ALTERNATIVES TO AUSTERITY© 2014, Institute for Economic Futures

NECESSARY REFORMS

EMERGENCY AID

• IMF estimates that there is a 30% of deflation in Europe.

• Deflation could devastate Europe for years.

• What is required is massive capital investments.• Will stimulate the economy.• Will have lasting results.

• Most countries overextended with debt, while private sector wealthy.

• Germany, who could stimulate the economy, sticking to its “black-zero budget.”

• Possible solution:• Two year European Investment Bank bond issue of EUR 400 billion.• Used for infrastructure and other capital projects inside the EU.• Would free individual countries from stimulus spending.

INCREASE REVENUE INSTEAD OF CUTTING COSTS

• Government austerity hits the poor, hurts the economy and increases debt, as tax revenue dwindle.

• As countries are wealthy but governments are poor, the solution is to transfer back some of the wealth from individuals to the state through taxation.

SOLUTION: TRANSFER MONEY BACK!

• The only way to resolve the financial crisis is to return wealth from the richest back to society!

Crisis No Crisis0%

100%

200%

300%

400%

500%

600%

Resolving the Financial Crisis

Private Wealth Public Wealth

POLICY SUGGESTIONS

• As wealth inequality is much higher than income inequality, an income tax, no matter how progressive, will not be effective. It could take hundreds of years before meaningful change takes place.

• A wealth tax, on the other hand, will quickly resolve the crisis, wipe out government debt, and stimulate the economy.

• Remember, the wealth that will be raised through the wealth tax will be a stagnant one, that is sitting idle and unproductive.

• Introduce tax on wealth of 20% once, or 2% per year over time would quickly pay down the public debt.

Richest 1%

35%

Next richest 9%35%

Medium wealth25%

Poorest 50%5%

Structure of Inequality:Share of Total Wealth

REFINING THE SUGGESTIONS…

• The richest 1 percent a wealth tax of 35% (or 3.5% per year)

• The next 9 percent a wealth tax of 20% (or 2% per year)

• The middle income a wealth tax of 2.5% (or 0.25% per year)

• The lowest 50 percent zero wealth tax.

Richest 1%23%

Next richest 9%28%

Medium wealth24%

Poorest 50%5%

Government20%

Share of Total Wealth After Progressive Wealth Tax

SELF-REGULATING MARKETS

ASSUMPTIONS OF PERFECT MARKETS

• Every actor consistently acts as a rational profit-maximizer.

• No participant is big enough to influence prices.

• There are no barriers to entry and exits of markets.

• Everybody has perfect information available to them.

• There are equal access to factors of production.

• There are no externalities.

• There is no intervention of society.

IF THIS WAS TRUE…

• “Equality assumption in economics” Nobel Laureate James Buchanan• All economic activity equal with other• If this assumption removed, standard textbook economics collapses.

• Factory Price Equalisation (Paul A. Samuelson)• Salaries and costs of production same everywhere.• This would lead to capitalism being more Communist than Marx!

• Same assumptions would lead to no trade at all except in raw materials!

REALITY

• Factor Prize Polarization – (Swedish economist Gunnar Myrdal)

• Perfect markets need a formidable external framework to maintain.• Companies consolidate and grow until they can push out competition.• In the interest of greed, speculative bubbles are created that can destroy the entire financial

system.• There is no successful capitalist economy without a strong state sector:

• US – Pentagon System• Sweden – Social services• Japan – Ministry of Trade and Industries• Taiwan, South Korea – Strong state involvement in economy• Singapore – State dominates large sectors of economy

• Singapore Airlines• Virtually all land publically owned• 85% of housing provided by Housing and Development Board• State sector 3 times of Korea, 6 times that of Argentina and 15 times that of Philippines

• Average government Spending in EU – 46.8% of GDP

RESOLVING INEQUALITY

SUGGESTED REFORMS

• Reintroduce progressive income tax.

• Reintroduce progressive inheritance tax.

• Tax income from wealth higher than income from work.

• Tax speculation higher than productive investments.

• Stricter regulation on banks.

• Regulate the derivatives market.

• Regulate the currency markets.

USE OF THE EXTRA REVENUE

• Improve education (long term investment in the future)

• Invest in infrastructure

• Guarantee employment

• Promote green technologies

• Making average people better off, and substantially reducing inequality.

PREREQUISITES

• Global declaration of wealth and income.

• Open up bank secrecy.

• Implemented in many countries to avoid capital flight.

REIGNING IN THE FINANCIAL SECTOR

• Bail out people rather than banks owners.

• Keep investment banks separate from commercial banks.

• Limit banking activities to those needed for the real economy.

• Nationalise distressed banks.

• Let small banks go bankrupt but protect depositors.

• Regulate the derivatives market• Credit Default Swaps should be regulated as insurance• Options should be used for the mitigation of risk, not for speculation• Ban all derivatives that cannot be shown to be useful for the real economy

• Discourage short term speculation in the stock market.

• Limit currency market to people who actually need the currency.

• Limit future contracts to those who actually are going to take delivery of the goods.

IMPROVING THE LOT OF POOR COUNTRIES

Policies for Increasing Equality Between Countries

HOW DID RICH COUNTRIES GET RICH?

• Government taking a decisive part in planning and supporting economic development. (Most European counties, US, Japan, other Asian miracle economies, China).

• Protected their industries until they were strong enough to compete.

• Only opened up to free trade when they were ready.

• Strict currency controls.

• Ignored patent and stole inventions whenever they could.

WHAT DOES RICH COUNTRIES ADVICE POOR COUNTRIES TO DO?

• Government should not get involved in economy, neither in planning, state enterprises or in subsidies.

• Open up to free trade immediately, even if it means that the local industries will be destroyed.• Remove all import barriers and tariffs.• Remove all capital control.• Allow local currency to be traded freely.• Remove all subsidies on stable foods etc.• Impose strict adherence to patents and intellectual property rights.

• In short, they are advised to do exactly the opposite of what they themselves did to become rich!

“FOLLOW WHAT THEY DID, NOT WHAT THEY TELL YOU TO

DO.”• The government needs to take a leading role in developing the economy.

• Concentrate on areas of increasing return, such as industrial production, rather than on areas of decreasing return, such as agriculture and extraction of raw materials. Even if they are not internationally competitive, the country will never progress if industries are neglected.

• Protect local industries until they are strong enough to compete internationally.

• Process raw local raw materials before selling.

• Patent legislation should be carefully considered. It is not in the interest of a developing country to extend intellectual property rights that prevents it from emulating technology from abroad.

ADVICE FOR EU COUNTRIES

• Implementing the suggestions in the previous slide is not possible for EU countries, as it goes against the fundamental laws of the EU.

• Those inside the Euro zone are even harder hit. The Euro removes the last mechanism that could potentially help economies to compensate for lower levels of productivity.

• Advise:• Poor countries within the Euro Zone should leave the Euro.• A movement should be created within the EU to promote fair trade instead of

free trade between its members, to allow less developed members to develop their industries and economies.

• Long term, the whole basis of the EU has to be changed.

STRUCTURAL CHANGE:ECONOMIC DEMOCRACY

DOMINANCE OF ECONOMIC SYSTEM

• First time in history, economic system has been elevated to as status of controlling society.

REAL POSITION OF ECONOMIC SYSTEM

• The economic system is an abstract creation of human beings. It is invented by human society, and is part of it. Human society is in turn a part of nature.

IMPLICATIONS

• The rules of the market economy is not a natural law that is valid at all times under all conditions.

• Without the administrative and military might of governments, it would collapse over night, and the rules of the market would no longer hold.

• So to the extent that market rules exist, they do so within a carefully orchestrated economic framework determined by the sanctions of society.

DECIDING THE ECONOMIC SYSTEM

• As society determines the economic system, not the reverse, we can envision a new system.

• Capitalism probably the best system so far, but this does not mean that it is the ultimate system.

• The reason that communist experiments failed only means that the communist system as implemented did not work. It says nothing about whether the capitalist system is the ultimate.

• The system we choose has to be determined by what we want to achieve.

WHAT ARE OUR AIMS?

• Before suggesting an economic system, we need to determine the aims of society.

• Only a part of these goals are directly concerned with the economic system.

• Most systems in the past has aimed at concentrating wealth. Keeping the majority poor in order to promote a rich elite.

• With increased labour productivity, possible to provide comparative prosperity for all.

BROAD GOALS

• Equality is impossible: There will always be diversity.

• Even so, it does not mean we need to accept vast discrepancies. We, as a society, can choose to aim towards equality.

• A few suggested points:• Everyone should be guaranteed the minimum necessities.• A proper incentive system should be in place to reward individuals who

contributes most to society.• There should be a constant effort to increase the minimum level of the

majority.

WHY STRUCTURAL CHANGE?

• The present economic system is designed to concentrate wealth in a few hands.

• Political democracy can do little to change this fact, as the real power lies with the economic power. • Most elections are won by those who spend the most money!• Lobbying by large corporations decides government policies.• Where democratic governments fail to bring in business friendly policies,

they are taken out of the hands of governments through international treaties.

• In order to achieve real change, we need economic democracy.

REFORM INCENTIVE SYSTEM

• Capitalism prides itself on its incentive system.

• However, when the incentive system rewards acts that are against the public interest, and punishes acts that are good for the public interest, then the system has failed and has to change.

• Present profit system and system of executive bonuses does not encourage good actions.

• People should be rewarded for actions that are beneficial to human society, and be sanctioned for anti-social acts.

ECONOMIC DEMOCRACY

• Society should set a limit to the accumulation of wealth by individuals.

• The corporate system serves a free market ideology. It has no place in economic democracy.

• Replace corporate system with a three-tier system of:• Small scale individual enterprise.• Small-medium-large co-operative enterprises.• Efficient government corporations for key and very large scale enterprises.

• Encourage geographic distribution of economic development, by promoting and supporting local economies.

BASIC SERVICES

• All people are assets to society if they are healthy and educated.

• If sick and uneducated, they become a burden to the rest of society.

• Therefore, everyone should be provided:• Free education according to ability of students• Free medical care• Guaranteed employment at wages that can meet food, shelter and clothing.

• These are not gifts or charity, but essential in building a prosperous society.

PROUT

• Progressive Utilisation Theory of P. R. Sarkar.

• Contains details of alternative economic and political structures for a prosperous society.

• Most suggestions in this presentation taken from Prout.

• For in depth coverage of these and many other topics, see upcoming book “The Perfect Storm.”

• Also refer to the book “Principles for a Balanced Economy” presently being translated into Romanian.