The economics of democratic communism: savings and credit

Democratic communism dispenses almost completely with the profit motive. By "profit motive" I mean the motive to acquire money for its own sake. There are still money-based incentives; as I noted in my previous posts, one way to construct wages and personal taxes is to have a regressive tax structure to encourage people to work an efficient number of hours. But the incentive there is slightly different: it doesn't by itself encourage people to accumulate money; I'm assuming that people working more than the minimum will spend their money.

I have come to the conclusion that one element of capitalist economics that is "intrinsically" capitalist, that must be done away with, is the strong connection between "savings" and investment. There are a couple of reasons, which I will briefly describe. (I will post more detail if asked.) Please pardon the long preamble: it's necessary to expose a delusion in some detail before an alternative becomes coherent.

First, "savings" is deeply equivocal in capitalist economics. One sense of savings is literally hoarding currency, i.e. physical dollar bills. No capitalist economist likes this sort of savings. All it does is make future consumption hard to predict, because it's difficult to know how much currency people are hoarding and impossible to know how that hoarded currency is distributed. Because the currency is hoarded, it's not used to socially privilege actual capital formation or other forward costs (i.e. investment). Obviously, we want to have some currency in our pockets: I don't want to literally spend each paycheck the moment I receive it, but it's also a bad economic idea to stuff a lot of currency in my mattress.

The more typical sense of savings foregone consumption: In a given year, Alice could have consumed, say, \$100,000 worth of goods and services, but instead she consumed only \$60,000, leaving \$40,000 to be consumed by investment. What is obviously necessary here is that Alice, either directly or through an intermediary such as a bank, actually gives that \$40,000 to firms to actually use for investment.

But what precisely is being "given"? When Alice actually has her \$100,000, the stock of existing consumer goods and services is already fixed. Spending more or less will neither increase nor decrease that stock one iota. The only choice that Alice makes is how to allocate that fixed stock. Using the extra \$40,000 to buy consumer goods will just raise the prices of existing goods for everyone else: others will consume less so Alice will consume more. But I can't see any direct, real effect on how we allocate the existing stock of consumer goods and services on the one hand, and how we choose in the future to allocate land, labor, and physical capital to the production of new physical capital or consumer goods in the future.

Even the social relationship is unclear. Assume Alice spends \$60,000 on consumer goods, and offers \$40,000 for investment. And, furthermore, assume Alice is "typical": people typically are not allocating all their stock of money for consumer goods, instead offering some for investment. One the one hand, companies see all this investment cash, which is great. On the other hand, companies also see that people are not bidding all they have on consumer goods, so why should they produce more consumer goods? Consumers are signalling that there is a surplus of consumer goods; producing more will just lower the price and lower profit. On the other hand, if Alice (and everyone else) spends everything they have on consumer goods, they're signalling that there's at least just enough (if market prices equal costs) or not enough (if market prices exceed costs) consumer goods. In the latter case, there's a signal that firms should increase production, but there's no savings to fund this investment.

Presumably, there's some sort of equilibrium mechanism operating. People can still not spend all their money, but the money they do spend exceeds the money cost of production, signalling the desire for more production. But where does this new money come from? If it exceeds the money cost of production, then by definition, it wasn't spent by firms in creating the existing stock of goods and services. In a capitalist economy, this money comes from private banks. But why should we permit private banks to create excess money, i.e. the social permission to consume or invest? And if we do give them this permission, why, in a capitalist economy, would banks create this excess money to benefit anyone other than themselves? Indeed, we can see empirically that banks do not benefit others unless they're forced to.

It is not savings but credit, the creation of new money, that drives investment. And the creation of credit is a social issue, and the fundamental principle of real democracy is that social issues are decided democratically. Note that every time we have left the creation of credit to the "free market", the "free market has completely destroyed the economy.

So...

In democratic communism, the fundamental asset is not claim on ownership rent, but on each individual's ability to provide labor, to work. We want each person to work, and we want each person to consume in proportion to their work. No one should need to "save" for retirement, because all working people have a moral obligation to provide for all their retired elders. Retirement is an entirely collective obligation.

In democratic communism, the democratic national government finances all investment. Democratic national, regional, and local governments allocate investment in a complicated way, dependent on immediate conditions. Inflation is controlled entirely by taxation, both income taxes and capital taxes. (See my earlier posts for more on this topic.) Instead of trying (poorly) Democratic communism

While it is possible to save for large, infrequent purchases (a car, a house, a college degree), it is actually much more efficient to make these purchases on credit. Assuming that an individual can live comfortably on 12 SVU per week, and she can earn up to 28 SVU per week (after taxes), every individual make a payment of 16 SVU per week, and can therefore borrow a certain amount. Assuming we set the real rate of interest (denominated in SVU) at 2 percent (the expected rate of economic growth) and a standard year of 50 weeks, the amount a person can borrow varies by term:

Term (years)	SVU	US \$
1	791.90	23,756.89
5	3,805.78	114,173.39
20	13,185.05	395,551.61

This credit is individually autonomous. Because we know (because we've designed the system this way) that every individual can come up with 16 SVU per week to pay back loans, we can loan this money with few restrictions. Furthermore, longer term loans should be backed by some physical asset: an individual can completely discharge the loan by forfeiting the asset. So the worst case scenario is that a person borrows 790 SVU (\$23,700), blows it all at Vegas, and for a year works 40 hours a week and lives on 12 SVU per week. Perhaps uncomfortable, but that's hardly a devastating catastrophe. Starting from scratch, a BA/BS and a Ph.D. from an mid-priced school might cost 3800 SVU (\$114,000), which can be paid off at worst in five years. Note that because the SVU as a unit of account is deflationary, the nominal interest rate for loans denominated in SVU does not include currency inflation, and the real interest rate is less than the nominal rate.

I expect that the most frequent use of these loans will be for purchasing the right of occupancy from existing tenants. The second most frequent use is to take vacations or leaves of absence: a person can, if she chooses, work one year and take the next year off, financed entirely by guaranteed credit.

Loans that have a payment of up to 16 SVU per year will have a near-zero default rate. The only reason to default is partial or complete disability. Otherwise, people are obligated to work up to 40 hours per week, pay their taxes, live on 12 SVU per week, and pay up to the remaining 16 SVU for their loans. However, the government can make loans to people making more than 40 SVU per week, and which are payable only given this higher income, which is not guaranteed. In these cases, individuals will be required to purchase insurance, which will cover involuntary loss of income. Furthermore, there should be some mechanism to reduce moral hazard of covertly lowering one's income and relying on the insurance, such as a rebate of part of the insurance if the loan is completely repaid.

Under ordinary circumstances, there is absolutely no reason for people to save; instead, they will typically spend all their income. They can rely on credit for unusual expenses, and it's relatively easy for the government to require and facilitate repayment, while exercising very little control over how people borrow. The only real control I can see is when a person has used all their ordinary credit, and has unexpected expenses. In these unusual circumstances, the government can extend an extra amount of credit, taking more than a year to repay, so long as the person can make a reasonable justification for the expense. It seems very unlikely that a person would have more than \$23,000 of emergency expenses over two years.

There are some edge cases where savings makes some sense. There are some short-term jobs that are so arduous, inconvenient, or distasteful that we have to pay people a lot to get them to do them. For example, when I was in high school (lo, these many years ago), my friend's mother was a welder on the Alaskan pipeline. I think she made \$100,000 in a year (in 1970s dollars). Since this is a short-term job, it seems unfair to make people pay the higher marginal tax rates for the year; the higher marginal rates are intended for people with consistently high incomes. Therefore, we create tax-deferred savings accounts (TDSA), denominated in SVU. Any money deposited into a TDSA is deducted from taxable income; any money withdrawn from the account is taxable in the current period. A TDSA does not pay nominal interest; because it's denominated in SVU, it's protected from inflation, and because SVU's are deflationary (increased economic efficiency should mean that an SVU will purchase more goods and services in the future), it has an implicit real rate of interest. TDSAs are also available to high income earners in general: if you can get a job that pays 500 SVU per week, you're free to put 100 SVU per week in a TDSA, and you won't pay any taxes, much less the 95% marginal rate. You'll just have to spend it eventually, and pay taxes when you spend it. A person, of course, always has to pay the minimum tax of 12 SVU per week, and money withdrawn from a TDSA is subject to a minimum tax rate of 50%, even if it's between 24 and 40 SVU per week. (We can adjust the tax code a little such that if she withdraws more than 40 SVU per week, she pays no more taxes than if she had earned the money.) [This doesn't work. I'll have to rethink it.]

There are also some edge cases where credit should not be guaranteed. In any society, there will be "slackers", people who do not want to work at normal intensity. (People who cannot work at normal intensity are by definition disabled, and their care, like that of retired elders, is a collective moral obligation.) We allow people to trade off time for intensity: a person can work 40 hours per week at a job that requires 60% of normal intensity (basically, showing up and plausibly pretending to work), and receive 24 SVU per week (12 SVU disposable income). People can trade-off of time for intensity, but they do lose some autonomy: since these people don't have the extra capacity to pay loans, they cannot borrow. They should not have many emergency expenses; in the worst case, if they have to attend the funeral of an immediate relative (parent, grandparent, child; uncles and cousins will have to go unmourned by slackers.) funeral, the government can, subject to proof, just buy them a bus ticket and give them a few paid days off.