Like oxygen powers our cells and our body, money powers our businesses and the economy.
If your blood stops pumping oxygen to every cell, your body becomes less efficient, and without oxygen, our cells function less efficiently and begin to die.
Economies are similar: Households and businesses need money to function optimally and transact with each other. If we don’t get enough supply of money (income), we cannot purchase the goods and services we need from those around us, which drives their incomes down too. This symbiosis means our own income is dependent on our fellows receiving enough income to spend on our own goods and services.
In the same way that oxygen is distributed to all the cells in a healthy body, healthy economies rely on money being distributed adequately to all the households within the economy.
However, while our cardiovascular systems are efficient and automatically distribute the oxygen in our blood efficiently to every cell in our body, our monetary system does not automatically distribute money to all our households.
Efficient distribution of the money in supply within our economy depends on efficient monetary and fiscal policy, and on the decisions we all make as to how we spend or invest the money in our own bank accounts.
The state (the SARB is an organ of state) is the issuer of all Rands. As the state can issue as much currency as it chooses, it is not financially constrained, nor dependent on the private sector for revenue.
Monetary & fiscal policy determine how the state lends (via licensed banks) and spends the Rands it creates into private sector bank accounts to increase money supply, and uses interest charges, taxes and bond sales to extract money out of private sector bank accounts to reduce money supply.
Spending and lending increases money supply from state to private sector. Taxation and interest charges return money back to the state.
While the economy is operating below full capacity, and inflation is low, the state can reduce interest charges (incentivising private sector borrowing) and deficit spend into the economy, resulting in increased employment of idle resources (including labour), and higher demand.
Demand is the desire and ability to purchase goods and services. Demand is useful in that it incentivises investment in businesses that supply goods and services. Without adequate demand for a product, there would be no point in investing in producing it.
There are several ways to ensure adequate demand for goods and services.
The most efficient way to increase demand is to reduce inequality, because reducing inequality spreads money already in supply more evenly, creating more demand without adding to money supply.
Richer citizens save more share of their income than poorer citizens do, and because poorer citizens spend more share of their income, moving money from richer citizens to poorer ones achieves more demand without any increase in money supply.
Like healthier circulatory systems distribute limited blood supply to all the cells in our bodies, so more equal economies more efficiently distribute the available money supply more broadly and evenly to more households, increasing the demand for our goods and services without increasing the amount of money in supply.
The most efficient way to reduce inequality and distribute available money supply more deeply into our communities is for our companies to ensure that more share of their turnover goes to their lowest paid workers.
By moderating our company pay gaps and sharing company profit with our workers, we can increase demand by ensuring our workers share adequately in the profit from their labour.
Pay gap moderation and profit sharing with workers is the most efficient way to reduce inequality because no government intervention in the form of tax is required. An added benefit is that it is non-racial.
If we don’t moderate our company pay gaps and profit share with our workers, inequality increases, making our economy less efficient due to the resultant drop in demand.
When demand is too low as it is in SA now, private sector investment in the real economy (productive sector) drops, so government has to step in and use monetary policy or fiscal policy to ensure that the money in supply is distributed more evenly and broadly, so that more people can afford our company’s products and services, thus incentivising productive investment.
If pay gap moderation and profit sharing with workers is not implemented, another way to increase broader demand without increasing our money supply, is for the SA Revenue Service to tax excess wealth and income and spend into the bank accounts of our poorest, preferably by employing them productively or, if they are unable to work, issuing them with grants.
Government taxing and spending is less efficient than pay gap moderation and profit sharing because it requires government as middleman, to tax and spend into the economy, which opens up avenues for corruption.
Taxation also maintains our lowest paid workers’ dependancy on government for essential services, while pay gap moderation and profit sharing empowers more citizens to be less dependent on government. But while business leaders refuse to moderate their pay gaps and profit share, taxation remains necessary.
Because pay gap moderation and profit sharing with workers distributes wealth more efficiently than taxation, government can offer tax incentives for companies with low pay gaps and worker profit sharing schemes, and for shareholders and executives of companies with low pay gaps and worker profit sharing schemes.
As I’ve explained, distributing money already in supply increases demand, but government can also simply increase the money supply to increase demand, by spending and lending (via licensed banks) newly created money into private sector bank accounts.
The SA Reserve Bank is tasked with carrying out monetary policy. By dropping interest rates, and incentivising increased lending by banks to our households and businesses, central banks can ensure more citizens end up with more money to spend.
If the private sector is unwilling to borrow, or banks unwilling to lend, as often happens during recessions or depressions, the SARB can increase demand by issuing loans to government, so that government can spend money into the private sector, increasing the supply of money.
Because the SARB issues Rands at will, and government can always borrow from the SARB, it is not dependent on taxing or borrowing from the private sector for revenue.
Thus, government is not financially constrained, but that does not mean it can spend unlimited amounts without consequence. Government spending increases demand, and if demand increases faster than the increase in the supply of goods and services, inflation will occur. Government can’t spend too much, too fast, or inflation will become a problem.
If demand pulled inflation becomes too high, government can remove money from the private sector by increasing taxation and interest charges.
All money spent on purchasing locally produced energy, goods and services, or invested in increasing the supply of locally produced energy, goods or services, is money spent or invested in employing idle local resources (including labour). While unemployment is extreme, it makes no sense to tax that local spending and productive investment, as doing so reduces employment and growth.
We should rather tax excess income – all income not spent on SAn products or invested in the local production of energy, goods and skills. In other words, we should rather tax any money saved, spent on imported products or invested offshore.
Taxation lowers demand for our products and services and increases our costs.
VAT, the fuel levy and unnecessary income tax make travel, goods and services more expensive, which makes production more expensive and our companies less competitive.
Higher costs and lower demand makes our businesses less viable and profitable, leading to less investment and less employment, thus reducing demand for goods and services further.
Therefor, while unemployment and inequality is extreme, SARS should only tax the portion of income and company profit that is spent on imports, saved, or invested in financial assets and property (excluding spending on construction), or invested overseas.
In other words, SARS could do away with VAT, the fuel levy, and a large portion of income and company taxes which add to our costs and reduce demand for our products and services.
Doing so would, however, leave our national treasury with a significant shortfall in terms of the revenue it needs to fund government spending on education, health and other essentials that our poorest rely on.
Some of this will be offset by increased private sector employment, and reduced inequality and poverty, due to lower costs and higher demand, but a there may still be a significant deficit.
To make up for this deficit, government would have to borrow, but borrowing from the private sector and foreign sector only has proven very costly: High government and SOE bond yields mean that treasury is spending over R300 billion per year on interest payments on its debt, with over R100 billion of that going to foreign investors, which increases SAs debt by that amount each year and weakens the Rand.
Furthermore, when returns on investment in the real, productive economy are low due to high costs and low demand, high returns on government bonds attract investors away from our real, productive economy towards investment in bonds (reducing private sector employment and demand further).
Another downside of government borrowing from the private sector is that it is net inflationary as, over time, interest and principle is paid back to private sector lenders, increasing the money supply.
High interest payments on government and SOE debt add to private sector costs as higher interest payments are funded by increased taxation and higher SOE charges like electricity tariffs, eTolls etc. These higher taxes and tariffs often are paid by our poor and middle class, reducing demand for our businesses products even further, and adding to unemployment.
High interest on government debt is unnecessary.
The state (via the SARB) is the issuer of all Rands, so it sets the rate of interest it pays on its debt denominated in Rands. The SARB as bidder of last resort can bid down the yields on government bonds to whatever rate it wants. If the market price for government bonds is too low, the SARB can simply buy the bonds itself using Quantitative Easing (QE).
However, QE (which currently involves central banks buying bonds on the secondary market) is a very roundabout way to lend to government, and artificially drives up the prices of financial assets which can lead to asset bubbles.
Luckily for us, the drafters of SA’s constitution and the SARB Act provided us with a better option: The SA Reserve Bank Act allows the SARB to issue normal bank loans directly to Treasury at 0% if it chooses. The implications this has for our tax policy is profound, because it opens up a cheaper, more efficient and less inflationary source of revenue for government.
Cheaper funding for government means less interest payments, so more share of government spending can be targeted at where its needed the most – improving the lives of the poor, reducing inequality, providing essential services, providing employment to the unemployed, and increasing productivity through investment in education, infrastructure and financial support for our producers and entrepreneurs.
Reducing wasteful expenditure by government reduces inflation, so it follows that reducing unnecessarily high interest payments by government to the private sector also reduces inflation.
While resources (including labour) are unemployed, government cannot crowd out the private sector’s utilisation of those resources. In fact, by providing work experience and training, and by increasing demand by paying more people a wage, private sector employment becomes more viable. Thus state spending crowds in private sector productive investment.
Just as athletes fine tune their bodies through disciplined exercise and dieting, we can fine tune our economy to eliminate inefficient distribution and utilisation of available resources:
- While inequality is too high; demand, employment and growth are too low; and inflation is mild and cost pushed, treasury can eliminate taxes on any income that is spent or invested into the local economy. Instead treasury can increase taxes on excessive non-productive savings, spending on imports, and offshore investment.
- While demand is too low, and inflation is mild and cost pushed, treasury can increase deficit spending in ways that incentivise local investment into locally produced energy, goods and skills. When South Africans productively invest their money locally, it utilises Rands already in supply and keeps more investment and profit onshore (reducing SAs current account deficit and thus reducing SA’s debt). Local production increases local supply, reduces imports and increases exports, all of which reduce inflation, strengthen the Rand and reduce debt accumulation by reducing SAs balance of payments deficit.
- Treasury can also reduce private sector costs and inflation by funding its deficit with a 0% loan from the SARB. This strategy makes sense as long as demand, employment and growth are too low and inflation is mild and cost pushed. Taxing and borrowing from the private sector only makes sense when demand pulled inflation is too high.
Doing all of the above will make our economy more efficient, and increase investment, employment and growth by reducing our private sector’s costs while increasing demand for our products and services. Greater supply of locally sourced sustainable energy, goods and skills will further reduce the constraints on our economy.
Article first published in https://buddywells.wordpress.com/