FIREWALL ECONOMICS SHORT
A Soft Landing for Capitalism
Progressive Economic Policy That Even Republicans Can Live With
J.D. Phillips MSW, LCSW
The following is the last two chapters of my book, Firewall Economics-Political Literacy for Democrats. The first part of the book is about basic political literacy. The book has about 30,000 hits as of February of 2016. The entire book is free at http://firewalleconomics.com/my-book-firewall-economics-political-literacy-for-democrats/
What Is Firewall Economics
The short answer is that Firewall Economics is an economic model that separates markets for Desperate Human Necessities from markets for everything else. Markets for desperate human necessities are protected from exploitation by making them off limits to capitalism. These goods and services are provided on a non-profit basis and with a public sector government subsidy if needed.
A desperate necessity is something that you cannot refuse to buy, even if you have very little or no money. Water, food, clothing, shelter, medical care, utilities, etc. Capitalism should be out of bounds to these markets. When someone cannot afford to heat their home by purchasing heating oil on the private sector market, they can either freeze to death or go deeper into debt. Classical economics did not anticipate predatory lending.
Classical economics predicted that the price of desperate necessities would only go as high as consumers could afford to pay, but the law of supply and demand breaks down when the consumer is forced to borrow money to pay artificially high prices. The result is what we have now, massive debt and an artificially maintained market bubble in basic human necessities. We can tighten our belts and buy fewer cars, but some things have us trapped between a bank and a sidewalk.
Firewall Economics contains one very new idea. Capitalism and socialism do not mix. They cancel each other out. Any mixed economy that allows a mixture of capitalism and socialism, in every market, for every good or service, will be extremely inefficient in both the provision of necessities and everything else. Socialist, bottom up, government planned, non-profit, public sector administered, needs based, delivery of goods and services is more efficient in markets for desperate necessities.
This is still debated, but it should not be. The Social Security Administration has an efficiency rate of 98%. Only 2% goes to administrative overhead. In addition to that, the first goal of any public sector delivery system is to cover every person. The private sector never does that. But even after we all agree that the public sector does some things better, it is still not necessary to use this delivery model for anything other than desperate necessities. Capitalists should love Firewall Economics, and the extreme left should hate it because it might postpone the end of capitalism. I choose reform over revolution. I will not ask people to continue to suffer as we build up support for pure utopian socialism. I am a social worker interested in feeding people who are hungry today.
I call things what they are. Public sector planned markets are socialism. I am not afraid to use the word. Even taxes are socialism. Socialism and capitalism are the two economic models we have. One is based on competition and the other is based on cooperation. It is impossible to compete and cooperate at the same time. All modern economies are mixed economies, mixtures of competition and cooperation, and therefore inefficient.
It is not necessary to apply the same economic model, or mixture of economic models, to all markets for different goods and services. It is possible to use a small amount of pure undiluted socialism to cover the delivery of desperate necessities, and allow profit driven competition for everything else. A small amount of undiluted socialism would be less expensive and cover every person in need. Markets for luxuries need no protection. If the vulture capitalists run up a bubble in the price of backyard pools, then we can swim at the YMCA.
Remember that the definition of a desperate necessity is something that you can not refuse to buy. You can refuse to buy a big home, but you must buy or rent some kind of shelter that comes up to code. There would still be some relative poverty with FE, but no absolute poverty. There would be no homelessness, hunger, utility shutoffs for the poor, lack of medical coverage, etc. Capitalism is like casino gambling. It should be illegal to go to the casino before the kids get shoes. The compromise of FE is that once the kids have shoes, it’s OK to hit the slots.
It is important to understand my premise that capitalism and socialism do not mix well, and to mix them is inefficient. Let me try a visual mental image. First of all, Pope Francis, recently debunked trickle down economics, which is code for capitalism, with a water glass example. He said “Advocates of trickle down economics insist that if we let capitalism go unregulated, the glass will fill up until it runs over and trickles down to the poor. But this never happens, because the rich keep making the glass bigger.” If being a Christian was a crime, I think there would be enough evidence to convict Pope Francis. The trickle down theory is false, but even if it were true, it would be very very inefficient.
Why should the poor have to wait until the rich have gorged themselves, and cannot eat another bite, to fight for the crumbs that fall off the table? And why should the rich complain if we feed the poor first? There is enough surplus to do that without depriving the rich of anything. A tiny group at the very top of the income scale own half of everything. If we tax them a little more, to provide a truly basic safety net, the rich will not miss a single meal, even if they eat caviar with disposable platinum spoons.
Now for my water glass image. Imagine that socialism is vegetable oil, colored red, and capitalism is water, colored blue. We will be pouring a mixture of both into a glass. Mark a ten inch glass one inch from the bottom. That mark represents the level in the glass that the red oil socialism must reach before ALL needy people are served. If we fill the glass with 9 inches of blue water capitalism first, and then add a little red oil socialism, the red oil socialism will float to the top and fail to reach the anyone in need.
But, if we add the red oil socialism first, we would only need a little socialism to cover everyone. As soon as the LAST needy person is served, we could pour in all the blue water capitalism that the rich think they want. And since the poor have already been served, the rich could enjoy their money without the guilt of exploiting the poor to buy luxury goods.
When you allow profits to be taken on markets for desperate necessities, the cost of delivering them is 1. Cost of good or service + 2. Profit. Under Firewall Economics it’s just 1, and there is no hidden cost to the general economy from predatory lending. Private, for-profit companies will charge as much as they can for home heating oil. Once the buyer can no longer pay the rising price, he or she must borrow the money. Needy people are forced to use payday loan sharks at astronomical interest rates. Under the old system, a lender would not lend to a person who could not repay the loan, and the price of heating oil would stop climbing once it exceeded the ability to pay, but banks will now loan to anyone.
The banks are purposely doing this to trap people in debt, show paper assets on the balance sheet that do not really exist, and rely on the taxpayers to bail them out when the bubbles burst. This would not be possible if people COULD refuse to buy what they are selling at the price the seller demands. The law of supply and demand does not work with any market where the buyer can not refuse to buy. You have to buy heating oil if the landlord uses an oil furnace.
Exposing markets for desperate necessities to predatory capitalism could be the final stage of capitalism before it collapses into total socialism or, God forbid, total fascism. The extreme left will be critical of Firewall Economics because it saves capitalism at least temporarily. There are two reasons why I do not support allowing capitalism to collapse. 1. There would be a lot of transitional suffering. It is unethical to punish people today for the gains of tomorrow. 2. If capitalism collapses, we could just as easily fall into fascism as socialism. The Pope says he is not a socialist, but definitely not a capitalist. I am with him, but he is now open to the criticism that there is no third alternative. The third alternative is Firewall Economics.
The Danger Of The Self Defeating Prophesy.
Every new idea is subject to abuse by future spin doctors. I am trying to prevent this by anticipating how Firewall Economics could be turned inside out. George Orwell thought he was giving people a heads up in his book 1984, but it backfired. The bad guys used it as a playbook, and the working poor didn’t read it. If I were going to turn Firewall Economics against the people, I would praise it as a fundamental human value, and then proceed to squeeze the definition of a desperate human necessity down to a level just above starvation for everyone but the privileged elite. Bread would be a Desperate Human Necessity, but not butter.
That is not Firewall Economics. FE without a limit on extreme income inequality is only one step up from no FE at all. If income disparity rises drastically after the implementation of FE, then upper income earners should be taxed to reduce the gap. My strategy is to wager that present day republicans will adopt FE anyway, as it will be irresistible for them to pass up the opportunity for short term profits in exchange for long term risk. Stockholders want to see quarterly profits.
Other Criticisms from the Left that I Anticipate but Reject.
Unlike Socialism, FE will perpetuate a two tired society. (Like we have now) This is the classic social policy debate between means testing and universalism. Means testing sets income limits on eligibility. Universalism covers everyone, regardless of income. Means testing is like welfare. Universalism is not. FE is a compromise. There is currently little political support for universal coverage of anything new that the public sector can help with, especially if it involves deficit public spending, so I minimize public sector intervention to a level low enough to attract republican support. I’m giving up a lot here, as the public sector has never been smaller than it is now. FE accepts means testing when universal coverage is not politically possible, AND when the alternative is no coverage at all.
Another valid criticism from the left: Under FE there would be no absolute poverty, but relative poverty might even increase. It is true that relative poverty makes people miserable. We have new research that identifies the size of the wealth gap, between the rich and everyone else, as a major cause of misery in every human community. Large gap- depression- anxiety. Smaller gap- happy people. We also have statistics to prove that the suicide rate goes up with every republican administration. Why Some Politicians Are More Dangerous Than Others by James Gilligan-2011.
Economic anxiety is relative. If we are unemployed during a depression, when everybody we know is unemployed, we feel less depressed than we would in good economic times. If we lose a job when everyone we know is still working, it is much more psychologically devastating. This is human nature. FE won’t bring absolute equality, but it could be the first step to a progressive future that will.
There will be some from the left who criticize FE as being incremental. It is. FE is about reform, not revolution. It is only intended to be a step up from our present level of unregulated capitalism.
Criticisms from the right will be of the traditional sort, with the invisible hand of perfectly self regulating private sector markets being more efficient than public sector planning in the provision of everything, including desperate necessities. The track record of the world economy over the past thirty years is all that is needed to debunk this myth, and supply side economics in general.
Republicans will argue that FE is only a foot in the door to enable further rollbacks of unregulated capitalism. That would be correct. That is exactly what it is, a way to present a reform proposal to republican legislators that is so clearly fair and humane that they can either accept it, or be exposed as being devoid of any trace of human compassion. Once we establish a precedent of shielding some market items from naked exploitation, a dialogue will develop about other things that should not be for sale. What is or is not exposed to competitive markets can be decided democratically, but once the dialogue begins, there is no turning back. Here is another book that I recommend. What Money Can’t Buy. The Moral Limits Of Markets by Michael J. Sandel-2012.
Firewall Economics could be misused by the wealthy, and I am showing them how to do it, but I wager that it will be more difficult if I post a warning in the body of the text. By exchanging absolute poverty for relative inequality, the rich may try to use FE to justify even greater inequality. The argument would be that once you have everything you need, it doesn’t matter how much more that the rich have. Do not let them spin FE that way.
First of all, being comfortable with the absence of absolute poverty when relative poverty is very high is against human nature. New primate studies show that even chimpanzees hate relative deprivation. Second, absolute equality is not required for a life without extreme suffering, but the absence of extreme inequality is.
I still fear a situation where the rich might use FE to justify squeezing the level of protected necessities tighter and tighter, until the majority are living on a thin string, with little economic security, while the rich have more income than they can spend. If this happens, it will be necessary to apply a brake to the ratio of high to low incomes. The tax code would have to be amended to set the upper rates at a point that stops the income/wealth gap from widening beyond a set point.
Firewall Economics restricts open market exposure to markets that are not involved in the delivery of goods or services that can be demonstrated to be Desperate Human Necessities. A desperate necessity is something that is essential for a dignified and healthy home environment, that a consumer can not refuse to purchase, even if the consumer does not have enough money to pay for the good or service without borrowing money.
Income inequality has never been greater than it is now, at the time of this writing. According to an Oxfam report that was just released, the 85 richest people on earth now have about the same amount of wealth as the bottom half of the global population. The percentage of income held by the richest 1% in the US grew 150% from 1980, the beginning of Reaganomics, until 2012, while middle class wages adjusted for inflation remained flat. CEO pay at the same time went up by 726%, twice the growth rate of the S&P stock market index.
Surely there is enough profit to be made on goods and services that are not desperate necessities to satisfy any investor. Even capitalism needs a few rules and boundaries to improve the game. FE creates no competitive disadvantage for any corporate enterprise, because all competitors would have to play by the same rules. Capitalism is strong enough to function even when some things are not for sale. This is not new. You can not sell a kidney in the US. All I propose is that we apply a rational analysis to what should or should not be for sale, and I suggest desperate necessities as a place to start.
Implementing FE would be a gradual and ongoing process. As each legislator comes to understand the logic of FE, they can make voting decisions based on their assessment of the issue being voted on in relation to the trade off between private sector and public sector advantages and disadvantages.
Understanding trade offs is crucial. My favorite example is bicycle gearing. A ten speed bike has ten different gears of different sizes. There is a trade off between speed and power/torque. The easiest pedaling gear, the most efficient gear, depends on what you need at the time, speed or power. If you are racing downhill, you need a small gear in the rear wheel to maximize speed. If you are climbing uphill, you need a bigger gear for more power, and you are glad to give up some speed to get more power out of every stroke. The relationship between speed and power is a trade off.
Firewall Economics recognizes the trade off between the private sector and the public sector. The private sector is a fast gear, it’s better to get the economy growing, but too much private sector can overheat the economy and cause massive inequality. The public sector is a low gear. It is better for providing EVERYONE with the basic desperate necessities of life. FE recognizes this trade off, and the best way to implement FE can be thought of as a constant ongoing process of fine tuning the economy, day by day, one legislative vote at a time.
In hard times, we fine tune the economy by shifting to a lower gear, sacrificing speed for power. In hard times, we should increase the size of the public sector to catch people falling off the increasingly steeper hill. Not only do we not always do this, we frequently do the opposite. (Trickle Down Economics in a recession)
Another improvement of FE over the traditional tug of war between the private sector and the public sector is that once some restrictions are in place, the firewall sets limits on what things are fair game for political competition. Basic Desperate Human Necessities are always out of bounds for private sector exploitation. This makes all political competition less severe. Once necessities are off the table, the stakes are much lower. Nobody is going to go hungry because the private sector corners the market for concert tickets. (Ticketmaster) We will still fight them, but the stakes are lower than if we were fighting over food prices.
FE does not stop political competition. It just adds enough reasonable rules to make the competition less brutal. FE actually helps competition. Imagine a football game with no rules. The winners are always going to be people with a character structure that is less than ideal. You would not want to live near someone with a cut throat personality disorder, but we allow a political system to exist that encourages our leaders to be sociopaths. FE is just the first logical step to improve the political process. A big general piece of legislation to protect all necessities at once is not necessary. It can happen gradually, with one good legislator at a time. Having said that, I do have some suggestions for legislation that would help.
A crucial part of the banking system, consumer banking, needs to be taken out of the private sector. The feds could open a bank and run it on a not for profit model, like a credit union. This is not nationalizing the entire banking system, just the part that we need to provide Desperate Human Necessities. And it’s not the feds taking over anything. The feds would be making a new bank that no customer would be forced to use. You couldn’t get a 500,000 dollar mortgage there, but you could get one for 100,000, and probably at about 3% over 30 years. You could get a credit card there with a 2000 dollar limit at a rate that would be way lower than what we pay now. Think what that would do for the economy. That would increase the purchasing power of average consumer.
And don’t forget student loans. What part of student loans are a necessity, and what part should be considered a luxury? My opinion is that public colleges should be given low interest, government assisted, student loans, but not private schools. If you want to find a dividing line between the rich and what used to be the working middle class, that would be a rational place to draw the line. Harvard is not a Desperate Human Necessity.
The Glass-Steagall Act should be put back into law. The repeal of this law, that was inspired by the great depression, caused the Bush recession. The law separates investment banking from consumer banking, making it illegal for the bank to invest your checking account money and personal savings in fly by night risky schemes like derivatives and credit default swaps.
A chunk of the energy market needs to be attracted to the public sector, in direct competition to private sector energy that preys on low income markets for Desperate Human Necessities. Just like the banks, this is not the government taking over the oil business. This is the government going into the oil business, but only in markets for DHNs.
If you are under an income of say 100,000 dollars a year, and you need to buy home heating oil, or electricity to warm your average size home, you could buy it from the feds for what it costs the feds to buy it. (A lot less than you think because the feds can negotiate from a stronger position than an individual consumer) The feds would only sell heating oil for average sized homes. Heating a mansion is not a Desperate Human Necessity. Other markets for energy that involve Desperate Human Necessities should be included in the program.
I have just suggested two examples for implementing Firewall Economics. What markets get protected, and to what degree, is not up to me. It is a matter to be decided democratically. The logic can be applied to any issue, but I do believe that these examples would bring the most benefit for the least cost. Here are some others.
The Affordable Care Act heath care bill that the democrats got by compromising with the republicans and the insurance industry is a big improvement over what we had before, but it does not go far enough. It cuts costs, but not by anywhere near as much as a single payer system would. The insurance companies are private sector, for profit corporations, that make a ton of money from exploiting people who are over a barrel on the most Desperate Human Necessity of all, their bodies.
It is my opinion that there should be zero profit, and no private sector involvement whatsoever in health care. Medicare for all might be better than the Affordable Care Act, but it still involves private sector heath care. I call for a total public sector heath care delivery system.
Costs should be kept down by training doctors with free tuition in government run medical schools, in exchange for graduating debt free and working for a reasonable salary as an employee of the federal government. Drugs should either be bought in bulk at low prices by the feds, or manufactured by the feds in a government owned and run factory. (That will not be necessary. The threat alone will make the private sector do it at low cost)
There are plenty of ways for the investor class to make money without allowing them to corner people who are sick and poor. They had an easy time getting away with it when private sector health insurance premiums were only unaffordable for the poor. But during the republican revolution, the premiums were more than a middle class mortgage payment. It’s time for the 99% to dump private heath care completely.
Pensions are a Desperate Human Necessity for the 99%. When I say pension, I mean an old fashioned Defined Benefit Pension, not an IRA. The purpose of a pension is to provide at least a little economic security in retirement. IRAs have no security. A stock portfolio can lose money overnight. A retired person dependent on an IRA will spend every day watching the stock ticker. That is not security. An IRA with bonds instead of stocks would be safer, but bonds fluctuate too.
Since the 1980s, pensions have been forced into IRAs and out of defined benefit plans. This is a massive transfer of retirement money into the hands of stock traders who make a fortune churning stocks. They get to play casino with half of our retirement money that way. They would love to privatize social security, and get the other half too. In order to understand just how bad this swindle is, we need to understand the truth about retirement.
There is no possible way for workers to save up enough money in their working years to retire, for the rest of their life, at a reasonable age, with any level of reasonable security, without younger workers subsidizing them and the rest of the retirees. It has always been that way. It’s not a bad thing, it just works out that way. It’s part of the social contract. Workers pitch in when they are young, in exchange for the secure feeling of knowing that when they are too old to work, the next generation will help them too.
It used to be the custom that the extended family did this. Older people who could no longer work were taken care of directly by their children. It is a mistake to believe that we no longer have an obligation to do this. We just do it differently. We do it collectively. People who receive Social Security get the money from younger workers and the employers of the younger workers. The money they collect is not the same money that they contributed in their working years. The Social Security fund is not insolvent. It is invested in treasury bonds that earn interest, but it is still partially a pay as you go system because we will dip into general revenue if we have to. The young take care of the old, just as it has always been. There is no other way.
The problem with doing it collectively is that it makes the process seem impersonal. If we thought the money we see being deducted from our pay was going to our blood grandparents, we would feel guilty about resenting it. Since we think it is going to strangers, we don’t make the emotional connection that is really still there. The money is going to our grandparents. It’s just pooled and centrally distributed.
Using an insurance method has more advantages than disadvantages. You could make the argument that selfish people could game the system by not having any children. It is true that the burden of having a large family to protect you in old age has been removed, but that is certainly a good thing. And no worker can say that the pool is exploiting them because every worker has grandparents.
Pooling retirement money is a good thing, but the basic human reality that the young must care for the old is still true. The young will always complain about it when they are young, and they will always change their minds about the arrangement when they get old. Republican stock brokers know this, and they use the psychology of greed in an attempt to trick voters into moving retirement funds away from public sector Social Security, and into private sector investment schemes like IRAs.
Now suppose that the voters woke up one morning and decided to reverse this. What could be done? It depends. We could do a little or a lot, whatever there was political support for. Let us start with a little, then a lot, and then find a middle position.
The goal is to move pension money out of Wall Street and into the Social Security system. Right now Social Security is the only real pension for most people, and it pays about 25% of your salary at retirement. We need to increase that to 50%. You can live well on half pay, but not 25%.
We could do a little by chipping around the edges. Maybe raise the income cap for SS contributions so that upper income earners would pay more in. (Taxpayers who earn over about 100,000 a year do not pay SS taxes on anything over the 100,000) We periodically raise the cap to keep up with inflation. We will keep doing this, but it won’t get us to 50%.
We could pass tax laws that “encourage” IRA funds to be invested in safer places like bonds, but they would still still be at risk in the private sector.
We could go for the sledgehammer and pass a law that bans private sector pension funds altogether, and forces that money into the SS fund. Ba-Bam!
With that, we could have new levels of SS investment for individual workers. The half of your retirement money that you now put into an IRA to supplement your SS could be counted in units or shares, and you would know exactly how much higher your SS check would be at retirement, guaranteed. Your higher level of SS investment would depend on how much extra money you put in, but all money invested for retirement would have to be invested there. Private retirement funds would not be allowed, and would certainly not get any tax benefits.
That is a lot of money. If all the private retirement funds that are out there right now in IRAs were moved to the SS system, the fund would be so strong that everyone would feel secure about the fund in the very long run. The money would be in treasury bonds, the safest investment on earth. Ask the Chinese.
That would work, but we don’t need a sledgehammer. Now for the middle position. Use the same system that I just described, but make it voluntary. If you want to put money into an IRA, go ahead, but you would have the option of investing extra money in a public sector, government guaranteed, treasury bond backed, expanded SS system if you so choose. You would know exactly how much your future monthly SS check would increase with each additional dollar you put in, before you put it in.
That is the ultimate conservative investment. Maximum security with minimal risk. Retirement is about secure investing, not risky speculation. But even a speculator would like this system because he could quantify his risk benefit analysis. He would know exactly how much security he was giving up for choosing a higher risk private investment strategy.
Now why not just use your IRA money to buy treasury bonds? Because the SS system is more secure than treasury bonds alone. The feds will do anything to keep it in the black, and that is good. Social Security is an insurance system. It was designed that way. But in reality, it is, and should be backed up by general revenue.
If the fund is stressed by a temporary crisis, like a baby boom reaching retirement age, then it should be acceptable to use general revenue, federal income taxes, to help it bridge the crisis. Doing that would make it welfare, and not insurance, but as I explained earlier, young workers always have a real obligation to take care of people who are too old or sick or disabled to work. They can not be abandoned just so the books are always in balance on any given day.
Businesses run deficits all the time. They have to. But say you want to run a temporary deficit in the public sector and republicans cry fowl. The fact that the federal government has the power to run a deficit to protect the SS fund makes it a safer retirement investment than treasury bonds alone, and that is a good thing.
If the IRA investor had the option to invest the money in an expanded voluntary SS system, the power of the federal government to protect the fund would crush the market for private sector IRAs. That is why republicans would oppose it. Republican spin doctors who love to claim that the private sector is more efficient in everything would not fear this plan if they really believed that myth. When they object to giving people a choice here, or anywhere else between the private and public sector, they expose their own hypocrisy.
It is the profit that they seek, and only profit. They would allow our grandparents to suffer in old age just to make another buck. Retirement is a Desperate Human Necessity, and it should be protected from private sector profiteering. Let the private sector make money somewhere else. Some things should just not be for sale.
Lucky people have jobs that they enjoy, but some people have jobs that are sheer drudgery. The hard jobs need to be done too. People who do them need to be motivated, and they best way to do that is to give them a living wage, fair benefits, and a sense of security for retirement. Some jobs, like prison guards, have such poor working conditions that the only reason to endure them is for the benefits. Take away the benefits and people won’t do them.
Just one example: Who would be a prison guard for a private company with no benefits, low pay, and no pension? You would get desperate people who would work for a short time and move on. High turnover is dangerous to the workers, to the public, and the inmates. The for profit company would cut costs to the bone. They would get sued for overcrowding, poor food, worker injuries, etc. They would lose in civil court where nobody goes to jail, pay a fine as the cost of doing business, declare bankruptcy, and if the fine was too big, dissolve, and reform into a new company who would win the same contract by underbidding it. Welcome to privatization. Some things do not belong in the private sector. Worker benefits and pensions need the protection of the federal government.
There is a big incentive available to get private employers to sign on to a plan that moves pension funding completely out of the private sector and into the public sector. Employers pay half of each worker’s monthly contribution to Social Security, about 8% of the worker’s salary. Move that charge into the general revenue stream. Pay it with the federal income tax. The income tax rate would be increased a little to make up the difference. Worker’s would want an 8% raise to cover it. Employers would want to keep the 8%. Negotiations and market dynamics would work it out, but it should be worth it to both sides to get private employers out of the retirement business. Raising the minimum wage 8% at the same time might work. Raising the minimum wage 1% pushes all wages up 1%. The 8% could also be made up by increasing the maximum income cap a little bit. (No SS tax on anything above the cap….Now about 100,000 dollars per year)
Expand and Reform Licensing Laws. The working class gets licensed to death while the ruling class enjoys very limited controls while performing a licensed activity. Licensing can be a great protection for people trying to obtain Desperate Human Necessities, but the enforcement of licensed behavior is skewed to benefit the rich.
You need a license to cut someone’s hair, but not to do investment counseling. You can lose your drivers license for being behind on child support, but bankers can stay licensed after getting busted for defrauding people and running bundled mortgage scams. Banks actually have to be licensed, but they are never in any danger of losing one. Bankers pay fines. Workers go to prison.
Here is the big one. Corporations need permission from the government to incorporate. Call it a charter, a license, whatever. They are supposed to give up something to get something back. What they get is LIMITED LIABILITY. If a corporation makes a defective product and hurts a thousand people:
1. They get sued in CIVIL COURT (they can only lose money there), not CRIMINAL COURT (you can go to prison from there). No matter how many risks the corporation takes, the worst that can happen is a fine, not prison. The fine is just a cost of doing business, and sometimes it’s cheaper to hurt people than to make a good product.
2. The amount of money that a corporation can lose is limited to the value of the shares. If you own shares in a corporation that loses a court case, and the judge sets a zillion dollar fine, all you can lose is your shares. They can not take your house or any part of your personal assets. If the corporation goes bankrupt, you only lose your shares.
Now what does a corporation have to give back to the government in order to get this limited liability. They are supposed to act in an ethical way that promotes the public good, or some such language as that. Somewhere along the line, that part got ignored. I propose that we stop ignoring it. At some point it became easy and cheap to get your company incorporated. I propose that we make it harder. The powers that be have never seriously considered revoking a company’s permission to incorporate for bad behavior. I propose that we start doing a lot of that.
Workers have to appear regularly at the DMV and prove that they are still entitled to their driving privileges. British Petroleum needs to be required to show up in a government office once a year and prove that they still deserve their limited liability. If they feared revocation of their limited liability, they would think twice about cutting corners with safety.
It is time to reconsider our laws of incorporation. We don’t have to stop incorporating companies altogether, but we need to make law enforcement as strict for the investment class as it is for the working class. We also need to bring criminal charges against white collar criminals, and not just file civil charges that are limited to fines.
It is time for real tax reform. Taxes fall lightly on the investor class, and heavily on the working class. Investors pay about half the tax rate of their office staff because investments are only taxed at about 15%. Not only should investments be taxed at the same rate as income, there should be a small transaction tax on every stock purchase.
Sales taxes are regressive. They affect the rich less than anyone else because most sales tax revenue comes from consumption purchases. People with lots of money can spend a lower portion of what they earn on consumption. If you have to spend everything you earn on groceries, rent, gasoline, and shoes, you pay sales tax on all of it. If you can save half of what you make, that half gets taxed at a lower rate. Sales taxes increase the gap between the rich and the rest of us.
Regressive is the opposite of progressive. The income tax is progressive. That’s why the rich move their income out of the income tax column and into the investment income column. This also jams up the economy by taking cash out of the economy that could be used to create jobs. If you tax people MORE when they make jobs than when they sit on the cash, they are going to sit on the cash.
There should be no sales tax or federal income tax on Desperate Human Necessities. A corporation can deduct an expense for almost anything, while a worker can deduct almost nothing. A corporation can deduct an expense for an executive lunch, but a worker can not deduct the cost of gasoline to get to work. If you buy a beat up old car from your brother, you have to pay sales tax. If he sells it back to you in a week, the tax is due again. Stock brokers trade stocks by computer back and forth at the speed of light. No sales tax.
The federal income tax home mortgage deduction should not apply to mansions. We need to cap the deduction at say 200,000 dollars. No deduction for any value over that. A home is a Desperate Human Necessity. A mansion is not.
Education should be funded from general revenue, not property taxes. Funding schools with property taxes when schools are segregated into local zones creates educational inequality. Wealthy people will do anything to give their children an educational advantage. They do this by funding local schools with property taxes. This is unfair, but all parents are forced to play this game by a system that they did not create. If they do not buy a home in the most expensive school zone that they can afford, they put their children at a disadvantage. Even wealthy parents would benefit from stopping this game, and by funding schools equally from general revenue.
If we have a tax deduction for buying a home, then we need a tax deduction for paying rent. Taxing rents but not mortgages is regressive. Low income people rent. They pay off the mortgages of their landlords, who can deduct the interest from the very same mortgages.
Even landlords would be happy to see a federal income tax rent deduction, as it would make it easier for their tenants to pay the rent. Now would landlords take advantage of the deduction by raising rents? Yes, just like home sellers raise the price of homes with the extra money home owners get from the mortgage deduction. The only change is that the new policy would give renters the break that buyers already have.
Low income people pay taxes on everything they earn, almost everything they buy, and almost all of what they buy is a Desperate Human Necessity. Taxes need to become more and more progressive, and taxes on Desperate Human Necessities need to go away altogether. If we don’t stop paying the rich to take cash out of the economy, even the rich will suffer from the subsequent economic collapse. We fell for the trickle down scam, we cut upper income taxes, but instead of creating jobs, the wealthy stuffed the extra cash in a mattress in the Virgin Islands. Reversing dumb tax policy is not enough. We need new laws to prevent it from happening again.
The case for completely nationalizing the oil companies.
Many nations have government owned oil. It is hard for a private oil company to compete against sovereign nations. Oil wars get us in more trouble than anything else. Since it is the public sector military that has to fight the oil wars, the public sector should be able to call the shots. Private oil profits should not figure into decisions to go to war. This is a classic case of nationalizing the cost and privatizing the profit.
US oil actually belongs to the people. Private oil companies buy it from the government and then sell it back to the people. And most important, private oil companies do everything they can to keep the price as high as possible. This is not only a punch in the gut at the gas pump, it is a drag on the entire economy. The feds could set the price of gas at the pump just like they used to do with other utilities like electricity and natural gas for homes. Just the threat of nationalization would motivate the energy companies to keep prices low.
In the US, half of the oil goes to the military to fight oil wars to keep the price of oil UP. When we send the military into an oil producing nation, it cuts off the oil being pumped out of there. Lower supply worldwide means higher prices.
If Iraq pumps more oil than the Saudi royal family wants, they send in the US military to stir up conflict and disrupt production. I believe that we send our troops to their death to keep the price of oil UP. Private oil has a conflict of interest with the safety of our troops. The oil wars actually make us less secure, because they waste our military resources and poison our reputation in the world. Do this: Look up a chart of oil prices over the years and mark the oil wars on the time line. The price went UP during those wars.
Now think about it. If this is not what the investor class wanted to see happen in those wars, why do they keep doing it over and over? If people understood that the goal is to prop UP oil prices, there would be no public support for oil wars, and if we kept getting them anyway, that would produce public support for nationalization.
What would the economy be like with public sector protection for health care, consumer banking, energy, and pensions?
30% of labor costs are in worker benefits. Firewall Economics takes the responsibility for heath care and pensions away from private sector employers and moves it to the feds. What employer would object to that? There is a trade off though, and workers will like this. You could change jobs whenever you wanted, without messing up your heath care or your pension. I think FE is a rational good deal for labor and management. If an arbitrator decided to find a compromise that both sides could live with, this would be it. Employers should not have to be responsible for heath care and pensions, and employees should be able to change jobs any time they want.
These four markets are only a fraction of the total economy. There are plenty of other markets left for private sector profit taking. Restricting markets for Desperate Human Necessities is not only morally logical, it’s not expensive. I believe it would actually be profitable for the private sector by creating a big economic stimulus. Investors could simply move their capital into other areas that are not DHNs, and are therefore not eligible for federal oversight. Firewall Economics does not need to kill capitalism. It only wants to trim it’s toenails.
I’m asking for a little socialism that is walled off in specific areas. Republicans are going to fear a slippery slope. Again, I anticipate the argument that Firewall Economics is itself an implementation strategy for socialism. That’s what the republicans said about Social Security in 1935, and Medicare in 1965. The truth is, we adjust the relative levels of private vs public sector government involvement all the time. In the past 30 years the republicans have reduced the public sector to the smallest it has been since the Great Depression. I just want to get some of that back. The idea that we could be on a slippery slope, to where the private sector would be too small, is ridiculous.
What’s new about FE is that instead of turning up the public sector on the entire economy, the increase in the public sector would be restricted to Desperate Human Necessities. This is an attempt to be rational about mixing the economy, instead of being competitive and completely political. We don’t have to increase the entire public sector in a recession, just in the places that prevent hunger, sickness, homelessness etc. If you lose your job in a recession, your heath care and pension are protected. When the recession is over, you can pick up where you left off. Under the current system, recessions cause permanent damage to families.
How about a constitutional amendment? Suppose we get widespread approval for taking Desperate Human Necessities out of the private sector. A constitutional amendment might actually be the easiest way to implement Firewall Economics. Who am I to say that it’s a long shot. We are going to get an amendment soon to legislate that corporations are not people. We got a quick amendment to move the voting age to 18. There was a time when giving women the right to vote was considered a long shot.
An amendment would be easier than passing a separate bill for each market individually, and I am for it, but I would predict a slower implementation strategy at first. After voters got protection in one market and directly experienced the added security, I think the idea of an amendment might become popular. A slower implementation would also give investors time to move capital from DHN markets to other investments.
A word here about so called government bailouts. They should be called private sector bailouts. The government doesn’t get bailed out, private sector markets do. The public sector bails out the private sector. Don’t forget that the private sector competes with the public sector. The public sector is potentially far stronger, and that is why the private sector tries to shrink it. That is, until a private sector dominated market goes bust. Here we go again with publicize the risk and privatize the profit.
When a private corporation asks for a bailout, they actually want the bailout under conditions that are completely unfair to the public sector, and the taxpayers who fund it. When a private sector company becomes unprofitable, they want to take money from the government until they can show a profit again, and then kick the government free without offering anything in return.
The government doesn’t set enough conditions for the deal. When the feds bailed out GM, they could have cut a deal that forced the company to play fair with the union, keep providing pensions instead of IRAs, stop outsourcing jobs, etc. They could have forced them to start making cheaper electric cars. They could have taken over the company and kept it in the public sector. The taxpayers had to buy the factory. The taxpayers had to pay for it. They should have been able to keep it. The only time the people get to own it is when it’s unprofitable. The people have to fix it, and then give it right back.
These bailout situations are opportunities for nationalizing markets for Desperate Human Necessities. I can not think of a better way to determine what markets the private sector can’t handle. When a private market for a DHN goes belly up, nationalize it. And remember, Firewall Economics is not about nationalizing everything, only the small fraction of the economy involved in the provision of necessities. I say that last part a lot, because that is the part the republicans are not going to hear.
When the banks exploded, we only needed to nationalize consumer banking, not commercial banking too. Commercial banking is NOT too big to fail unless it is allowed to take consumer banking down with it. When we bailed out the banks, we should have insisted that in return, we get either a reinstatement of the firewall between commercial banking and consumer banking (Glass-Steagall), or a nationalization of consumer banking.
The best way to implement FE might be to buy these markets from the private sector on the cheap, when they need a bailout. That would scare private sector providers away from price gouging and excessive risk taking. Not only would the government not be there to bail them out, the government would be waiting to nationalize them. The public sector does not have to force the private sector to do anything. The government can just wait until the private sector approaches them.
Could Firewall Economics be implemented at the state and local level. Why not? California could go first, but they always get to go first. Let Massachusetts go first. A state would be an ideal place to start, because we could compare the results with other states that still allow profit taking in Desperate Human Necessities.
How about running a computer simulation to test Firewall Economics before implementation? Using computer simulations to test economic models is just starting to happen. I am researching it now. I am looking for a university that does computer simulation in economics so that I can estimate the cost of running one and develop a plan to secure the funding. Crowd Sourcing may be in order.
Here is a book by a social worker that thinks he has the next stage in the dialectic evolution of economics. Feudalism-Capitalism-Socialism-Firewall Economics. I have been massaging this idea for 30 years. There are only two possibilities. I either found something useful, or I have delusions of grandeur. I might be delusional, but I am not afraid to hold this up to the world. This is a good idea.
Before the internet, lots of good ideas never had a chance to be heard. The gatekeepers screened out anything that might offend the ruling class. The internet changed everything, but there are tradeoffs. Now that anyone can be published, the sheer number of publications has become staggering. A good idea still needs a lot of luck and a little help from social media. I can not market this idea by myself. It will depend on other people passing it on. I will be doing all that I can to make copies of this manuscript as close to free as I can. The only thing that I am selling is an idea. I don’t need money from it. I have no boss to please. I can say anything I want. There is no editor to cut something out.
I have a website for Firewall Economics where I post my blog. I like to apply FE to breaking news and show how problems are frequently caused by profiteering in Desperate Human Necessities. Take a look at firewalleconomics.com If FE appeals to you, pass the link around, write congress, take control of the water cooler, and please vote each and every time.
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