex SELDOM makes repairs or updates unless a city inspector makes them/something breaks. When they want to increase the rent; Let’s be honest, that greed is a reality and don’t think for a minute that people won’t take the opportunity to get all tenants booted, make upgrades and bring in higher rent payers. This is their right to do as property owners, but is this right thing to do morally? I think you know the answer to that.
There plenty of worthwhile projects to invest it, as last count there is 2.1 Trillion dollars worth of infrastructure upgrades, stop with the ridiculous confidence fairy being taken hostage by Keynesian thinking…
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Anthony, thanks for the comment.
One thing you bring up is that your parents would be able to save their pensions. This is part of the problem of a debt jubilee. In all likelihood, the debt jubilee would eliminate their pensions, too. These things have trade-offs, unfortunately. It’s one of the things that makes it a complicated matter to address.
Even with that, I think the jubilee is a good idea. But it’s important to go into it with eyes open.
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Just eliminate debt entirely, even prospectively. All capital is equity and all risk is shared, and liabilities shrink if assets are devalued. End of problem. The Muslims knew this 1200 years ago and outlawed interest, gambling, and, in some interpretations, just about any risk apportioning terms in any contract.
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James, I took a quick look at your blog and noticed that in your last post you were very sensitive to the question of incentives for politicians dealing with the “health care” issue. It’s good to be sensitive to things like that. The kind of thinking you have done over there is the same kind of thinking required to address the issues we’re facing right now.
There has been a strong preference for debt financing as opposed to equity financing in business. This is part of the rise of the financial sector. Equity financing is straightforward and, as you say, everybody’s taking the same risk. Debt financing is placing the lender in a preferred position. Plus it can get endlessly complicated.
Think about this one: debt is primarily grounded in contract; equity is primarily grounded in property. Those are two different categories of thinking about social and legal relationships. Two different courses usually taken up in first year law school.
Eliminate debt entirely, even prospectively? Well, you’re going to have to think that through a little better for me. The jubilee I have proposed in fact eliminates almost every debt except those that are required to preserve a semblance of a money supply.
But jubilees are traditional, even if they haven’t been done in modern times. Eliminating debt “prospectively”? As in, the very idea of debt will disappear? It’s one thing to eliminate interest and usury, and that’s not strictly a muslim idea, either. But you’re talking about more than that.
I don’t know how you would accomplish it. I don’t even know whether it’s a good idea. It’s like saying we’ll eliminate the idea of contracts or the idea of property. Yet these are fundamental categories of the way we relate to one another socially and legally. I wouldn’t take them off the table for that reason alone. Maybe our categories are fundamentally flawed in some way.
But I think it’s more us that are fundamentally flawed. Human beings are beautiful but fundamentally flawed things. The flaws should be addressed, but they shouldn’t prompt a change in categories.
Debt is not a good thing, but it’s part of life, like death, with which it shares etymology. We don’t “eliminate” death, at least not in the worldly sense. If we’re lucky we keep it at bay for a while.
Same with debt, I think. It is a dangerous substance, like moral nitro glycerine. It has to be confined and contained, but we can never stamp it out. I think the jubilee respects that. Debt has gotten out of hand, it’s gotten the better of us. It’s killing us, literally and figuratively, and it needs to go back in its cage.
But we can’t kill the beast once and for all. He lives right along with us, tugging at our elbow day to day.
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Debt shifts risks from creditors to owners. As asset values shrink, the value of equity drops but the face amount of debt obligations do not, which places undue burdens on the debtor. It is this hierarchalization of human relations (i.e. equity subordinate in rights to debt) that Islamic finance principles consider unethical/immoral. I am very familiar with the legal differences between equity and debt–I would agree with your characterization of the nature of equity as a fiduciary relationship and debt as contractual, as you note. In a world without debt, investors in an enterprise are co-venturers or partners, with no priority or seniority except by virtue of share of equity. It works but economics types would argue that forcing everyone to accept the same risk/return profile (by eliminating leveraged returns) is “inefficient.” I’ve had enough of the rule of “efficiency” economics. By the way, I am not pushing Islamic finance because I am a fan of Islam as such, I just happen to admire the wisdom behind this particular aspect of Islamic legal doctrine, which I have (lightly) studied. Also, thanks for actually checking my blog, the last post was over a year ago and I mean to follow up on the “medical loss ratio” concept as it has actually played out in the regulations since then, and perhaps some other things, but time is scarce.
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Well the question is not so much whether the risk/return disparity is a good or bad thing, but whether it’s possible to mandate one and prohibit the other. Usury and indeed lending of any kind were also frowned upon in the Christian and Jewish traditions as well, I believe.
But, you know, if you try to prohibit it you just get loan sharking. There seems to be a human inclination to lend and borrow.
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