The nation’s budgeting process is
in need of significant restructuring. The current offering prevents the nation
from properly managing the money supply. Current policy lacks the ability to
directly influence this pivotal economic indicator, but setting the US economy
onto a better path will be no small task. Not only do tactical operations reinforce
misguided policies, but the strategic direction is also profoundly off course.
Imagining that wealth hoarders are sacrosanct and require special
considerations leads us down the wrong path. It is within this context that a
fresh look at money supply management is necessary. A better understanding of how
economies work may be a good place to start.
The current strategy administers
the economy based upon microeconomic principles. National economies, however, do
not respond to efficiencies or the profit motive. They respond to an “effective
demand” for goods and services, a term first made prominent by John Maynard Keynes
in the 1930s. Without an effective demand for their product or service, most business
firms will fail. This is where proper management of the money supply becomes
necessary. The appropriate level of demand is put at risk when the money supply
is left to chance. Proper management of this key indicator is the necessary objective,
but to be sustainable, economic policies must be couched within societal
objectives.
To achieve the social objective
of improving humanity’s well-being, democracy and the rule of law must be
protected. To protect democracy and the freedom it bestows, social and economic
objectives must address human shortcomings by limiting unhealthy
concentrations of private wealth that will attempt to influence public policy
in a self-serving direction. Initiating a Sufficiently Progressive Tax Code and
a wealth tax is necessary as a starting point, but this, of course, is no easy
task in an environment where money and politics have been engrained in our
system of governance. Proper management of the money supply must begin with an
equitable distribution of the burden. Assuming a more level playing field is in
the offing, the following will attempt to uncover the benefit of moving away
from a microeconomic financial budget at the national level and toward a truly
economic budget by focusing on the prospects of inflation within the context of
the money supply.
Fiat (Sovereign) Currency
With centuries in development,
our current economic budgetary process has evolved little. It remains captive to
the “supply creates its own demand” mantra. The current economic financial
budgetary process, however, is no longer appropriate for a country that enjoys
a sovereign currency such as we have in the US. Managing to a financial budget assumes
too much. It assumes a level playing field where revenue is reintroduced into
the economy by way of tax collection at appropriate levels. Given the current tax
structure, this assumption is not warranted. Managing to a financial budget also assumes the appropriate
level of funding can be determined as the annual budget is finalized. The
appropriate level of funding (revenue creation or revenue withdrawn) will keep
an economy from running too hot or too cold and is, in fact, a moving target
unlikely to be arrived at annually. The ability to adjust spending as the
situation arises is lost in the current budgeting process.
A fiat currency allows for more
flexibility. It allows policy makers the ability to fund socially useful
initiatives up to the point where the prospect of accelerating inflation
becomes apparent. In an inflationary budget regime, an across-the-board
adjustment to the rate of taxation is initiated once the appropriate economic
indicators appear. Tax rates are either increased to slow consumer buying power
or, in the case of high unemployment, lowered to increase demand. The
distraction of deficit financing is put to rest. A fiat currency allows for this greater
versatility.
Managing to a financial budget may
be reassuring to those on the profit motive, but economies do not operate on
the profit motive. A national economy operates on the principles of price stability and full
employment, that is, within the context of the social goods it can produce.
Because future optimum money supply levels cannot be known in a world full of
contingencies, discovering inflationary trends must now become the focus. An
inflationary budget that projects the likelihood of accelerating inflation allows
for a more robust economy, one not constrained by artificial limits. An
inflationary budget can allow for policies that better administer to the needs
of all stakeholders. Constraints must be put on the money supply by way of an
inflationary budget with less self-defeating intrusions.
Appropriate Tools
The authority to manage the money
supply has been delegated by Congress to the Federal Reserve (Fed). To
influence this key economic indicator, the Fed raises or lowers interest rates.
It is felt here that this is the wrong approach to managing the money supply.
While the Fed has the ability to act decisively, results of interest rate
adjustments are often less than optimal and sometimes even harmful as the
recent banking crisis has shown. A more appropriate approach would be to use
Fiscal Policy to effect changes to the money supply when necessary. Fiscal
policy has the advantage of adding or withdrawing revenue directly from the
economy and not having to wait for the private sector to perform this function
by way of increased or decreased lending. Moving from a central bank (private) focus
to a Congressional (public) focus presents major obstacles but is necessary for
a more rational approach to economic policy.
In the fight against inflation,
Congress has the ability to raise taxes or suspend non-essential governmental
spending to reduce the money supply and lessen demand. It can better target a
money supply that produces an economy that runs neither too hot nor too cold.
This “Goldilocks economy” is in a sense the objective of good economic policy.
Adjusting the money supply to prevent inflation while providing for full
employment should be left to those with the appropriate tools.
The unfortunate reality, however,
is that Congress has been designed to be deliberative, which can be a significant
disadvantage when fighting inflation. Quick action is typically needed to
prevent the snowball effect inflation can sometimes elicit. When inflation
appears in the data, raising personal income tax rates must be initiated to maintain
the economic sweet spot. Producing an economy that runs neither too hot nor too
cold is a daunting task when faced with the headwinds of windfall profits,
barriers to entry, monopolistic power, managing expectations, and other exogenous variables.
Congress
Along with tax considerations
mentioned earlier, one of the most challenging obstacles to the creation of an
inflationary budget is Congress itself. As is commonly understood, when
fighting inflation, time is of the essence. Because our elected representatives
are tied to the mainstream narrative, heroic efforts must be taken to ensure a timely
response to inflationary pressure once Congress reassumes responsibility for
price stability. This response will require authority only big data can
provide. Advances made in the field of machine intelligence must be considered
as a tool to make the deliberative process a matter of acquiescence on the part
of Congress and not one of research. Deep Learning, a subset of Machine
Learning, shows the power of pattern recognition and the ability to serve a
designed purpose. We must develop a tool that can recognize all contributions
to inflation and recommend a path forward to mitigate perceived ill effects. Factoring
in a policy to optimize private enterprise performance vs. societal well-being
will undoubtedly be a stumbling block, but a well-designed tool should be able
to provide supportable data that ensures integrity. This tool must be a
bipartisan government funded basic research project that can predict the
likelihood of inflation (undoubtedly using much of the same data the Congressional
Budget Office and the Fed’s 400 or so PhD scholars use to make projections) and
then recommend appropriate Fiscal Policy adjustments when inflationary trends
are found.
Conclusion
While an inflationary budget
process makes good economic sense, current obstacles to good money management
must be overcome before a useful budgetary process of this sort can be properly
administered. Profound obstacles stand in the way of creating the level playing
field necessary for an inflationary budget to work properly. Asking the
economic community of scholars to abandon 150 years of the financial economy in
favor of a more wholistic approach to wealth creation will not be easily overcome.
The challenge is probably analogous to the centuries long struggle to unseat
the Catholic Church as the supreme arbiter of morality.
Before an inflationary budget can
be seriously considered, a Sufficiently Progressive Tax Code, based upon one’s
saving behavior, and a wealth tax must be in place to avoid fueling our current
march toward oligarchical rule. A recognition that Fiscal Policy, administered
by Congress, is the more appropriate tool for addressing the money supply can
then be entertained. Finally, because of the nature of politics, the use of Machine
Learning must be developed to minimize the obstruction politics will have on good
economic policy.
A financial budget has the
presumed benefit of fiscal responsibility. The inflationary budget approach must
be couched in similar terms. We do ourselves a disservice by ignoring the
possibility of greater social well-being by way of proper economic tools. We
must begin to better focus on economic and social objectives by moving economic
policies into the twenty-first century.
