Debt: The Good and the Evil

Debt causes many problems in an economic system, but some benefits as well. How can a new system be designed to only incorporate the benefits?


Let’s start with the simplest case to consider, a wholly self-contained, up-and-running Just Deserts socio-economic system. The good side of debt is that it can be used to speed up growth of production in an already-growing system. The basic idea is that funding is obtained to finance capital acquisition and operations, which produce enough benefits to cover all costs and repay the debt.

The bad side of debt is that it can be used for permanent consumption costs, growing continually, as the consumer chooses to consume more than his allocation of benefits can sustain. This means that the debtor must continually and exponentially go deeper into debt, meaning that much of his income and all of his holdings will eventually be confiscated by the debt holder. This works for individuals, for organizations, and for government organizations and entities. The organization situation is much like that for an individual, meaning the debt holder eventually collects the title to all the organization’s property. For a government organization like a nation, it does the same thing, allowing current consumption at the price of confiscation of nationally-owned property and also future income, such as taxes. Greece is the preeminent example. The time displacement of the repayment allows bad effects to be unfelt for as long as the term of the debt, and if it is rolled over, successive terms. Since people typically only have the ability to think in the short term, debt is a successful means of further enriching those already wealthy.

In some situations, personnel rotation in a government organization means those who will face the problems of repayment are not those who enjoyed the benefits of consumption. There are many ways to implement such a situation, such as a politician staying in power because voters are happy with the benefits distributed from the debt funds, being short-sighted at best, followed by the politician’s retirement before the debt comes due. Many other means of benefiting by the time difference between incurring and discharging a debt exist, and because of the flexibility such a situation provides, it is likely that no solution can be found other than outlawing or prohibiting this type of debt.

Thus, there is growth acceleration on the good side, and countless scams on the other side, along with all the pitfalls of a myopic view of life. In a Just Deserts economic system, taxes or income restrictions prevent any individual from personally amassing enough funds to make large-scale loans, meaning that there could be small debts, which do not debase someone’s life, but no large ones.

Growth acceleration can be accomplished by other means that loans from individuals; debt from other organizations which can legitimately amass large amounts of delayed benefits could happen. So can other means of obtaining funding, typically meaning some ownership rights in the organization needing or wanting the money are traded for up-front funds. This is the stock market, plus all types of individualized arrangements made between a producing organization and a funding organization. In a Just Deserts economic system, there would be funds in possession of insurance organizations and pension organizations, as well as possibly specialized organizations, the equivalent of today’s mutual and hedge funds, except with necessarily more diverse ownership. Thus, debts for growth acceleration would not be interfered with.

Debts for temporary consumption needs, such as necessitated by temporary disability, or for replacement of productive capacity, such as necessitated by permanent disability, would be handled by insurance funds. Once started, these insurance funds would exist to replace lost benefits for someone suffering from a disability, either temporary or permanent. They would be paid into as part of a mandatory deduction from working wages and salary. The usual objection to such insurance funds is that they drive workers and employers to use a black market, where possible. Whether this is palatable depends on the regulations against it, and the results on the workers who have to choose whether to use it or not. Having high fines and fees prohibiting it, and a very low level of benefits for those who use it might reduce this objection.

Once again, this can be described as a myopic viewpoint. Someone who avoids taxes and insurance withholdings gains possibly in current consumption levels, but risks later problems. Since people do not see later problems as clearly as they do current ones, the black market can burgeon. But with education and experience, it might be reduced substantially in a Just Deserts socio-economic system.

Debt for the purpose of raising current consumption levels would not be possible in a Just Deserts socio-economic system. No organization would have the right to grant such debt. Thus debt in a Just Deserts system is somewhat simplified, compared to contemporary systems.

Now enlarge the domain being considered. Suppose there are external actors, individuals, organizations or governments, outside the Just Deserts system boundaries. They are not constrained by the rules and regulations of the Just Deserts system and can provide debt to those individuals, organizations and government bodies within the system.

There are always two polar extremes in dealing with any behavior that is considered undesirable by some authority. One is to involve a chain of actions, such as detection, confirmation, punishment. The other is to arrange the situation so that the natural consequences of the behavior are so negative that it is discouraged. The latter arrangement does not work well when the natural consequences are not immediate, or not definite. Then the typically myopic individual can not rationally weigh these consequences, and therefore can make decisions based mostly on immediate effects. With organizations, one can expect they are run under rational considerations, but decisions within organizations can be made by individuals seeking personal benefits in the short term, as opposed to organizational advantages in the long term. The same holds whether the organization is a private one or a governmental one. Thus, in the absence of a magic wand that transforms everyone into a rational person able and willing to weigh long-term consequences, and to put the organization’s benefit in front of personal benefits, only regulation will work.

Regulation can have just as many horrible consequences as depending on individual rationality and organizational altruism. If governmental organizations involved in regulations were all full of rational, well-educated individuals with the best interests of the nation at heart, they would work well. The real trick in designing a socio-economic system is to make one that works with venal and stupid people in it. Clearly one major avenue for improvement is to properly train and educate children, but even that can be subverted in the interests of personal benefits and even to further some misunderstandings of how both education and government work. So, no magic wand.

Regulation is made easier by transparency. So is the detection of misdeeds by regulators, if the transparency is so thorough that private individuals, or organizations constituted to serve as checks on mis-regulation, can obtain the same data as the regulators. Rather than make transparency something that is only in effect in special instances, it could be the default situation unless there were compelling reasons to deny it. In the financial arena, this would mean that any individual, organization, or government body that went outside the nation where Just Deserts was the system employed, and violated the principles of it, would be obvious and visible to any organization that chose to inspect the pertinent records. If transparency is the standard, the next level of deception involves maintaining false records that are visible, and a set of other records that are hidden. This would allow debt money to come into an organization, but it would not allow it to be used, as the transparency of most records would show off the entry point of the illegally sourced funding. In other words, it could be put into a hidden external account, but could not be brought into the nation and mingled with internal funds without leaving a trace.

The other difficult situation, besides relations with external non-Just Deserts nations, is the transition from any other system into a Just Deserts one. Specifically, this means that if there were a nation with a large international debt, what would happen to this debt when the nation worked through the transformation of itself into a different system, a Just Deserts one. For example, consumption levels might have been higher in that nation for previous times than could have been justified by the level of production there. This means that some external actors have loaned money to the nation so that it could have an average consumption level higher than otherwise possible. Does the nation repudiate this particular amount of debt, or does it decide to lower consumption levels and pay back the debt? Usually debt is not repudiated unless the debtor is willing to assume there will be no more debt in the future. This is the situation with a Just Deserts nation, so repudiation would not have the same theoretical effect as it would in a nation that was bound and determined to have inflated consumption levels until the dam burst and economic collapse occurred. There are good arguments to be made for both honoring the debt and dishonoring it, and such decisions would have to be made in the framework of the whole transition, by whichever rational, non-myopic, and altruistic people can be found within the nation to make such weighty decisions.

Balancing Benefits to Consumers and Producers

Is efficiency in marketing a good thing and something desirable in an improved socio-economic system? Or are there trade-offs that need to be carefully examined?

This post is about one aspect of the trade-offs that exist in an economy between producers and consumers: retail size and the corresponding efficiencies. To develop some simple insights, consider an economy with only a few positions. The economy has a retail sector, and many other sectors, which we will lump together as non-retail, except for the suppliers sector, which makes and sells things to the retail sector.

The positions in the economy are retail workers, supply personnel, other workers, unemployed, retail managers, and retail owners. Let’s assume they are all distinct to keep things as understandable as possible. Consider two alternatives, one in which all retail is of some average size, non-chain, and local, and the other in which some retail is very large, chain, and regional or national. Outside of retail, things are mostly identical between the two alternatives. There are differences, and they go like this. The large retail has more low-level worker efficiency, and gets by with fewer workers. This means that in the first alternative, there are less unemployed people, and more retail workers, per item sold or per dollar in sales. It also means that, in the management hierarchy of the large retail, there are more managers, and the upper salaries are larger, since salaries tend to go upward, sometimes rapidly, in larger organizations. Furthermore, ownership may be more concentrated.

Besides the labor efficiency of the larger retail, it has supply efficiency, in that larger quantity buying may get discounts, justified by cost or motivated by competition. The discounts in part come from the supply sector workers and owners. It would be possibly to consider consolidation of supply firms, but that is an unnecessary complication.

Contrast the two. Prices would be lower in the large retail case, as there are efficiencies to be gained, so everyone’s earnings would go more into retail and less into other sectors. There would be more goods passing through the retail sector. Other sectors would suffer from the redistribution of spending. This has an effect on benefit allocation. There would be more unemployment in the large retail case, so more taxation would have to flow from the population in general to those who are unemployed and need some sort of assistance in order to maintain a tolerable standard of living. Taxation could come from anywhere, but if it is not very progressive, it hits a middle sector of the population, leaving the lower and higher ones with less effect.

So, in one simple situation, the benefits of society are distributed differently in a small-only retail case or a large retail case, and going from small-only to large means unemployment would be greater, more benefits would flow to higher pay managers and wealthy owners than to workers. Other sectors would lose some benefits, as lower prices in the large retail would draw more spending there.

To generalize from this simple example in a single sector, conglomeration tends to move benefits from the poorer portion of the population to the wealthier. Perhaps there are exceptions to this, but that seems to be the trend. Is this desirable in a Just Deserts economy? The question is a very basic one. How much of society’s benefits should be allocated to different classes or percentiles of the population? Government regulation, most likely taxation, can affect this, and can also affect the ability of large retail, or any large organizations in an economic sector, to exploit the potential advantages of size. What should be done?

This question needs to be set into the context of the whole Just Deserts economic system. One principle is the maximum income effect. This might be done with a Maximum Salary law plus a wealth tax, or tax rates similar to those in effect in the United States during the era around John Kennedy’s presidency, when the top rate was 90%. This change has as a side effect, the reduction of major corruption, meaning it would be possible to pass laws affecting large businesses without the expectation that they would be riddled with loopholes designed by those donating blocks of funds to politicians or otherwise arranging for them to be rewarded.

Another effect of this change would be that ownership of corporate organizations and private companies would be different, in that many or perhaps most would be employee owned; others might be stock companies, but ownership would be more widely distributed among individuals. Government agencies charged with amassing pension and other types of funding might be owners as well. Thus, when the two alternatives are compared, the wealthy that are benefited by the large retail are not the exceeding wealthy, but simply those who have arranged to have substantially higher wealth and income. Estimates might be that an asymptote for the upper salaries are five times average salary, but there are many ways in which this might be figured out.

Perhaps the largest of the differences between the large retail case and the small-only retail case is the change in the unemployment fraction. All other things being about the same, small-only is less labor-efficient, and therefore employs more people per dollar spent on retail consumption. To be able to judge what might be better or worse, it is necessary to determine how the situation of more or less large retail could be adjusted by government intervention.

Taxation is the common tool that governments use to affect such things. Consider a market share effect on a profits tax. Profits might be figured in some convenient way, but in general, they would be taxed at some rate. If there was also a mechanism by which market share of any particular retail organization could be measured, the profits tax rate could be increased for larger market share and reduced for smaller market share. This would favor non-chain individual retail organization, as well as local over regional and regional over national.

The tax rate increment relating to market share could be determined in different ways. One way would be to bundle all retail together, and simply look at sales fraction on a national or regional, or even international, scale. Then a table would have to be constructed, akin to the many tables of tax rates that are dependent on such things as income, which says how much bump up there would be for a market share of such and such. The table really would control the eventual outcome of the trade-offs between large and small retail. If the tax rates were much larger for bigger market share, then larger organizations would shrink, and small ones proliferate. If the tax rates were only slightly larger, they would only slow down the agglomeration of small retail into large retail. So, juggling the tax rate table is equivalent to determining what spectrum of organizational size is desired.

Only good data resources would allow this tax rate table to be set up. If the goal is to reduce employment, then it would be necessary to understand just what head counts were needed for different scales of businesses in the retail sector, as well as to understand the secondary effects that happen in other sectors and especially in the supply sector. If the goal were instead to affect the median wage, then a different set of data would need to be collected, being the employment data needed for the first option but also salary or wage and hours-worked information for all employees. Some combination of these goals might also be accomplished by just having these two sets of information.

One thing that has not been discussed adequately in Just Deserts economic system posts is how to do a transition from some other system to a Just Deserts system. Clearly, this can be done very gradually, to allow everyone affected by it to make necessary adjustments in their own personal plans, or it could be done rather quickly, to bring about the effects within a single generation or even less. The two aspects of this speed question relate to evasive possibilities. As is well-known, any type of change in a system of large wealth disparities that affects the upper tier wealth or income will be evaded, or politicized, or subject to lobbying. There does not seem to be any mechanism that can avoid this, and so, it may well be that some Just Deserts system can be theoretically designed, and it will look impressive on paper, but there will be no implementation path that is tolerable to those whom it would affect.

No one wants to go through a violent revolution, as it does not simply make some basic changes, it undermines an economy, disrupts all manner of commerce, causes migration, and leaves everyone full of uncertainty and foreboding. Short of such a revolution, there does not seem to be any way that those who might want to live under a Just Deserts economic system could get their hands on the levers of power. There is no educational miracle on the horizon. Cajoling and convincing is not likely to be effective. Some bright new ideas are needed related to transitioning from something else to a Just Deserts system, and these will take a lot of work to develop and refine.

Unearned Income and Winston Churchill

Churchill wanted to put a tax on land sale profits, in a specific way, as he felt some were unearned and therefore more deserving to be taxed away. This concept is intriguing, but regrettably not the Rosetta Stone to a new system.

The term “unearned income” became famous with economists David Ricardo and Henry James, who used it to denote the appreciated value of property which was not from development of itself, but of the surroundings. The idea was that this was done without any significant contribution by the owner, yet he or she reaped the lion’s share of this appreciation. A very famous speech by Winston Churchill in 1909 is often quoted to define the problem, if there is assumed to be one, with a landowner making possibly huge profits on land without having exerted any effort whatsoever to receive them. Instead, Churchill spoke about the profit arising because of the labor and expense of the general community surrounding the property, near and far, who improved the potential utility of the land without any development of it having been done. Churchill favored that the unearned profits from the sale of such land be taxed by the state and used for the good of the community, whose efforts produced it.

The general principle of taxing unearned income more than earned income has received support from many quarters, and seems to be an acceptable principle upon which to base a taxation system. However, there has been no end of controversy and change in what is considered unearned income. This blog has as a goal, a better way of defining it, and a better way of taxing or otherwise regulating it.

It is a natural way of human existence to avoid tax, and tax avoidance mechanisms are as ubiquitous as tax plans and almost as prevalent as tax payers. Even more prevalent are the paid experts who promote the income and wealth of their sponsors as earned, or whatever label receives less opprobrium. The same experts are at the ready to explain or rather excuse any tax avoidance scheme in terms relating to personal choice or corporate advantage or professional practices or some other rationale for its use, other than stating it to be exactly what it is. In contrast, there are a few individuals who simply label tax avoidance schemes for what they are, and state they are proud to have located and made use of them. All this obfuscation makes it somewhat difficult to exactly define what is ‘unearned income’, if there is anything like this, and what should be done to tax or regulate it. To deal with this murky situation, some basic principles need to be enunciated.

The first point to be made is that unearned income does not exactly exist. All income is partially earned and partially unearned, and the difficulty is in deciding how much of it is one and how much is the other. The land value appreciation gain that Churchill spoke about is one of the easiest and simplest ones to describe as it is almost binary. In Churchill’s picture, the value gain is unearned if the landlord does not develop the property, but the development, if it appreciates, produces earned value. Things aren’t binary in economics, but quantitative. The landlord invests his money in a piece of property, and could have instead put the money into a CD or some other investment. The lack of interest paid for undeveloped land represents a loss, as compared to the interest from other investments. Annual tax, even if small, represents another cost of holding the property. Thus, taxing the gain of a piece of undeveloped property at 100% would eliminate all potential interest in such investments. However, a tax at 100% of the amount over some multiple of the average gain of investments, plus tax costs, would be a better approximation to the return of unearned income back to the community which created it. What multiple to use is debatable, but it should not be large, perhaps somewhere between one and a half and four.

Churchill also used the same speech to promote the annual tax on a piece of property, as distinct from tax on the appreciation recognized in a sale, as dependent on the potential value of the property, as opposed to its original value. Sometimes and in some places, the exact opposite is done; zoning is a tool for maintaining artificially low appraised values, and limits on tax appraisal changes annually is another. The taxation on an annual basis, as opposed to the tax on the sale profit, is simply a moving in time of the amount of the taxation, if the mathematics of tax rates is done correctly.

The label ‘monopolist’ was used in Churchill’s speech, and this again is because of the nearly binary nature of land. There is little land created on the planet’s surface, and only by reclaiming wetlands, dredging dirt for use in artificial islands, or using polders to force back the sea. One can claim that a particular piece of land is held as a monopoly, if it is in a particular location that cannot be bypassed, but otherwise, land is somewhat fungible. The owners of all the land in some particular location might be said to have a collective monopoly, but so could all the owners of a particular stock or anything else. Supply and demand slides into monopoly as the owners form a cartel to dissuade individuals from selling before some process increases the price substantially.

A real monopoly would exist if some individual or band of individuals obtain rights to all of some land, just as they would if they had obtained all the rights to some resource, like oil, or some invention that was patented or some drug which was likewise limited. These monopolies have not been similarly singled out for extra taxation, as Churchill did with land, but they could be with similar justification. The basic point of the singling out needs to be clearly stated. Churchill felt that there was little justice in allowing unearned income to be lightly or inconsequentially taxed, but he felt that justice was done better with a mere 20% tax on land profits. Others have written that societies need to harness the labor, capital, land, and resources they have available to them so that these four quantities could be put to the best use in increasing the living standards of the population, or at least some of them. The Churchill 20% tax would not do that.

In designing a new socio-economic system, or even trying to see if there are any better ones possible, it is necessary to be specific about the goals of the society. Should this goal of increasing the living standards of some subset of the population be one which shapes all the tax and regulation policy of the governance mechanisms? This one, as are most others, has some appeal to it, but like all goals, it is arbitrary as well as being poorly defined. Should a socio-economic system be defined by setting down a few goals and then building up the details of the system to accomplish them? Soviet communism had a simple slogan, something about changing the distribution of the products of society to be based on needs rather than productivity, past and present. Other systems have had slogans as well. The alternative is to be more Churchillian, and stick with what we have but modify it a small amount in the direction we think would improve it.

These are just two of the many ways to conduct planning for a society or for a project or anything else. One is to set a destination, which might be listed as a set of goals, and then try to get there. The other is to keep doing exactly what is currently being done, and just make small corrections. Both work well in many instances. The first one is more appealing if the general opinion of the existing socio-economic system is negative, and then a new plan or a new set of goals might be chosen to break away from it. The second one, obviously, has appeal in the inverse situation, where the general opinion is that things are not so bad, and can be corrected. The second one also arises in the instance where it is recognized that no one at all can figure out how to design a new socio-economic system from scratch, and that any system should have some experience with it before it is adopted. Since one cannot experiment with a whole society, it means that there is no way to make a new socio-economic system that is acceptable to the population. Theoretical justifications as to how a system would work are not likely to be correct, as there is no body of experience and no general theory of sociology and economics which would assist a team of designers in figuring out the details of the new system.

Are these latter opinions justified? Is it indeed impossible to come up with a whole new system, and the best that can be done are minor course corrections, perhaps a large amount of them in an never-ending stream. How exactly would we know if minor course corrections will take us in a desired direction or steer away from it or lead us into unknown territories, if there is no competency in sociology and economics? The lack of experience and the lack of theory seem to be an inhibition to small changes, as well as to large ones. So, let’s just keep trying.