(Week 24 - Monday, Jan. 19 / 2009)
In the last column I introduced to this discussion the concept of "value-added", which is an expression used to describe the actual value that accrues to a resource from the earth as it is transformed, at first into a commodity (some would say "raw material"), and thence in successive steps to a finished product that is finally consumed. The value-added process has two parallel streams.
The first is a material stream, which is the series of incremental increases in the material worth of a product-in-the-making that results from the physical and intellectual contribution of each worker in the production chain as it evolves. The second is a monetary stream whereby each worker is compensated according to his net cost of production (i.e. expenses incidental to performing his step in the process), plus receives a profit to cover his living expenses, plus has enough left over monetarily to seed his next round of production.
"Value-added monetization" is the process by which the material and monetary streams of value-added are coordinated. Ideally, the result should be that monetary value accrues proportionally to material value at every step in the production process, and in such a way that it is equitable with respect to the efforts and needs of those who perform the work. The key to making the value-added monetization process work, then, is to maintain this equitable proportionality from raw-material inception to final-product consumption. The key to making this happen is to understand the concept of value-added from both private (micro-economic) and national (macro-economic) perspectives.
"Value-added monetization" in the Private (micro) Economy:
"Value-added monetization" in the private (micro) economy is the process by which the prices of different products relative to each other evolve through the exchange process in the marketplace, given the amount of money in circulation. The price for any given product will tend towards an equilibrium which determines essentially the monetary value-added of each step in the production chain.
To illustrate, if there was a high level of money in circulation relative to economic activity at current prices, then prices would trend upward until a new equilibrium is reached. Economists would describe this upward readjustment of prices to fit the money supply as "inflation".
Conversely, if there a low level of money in circulation relative to economic activity at current prices, then prices would trend downward until a new equilibrium is reached. Economists would describe this downward readjustment of prices to fit the money supply as "deflation".
Ideally, this tendency in the marketplace to seek a new equilibrium has the effect of each product arriving at a price that truly expresses a balance between the material value-added involved in its production, and the monetary value-added that would reflect it. The principle is analogous to the water on two sides of a porous dam seeking its own level. According to whether the amount of currency in the monetary pool is high or low, the material worth vs. the monetary prices of all products will readjust until a new equilibrium is reached.
"Value-added monetization" in the National (macro) Economy:
"Value-added monetization" in the national (macro) economy is the process by which a determination is made of the amount of money to be issued into or withdrawn from circulation that would promote stable prices, given the total activity participants in the economy would be inclined to undertake. The object is to adjust the amount of currency in the monetary pool such that overall prices remain essentially stable. If a good balance between money supply and economic activity is struck, the price that each producer receives for his value-added contribution to the material worth of whatever product he is working with will tend to be predictable, equitable and sufficient.
This description of how the respective value-added monetization processes would correlate with each other from the private (micro) and national (macro) perspectives is, of course, ideal, but in my view the principle is understandable, sound, and practical. Correlation with this principle in the real world can be observed, but it has been very approximate at best. Indeed, it has broken down many times for individual sectors of the economy, and in the current financial crisis, the breakdown has become general. The reason for this is that the national (macro) economic function of creating, issuing and controlling money has been unwisely transferred to a private (micro) corporation. This is an unnatural economic order that breaks the correlation between the micro and macro monetization streams (due to the loss of monetary value-added through the "interest" charge on bank loans), that cannot help but result in the financial troubles the nation, and the world, are experiencing at present.
Richard Kotlarz
1904 1st Ave. S, #12
Minneapolis, MN 55403
218-828-1366
richkotlarz@gmail.com
The complete set of columns from this series is posted at the following websites.
http://economictree.blogspot.com/
http://www.concordresolution.org/column.htm
Tuesday, January 20, 2009
Sunday, January 18, 2009
Column #108 VALUE-ADDED
(Week 23 - Friday, Jan. 16 / 2009)
In the last two columns I have introduced to this discussion the concepts of "micro-taxation" and "macro-taxation" (taxation, respectively, by governmental bodies who do not, and who do, issue the money being collected). Questions arise as to how rates of micro and macro-taxation might be determined, how forms of taxation we are familiar with (income, property, sales, estate, etc.) fit into the picture, how might issues of equity be addressed, and many others. To create a basis for answering these it is necessary to introduce another fundamental concept into the discussion, "value-added".
"Value-added" is a term that is already common in economics, and is relatively familiar to the public in much of the world as a mode for taxation. This is especially true in Europe where the "value-added tax" (VAT) is the basis of the taxing regime. The idea is expressed by other names in various locales, as for example in Canada and New Zealand, where it is known as the "goods-&-services tax" (GST). The term is relatively less known (but not entirely unknown) in the United States due to the unique way our taxing structure has evolved, but is reflected in a very limited sense in how we think of the "sales tax", as well as the oft proposed "flat tax". All this notwithstanding, these and other expressions have been co-opted in a way that is not wholly consistent with economic reality by the "debt-money" financial culture, so our understanding of the term "value-added", and its derivative expressions could benefit by reconstructing them "from the ground up", so to speak.
Defining "Value-Added" and some Derivative Expressions:
The most fundamental rule of economics, in my view, is that one should think first in images of the actual material and human realities of economic enterprise, and only then add in the factor of money. As an exercise, let us track in our imagination the progress of a product as it emerges from the untapped resources of the earth through to final use.
Before its extraction, an untapped resource has no economic value as it merely lies there in the ground. Presently someone comes along to mine it, pick it, hunt it, fish it, pump it, cut it down, bulldoze it into a heap, or otherwise perform the task necessary to wrest it from the earth. When this raw material is gathered up into a form that can be offered on the market, it has become a "commodity". Someone with a use for it in mind then will buy it as a commodity.
Let us imagine wood that has been given value by a logger in the sense that he has put work into transforming it from standing trees, to logs ready to be picked up for other uses at the landing. This net increase of value is "value-added".
It may happen that the party who shows up to haul away the logs wants them for personal firewood, the additional processing for which he will do himself. This buyer then is the final "consumer". In this case there was only one value-added increment between unrealized potential in the earth (standing trees) and end product (firewood).
More commonly the party who shows up to purchase the logs does not want them for final consumption, but intends to process them into an intermediate product; a more refined commodity, if you will. He may, for example, be a lumberman looking to buy saw logs. He will pay a railroad to transport them to his mill, where he intends to saw them into lumber. From there a lumberyard will buy the lumber, hire a trucker to transport it to their location, and place it on racks where it is more accessible to those who need lumber for their enterprise. Let us further suppose that a contractor buys the lumber and makes it into a house, which is then sold to a consumer who wants to live in it.
If we track the wood from earth-to-log-to-train-to-sawmill-to-truck-to-yard-to-contractor-to-consumer we can easily see that an increment of value has been added to it at each stage of the process. In economic terms, each of these quantum increases are said to be "net value-added", and the sum of all these steps is the "total value-added" of the product.
Note that we have talked through this example so far without any reference to money. We have referred to value-added with respect only to the worth of the product in physical terms. Ideally, money enters the picture as a medium of convenience to facilitate the exchanges required to move the increasingly valuable product along. Each tradesman who performs his necessary task must be compensated according to his net "cost of production" (i.e. expenses incidental to performing his step in the process), plus receive a "profit" to cover his living expenses, plus have something left over for continuing his business.
For practical reasons these value-added increments must be expressed in monetary units. It follows, then, that these successive price increments (net value-added) accruing proportionally to each step in the process determine ultimately the price a consumer would need to pay (total value-added) in order to maintain overall economic equity for everyone who participated in bringing the wood from raw material to final product. I call this process "value-added monetization".
In the next column I will describe more specifically how this "value-added monetization" occurs.
Richard Kotlarz
1904 1st Ave. S, #12
Minneapolis, MN 55403
218-828-1366
richkotlarz@gmail.com
The complete set of columns from this series is posted at the following websites.
http://economictree.blogspot.com/
http://www.concordresolution.org/column.htm
In the last two columns I have introduced to this discussion the concepts of "micro-taxation" and "macro-taxation" (taxation, respectively, by governmental bodies who do not, and who do, issue the money being collected). Questions arise as to how rates of micro and macro-taxation might be determined, how forms of taxation we are familiar with (income, property, sales, estate, etc.) fit into the picture, how might issues of equity be addressed, and many others. To create a basis for answering these it is necessary to introduce another fundamental concept into the discussion, "value-added".
"Value-added" is a term that is already common in economics, and is relatively familiar to the public in much of the world as a mode for taxation. This is especially true in Europe where the "value-added tax" (VAT) is the basis of the taxing regime. The idea is expressed by other names in various locales, as for example in Canada and New Zealand, where it is known as the "goods-&-services tax" (GST). The term is relatively less known (but not entirely unknown) in the United States due to the unique way our taxing structure has evolved, but is reflected in a very limited sense in how we think of the "sales tax", as well as the oft proposed "flat tax". All this notwithstanding, these and other expressions have been co-opted in a way that is not wholly consistent with economic reality by the "debt-money" financial culture, so our understanding of the term "value-added", and its derivative expressions could benefit by reconstructing them "from the ground up", so to speak.
Defining "Value-Added" and some Derivative Expressions:
The most fundamental rule of economics, in my view, is that one should think first in images of the actual material and human realities of economic enterprise, and only then add in the factor of money. As an exercise, let us track in our imagination the progress of a product as it emerges from the untapped resources of the earth through to final use.
Before its extraction, an untapped resource has no economic value as it merely lies there in the ground. Presently someone comes along to mine it, pick it, hunt it, fish it, pump it, cut it down, bulldoze it into a heap, or otherwise perform the task necessary to wrest it from the earth. When this raw material is gathered up into a form that can be offered on the market, it has become a "commodity". Someone with a use for it in mind then will buy it as a commodity.
Let us imagine wood that has been given value by a logger in the sense that he has put work into transforming it from standing trees, to logs ready to be picked up for other uses at the landing. This net increase of value is "value-added".
It may happen that the party who shows up to haul away the logs wants them for personal firewood, the additional processing for which he will do himself. This buyer then is the final "consumer". In this case there was only one value-added increment between unrealized potential in the earth (standing trees) and end product (firewood).
More commonly the party who shows up to purchase the logs does not want them for final consumption, but intends to process them into an intermediate product; a more refined commodity, if you will. He may, for example, be a lumberman looking to buy saw logs. He will pay a railroad to transport them to his mill, where he intends to saw them into lumber. From there a lumberyard will buy the lumber, hire a trucker to transport it to their location, and place it on racks where it is more accessible to those who need lumber for their enterprise. Let us further suppose that a contractor buys the lumber and makes it into a house, which is then sold to a consumer who wants to live in it.
If we track the wood from earth-to-log-to-train-to-sawmill-to-truck-to-yard-to-contractor-to-consumer we can easily see that an increment of value has been added to it at each stage of the process. In economic terms, each of these quantum increases are said to be "net value-added", and the sum of all these steps is the "total value-added" of the product.
Note that we have talked through this example so far without any reference to money. We have referred to value-added with respect only to the worth of the product in physical terms. Ideally, money enters the picture as a medium of convenience to facilitate the exchanges required to move the increasingly valuable product along. Each tradesman who performs his necessary task must be compensated according to his net "cost of production" (i.e. expenses incidental to performing his step in the process), plus receive a "profit" to cover his living expenses, plus have something left over for continuing his business.
For practical reasons these value-added increments must be expressed in monetary units. It follows, then, that these successive price increments (net value-added) accruing proportionally to each step in the process determine ultimately the price a consumer would need to pay (total value-added) in order to maintain overall economic equity for everyone who participated in bringing the wood from raw material to final product. I call this process "value-added monetization".
In the next column I will describe more specifically how this "value-added monetization" occurs.
Richard Kotlarz
1904 1st Ave. S, #12
Minneapolis, MN 55403
218-828-1366
richkotlarz@gmail.com
The complete set of columns from this series is posted at the following websites.
http://economictree.blogspot.com/
http://www.concordresolution.org/column.htm
Thursday, January 15, 2009
Column #107 FURTHER THOUGHTS ON MICRO & MACRO-TAXATION
(Week 23 - Wednesday, Jan. 14 / 2009)
In the last column I introduced into the discussion the concepts of micro-taxation and macro-taxation, respectively. "Micro-taxation" is the process by which a governmental body that does not issue the currency in which payment for the taxes are accepted obtains revenue to meet its expenses, while "macro-taxation" is the process by which a governmental body that does issue the currency in which payment for the taxes are accepted removes from circulation the excess of currency that builds up in the monetary pool as it spends into circulation the money it creates.
Within the current American system, all taxes collected currently are micro in nature simply because the governmental body (Federal) that would issue the national currency has abdicated that responsibility to a private corporation. For purposes of discussion, I will assume the return of the franchise to create, issue and control the money supply to the national government, unless otherwise indicated.
This represents a radical departure from the way we commonly think about "taxes," especially at the Federal level. It is unfortunate that we use the same term (taxes) to cover both instances. I would suggest that it might be better to call the revenue collected by any level of government that does not issue the money collected as "taxes", and the money being retired from circulation by the Federal government as something else; say, "retirements" or "overflows." To be sure, such a change would take a bit of getting used to, but in my view it is imperative that we reclaim the consistency of our language if we are going establish clear thinking on monetary matters. Establishing unambiguous and descriptive terminology is one way to do it. I would invite anyone out there to see if they can come up with a better term.
In response to the last column, which introduced the concepts of micro-vs.-macro-taxation into the discussion, a reader asks, "what is it that keeps lower government micro-economic units (state county, municipal) from being just extensions of the Federal macro system? That is, why aren't the micro-level government expenses covered by the issuance of monies from the Federal Treasury? Should this be done? Why not make all government (regardless of level) expenses the macro-economic responsibility? What would be the consequences? Why would we, or wouldn't we want to do this?"
These are excellent questions. The key to understanding the answers is to keep in mind the nature of the micro-vs.-macro-economic functions themselves. The task of the macro-economy is to set up, by law, a matrix of rules, definitions and relationships whose purpose is to create conditions that allow the participants in the micro-economy to exercise "life, liberty and the pursuit of happiness" within the fullest possible expression of personal freedom, social equity, and the commonweal.
That said, let us return to the question, "What is it that keeps lower government micro-economic units (state, county, municipal) from being just extensions of the Federal macro system?" I would say that micro-units of government have largely become extensions of the Federal government now, simply because the Federal part of the system is no longer a macro-economic entity, but has become another "business" among businesses.
If there is a distinction to be made, it is that this "Federal business" retains the greatest ability to borrow money, and has therefore come to resemble a huge predatory corporation that swallows up the smaller corporations in an ongoing process of economically forced takeovers (notwithstanding that our government leaders, I have to believe, do not intend such an end). This tendency has accelerated with the current "bailout" process, whereby the Federal government borrows hundreds of billions of dollars to "rescue" (i.e., take control over) smaller corporations. The take-over aspects of the process tend to be obscured by euphemistic language about requiring more "control" and "accountability" in return for the money.
If the monetary franchise were returned to the Federal government, that in itself would distinguish it as a true macro-economic functionary, that by its very nature and operations would preclude its micro-economic participants from being perceived as being "just extensions" of the same thing.
As to the question, "Why aren't the micro-level government expenses covered by the issuance of monies from the Federal Treasury?", if micro-level government expenses were covered by the issuance of monies out of the Federal Treasury, it would cease effectively to be micro-level government. Without the power over their own purse strings, state and local governments would lose their independence and be relegated, in effect, to being budgetary departments of the macro-government. Political appearances notwithstanding, the operating distinction between levels has indeed become blurred due to the Federal government being obliged to provide the money to keep lesser government in operation out of the Federal's greater power to borrow money, which is then disbursed with "mandates" attached.
"Should this be done?" That is a political decision. I suggest that preserving the distinctions between micro and macro levels of government is an indispensable expression of the types of sovereignty (state, municipal, township, library district, etc.) that will organically arise in any society. It is, to put it another way, the critical means for the unfoldment of a free and diverse social order.
"Why not make all government (regardless of level) expenses the macro-economic responsibility?" We could have a national government, and nothing else. That would be the effect of having the Federal government pay for everything, but is that what we as a society want?
"What would be the consequences?" It would mean the hegemony over the entire social order through a single nexus of power.
"Why would we, or wouldn't we want to do this?" Ultimately, it is up to We the People as to whether we would want this or not. The key to answering the question is to become mindful of who we want, or allow, to exercise the money creation, issuance and control power.
We, as a society, have been making the choice for increasing social hegemony exercised out of an ever-constricting circle of control simply because we are letting the monetary question be answered by default out of our own (dare I say negligent) unconsciousness about money.
Richard Kotlarz
1904 1st Ave. S, #12
Minneapolis, MN 55403
218-828-1366
richkotlarz@gmail.com
The complete set of columns from this series is posted at the following websites.
http://economictree.blogspot.com/
http://www.concordresolution.org/column.htm
In the last column I introduced into the discussion the concepts of micro-taxation and macro-taxation, respectively. "Micro-taxation" is the process by which a governmental body that does not issue the currency in which payment for the taxes are accepted obtains revenue to meet its expenses, while "macro-taxation" is the process by which a governmental body that does issue the currency in which payment for the taxes are accepted removes from circulation the excess of currency that builds up in the monetary pool as it spends into circulation the money it creates.
Within the current American system, all taxes collected currently are micro in nature simply because the governmental body (Federal) that would issue the national currency has abdicated that responsibility to a private corporation. For purposes of discussion, I will assume the return of the franchise to create, issue and control the money supply to the national government, unless otherwise indicated.
This represents a radical departure from the way we commonly think about "taxes," especially at the Federal level. It is unfortunate that we use the same term (taxes) to cover both instances. I would suggest that it might be better to call the revenue collected by any level of government that does not issue the money collected as "taxes", and the money being retired from circulation by the Federal government as something else; say, "retirements" or "overflows." To be sure, such a change would take a bit of getting used to, but in my view it is imperative that we reclaim the consistency of our language if we are going establish clear thinking on monetary matters. Establishing unambiguous and descriptive terminology is one way to do it. I would invite anyone out there to see if they can come up with a better term.
In response to the last column, which introduced the concepts of micro-vs.-macro-taxation into the discussion, a reader asks, "what is it that keeps lower government micro-economic units (state county, municipal) from being just extensions of the Federal macro system? That is, why aren't the micro-level government expenses covered by the issuance of monies from the Federal Treasury? Should this be done? Why not make all government (regardless of level) expenses the macro-economic responsibility? What would be the consequences? Why would we, or wouldn't we want to do this?"
These are excellent questions. The key to understanding the answers is to keep in mind the nature of the micro-vs.-macro-economic functions themselves. The task of the macro-economy is to set up, by law, a matrix of rules, definitions and relationships whose purpose is to create conditions that allow the participants in the micro-economy to exercise "life, liberty and the pursuit of happiness" within the fullest possible expression of personal freedom, social equity, and the commonweal.
That said, let us return to the question, "What is it that keeps lower government micro-economic units (state, county, municipal) from being just extensions of the Federal macro system?" I would say that micro-units of government have largely become extensions of the Federal government now, simply because the Federal part of the system is no longer a macro-economic entity, but has become another "business" among businesses.
If there is a distinction to be made, it is that this "Federal business" retains the greatest ability to borrow money, and has therefore come to resemble a huge predatory corporation that swallows up the smaller corporations in an ongoing process of economically forced takeovers (notwithstanding that our government leaders, I have to believe, do not intend such an end). This tendency has accelerated with the current "bailout" process, whereby the Federal government borrows hundreds of billions of dollars to "rescue" (i.e., take control over) smaller corporations. The take-over aspects of the process tend to be obscured by euphemistic language about requiring more "control" and "accountability" in return for the money.
If the monetary franchise were returned to the Federal government, that in itself would distinguish it as a true macro-economic functionary, that by its very nature and operations would preclude its micro-economic participants from being perceived as being "just extensions" of the same thing.
As to the question, "Why aren't the micro-level government expenses covered by the issuance of monies from the Federal Treasury?", if micro-level government expenses were covered by the issuance of monies out of the Federal Treasury, it would cease effectively to be micro-level government. Without the power over their own purse strings, state and local governments would lose their independence and be relegated, in effect, to being budgetary departments of the macro-government. Political appearances notwithstanding, the operating distinction between levels has indeed become blurred due to the Federal government being obliged to provide the money to keep lesser government in operation out of the Federal's greater power to borrow money, which is then disbursed with "mandates" attached.
"Should this be done?" That is a political decision. I suggest that preserving the distinctions between micro and macro levels of government is an indispensable expression of the types of sovereignty (state, municipal, township, library district, etc.) that will organically arise in any society. It is, to put it another way, the critical means for the unfoldment of a free and diverse social order.
"Why not make all government (regardless of level) expenses the macro-economic responsibility?" We could have a national government, and nothing else. That would be the effect of having the Federal government pay for everything, but is that what we as a society want?
"What would be the consequences?" It would mean the hegemony over the entire social order through a single nexus of power.
"Why would we, or wouldn't we want to do this?" Ultimately, it is up to We the People as to whether we would want this or not. The key to answering the question is to become mindful of who we want, or allow, to exercise the money creation, issuance and control power.
We, as a society, have been making the choice for increasing social hegemony exercised out of an ever-constricting circle of control simply because we are letting the monetary question be answered by default out of our own (dare I say negligent) unconsciousness about money.
Richard Kotlarz
1904 1st Ave. S, #12
Minneapolis, MN 55403
218-828-1366
richkotlarz@gmail.com
The complete set of columns from this series is posted at the following websites.
http://economictree.blogspot.com/
http://www.concordresolution.org/column.htm
Tuesday, January 13, 2009
Column #106 MICRO-TAXATION & MACRO-TAXATION
(Week 23 - Monday, Jan. 12 / 2009)
There are, in my view, two types of taxation:
One is "micro-taxation," which is taxation by a governmental body that is not issuing the currency in which payments for the taxes are made. Ideally, this would include taxation by states, cities, counties, townships, transportation districts; essentially any level of government below the Federal.
The other is "macro-taxation," which is taxation by a governmental body that is issuing the currency in which payments for the taxes are made. In the American system as currently configured, all taxes being paid are actually micro in nature because the body that creates our money is no longer the US Treasury under the auspices of the Federal government, but rather the private banking system under the auspices of the Federal Reserve. If the franchise for the creation and issuance of our nation's money were restored to the public sector, then the Federal government would by definition be practicing macro-taxation.
Despite their being virtually identical in outward appearance, micro and macro-taxation are very different processes with very different purposes:
The purpose of micro-taxation is to raise revenue for a governmental body that needs a source of money to meet its expenses. In this respect, such bodies are much like other entities that operate in the micro-economic realm (i.e. individuals, businesses and corporations).
The purpose of macro-taxation is to return money that is in excess of the requirements of commerce to the governmental body that created and issued it into circulation via direct spending. Such a body does not need a source of revenue to meet its expenses because it has the power to create money. Currently within the American economic system the only body with the power to create money is the Federal Reserve, but this is a private corporation, not an agency of the government (in spite of what its name might lead one to think). This is why, specifically, the Federal government operates at a "deficit," and can even be said to "run up a debt." Monetarily speaking, it is operating, effectively, as a "business" in the micro-economic realm (see Col. #38 – "The United States as a Business").
I cannot recall ever hearing the terms "micro-taxation" and "macro-taxation" used and/or contrasted explicitly, especially not in a way that that makes clear the respective distinctions between them. I can hardly imagine that they do not exist in the dictionary of economic expressions in some form. After all the major division in the study of economics in academia from the outset is between micro and macro-economics, but even in the many macro-economic analyses and pronouncements I have encountered, taxation has been referred to only in a micro-economic sense (i.e. as a way to raise revenue to pay government expenses).
How, then, can we describe how macro-taxation works? If we had a monetary system whereby currency was issued directly out of the US Treasury, much, most or all of it (depending on legislated public policy) would enter circulation via "government spending" ("public monetization" would be a more accurate expression). This would create a continuous flow of funds into the money supply, or as it is sometimes called, the "monetary pool." If such a buildup were allowed to continue unchecked the amount of money in the monetary pool would, after a time, exceed what was required to facilitate commerce at current price levels, and this would, in turn, cause an unchecked escalation of prices; what is commonly called "inflation." The way to regulate this process is through macro-taxation.
Assuming that the public creation and issuance of money were re-implemented, macro-taxation would serve two main functions:
One is to act as an overflow device for the monetary pool. When money is injected into circulation via Federal spending, the amount of currency in the monetary pool would be allowed to build up to an optimum level. Any excess that enters after that is essentially monetary overflow, and would be drained out of the pool via macro-taxation. The amount of money in circulation, then, can be controlled easily and transparently by adjusting the rate of macro-taxation (essentially the height of the overflow spillway).
The other main function is to provide a way to "renew" the money in circulation. As overflow currency is removed from circulation, it can then be extinguished and reissued afresh as the Federal government needs money. The very idea of extinguishing currency can be experienced as somewhat disheartening, especially given that one has sent in one's "hard-earned money" to pay the tax, but there is actually nothing lost in the process, since it amounts essentially to the entry and deletion of numbers in an electronic ledger.
At length, a balance will emerge within the macro-economy (i.e. the national economy as a whole) between the amount of actual economic activity performed or paid for by the Federal government (the macro-economic entity), as opposed to that performed or paid for by the aggregate of individuals, businesses, corporations and governmental-bodies-below-Federal (the aggregate of micro-economic participants). The percentage of the total attributable to the Federal government essentially determines the macro-taxing rate (percentage of economic activity to be paid as taxes).
This discussion of micro and macro-taxation will be continued in the next column.
Richard Kotlarz
1904 1st Ave. S, #12
Minneapolis, MN 55403
218-828-1366
richkotlarz@gmail.com
The complete set of columns from this series is posted at the following websites.
http://economictree.blogspot.com/
http://www.concordresolution.org/column.htm
There are, in my view, two types of taxation:
One is "micro-taxation," which is taxation by a governmental body that is not issuing the currency in which payments for the taxes are made. Ideally, this would include taxation by states, cities, counties, townships, transportation districts; essentially any level of government below the Federal.
The other is "macro-taxation," which is taxation by a governmental body that is issuing the currency in which payments for the taxes are made. In the American system as currently configured, all taxes being paid are actually micro in nature because the body that creates our money is no longer the US Treasury under the auspices of the Federal government, but rather the private banking system under the auspices of the Federal Reserve. If the franchise for the creation and issuance of our nation's money were restored to the public sector, then the Federal government would by definition be practicing macro-taxation.
Despite their being virtually identical in outward appearance, micro and macro-taxation are very different processes with very different purposes:
The purpose of micro-taxation is to raise revenue for a governmental body that needs a source of money to meet its expenses. In this respect, such bodies are much like other entities that operate in the micro-economic realm (i.e. individuals, businesses and corporations).
The purpose of macro-taxation is to return money that is in excess of the requirements of commerce to the governmental body that created and issued it into circulation via direct spending. Such a body does not need a source of revenue to meet its expenses because it has the power to create money. Currently within the American economic system the only body with the power to create money is the Federal Reserve, but this is a private corporation, not an agency of the government (in spite of what its name might lead one to think). This is why, specifically, the Federal government operates at a "deficit," and can even be said to "run up a debt." Monetarily speaking, it is operating, effectively, as a "business" in the micro-economic realm (see Col. #38 – "The United States as a Business").
I cannot recall ever hearing the terms "micro-taxation" and "macro-taxation" used and/or contrasted explicitly, especially not in a way that that makes clear the respective distinctions between them. I can hardly imagine that they do not exist in the dictionary of economic expressions in some form. After all the major division in the study of economics in academia from the outset is between micro and macro-economics, but even in the many macro-economic analyses and pronouncements I have encountered, taxation has been referred to only in a micro-economic sense (i.e. as a way to raise revenue to pay government expenses).
How, then, can we describe how macro-taxation works? If we had a monetary system whereby currency was issued directly out of the US Treasury, much, most or all of it (depending on legislated public policy) would enter circulation via "government spending" ("public monetization" would be a more accurate expression). This would create a continuous flow of funds into the money supply, or as it is sometimes called, the "monetary pool." If such a buildup were allowed to continue unchecked the amount of money in the monetary pool would, after a time, exceed what was required to facilitate commerce at current price levels, and this would, in turn, cause an unchecked escalation of prices; what is commonly called "inflation." The way to regulate this process is through macro-taxation.
Assuming that the public creation and issuance of money were re-implemented, macro-taxation would serve two main functions:
One is to act as an overflow device for the monetary pool. When money is injected into circulation via Federal spending, the amount of currency in the monetary pool would be allowed to build up to an optimum level. Any excess that enters after that is essentially monetary overflow, and would be drained out of the pool via macro-taxation. The amount of money in circulation, then, can be controlled easily and transparently by adjusting the rate of macro-taxation (essentially the height of the overflow spillway).
The other main function is to provide a way to "renew" the money in circulation. As overflow currency is removed from circulation, it can then be extinguished and reissued afresh as the Federal government needs money. The very idea of extinguishing currency can be experienced as somewhat disheartening, especially given that one has sent in one's "hard-earned money" to pay the tax, but there is actually nothing lost in the process, since it amounts essentially to the entry and deletion of numbers in an electronic ledger.
At length, a balance will emerge within the macro-economy (i.e. the national economy as a whole) between the amount of actual economic activity performed or paid for by the Federal government (the macro-economic entity), as opposed to that performed or paid for by the aggregate of individuals, businesses, corporations and governmental-bodies-below-Federal (the aggregate of micro-economic participants). The percentage of the total attributable to the Federal government essentially determines the macro-taxing rate (percentage of economic activity to be paid as taxes).
This discussion of micro and macro-taxation will be continued in the next column.
Richard Kotlarz
1904 1st Ave. S, #12
Minneapolis, MN 55403
218-828-1366
richkotlarz@gmail.com
The complete set of columns from this series is posted at the following websites.
http://economictree.blogspot.com/
http://www.concordresolution.org/column.htm
Saturday, January 10, 2009
Column #105 THE ROOT CAUSE OF "INFLATION"
(Week 22 - Friday, Jan. 9 / 2009)
The root cause of inflation within the present system is the "interest" charge attached to the private bank loans by which our money supply is created and loaned into circulation. It is really, I suggest, about as simple as that. To be sure, there are secondary factors that exacerbate inflationary tendencies, but these are mainly psychological, and derive from the inexorable effects of charging "interest" on money at the point of issuance. This may seem strange to the modern ear, given the profusion of arcane economic analysis in the media and academia that portrays "inflation" as if it were some insoluble economic phenomenon that we can only hope to keep under control through sound "business" management.
The truth is, in my view, that "inflation" is not some phantasmal monetary lion roaming about seeking what economic chaos it can cause and whosever's wealth it may devour, but rather the straightforward result of something that We the People permit to be done with our money; that is, we permit it to be created and loaned into circulation from a private corporate entity (the Federal Reserve and private banking system) at "interest." When we stop that practice, the fuel will be withdrawn from the "inflationary" fire.
It is true that "inflation" would still be possible under the auspices of a public monetary system if too much money were issued, but that would be an unlikely outcome within a system that was transparently amenable to control. As it is now, "inflation" has plagued this society, and indeed most of the world, as a mysterious specter for the almost-century since "debt-money" was firmly established as the basis of the monetary system, and hardly anyone with significant influence or control within the system seems to know what to do about it.
To understand the root cause of "inflation" we need only look at how a typical bank loan plays out over time. Suppose that an entrepreneur were to borrow money from a bank to build a small factory. The banker would create the money when he writes the check, and the entrepreneur would spend it into circulation when he paid whatever contractors were hired to build his factory.
Let us suppose further that the term of that loan was ten years. That means that over ten years time, the manufacturing firm that was set up in that factory would have to charge enough for its products to earn back the money to satisfy the contract which spelled out the terms by which the loan would be repaid.
If, hypothetically, there were no "interest" charges on the loan, then the amount to be repaid would be only the original principle balance. Under current practices, however, there would be an "interest" charge which would, typically, more-or-less double the amount of money required to be "paid back" over ten years. It is obvious that this doubled "cost" would have to be covered in higher prices charged by the factory for whatever goods it produced. What is more, this increased "cost" is in no way associated with an enhanced material input into the product. Clearly, then, the price of the product will be "inflated" by the "interest" charge.
But the matter does not end there. The money paid to cover the "interest" goes to financial speculators who have purchased "debt"-based financial instruments (loan contracts, bundled mortgages, bonds, etc.) for the very purpose of receiving those remittances. Assuming that they are not going to spend that money themselves, or gift it back to society through philanthropic efforts, they will effectively withhold those funds from circulation until someone borrows them back into circulation. When that happens we say in the current financial culture that these funds were "reinvested," but the overall burden of "debt" borne by the money supply will have been increased without, even, the injection of newly-created money to help bear it. New money will eventually have to borrowed into existence from private banks to help roll over the growing "interest" charge, and this in turn will have to be factored into the "cost" of producing more goods, thus driving up prices.
It should be noted here that under a public monetary system, a given private enterprise may or may not be eligible to borrow money directly, not-at-interest, from the public sector. That would be a matter of public policy. However that is worked out, it is still a fact that the aggregate "interest" burden borne by the participants in the micro-economy would be reduced by whatever payments would have been required to maintain a money supply borrowed from a private banking system in circulation.
In any case, the vicious spiral I have described here has been the very engine of "inflation" in our economy for almost a century. The expectation that prices will continue to rise is, in itself, a factor that insures that "inflation" will continue to roll. This becomes manifest in price structures, wage labor contracts, budgetary expectations and other hedges in the behaviors of participants in the micro-economy as they try to hold their own against what they anticipate as an inflationary tide.
This can go on only so long before confidence in the monetary scheme collapses, and indeed in the current financial crisis the tide is beginning to turn as we enter a deflationary period. This "deflation," is not an orderly reversing of the inflationary process, but rather a traumatic popping of the inflationary bubble. If the present "debt"-based system can be stabilized for another round of "economic growth" (by no means a sure prospect at this juncture), then the "inflation" dragon will rise again.
Originally the Federal Reserve System was proposed to the public as a means of creating a stable circulating currency of constant buying power. What has the ninety-six years of its existence shown? In 1913, the value of the dollar was approximately the same as it had been a century earlier. Immediately after the establishment of the Fed, prices began to inflate on a more-or-less continuous basis until the dollar today is worth only about 1/20 of its original value. This is because the monetary scheme implemented by the Fed is based on issuing money through loans to which a compounding "interest" charge is attached, and these compounding charges for the use of money must be covered as a cost of doing business; ergo "inflation."
In my view, though we as a nation did not adequately realize it at the time, the mode by which money would be created and issued under the Fed made this outcome a virtually forgone conclusion.
Richard Kotlarz
1904 1st Ave. S, #12
Minneapolis, MN 55403
218-828-1366
richkotlarz@gmail.com
The complete set of columns from this series is posted at the following websites.
http://economictree.blogspot.com/
http://www.concordresolution.org/column.htm
The root cause of inflation within the present system is the "interest" charge attached to the private bank loans by which our money supply is created and loaned into circulation. It is really, I suggest, about as simple as that. To be sure, there are secondary factors that exacerbate inflationary tendencies, but these are mainly psychological, and derive from the inexorable effects of charging "interest" on money at the point of issuance. This may seem strange to the modern ear, given the profusion of arcane economic analysis in the media and academia that portrays "inflation" as if it were some insoluble economic phenomenon that we can only hope to keep under control through sound "business" management.
The truth is, in my view, that "inflation" is not some phantasmal monetary lion roaming about seeking what economic chaos it can cause and whosever's wealth it may devour, but rather the straightforward result of something that We the People permit to be done with our money; that is, we permit it to be created and loaned into circulation from a private corporate entity (the Federal Reserve and private banking system) at "interest." When we stop that practice, the fuel will be withdrawn from the "inflationary" fire.
It is true that "inflation" would still be possible under the auspices of a public monetary system if too much money were issued, but that would be an unlikely outcome within a system that was transparently amenable to control. As it is now, "inflation" has plagued this society, and indeed most of the world, as a mysterious specter for the almost-century since "debt-money" was firmly established as the basis of the monetary system, and hardly anyone with significant influence or control within the system seems to know what to do about it.
To understand the root cause of "inflation" we need only look at how a typical bank loan plays out over time. Suppose that an entrepreneur were to borrow money from a bank to build a small factory. The banker would create the money when he writes the check, and the entrepreneur would spend it into circulation when he paid whatever contractors were hired to build his factory.
Let us suppose further that the term of that loan was ten years. That means that over ten years time, the manufacturing firm that was set up in that factory would have to charge enough for its products to earn back the money to satisfy the contract which spelled out the terms by which the loan would be repaid.
If, hypothetically, there were no "interest" charges on the loan, then the amount to be repaid would be only the original principle balance. Under current practices, however, there would be an "interest" charge which would, typically, more-or-less double the amount of money required to be "paid back" over ten years. It is obvious that this doubled "cost" would have to be covered in higher prices charged by the factory for whatever goods it produced. What is more, this increased "cost" is in no way associated with an enhanced material input into the product. Clearly, then, the price of the product will be "inflated" by the "interest" charge.
But the matter does not end there. The money paid to cover the "interest" goes to financial speculators who have purchased "debt"-based financial instruments (loan contracts, bundled mortgages, bonds, etc.) for the very purpose of receiving those remittances. Assuming that they are not going to spend that money themselves, or gift it back to society through philanthropic efforts, they will effectively withhold those funds from circulation until someone borrows them back into circulation. When that happens we say in the current financial culture that these funds were "reinvested," but the overall burden of "debt" borne by the money supply will have been increased without, even, the injection of newly-created money to help bear it. New money will eventually have to borrowed into existence from private banks to help roll over the growing "interest" charge, and this in turn will have to be factored into the "cost" of producing more goods, thus driving up prices.
It should be noted here that under a public monetary system, a given private enterprise may or may not be eligible to borrow money directly, not-at-interest, from the public sector. That would be a matter of public policy. However that is worked out, it is still a fact that the aggregate "interest" burden borne by the participants in the micro-economy would be reduced by whatever payments would have been required to maintain a money supply borrowed from a private banking system in circulation.
In any case, the vicious spiral I have described here has been the very engine of "inflation" in our economy for almost a century. The expectation that prices will continue to rise is, in itself, a factor that insures that "inflation" will continue to roll. This becomes manifest in price structures, wage labor contracts, budgetary expectations and other hedges in the behaviors of participants in the micro-economy as they try to hold their own against what they anticipate as an inflationary tide.
This can go on only so long before confidence in the monetary scheme collapses, and indeed in the current financial crisis the tide is beginning to turn as we enter a deflationary period. This "deflation," is not an orderly reversing of the inflationary process, but rather a traumatic popping of the inflationary bubble. If the present "debt"-based system can be stabilized for another round of "economic growth" (by no means a sure prospect at this juncture), then the "inflation" dragon will rise again.
Originally the Federal Reserve System was proposed to the public as a means of creating a stable circulating currency of constant buying power. What has the ninety-six years of its existence shown? In 1913, the value of the dollar was approximately the same as it had been a century earlier. Immediately after the establishment of the Fed, prices began to inflate on a more-or-less continuous basis until the dollar today is worth only about 1/20 of its original value. This is because the monetary scheme implemented by the Fed is based on issuing money through loans to which a compounding "interest" charge is attached, and these compounding charges for the use of money must be covered as a cost of doing business; ergo "inflation."
In my view, though we as a nation did not adequately realize it at the time, the mode by which money would be created and issued under the Fed made this outcome a virtually forgone conclusion.
Richard Kotlarz
1904 1st Ave. S, #12
Minneapolis, MN 55403
218-828-1366
richkotlarz@gmail.com
The complete set of columns from this series is posted at the following websites.
http://economictree.blogspot.com/
http://www.concordresolution.org/column.htm
Thursday, January 8, 2009
Column #104 WHY PUBLIC MONEY IS NOT INFLATIONARY
(Week 22 - Wednesday, Jan. 7 / 2009)
Perhaps the most common question I hear when the idea of direct public funding (as opposed to the issuance of money via private bank loans) comes up is, "What is to prevent all this currency being issued out of the US Treasury from flooding the economy with too much money and causing inflation?"
Public funding, assuming it is done with a minimal level of integrity, is by nature not inflationary. Indeed, it is the practical answer to inflation. It is amenable to being issued in a manner that is direct and proportionate to the actual economic activity monetized.
As with almost any other mode of disbursement, public money is, presumably, not passed out willy-nilly. It is, rather, issued as part of a transparent and orderly monetization process that is coupled with the production of real wealth (e.g. public infrastructure), or the provision of tangible human benefits (e.g. health care). Another way of saying this is that money is emitted as a complement to genuine human enterprise, which is indeed its "backing."
This process could still be abused, of course, but it is hard to imagine it ever becoming as disconnected from economic accountability as with the hundreds of billions of dollars that are being passed out currently to purchase "troubled assets" (e.g. the "securities" attached to already failed ventures) in the present financial crisis. This out-of-control issuance is caused by the supposed need to "keep the banking system from collapsing," which is another way of saying the need to make the "interest" payments on old loans required to maintain money in circulation. The resultant "need" to constantly expand the pool of circulating medium with ever more sums of borrowed money would not exist within a public system, and that, in turn, would remove the essential fuel from the "inflationary" fire.
Much has been made of the supposed tendency for uncontrolled spending by politicians when they get their hands on the public purse strings. Well, for better or worse, they have "their hands on the public purse strings" now.
Furthermore, even if we were to assume the worst concerning the character of our elected representatives, would it be better if they were spending money that had a compounding "interest" charge payable to private interests attached, or funds emitted essentially at no cost directly out of the Treasury?
I seem to recall scandalous reports in the news some years ago about how the space agency NASA had paid $900 dollars for a hammer, and other such outrages. I would ask, would it be better if that hammer were purchased with money issued directly out of the US Treasury, or with funds borrowed at "interest" from the Fed? If it were paid for with money borrowed at "interest" out of the Fed, the $900 dollar price tag would be only the beginning of the cost. The "interest" charge would be added to the Federal "debt," and more money would have to be borrowed by the government to make up for that charge, which would, in turn, cause over time a further compounding of the "debt." In practice, the "cost" of the hammer would always be with us and never cease to mount.
If, on the other hand, the hammer were paid for with money issued out of the Treasury, the "cost" would be $900, and no more. The unjustifiably high price (if indeed it is that) is not a function of the monetary system. It is the result of poor bureaucratic management and lax political control. However inflated the price of an item might be, nothing is gained, and indeed much is lost by purchasing it with money borrowed at "interest."
The problem with the current private system is that it has virtually no transparency. Indeed, the bank-money financial system is a knot of complexity that even the experts cannot seem to effectively penetrate. Instead the public is subjected to endless political promises, partisan ideologies and economic bromides within an intellectual atmosphere that is basically confused. If the public cannot understand how money is being created, issued and controlled, how then can there be accountability? The direct public issuance of money would cut through the lack of transparency, control and accountability, which, in the end, is the key to controlling "inflation."
In the next column I will describe more specifically the root mechanism that currently drives "inflation."
Richard Kotlarz
1904 1st Ave. S, #12
Minneapolis, MN 55403
218-828-1366
richkotlarz@gmail.com
The complete set of columns from this series is posted at the following websites.
http://economictree.blogspot.com/
http://www.concordresolution.org/column.htm
Perhaps the most common question I hear when the idea of direct public funding (as opposed to the issuance of money via private bank loans) comes up is, "What is to prevent all this currency being issued out of the US Treasury from flooding the economy with too much money and causing inflation?"
Public funding, assuming it is done with a minimal level of integrity, is by nature not inflationary. Indeed, it is the practical answer to inflation. It is amenable to being issued in a manner that is direct and proportionate to the actual economic activity monetized.
As with almost any other mode of disbursement, public money is, presumably, not passed out willy-nilly. It is, rather, issued as part of a transparent and orderly monetization process that is coupled with the production of real wealth (e.g. public infrastructure), or the provision of tangible human benefits (e.g. health care). Another way of saying this is that money is emitted as a complement to genuine human enterprise, which is indeed its "backing."
This process could still be abused, of course, but it is hard to imagine it ever becoming as disconnected from economic accountability as with the hundreds of billions of dollars that are being passed out currently to purchase "troubled assets" (e.g. the "securities" attached to already failed ventures) in the present financial crisis. This out-of-control issuance is caused by the supposed need to "keep the banking system from collapsing," which is another way of saying the need to make the "interest" payments on old loans required to maintain money in circulation. The resultant "need" to constantly expand the pool of circulating medium with ever more sums of borrowed money would not exist within a public system, and that, in turn, would remove the essential fuel from the "inflationary" fire.
Much has been made of the supposed tendency for uncontrolled spending by politicians when they get their hands on the public purse strings. Well, for better or worse, they have "their hands on the public purse strings" now.
Furthermore, even if we were to assume the worst concerning the character of our elected representatives, would it be better if they were spending money that had a compounding "interest" charge payable to private interests attached, or funds emitted essentially at no cost directly out of the Treasury?
I seem to recall scandalous reports in the news some years ago about how the space agency NASA had paid $900 dollars for a hammer, and other such outrages. I would ask, would it be better if that hammer were purchased with money issued directly out of the US Treasury, or with funds borrowed at "interest" from the Fed? If it were paid for with money borrowed at "interest" out of the Fed, the $900 dollar price tag would be only the beginning of the cost. The "interest" charge would be added to the Federal "debt," and more money would have to be borrowed by the government to make up for that charge, which would, in turn, cause over time a further compounding of the "debt." In practice, the "cost" of the hammer would always be with us and never cease to mount.
If, on the other hand, the hammer were paid for with money issued out of the Treasury, the "cost" would be $900, and no more. The unjustifiably high price (if indeed it is that) is not a function of the monetary system. It is the result of poor bureaucratic management and lax political control. However inflated the price of an item might be, nothing is gained, and indeed much is lost by purchasing it with money borrowed at "interest."
The problem with the current private system is that it has virtually no transparency. Indeed, the bank-money financial system is a knot of complexity that even the experts cannot seem to effectively penetrate. Instead the public is subjected to endless political promises, partisan ideologies and economic bromides within an intellectual atmosphere that is basically confused. If the public cannot understand how money is being created, issued and controlled, how then can there be accountability? The direct public issuance of money would cut through the lack of transparency, control and accountability, which, in the end, is the key to controlling "inflation."
In the next column I will describe more specifically the root mechanism that currently drives "inflation."
Richard Kotlarz
1904 1st Ave. S, #12
Minneapolis, MN 55403
218-828-1366
richkotlarz@gmail.com
The complete set of columns from this series is posted at the following websites.
http://economictree.blogspot.com/
http://www.concordresolution.org/column.htm
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