7. Government Policies Must Adapt, and Quickly

 

Three things cannot be long hidden: the sun, the moon, and the truth.

– Gautama Buddha

The problems in the world today cannot be solved by the level of thinking that created them.

– Albert Einstein

 

(Video).  The problem in the US and other mature democracies is that new policy ideas do not advance at a faster rate than they did a century ago even though technology has accelerated the speed of many other economic and social forces.  Compounding this problem is the reality that government adaptations occur only in reaction to crises that are already fully underway, with the recent coronavirus pandemic as just the latest example.  They thus act from a position of panic and duress that leads to overshooting in the other direction.

The American Dream is in trouble, yet neither political party seems able to address why.  While even the voters themselves are not demanding that the US government become more dynamic and proactive, there are a number of policy solutions that can pre-empt the calamity if so desired.

 

The Third Millennium Economics Political Platform :  US political thought has become exceedingly unoriginal, acrimonious, and tribally conformist, with many internal contradictions within both major parties.  For example, people who consider themselves proponents of free-market economics generally identify as Republicans or Libertarians (even if Republicans are getting increasingly selective on this front), while people who consider themselves pro-technology generally vote Democrat.  Yet, to me, these two things are absolutely inseparable from each other.  So many cognitive dissonances have sprouted across US political discourse that the electorate and government will soon find themselves unequipped to interpret or even discuss upcoming challenges.  The entire political universe is hamstrung by the two peculiar ideological apertures they are trained to parse information through.

The US political landscape has devolved into a metaphorical checkerboard, where only half of the squares are used for the two sides to wage war against each other, and the other half of the squares are unused and practically invisible.  About half of all possible political and economic platforms are not even noticed within mainstream US politics, and people have been conditioned to think only within this box.  This is especially true when a person’s political bonafides are determined by how completely they remain within a specific box, which itself has ever-sharpening boundaries.

Democrats talk about providing a greater safety net, a ‘living wage’, and greater ‘equality’, yet do not see the most effective path to these goals.  They do not quantify a threshold that meets the standard of a ‘living wage’, after which success can be declared.  Accordingly, they keep devising new ways of taxing the most productive people, thus reducing their incentives and thus the total productivity of the economy.  This strategy is well past the point of maximum tax revenue because tax complexity ensures that any tax increase falls more on upper-middle-class people than the ultra-wealthy and their many avenues of legal tax avoidance that confer immunity to any increases in ‘retail’ tax rates.  An increase in the 'retail' tax rate thus accomplishes little except build a moat around the ultra-wealthy, ensuring that members of the upper-middle-class cannot join their ranks.  A cynic might conclude that this is deliberate protectionism for the ultra-wealthy, but I do not believe that was the original objective.  Rather, individual loopholes are sold to specific groups by individual legislators in Congress, with no holistic oversight to control spiraling complexity.  

Furthermore, while there is some merit to the concept of a guaranteed minimum income even if a person cannot earn that much from their own output, increasing the legally mandated minimum wage is emphatically the wrong way to accomplish that outcome.  Such a law merely forces the employer, which is usually a small business or franchise with narrow profit margins and steep competition, to trim any staff that cannot produce enough to justify the new minimum wage.  In this age, automation can quickly fill the gap and price out human workers from repetitive, lower-skill jobs, effectively making a minimum wage increase a subsidy for automation.  There are other reasons why obstructing the market from determining a minimum wage is misguided and costly.  If a guaranteed minimum income is to ever be a reality, it has to be funded from a source that does not have to operate under a tight profit-and-loss reality, and there is only one such entity in existence.

Republicans are equally infected with outdated ideas.  The GOP dithers about lower taxes and more favorable policies for small business, but is oblivious to easier methods to accomplish this.  While some people are more talented and harder working than others and should not be penalized for their productivity, it is simultaneously true that money created by the Federal Reserve accumulates in very few hands, thus making it very different from wealth creation via entrepreneurship.  Furthermore, as discussed before, tax complexity wastes as much as 20% of all tax revenue just in compliance and auditing, without counting the even larger cost of suboptimal business decisions for tax reasons.  Yet Republicans are not pushing for tax simplification, even though that would effectively be a larger and deeper supply-side stimulus than the tax cuts they propose.

One faction of Republicans are against QE by the Federal Reserve under the belief that this will someday, somewhere cause inflation that has not yet appeared for over a decade and counting.  While that would have been true in the 20th century, it is no longer true in the third millennium, for reasons discussed earlier.  There is still a vocal but shrinking clique of individuals who think hyperinflation is imminent, and a return to the gold standard is necessary.  These 'inflation hawks' have predicted about 100 of the last zero bouts of hyperinflation, and don't seem to be interested in reassessing their assumptions.  $30T of central bank action over eleven years, with another $300B/month being added to that as of mid-2020 post-coronavirus, has not vindicated this expectation.  We can safely declare that the burden of proving that inflation is inevitable is now theirs to bear, and they have yet to provide any evidence to support their blind belief.

If one cannot accept that monetary expansion up to a very high ceiling will no longer cause inflation, and indeed needs to be permanent and ever-rising just to halt techno-deflation, it will never occur to them to gradually fund government spending with central bank money instead of tax revenues.  That is a shame, since this is a path towards the goal of vastly reducing and eventually even eliminating all Federal income tax and fostering a huge economic stimulus, specifically favoring entrepreneurship to an unprecedented degree.

But within the respective blind zones of the two parties lies the most magnificent and elegant solution.  In reality, we are now in an era where both Democrat and Republican goals can be met and exceeded with ease and simplicity, leaving many difficult tradeoffs behind as relics of the pre-ATOM age.  I fully predict that by 2025, this solution will seem obvious in hindsight, despite the reflexive opposition by the ivory tower of the PhD Economists.  Allow me to explain.

For one thing, the relationship between the American people and the Federal government is not what it used to be.  A number of seemingly innocuous changes to the US legislative branch of government in the early 20^th century set in motion a mechanism that had large ripple effects over the next century.  A succession of tax-and-redistribute programs were created to address current or future poverty, but without holistic oversight, each new program was not sufficiently complementary to existing programs.  This led to many contradictory spending outlays, bureaucracies, and incentives.  At this stage, 75% of all spending by the US Federal Government comprises of payments to individuals, particularly if politically engineered non-essential jobs of a make-work nature are counted.  Unfortunately, even after all the wastage in the tax collection process, there is another gauntlet of rebound wastage within the disbursement process.  When you combine this fact with the reality that government spending substantially exceeds tax revenues, the perversity of this situation becomes apparent.  The number of voters who are net recipients of these handouts and entitlements is at or near a majority of the electorate, so there is political profit in talking about tax increases, even as it is politically impossible to trim these handouts.

In Fiscal 2019, the United States collected $3.5 Trillion in taxes and spent $4.4 Trillion, resulting in a budget deficit of $0.9 Trillion.  Remember that this will shoot to as much as $2 Trillion during the depths of the next recession, including the brief coronavirus recession.  It is already a moral hazard to spend more than is collected in taxes, but since 75% of this $4.4 Trillion, or $3.3 Trillion (96% of taxes collected), consists merely of transfers of money between individuals, it does not finance any direct governance function.  Many of these programs have heavily-staffed departments to administer them, and have complicated formulae and qualification criteria that determine payments.  Social Security, Medicare, Medicaid, the ACA, welfare, unemployment compensation, food stamps, housing subsidies, alimony and child support enforcement agencies, etc. are just some of these programs, many of which are contradictory and non-interlocking with each other.  As a result, a significant fraction of the funds disbursed are consumed in the processing of applications and payments.  Even worse, there is a substantial band of income where non-interlocking policies have entrenched perverse incentives.  For example, a person with no income qualifies for Medicare, but income above a certain cutoff disqualifies the person from the benefit without the earnings being high enough for the person to cover the costs by themselves.  Hence, by increasing their income, their actual income goes down.  This induces many people to avoid employment, as employment makes their healthcare affordability go down.

But what if I told you that now, for the very first time, we have the ability to implement a solution that will not only fund a very efficient, fair, and dynamic safety net, while making the tax code far more favorable to entrepreneurship, productivity, and corporate employees all at once?  It would have been too good to be true even as recently as 2008, but through the wonders of technology, it no longer is.  If the first solution seems 'too good', we even have a second-choice solution that is still a huge improvement over what we have now.  

 

First Choice : The Universal Stipend as a Multi-Solution :  Since central bank monetary expansion has to now be permanent, rise at compounded growth rates closer to Moore’s Law-type concepts than the 1-2% inflation rates, and can no longer involve buying some asset classes over others, there is really only one solution to this malaise.  That is, if the legislatures of the largest economies can untether their central banks to make this possible.

After estimating how much money can be created to keep NGDP in the 6-7% range, simply disburse that new money directly to the people in a uniform, equitable payment.  That is the most diffuse and fairest way for central banks to halt inflation and create a broader, smarter safety net, and is the most effective way to offset technological deflation.   It is more scalable and confidence-generating (‘carrot’) than negative interest rates (‘stick’).

More specifically, we can introduce the Direct Universal Exponential Stipend (DUES), where every US citizen over the age of 18 (230 million people at present) gets an equal share of the Federal Reserve monetary expansion.  If such a program were hypothetically implemented in the United States of 2020, my calculations estimate that it would amount to about $5,000 per eligible person for the year.  Every US citizen is eligible to receive it, and everyone gets the same amount.  Whether rich or poor, young or old, lazy or industrious, male or female, childless or with a large brood, every citizen adult gets the same amount, period.  The stipend also has to be exempt from Federal income taxes, and incoming payments cannot be garnished by creditors or bankruptcy courts.

Now, given the rapid and accelerating rate of technological change, consider the possibility that the DUES can rise each year at a speed much faster than the annual increases normally associated with inflation or ‘Real’ GDP.  The steep gradient of increase in worldwide central bank monetary expansion discussed earlier fully demonstrates that the necessary amount to be created in the US itself rises by an estimated 16-24%/year.  For this reason, the stipend rises by the same amazing rate, parsed into compounding monthly increments.  The Federal Reserve determines the monthly increase by gauging indicators like the MIT BPP, and then publishes the exact increase before the start of the next calendar month.

The stipend can take a couple of months to ramp up to $400/month (say, $100, $200, and $400 in months 1, 2, and 3), so as not to create a small inflation spike from the sudden V.M. jolt.  From there, it can then settle into the aforementioned cruising speed of approximately 1.2%-1.8%/month increases (16-24%/year), calculated dynamically in accordance with real-time inflation data.  A hypothetical $5,000 in 2020 rises to about $6,000 in 2021, then about $7,200 by 2022, and so forth as the payments compound.  As this is money generated by the central bank as cash, it does not need to be recorded on any balance sheet.

We, as a nation, have reached the point where the vast majority of government spending now comprises of payments to individuals, and we recognize that it is politically impossible to reverse this.  Simultaneously, the amount of monetary creation needed to halt technological deflation is rising exponentially, and there does not appear to be an easy fix to the fact that technology creates both vertical (skill level) and horizontal (specialization) skill mismatches in the workforce.  So why not embrace all of these realities?

The second half of the idea now arrives with a certain inevitability.  Since most of this government spending can be replaced with money that has to be generated just to offset deflation, we can proceed to, in a phased and orderly manner, eliminate all types of Federal Income Tax.  Yes, you read that correctly.  It logically follows that when the primary purpose of income taxes is to make payments to individuals, and the DUES supersedes current payment programs, there is simply too much economic upside to be captured by removing both the filing/compliance burden plus income taxes themselves.  Monetization of government spending has been taboo in eras past (see Friedrich Hayek), but that was before technology and the associated deflation was substantial enough that permanent, exponentially-rising easing was needed just to offset it.  Like so many worthwhile ideas, it was simply ahead of its time.

This transitional process should be gradual enough to seamlessly let the ATOM advance to a sufficient size, and thus is expected to take about 10 years.  As described earlier, the biggest problem with the tax code is not just the tax progressivity, but also the multiple categories that income has been divided into, known as ‘character’ for tax purposes.  As the phase-out is conducted, issues like tax complexity begin to vanish as the concept itself becomes moot.  

At this point, we should pause to catch our breath.  This solution may seem very sanguine, but the individual components of it appear to be drifting in this direction already, particularly after the coronavirus pandemic forced a huge volume of new monetary creation, that too in a form that is edging towards direct payments to people.  

Releasing $1.15 Trillion/year and rising in an economy of $22 Trillion may seem like a bit too much, but that is where the trend of cumulative QE against the deflationary force of technology has already brought us.  As explained before, this 6% and rising of GDP in newly generated money, distributed in a method that generates a tornado of VM, will still result in inflation of just 2-3%/year within NGDP of 6-7% a year.  It indeed is the minimum needed just to halt technological deflation, especially since central bank money flows across borders quite seamlessly.   Eventually, world central banks will have to coordinate with each other to synchronize total monetary generation to world GDP.  Note that the phase-out of income taxes will also generate a wave of one-time deflation that has to be offset.  Until the MIT BPP annual inflation measurement (or equivalent measurement, if you don't like the official CPI) pierces 3% inflation and threatens to dance with 4%, there is absolutely no reason to fear inflation or worry about the amount of monetary easing being excessive.  Even that rate of inflation merely means the next year’s rate of increase will be a few percentage points lower, perhaps just 15% instead of 16-24%, but still an increase.  The precise number does not need to be very accurate for any one year, for as the self-reinforcing mechanism builds, continual adjustment to economic feedback steers us to the correct numbers over time.

Critics may point out that this is just another ‘basic income guarantee’ or ‘living wage’ program.  On the contrary, the DUES greatly transcends that, since those other ideas involve impossibly high taxation, whereas the DUES is simultaneous with a removal of income tax.  Furthermore, the DUES is not an aid program, but rather a pure win-win through the self-reinforcing feedback loop, without which the payout is not possible in the first place.  The fact that the DUES adjusts for inflation and rises exponentially are added elements of difference.

Finally, we can note that the upside of this approach goes well beyond just statistics and fiscal calculations.  To truly grasp how many problems are addressed and swept away by the DUES of central bank money and corresponding tax phase-out, we have to delve deeply into the intricate psychology of hardship.

 

The ‘Peace of Mind’ Dividend : The curve of human suffering is very non-linear.  Deprivation of the most basic necessities is a cause of misery and distraction, and as we saw earlier, only in the last few decades have a significant percentage of humans been elevated above this layer of existence.  Yet even in 2020, at least 2 billion people worldwide do not have the very basic necessities, and while this aggregate number continues to drop, the progress remains very uneven.

At the other extreme, if a very wealthy person sees their wealth double, or conversely fall by half, very little about their living standard will change.  When leftists see this, they conclude that wealth should be redistributed, since the destitute person’s suffering can be greatly alleviated with no real pain to the wealthy, resulting in less net hardship overall.  As mentioned earlier, despite the initial appeal of this meme, such redistribution almost never works as intended and ends up shrinking the total economic pie.  Any real attempt to tax the wealthy instead taxes the upper-middle-class that cannot access sophisticated tax-avoidance structures.  This taxation thus has a negative multiplier effect on productivity without collecting much incremental tax revenue.

Another aspect of the poverty discussion is the failure to fully understand the differences, as well as similarities, between the poor-country-poor, and rich-country-poor.  This leads to one-size-fits-all approaches that do not help either group.  The former suffer from malnutrition, while the latter are more likely to suffer from obesity.  The poor in wealthy countries have access to amenities that even the rich in poor countries do not, such as reliable electricity, paved roads, and emergency response services.  Yet even those who point out the benefits available to the poor of developed countries fail to recognize the true burden on the human condition.  This is an angst common to poor-country-poor, rich-country-poor, and even many people who are not poor at all.  We know of this as hopelessness. 

Hopelessness with one’s life and prospects, in a psychological sense, is a state of purgatory where someone truly believes there is nothing to look forward to, nothing that can uplift their current condition, or nothing that can alleviate their despair.  It is a terrible scourge on the soul, and is often the reason for depression and suicide (consider that a country as prosperous as the US nonetheless still has over 45,000 suicides per year, a number which has failed to shrink from economic growth).  It is also the primary reason that people with seemingly normal lives decide to join fringe hate groups or terrorist organizations.

Hopelessness is a huge weight on the economy, social mood, and individual well-being.  Hopelessness is a menace just as familiar to the man in Bangladesh earning just $1000/year who worries about his children’s malnutrition as to the working class American earning $50,000/year who can barely accumulate any savings while seeing his industry replace jobs like his with AI.  Even people who are wealthy and famous experience hopelessness for any number of reasons (some celebrities loved by millions of fans have committed suicide, after all, and often for reasons related to a bleak and uncertain financial outlook).  Furthermore, stress and despair are major contributors to both cancer and heart disease, which are the two most frequent causes of death in developed countries.

While nothing can eradicate every source of human hopelessness fully, implementation of the annual guaranteed stipend will do a great deal to ease the ongoing anxiety of working class people about their employment and their savings.  Knowing that the stipend they receive continually rises by 16-24%/year while the price of their essentials does not mitigates the uncertainty factor by providing optimism about their future financial safety net, retirement income, and ability to service debt.  This in turn boosts consumer confidence and sparks more entrepreneurial risk-taking.  Knowing that the stipend is independent of one’s employer is another major relief to one’s financial outlook.

Many of the arguments in favor of a minimum guaranteed income and more generous safety net correctly emphasize the savings this may create elsewhere in the economy in terms of lower crime and higher consumer confidence.  But all of these ideas involved taxing productive work to a prohibitive degree, and providing money based on some convoluted assessment of neediness that often ends up incentivizing laziness and government dependence.  This solution, by contrast, merely takes the large and rising money stream that the Federal Reserve has to perpetually create anyway to halt deflation, and use it to replace the 75% of government spending that is just direct payments to individuals.  Since every eligible US citizen over age 18 gets the same amount, it is entirely fair, and the richer a person is, the less this will remove their incentives to produce.  Almost all wealthy people continue to work long past the point where their living standards can no longer improve further, and this will not change.  Excluding the top 1% of earners from the stipend will only increase the stipend for the other 99% by 1%, making this layer of complexity more trouble than it is worth.

This can be termed as a ‘Peace of Mind Dividend’.  If this program is implemented, the pervasive boost in economic confidence will be an immense catalyst to the economy, particularly as the stipend rises due to the deflationary effect of the ATOM.  While the hypothetical $5,000 payment in 2020 does not seem significant, the estimated 16-24% annual increase in monetary expansion required just to offset deflation means that the stipend could be over $12,000/year by 2025.  It will still keep on rising every year after that, from an ever-higher base.  Remember that a couple gets two such stipends into their household.  If elderly parents live with their married children, then such a household receives four incoming stipends.

Finally, the stipend provides a sense of participation in the high-tech economy to all US citizens.  Instead of the gains of technological progress seemingly a distant and esoteric concept for the other 80% to 90% of Americans, a stipend that grows quickly for reasons known to be associated with technological progress has subjective ripple effects.  It accomplishes a great deal in educating the general public about the accelerating rate of technological change, how productivity flows from technology, and how many fruits are available to them to pick if they know where to look.  AI will no longer be seen as a job-swallowing scourge, but rather as the engine that keeps the stipend rising, which in turn reduces the opposition to productivity gains inherent to anti-AI sentiment.  The value to the masses of this sort of participatory education and orientation towards welcoming new technologies should not be underestimated.

 

Allowing the Economy to Breathe from Both Lungs, For a Change :  Above and beyond this, the gradual elimination of income tax is an incremental and meteoric boost to personal wealth and consumer spending, for people at all income levels.  Being inured to tax withholding via their W-2 and then lulled by a direct deposit to their bank account, not many workers have pondered how much more their employer spends on them relative to what they receive in their pockets after all taxes.

Since most well-paying jobs are in states with very high tax rates, the marginal tax on every dollar earned by workers there rapidly crosses 50%.  When a person is hired into a job that supposedly pays ‘$120,000/year plus benefits’ in official paperwork, the employer has to spend about $175,000/year for the employee to receive $80,000/year after all taxes, not even counting the time spent by both parties on tax compliance.  When you consider this, it is surprising that there are even as many employed people as there are.  When income taxes are phased out for individuals and corporations the scenario above will be one where an employer spending $175,000 leads to as much as $150,000 being retained by the employee, inclusive of all benefits.  There will be many more jobs created in such a climate as well, since the same example could lead to an employer splitting the position, i.e. spending $175,000 to create two junior jobs where each employee retains $75,000.

It is obvious how much of a boost this would provide to consumer confidence, consumer spending, and debt serviceability.  Beyond that, when the marginal output of the most productive workers goes from 50-55% taxation to 0% taxation, their workplace enthusiasm and supererogatory productivity will rise by an astonishing degree.  This will have a magnificent cascading effect across every imaginable metric of economic health.  The entire culture of work and productivity will change, across all industries and every level of expertise.  Complaints about wage growth recede away, while employers have a wider range of tools at their disposal to align compensation with incentives.  It is scarcely possible to overstate how much improvement both employers and employees will see across every aspect of corporate culture.

There is considerable evidence that innovators and entrepreneurs flow to where the top marginal tax rate is the lowest.  Some will cite Silicon Valley as thriving amidst high taxes and heavily regulated building permits.  I counter (with my 25 years in residence) that Silicon Valley’s success is in spite of the business unfriendliness of the public sector, combined with the fact that the ultrawealthy of Silicon Valley pay almost no income tax due to loopholes available to them that are concealed by tax complexity, as described earlier.  Imagine how Silicon Valley could vault higher with lower taxes on startups and individuals, and with the DUES backstopping the living expenses of young entrepreneurs.  Countless business models large and small that are unviable under current taxation become viable, and existing businesses will enjoy margin expansion, which in turn leads to more innovation and competition in each space.

Furthermore, the elimination of corporate tax will unshackle the $2 Trillion in cash that US blue chips still have parked overseas in order to indefinitely defer the taxation of those funds, even after the early 2018 reduction in corporate tax rates.  It is often written how US job creation would increase if these offshore profits were brought back home, and the removal of the perverse incentive that keeps this money stashed in tax havens will alleviate a huge burden on both corporations and workers.  Since all capital expenditure has a quicker payback timeline through the faster compounding of returns without taxation, capex can increase, which means product lifecycles can speed up.  This erases the aforementioned problem of low NGDP and the ill-effects that flow downstream from it.

At this point, two common points are invoked by skeptics.  The first is the speculation that such a stipend will merely create a leisure class out of the bottom 60-80% of the population, who spend their lives immersed in various types of home entertainment.  They may do nothing else with their time and do not set good examples for their children, who then fail to grow into productive innovators that sustain the ATOM.  Putting aside the fact that such a concern is mutually exclusive with worries that AI will leave millions permanently unemployed, or that healthcare costs are surpassing affordability, it is unfounded in any event.  Since the incentives on productivity, entrepreneurship, and innovation are tremendously higher than ever before, the entire curve of return on investment/labor/risk shifts to a more favorable zone.  The absence of income tax will not only lead to much higher pay for the same job, but a greater quantity of jobs than could have come into being under the more oppressive tax code.  In addition, customers of each business have more money to spend, generating greater revenue for any business they buy from, and thus more jobs in those companies, some of which generate new technology, expanding and reinforcing the ATOM.  The ‘sloth class’ will in fact be much smaller than it is at present once this virtuous cycle is permitted to manifest.  Various dysfunctional subcultures will vanish of their own accord through a form of societal autolysis.

The second group of skeptics consists of those who do a basic calculation to discover that under this rate of increase, the ever-rising stipend will cross $100,000/year by the early 2040s, meaning that every US adult gets for free what few Americans in 2020 can capture post-tax even from full-time work.  They contend that this surely cannot be a serious prediction due to the law of large numbers alone, and if nothing else, this will cause inflation.  But if you refer back to the earlier charts about exponential and accelerating economic growth, the trendline deposits us at exactly a point where such a stipend and growth rate (now driving the NGDP growth rate itself to that level) is well within the band.  The second derivative of the curve cleanly indicates that the next 20 years may see the same multiplier of geometric increase as the previous 80-100 years, making such numbers consistent with the trendline.  Remember that AI advances hundreds or thousands of times faster than humans, and will by then be generating tens of trillions of dollars of annual output with very little input; output which humans can consume.  Add to that the fact that as per the ATOM diffusion rate established earlier, technologically deflating products may be as much as 8% of world GDP by then.  It all combines into a robust yet simple refinement of economic governance with the exponentially rising growth of the ATOM.

This is not to claim, in any way, that recessions and asset price crashes will never happen again after such a complete revamp of economic, fiscal, and monetary realities.  To the contrary, the gregarious groupthink of human nature ensures that such dips become inevitable after a certain period of time.  What will happen, however, is that the peaks and troughs of each business cycle will be along the much steeper growth trendline.  This also means that the old definition of a recession – two consecutive quarters of negative GDP growth, will continue to become more outdated, since even the troughs of the cycle may have positive, albeit below-trend, growth.

 

Second Choice : The Sovereign Venture Fund :  If DUES seems like too drastic an overhaul of the entire fiscal and monetary system, there is another solution for how the central bank monetary creation can be used to uplift an economy without changing fiscal flows.  While not as comprehensive and broad in its effect, it still can bring immense improvement to the lives of a country's citizens.  This solution is the Sovereign Venture Fund.  

This solution is exceptionally simple, as I wrote about in April 2018.  It is simply about capturing the rest of the world's technological deflation for domestic benefit, which by definition means that the country that executes the vision first gets all the benefit.  Any country with an advanced economy and its own central bank can qualify, and the dollar size of the Venture Fund can be the same no matter how small the country implementing it.  

While it is always better to be a prosperous country than an impoverished one, almost every small country (the size of Canada or smaller) is faced with a major vulnerability in the modern economy.  Their economy invariably depends on one or two major industries, and is hence vulnerable to a technological disruption that arises from somewhere else in the world.  The need to diversify against such external risks is obvious, but most countries are not on the best path to achieve this goal.  

These days, everyone I meet from the government of some foreign country seems to have the same goal for their country - to create an ecosystem of local technology startups.  This goal is not just extremely difficult to attain, but it is very misguided.  Technology is becoming increasingly governed by winner-take-all dynamics and capital concentration, which means even in the US, rival cities are unable to compete with Silicon Valley.  Silicon Valley itself has concentrated into a smaller portion of the San Francisco Bay Area than was the case in the late 1990s, with the bulk of new wealth accruing to a group of around just 7000 people within which there is relatively little turnover.  Small countries with technology sectors, such as Israel and Singapore, started decades ago and have a number of unique factors in their favor, including a major Silicon Valley diaspora.  Hence, a country that thinks it is productive to create a tech startup cluster in their countries will almost certainly create a situation where young people receive training at local expense, only to leave for Silicon Valley.  So these initiatives only end up feeding Silicon Valley at the expense of the original country.  Even if a few tech startups can be forcibly created in the country, it is extremely unlikely that they will achieve any great size within even 15 years.

Take, for example, a country like New Zealand.  It has many favorable characteristics, but certain disadvantages as well in an increasingly globalized economy.  It relies on agricultural and dairy exports, as well as the film industry and tourism.  It is too remote to easily plug into the well-traveled routes of tech executives (less than 30M people live within 3000 miles of New Zealand) or major supply chains.  It is too small to be a significant domestic market for tech (particularly when a functional tech ecosystem has to comprise of startups in multiple areas of tech in order to achieve rudimentary diversification).  New Zealand's success in getting Hollywood films shot in New Zealand cannot similarly translate into getting some Silicon Valley business, as an individual film project has a short duration and distinct ending, with key personnel on site for just a brief period.  Technology, by contrast, is inherently endless, and requires interdependency between many firms that have to have co-location.  Furthermore, no society is capable of placing more than 1-2% of its population into high-tech professions and still have them be competitive at the international level (most tech innovation is done by people in the top 1% of cognitive ability).  For this reason, a tech startup ecosystem does not create broad prosperity (it is no secret that even within Silicon Valley, only a fraction of people are earning almost all the new wealth.  Silicon Valley has among the most extreme inequality found in any advanced economy).  

As mentioned above, it is difficult for government officials, legislators, and statesmen to undertake the drastic steps of DUES implementation, particularly when the entire Economics profession, as described before, is still mired in outdated thinking about how QE will someday, somehow cause inflation.  For this reason, a second, less drastic option is also available for New Zealand.  That involves create what I describe as a Sovereign Venture Fund, where the New Zealand Central Bank creates a segregated account that is completely partitioned off from the domestic economy, and prints money to place into that account (say, $500 Billion).  It is crucial that this money not circulate domestically at first, as it would cause inflation.  The purpose of this $500B Sovereign Venture Fund is to invest in startups worldwide that might be disrupting New Zealand's domestic industries.  This model is extremely effective and flexible, as :

i) The money was not taken from New Zealand taxpayers, but rather generated for free by the New Zealand Central Bank.  Hence, it can invest in speculative startups across the world with far more boldness.

ii) The diversification achieved is immediate, and can always be adjusted with equal immediacy as needed.  

iii) The Fund is leveraging the rest of the world's technological deflation for New Zealand's domestic benefit.  

iv) Tech startups worldwide become extremely vocal advocates for the fund, and even the country itself.  It boosts New Zealand's branding (generating even more tourism).  

v) Fund gains can be used to offset government spending by replacement of income tax, or to fund training to enable citizens to modernize their skills.  It can also provide a greater social safety net to cushion industries buffeted by disruption, but without taxing those who are still working.  This is how to repatriate the money without inflation.  

vi) Even a larger fund of $800B can earn $80B/year from a 10% return, which exceeds the total taxes collected by the country.  

The Sovereign Venture Fund is an extremely effective, speedy, and versatile method of economic diversification.  It can be customized for any prosperous country (for example, an oil exporter should simply invest in electric vehicle, battery, and photovoltaic technologies to hedge their economic profile).  As a huge amount of worldwide QE has to be done just to offset technological deflation, there is no contribution to inflation even worldwide, let alone domestically.  As the winds of technological change shift, the Fund can respond almost immediately (unlike a multi-decade process of creating a tech startup ecosystem only to worry if the sectors represented are about to be disrupted).  

Since there is a very high and exponentially rising ceiling of how much world QE can be done before world inflation reaches even 3%, there is an immense first-mover advantage that is possible here.  The first $1 Trillion is effectively 'free money' for the country that decides to be Spartacus.  

New Zealand, in particular, has even more factors that make it a great candidate.  The NZ$ is currently too strong, which is crimping New Zealand's exports.  This sort of program may create a bit of currency weakening just from the initial reaction.  For this additional reason, it is a low-risk, high-return strategy for generating a robust and indeed indestructible safety net for New Zealand's citizens, hedging them from the winds of global technological disruption.  

 

Maintaining the Third Millennium Economy :  For this self-reinforcing feedback cycle to work best, the enabling factors of the ATOM have to be stewarded.  While this system is more robust, self-correcting, and decentralized than any existing system, it is not entirely immune to neglect, abuse, or political corruption.

In the political sphere, this new, yet permanent and rising tide of ‘free money’ will test the principles of even the most frugal of fiscal hawks, because the money is not ‘free’, but a dividend that continues through the adequate care and feeding of the (worldwide) ATOM.  An unrestrained political class may squander this bounty in various shortsighted grabs.  Examples include quadrupling military purchases of expensive new weaponry, doubling the number of staffers and aides attending to each high-level official, or making a vote-buying campaign pledge to pay women a larger annual stipend than men.  Collective self-control by both the citizenry and leaders in these matters will determine which nation stays competitive relative to others, in the third millennium.

Excessive and/or outdated regulation quietly suffocates innovation, and the regulatory regime has to upgrade to a new rubric compliant with the speed and effervescence of technological change.  When the economic pie grows due to lower taxation and higher velocity-of-money, the most zealous regulators may see the newly created space as an opening for vast increases in regulatory complexity, and the accompanying empire-building.  The topic of correcting obese or ill-structured regulation is beyond the scope of this paper, but it is worth mentioning that despite the consolidation of many government programs and departments, the regulatory regime may greatly inhibit the full potential of this system if not subject to independent oversight.

Industries that operate as cartels and monopolies may be the origins of occasional inflation spikes, which provide fuel to critics and can cause lasting damage to the entire philosophical underpinning of the program.  While most monopolies will eventually break from the disruptive pressure the ATOM exerts on them, the interim phase can easily be misinterpreted through an anti-technology lens.  The regulatory regime must also be wary of not letting the innovators of yesterday become the anti-innovation monopolies of tomorrow, for this impedes the ATOM and reduces the DUES growth rate, or the speed at which the Sovereign Venture Fund can take new central bank capital.

While the stipend itself will automatically generate considerable education about technological change as a matter of course, that alone is not sufficient.  Retraining programs to enable workforce transitions have to be far more extensive than they are today, with an associated cultural shift.  It should be expected that at any given time, 10-20% of adults are in some level of retraining even if they currently have jobs, as the churn of creative destruction endlessly remakes the economy.  Professions and industries on the brink of disruption have to be identified early in the process, so that the retraining of individuals can happen proactively.

The above maintenance requirements are minimal given how much other complexity is removed in this system.  But the human brain is often resistant to change, and has a bias in favor of the status quo, even if inferior.  The stipend is the key buffer in the process of cushioning human anxiety while transitioning society to this new age.

 

Continue to : 8. The Transformation of Specific Industries and Communities

Comments

[T.S.]

How will a country or jurisdiction that pays people to do nothing fare against another jurisdiction that does not?

[Kartik Gada]

T.S.,

It is obvious that America already pays a large fraction of the population to do nothing.

The DUES is an improvement since it is combined with 0% income tax and no disincentive to work (today, many people deliberately keep their income low so as to remain on welfare). A 0% tax rate greatly increases the incentive to do productive work.

[MSimon]

If the government (not the FED) issues the money there is no debt. I think this is preferable to the FED. Is there a moral hazard to government issuing money? Yes. But there is also a moral hazard to bankers issuing money. And they charge interest for the privilege.

[Forge the Sky]

"An unrestrained political class may squander this bounty in various shortsighted grabs. Examples include quadrupling military purchases of expensive new weaponry, doubling the number of staffers and aides attending to each high-level official, or making a vote-buying campaign pledge to pay women a larger annual stipend than men."

Why do you believe that governmental policy will light upon a universal flat stipend rather than any of the (call me cynical, but I believe) far more likely above possibilities?

Stipends are definitely possible, but I can see them being distributed very unevenly, just as they are now in order to appease specific interests, rather than some force necessarily creating incentives to make them equal.

I can see the rhetoric now regarding the last item in particular: "Women disproportionately bear the burden of parenting and housework." "Every year, X thousand women are beaten by their partners. Support the Strong Woman's stipend so that we can give these women the support they need to escape their abusive circumstances." Then just depict a universal stipend as funding layabouts and criminals. Oh, also support legislation B that removes the stipend from anyone convicted of a crime or misdemeanor etc etc.

Are you proposing some specific system to ensure that the thing that's happened to all the handouts we already are capable of giving doesn't happen to these ones?

[Kartik Gada]

I can see the rhetoric now regarding the last item in particular: "Women disproportionately bear the burden of parenting and housework." "Every year, X thousand women are beaten by their partners. Support the Strong Woman's stipend so that we can give these women the support they need to escape their abusive circumstances."

Yes, politicians will push for this. Hence, the country that can fight off such politicization will outperform those that cannot. The ATOM DUES program greatly tightens the competition between countries, you see. The uniformity of it will expose many fraudulent statistics and memes more easily than is possible at present.

It is harder to socially engineer when the entire flow is much simpler, and there is a lot less smoke and mirrors to hide behind.

Are you proposing some specific system to ensure that the thing that's happened to all the handouts we already are capable of giving doesn't happen to these ones?

The wholesale elimination of many departments is necessary. Since this is politically impossible in the US, see Chapter 10 about how it has to start in some smaller countries first, before any larger country can be considered.