Two new economic institutions are proposed to generate the required rates of saving and investment.
- Mandatory Savings
- A National Mutual Fund
- savings from the MSP
- public sale of NMF stock
- interest free loans from the Federal Reserve Bank
- supply venture capital for new manufacturing companies
- fund research and development of improved production technology
- finance worker training
- provide equity capital for new plants, modern equipment, and advanced process technology
- Solve the problem of consumption vs. investment
- Solve the problem of investment vs. inflation
- Create a new social contract
A Mandatory Savings Program (MSP) is proposed that would withhold income from consumers as a surcharge on income tax. The MSP would provide the savings necessary to support large increases in investment without inflation.
The rationale for mandatory savings is simply that there is no other way to achieve the increase in savings required to support a $800 billion (or more) increase in investment without inflation. The rate of mandatory savings would be established by formula at an amount necessary to keep inflation within an acceptable level (i.e. less than 4% per year). The savings rate would be proportional to the inflation rate, so that when prices are rising, the rate of savings would increase by an amount sufficient to slow the rate of inflation. When inflation decreases, the mandatory savings rate would decrease with it.
The funds generated by the Mandatory Savings Program (MSP) would be withheld from income and held in nontransferable five year bonds earning tax free interest indexed at 4% above inflation. Upon maturity, these bonds could be redeemed by the individuals from whom the savings were withheld.
Mandatory savings would provide fiscal restraint that would assist the Federal Reserve in fulfilling its responsibility to prevent inflation. Mandatory savings would act much more directly on consumer prices than monetary restraint, and with much shorter time delays. Mandatory savings would therefore be more effective in fighting inflation, and less subject to counterproductive effects, than tight money policy.
Mandatory savings could largely replace monetary restraint as the primary mechanism for controlling inflation. This would allow the central bank to pay more attention to promoting rapid economic growth without fear of inflation.
A National Mutual Fund (NMF) is proposed to provide the investment capital necessary to increase the investment rate by as much as 12% of GDP. The NMF would obtain its capital from three sources:
The primary rationale for a National Mutual Fund (NMF) would be to provide a mechanism for expanding the investment rate by a very large amount. The NMF would finance capital investment, earn a profit, and pay dividends to its stockholders. Returns on NMF investments would be distributed in two ways: first, as interest on mandatory savings; and second as dividends to NMF shareholders.
A secondary rationale for the NMF would be to give every U.S.citizen an ownership share in the means of production. Individual and institutional investors buying shares of the NMF would receive dividends proportional to their investment. Dividends paid to NMF shares purchased with loans from the Federal Reserve would be distributed to the general public on an equal per capita basis. By means of these public dividends, every adult citizen would become a shareholder of the nation's means of production. Through NMF dividends, everyone would benefit directly from increased investment, and the resulting increased productivity.
The NMF would function as a national investment bank for advanced industrial development. NMF investments would be made in competitively selected enterprises and programs that contribute to basic wealth production. The NMF would:
The NMF would be prohibited from investing in real estate, retail sales, advertising, or marketing.
Companies and consortia with prospective investment opportunities would submit proposals to the NMF. These proposals would be evaluated for soundness of technical approach, realism of business plan, and expected return on investment. The NMF would fund only those proposals that scored highest in open competition on both technical and economic criteria.
Working together, the Mandatory Savings Program and the National Mutual Fund would:
In the short term, NMF investment would create jobs and generate rapid economic growth. Meanwhile, mandatory savings would divert income from consumers -- but only in response to investment spending, not as a prerequisite. This is an important distinction. If savings are a precursor to investment, the deflationary impact of saving is felt before the stimulus of investment spending. However, if savings are levied only in response to inflationary pressures caused by investment spending, there is no deflationary effect. Mandatory savings would slow down consumption only by the amount required to contain short term inflation caused by growth in net investment.
In the long run, productivity would grow, investments would pay back, savings would be redeemed, and NMF would pay dividends on profits. Everyone would receive additional income, both from savings and invested capital. Consumption would rise along with production.
The economy would thus grow rapidly without inflation in both the short and long run. NMF investments would assure that there were always plenty of jobs and sufficient output to support rapid growth of both consumption and investment. Mandatory savings would assure price stability in the face of rapid economic growth.
A Solution to Investment vs. Inflation
Mandatory savings would free the Federal Reserve Bank from the dilemma of contradictory goals. Fiscal restraint produced by mandatory savings would enable the Fed to focus on policies for promoting investment in wealth creating enterprises, without simultaneously worrying about inflation.
Mandatory savings could control inflation without reducing the rate of investment. Inflation could be held in check without adverse impact on productivity growth. This would eliminate long term tendencies toward stagnant economic growth with high inflation.
Furthermore, mandatory savings would force every citizen to accumulate a substantial savings account. Eventually, everyone would experience the financial security that comes from money in the bank, and every citizen would receive a supplemental income from interest on savings.
Finally, mandatory savings would produce a much more direct and immediate controlling effect on inflation than current policies of monetary restraint. Current monetary policies are slow acting with significant time delays. As a result, actions of the Federal Reserve Board often are based on long term predictions that are incorrect, and policies sometimes turn out to be counterproductive, or contribute to instabilities in the economic system. A national savings rate directly indexed to the inflation rate would have an immediate impact on consumer disposable income, and hence, on the amount of money in the consumer market place. The negative feedback impact on prices would be felt with very little delay, which as any control systems engineer knows, is important to stability and controllability.
A New Social Contract
In the long term, NMF investments would effectively make every adult citizen a capitalist. Everyone would own a piece of the action. Everyone would enjoy the economic security that comes from owning wealth producing stock, and accumulating a substantial savings account. Everyone would have a vested financial interest in productivity growth. High rates of investment would produce rapid productivity growth. This would produce growing dividend income to consumers, while prices are falling in the market place.
Increased availability of investment capital would make it easier to start new businesses, and to invest in improved capital equipment. This would create new job opportunities. Meanwhile, economic growth based primarily on productivity growth would generate less pollution, and enable major new approaches to environmental preservation and restoration.
Income from NMF dividends and interest on mandatory savings would give to everyone a degree of financial independence that has here-to-fore been experienced only by the wealthy. Once NMF dividends grow to a significant fraction of the GDP, many workers would be able to choose to voluntarily leave the labor force, in order to devote more time to family, or to pursue additional education, or new career opportunities. With sufficient dividend income, single salary families might once again become popular. This would create many new job vacancies, increase the demand for labor, and generate incentives for productivity enhancing technologies to alleviate labor shortages. It would also cause wages and salaries to rise and create new opportunities for career advancement for those who choose to remain in the salaried labor force.
Finally, income from NMF dividends and interest on mandatory savings would provide a basic income floor below which no one could fall. Once this floor rises above the poverty line, poverty would simply cease to exist.