The whole of science is nothing more than the refinement of everyday thinking.
– Albert Einstein
(Video). If these ideas enter mainstream US political debate, the entire landscape will be re-arranged. Many former allies will become adversaries, and vice-versa, in a shattering and reorienting of coalitions. This process will be much faster than the political class is accustomed to, since the speed inherent to the ATOM cannot be kept out of political processes for much longer. Count this as yet another long-overdue disruption that makes way for appropriate modernization.
A robust, entirely fair, and rapidly-rising safety net combined with an eventual income tax rate of zero is what is possible when the aforementioned checkerboard analogy is transformed and turned into a chessboard, where allsquares are used. Society advances when both the left and right are competing to see who has better ideas, and where each side can admit when another had a good idea. I have always been a registered Independent and a ‘classical liberal’, and hence quite neutral in contemporary American politics, while being a co-blogger on both right and left-leaning blogs. But since it is the left that drives the political agenda in the US and with Republicans only reacting to the space that the left creates, I predict that of the two sides, I will be working with the Democratic Party to move these ideas forward. It is an exciting prospect to bring transformative ideas to the left, making long-sought goals of a guaranteed minimum income and deep safety net possible. This can lead to a return to the optimistic, can-do liberalism of yesteryear. This in turn improves the right as well. It is not an exaggeration to say that the decoupling of a robust, dynamic safety net from taxation may save democracy from itself.
With the general public, many types of petty property crime and financially-driven depression will greatly decrease, not just due to the stipend, but from the knowledge that it increases at a brisk rate each month. This is a significant alteration to the psychology of personal finance, and the relationship that people have with their own future-orientation hence adjusts favorably. While there will always be people who continue to squander all incoming money in addictions or mismanagement, there will be a wider gap between circumstantial and self-inflicted hardship.
High-crime urban communities may get a major makeover with the injection of capital, creating a chance for new local business formation and social cohesion where there previously was none. The stipend creates a strong incentive for young people not to default into gang membership. Why risk an early death or incarceration when your stipend starts from age 18 and rises so quickly each year? This is where the DUES provides a compound solution across both urban ghettoes and withering rural towns with undiversified economies.
The stipend enables an unprecedented degree of economic mobility, evening out some location-chained economic distortions. Some lower-income Americans in expensive coastal cities might elect to relocate to smaller towns in the interior with much lower costs of living, and look for a job after arrival with the stipend bridging the gap in between. There is far too little research into how much an individual benefits from just a slight increase in their economic ‘leash’, which is what we will see here.
Depopulated locations with excess housing supply will see a new influx of settlers snapping up low-cost properties without an immediate need for employment. As enough of them arrive, their critical mass creates a new local economy to revive the area. Regional supply/demand mismatches of housing will even out, as jobs can emerge after the arrivals settle and generate economic activity. Another set of Americans may choose to relocate overseas to a country where the stipend stretches much further. A retiree couple earning two stipends could retire in luxury in Latin America, the Caribbean, or Southeast Asia, with no worry about outliving their money. Choices that seemed impossible become entirely attainable with the DUES, and the unnoticed burden of economic bondage is greatly reduced.
The middle class sees a phoenix-like resurgence from an elixir that addresses the poorly understood challenges they face, as the stipend is uncorrelated to their home equity, employment security, and mutual funds, all of which decline at the same time during a recession. The DUES, by contrast, keeps rising quickly even through a recession, indeed at an even faster rate than before if the recession features excessive deflation. This buffer reduces the pressure the unemployed face to liquidate their home or other assets at a low price during this period.
Schemes such as the mortgage interest deduction, ostensibly created to help the middle class, are actually detrimental to an unemployed person with no income to write off mortgage interest against. Such a deduction ends up widening the gulf between the employed and unemployed, and the removal of income tax altogether eradicates this hidden vulnerability in the process. Such an independent cushion through the Peace of Mind Dividend addresses the collective blind spot of what truly causes middle class duress in recessions. In accordance with Nasim Taleb’s concepts of fragility and anti-fragility, the middle class moves from an existence that is quite fragile in the face of rapid technological change, to considerably higher anti-fragility and true participation in the ATOM.
Immigration to the US will automatically self-select for the highest skill levels since an immigrant, ineligible for the stipend, is at a structural disadvantage relative to US citizens in the job market. This disadvantage is inversely proportional to the skill level of the immigrant, until the immigrant becomes a citizen many years later. This solution thus addresses almost all of the complicated subtopics within the immigration debate at once, from the skill level of immigrants to the competitiveness of domestic workers in relation to recent immigrants, to even the geographic distribution of immigrants within the US. Most illegal immigration will stop of its own accord, since the illegal immigrant is not on a path to receiving a stipend and is uncompetitive in the labor market against stipend-receiving Americans. The stipend hence has ripple effects that repair the seemingly intractable topic of immigration (particularly skilled and legal vs. unskilled and illegal) with nearly perfect precision.
The DUES is particularly helpful to women. For one thing, women live a few years longer than men, so they collect more total funds over the course of their lifetime. Beyond that, there is much discussion about the tradeoffs that mothers incur in taking years off of their careers to have children. The DUES provides exceptional flexibility as a crucial buffer in these circumstances, as does the removal of income taxes, and thus the penalty on the second income that married couples face. There is also the topic of considerable intra-woman hostility from tax-paying career women towards benefit-receiving single mothers, even as individual circumstances vary greatly within both groups. The removal of income tax combined with an identical stipend for all adults irrespective of whether they have children substantially addresses the complicated nuances of fairness in such matters.
Not to be excluded, the wealthy experience a unique and invaluable form of relief from the need to organize their lives around tax efficiency. This frees their minds to focus on what they do best, which is to generate wealth, productivity, and jobs. The shameful yet ever-marketable myth that the wealthy have to lose before anyone else can gain receives a crushing blow when the linkage between taxation and the safety net is broken and the ‘make them pay their fair share’ bugbear evaporates. Furthermore, the aforementioned effect of improved working-class optimism from the DUES in turn diminishes the menacing threat of pitchfork sentiment directed towards the wealthy. This new climate where their employees retain their full pre-tax compensation and their customers have more spending money infuses all businesses with new energy and profitability. This, in turn, restores the reputation of free markets that the wealthy depend on.
The stipend program requires a negligible staff to administer. This slimming-down of many government bureaucracies provides a benefit to politicians as well, for now they can focus the Federal muscle on grander visions to finally take us to the 21st century we have been waiting for. High-tech infrastructure, a modernized space program, more funding for basic research, more elaborate startup incubators and entrepreneur grants, etc. are all areas that can receive greater focus than before. Some of the redundant employees from the entitlement program departments of government can find more soul-inspiring work in those agencies, as well as in the private sector, which will create far more jobs than the government sheds.
The technology industry, being a source of the ATOM itself, will benefit from the combined effect of multiple catalysts. When an entrepreneur has a guaranteed stipend that enables him to pursue some speculative venture without having to worry about basic necessities, and when the potential payoff is tax free, entrepreneurial activity rises tremendously. Startups will attract more employees for the same reason – more people are available for the uncertainty of startup life. Venture capitalists will fund a greater share of ambitious ventures, since the higher NGDP trajectory moves the risk curve back to what it was in the 1980s and 90s. Liquidity timelines for VC funds shorten from ten years back down to six, and the tax-free nature of all gains improves fund returns. Downstream, the linkage between mass-market demand and product innovation becomes more seamless. The technology paradox, where more technologically deflating devices in one’s life entails a rising cost of perpetually upgrading them, is a real imposition. This by definition requires that the wealth generated has to exceed the cost of aggregate upgrades across the majority of the population, for the last thing we need is a belief that the cost of upgrades is making people poorer. The DUES and tax phase-out allow this natural process to manifest, and for the virtuous cycle to proceed apace. All of these factors contribute towards moving the rate of technological progress back to the long-term trendline.
Beyond technology, various distortions in other sectors are ironed out. At present, the US economy has a huge bias in favor of products where the end consumer receives tax subsidies (such as higher education, mortgage interest, and healthcare) relative to those where they do not (such as consumer electronics and unprocessed food). This causes the subsidized industries to be low in innovation, while the unsubsidized ones are forced to be highly innovative. The removal of this bias will lift a considerable disadvantage borne by unsubsidized industries and their employees. Many monopolies and cartels will see an initial burst of profits as consumers simply buy more of what they have always bought, and this is where initial islands of inflation will form. But this widening of margin will attract greater competition and technological disruption, breaking many former fortresses of anti-competition after their initial surge.
Banks benefit from 220 million incoming monthly stipend deposits and the dramatic increase in transactions. Consumer goods companies benefit since they can now improve their revenue projections around the fact that their customers receive a stipend rising 16-24%/year. This larger and more durable market ensures greater dividends on R&D expenditures. More adventurous products can be considered as the path to profitability has shifted, and product cycles are faster. In effect, all companies will be able to adopt some of the favorable economic characteristics of technology companies.
All of these sectors are components of the broader equity index, and the equity market will start to shift into a steeper trajectory, consistent with the accelerating and exponential rise in GDP. The index is further supercharged by the removal of corporate taxes alongside the boost in employee productivity from the removal of individual income taxes. A more steeply rising equity market and the absence of capital gains taxes accelerates the cycle of creative destruction and wealth creation further, tying into the earlier point about venture capital returns and liquidity/viability of new technology startups. Equity volatility, however, will not go down; it will merely seem as though time has moved into fast forward relative to today.
By contrast, the sector of finance that will have to be completely rethought is the bond market. On one hand, the DUES makes it far easier for lower-income but responsible borrowers to service debt, elevating a new cohort of borrowers and driving interest rates lower. On the other hand, the assumption that bond yields are a reflection of inflation has to change, given the 16-24% annual increase in the stipend. The removal of deficit spending will discontinue the issuance of new US Treasuries, which is a huge adjustment to capital markets. International debt markets will see an even greater overhaul, since some countries can start a DUES program sooner than others, creating many peculiar arbitrages. Perhaps the bond market, after serving international finance for so long, will have to shrink to fraction of its prior size and significance with municipal and corporate bonds the only remaining instruments. Bonds may no longer be seen as a hedging counterbalance to equities, due to the advent of the ATOM and the associated deflation. The appropriate yield on municipal and corporate debt per grade will have to arrive at a new equilibrium after accounting for all of these forces.
Overall, a vast range of enterprises, aspirations, and talent utilizations seemingly too unattainable before could now be closer to a threshold that warrants serious pursuit, simply because central bank perma-QE can separate the safety net from tax collection. The battles between taxpayers and recipients that occur in country after country, and that have claimed millions of lives over the centuries, can be greatly reduced, due to this new paradigm of monetary injection. This solution transcends both socialism and capitalism, making the inherent assumptions behind each obsolete.
Continue to : 9. Reframing ‘Inequality’