5.2  Issues in Economic Transition

5.2.0 Introductory remarks: points concerning recent problems       added 10/2014, minor revisions/editing 12/2016
5.2.1 Recognizing basic problems       minor revisions/editing 12/2016
5.2.2 Reforming system of taxation; basic minimum income       minor revisions/editing 12/2016
5.2.3 Regulating financial institutions       minor revisions/editing 12/2016
5.2.4 Addressing problems of transition; fair compensation for losses     minor revisions/editing 12/2016

5.2.0 Introductory remarks: points concerning recent problems       added 10/2014, minor revisions/editing 12/2016
Economists have been unable to predict economic developments and they keep contradicting each other regarding advice on how to deal with economic problems; economists who advise elected and appointed officials, and the officials themselves appear to adhere much more to dogmas than experience and insights. Economic advisers keep recommending approaches that were obviously very damaging in the past.
In the USA, many highly intelligent people enrich their employers and themselves by very rapidly moving financial investments and assets, trading commodities, etc. Economists rationalize that moving money to where there is highest productivity at lowest costs is in itself productive. However, negative consequences of these moves, including social and hidden financial costs, are ignored. People as workers and places that people call home need reasonable stability. In addition, laws have been thwarted and exemptions from laws granted to allow unprecedented ways of banks interfering in markets and profiteering, e.g. buying commodities at relatively low costs, driving prices up and then selling with large profits; and there were new forms of bank gambling: “financial instruments” were invented that earn much income in most convoluted and risky ways, often including large debts. Economists and observers of Wall Street have been describing how there is much “shadow banking” and investments in very risky “synthetic portfolios” which put the whole economy in great danger of collapse.
There are sales taxes on almost all goods that are sold new (and there are even sales taxes on used cars which is illogical and discriminates against people who, for whatever reason, do not buy new cars), but there are no sales taxes when trading securities and real estate. In addition, unearned income from profits is taxed much lower than income from productive work (agricultural and industrial production and providing services).
Financial institutions are generally able to reap large profits but losses are passed on to investors or governments. When not only exploiting their powerful position but actually committing fraud, the responsible individuals are rarely punished.
Europe is partly doing poorly because of a dogmatic adherence to obsolete economic thinking (Chicago school of economics). In addition, some country governments are very inefficient and there is corruption. There is much tension and inadequate cooperation between the successful (disciplined) economies and the poorer ones.

Immediate steps to improve the USA’s economy include: (similar steps must also be taken in other economies)
– Until regulations are improved, there should be a campaign for people to put savings into credit unions, small local banks and socially conscious mutual funds.
People must pressure politicians that the following steps are taken:
– Executives and employees of financial institutions that hid truths, knowingly deceived and/or broke rules/laws must be severely punished as individuals; fining institutions is meaningless.
– To make securities markets more responsible, the USA must introduce a tax on all transactions.
– Gains from investments (unearned income) must be taxed at the same rate as earned income.
– Indirect forms of investments, derivatives, hedge funds, complex annuities, etc. must be regulated; if brokers do not understand them well, they must not sell them and these poorly understood instruments must never serve as (partial) retirement income or funds for children.
– As financial institutions are more regulated and less able to issue loans and other investment options (financial instruments), the money supply must be increased, with newly issued money going directly to workers and industries, to fill the demand for currency.
– Poor countries and poor areas within countries should introduce local currencies that are exclusively used like barter coupons for services and locally produced goods [some goods that require outside the region produced parts may be payable partly with local, partly with the country’s currency]. There may be multiple levels of currencies: small area (e.g. valley or group of villages), state or small country, convertible (“hard”) currency.

5.2.1 Recognizing basic problems       minor revisions/editing 12/2016
People and their institutions should be guided by ethics; design, goals and functioning of societies’ institutions should essentially comply with ethical principles. Our capitalist economic system does not. It is primarily driven by investors seeking profits; it encourages financial institutions to speculate and gamble.
Evaluating present economic institutions and education is essential. People, and particularly economists and journalists should acknowledge some basic problems and keep explaining them so that politicians are pressured to take them seriously, most importantly: the tenets of the economic system can and must be changed; particularly the function of money must be reestablished, reversing this credit-based economy to an economy that is based on ‘real,’ ‘positive’ by individuals and businesses owned money.
Profit must not be the guiding principle. Small interacting economic units are better than huge corporate conglomerates; widespread institutional discrimination against small businesses must be addressed. Securities and commodity trading (stock, bonds, derivatives, etc.) serves the wealthiest but hardly helps the productive “real” economy. As long as profits are high and invested assets grow faster than the overall economy, the trend towards increasing income inequalities will continue and the middle class will actually shrink.
Globalization is unavoidable; however present conditions of global economic interactions serve the wealthy countries more than the poor, and in Third World countries they bring mainly income to a middleclass that works within or for transnational corporations.
People must learn that capitalist principles hardly consider the needs of local people, ecological concerns, and long-term effects of corporate actions. Investors benefit from instability with high unemployment rather than steady growth with full employment. Capitalism is designed to foster any form of growth that can extract profits for present investors; but capitalism is by nature unstable. It generally leads to growing income disparities and a tendencies towards monopolies and oligopolies rather than strong competition, and it fosters a short-term orientation rather than encouraging long-term visions.
If there is a political will to improve economic systems, legislators can gradually curb the destructive consequences of modern economic institutions. Radical changes are possible within a reasonable time without a violent revolution, a collapse of the economy, or chaotic interim stages.
The following proposed changes may have to be introduced in an order other than described below and many steps can be taken simultaneously.

   To rapidly implement changes in the economic system according to a framework model, a team of academically trained experts, including economists, psychologists and cultural anthropologists should evaluate the details of planned proposals, forming a think tank and educational non-profit organization and possibly a political party. For some decisions, a panel of people who studied issues may make final decisions. Persons involved in planning and implementing changes must follow ethical principles rather than beliefs and biases of people they represent. Goals must include interests of people of all parts of the world and of future generations.

5.2.2 Reforming system of taxation; basic minimum income       minor revisions/editing 12/2016
As a first step, proposed goals and early proposed steps of changes need to be propagated: people and journalists understanding and basically agreeing with them may promote grassroots efforts that will pressure politicians to act.
Targeted taxation and laws must advance goods and services that people most need and wish while deterring waste and economic processes that harm people or the environment. In order to reduce detrimental influences of lenders and investors, long-term changes aim to greatly reduce for-profit banking and largely eliminate indebtedness to financial institutions and investors while replacing credit with a money supply that is owned by people, businesses and institutions. Taxation and regulations should encourage investors to sell their properties to the workers, farmers and other people directly involved in working with the economic activities. Instead of banks, investors, stockbrokers, etc. deciding how and where assets are allocated, individuals that operate economic entities make decisions, and there are incentives that they work towards ethical goals.
The present system of taxation can be gradually replaced by following a series of steps:
– Trade of securities (stock, bonds, etc.) is taxed.
– Unearned income (profits, rents, dividends) is either taxed like regular income, or progressively taxed: the higher the return on the investment, the higher the tax rate.
– Dyseconomy and luxury taxes are introduced and gradually increased to discourage economic activities that are wasteful or otherwise damaging to societies and the environment; a democratic process with consultation from experts is established to determine dyseconomy and luxury tax rates.
– Taxes on earned income are limited to the affluent, later abolished completely. Sales taxes on all products are gradually raised, in part to discouraged waste.
– Basic minimum incomes are introduced and gradually raised (in part as a refund for sales taxes on food etc.); basic minimum incomes are to be determined locally, adjusting to costs of living, etc.
– Other property taxes are reevaluated with regard to their effect on society and the environment.
– Laws and taxation promote steps to move the ownership of enterprises, by enterprises needed resources and land used for agriculture to the workers, farmers and people directly involved with designing, marketing and distributing their products For instance: owners of agricultural land or shares of an enterprise have high property taxes if they are not involved with the enterprise’s activities (in the design, production or distribution of the products; farming agricultural land or processing produced milk, etc.; former owners may stay involved as consultants explaining their vision of improvements and ways of managing factories and farms).
– Property taxes on land are gradually raised until the land has no commercial investment value.

5.2.3 Regulating financial institutions       minor revisions/editing 12/2016
Other steps to move towards a more decentralized, democratic economy and to evolve from a renter/borrower economy to an owner economy:
– Simple laws with no loop holes gradually tighten lending and investment practices, particularly increasing reserve requirement and defining conditions for loans, and decreasing international flow of capital, avoiding international loans for non-productive purposes such as military upgrades. Savings and retirement money should be increasingly put into government funds to enhance economic stability.
– Local currencies should be introduced in economically depressed areas to stimulate local growth and avoiding the need for people to barter or to move to places with more employment opportunities; local governments devise a democratic process of allocating such monetary units. However, generally such currencies should be a transitional solution.
– Money is gradually issued and distributed to individuals and governments to replace the function of lent money, bonds, and other securities. A democratic process is established to allocate newly issued money ethically. Areas may chose ways of infusing newly created money into the economy by using it to improve schools and infrastructure or to introduce a minimum basic income.
– A system of cooperative private banks and governmental development banks is established, which fulfills financial requirements of communities. Credit unions and other client-owned financial institutions may take steps to fulfill new requirements. Decentralized governmental development banks may issue grants to enterprises for research and development projects and interest-free loans for modernizing production facilities. Very small enterprises that fulfill local economic needs may receive grants for expansion. Loans and grants are given primarily to enterprises that serve the primary needs of communities and areas, such as the need for food, housing, water, infrastructure, and full employment.
– Conventional bank and credit card loans are converted into interest-free loans from the federal banking system or loans from newly formed private cooperative non-profit banks; these loans are to be paid off within a limited period. Loans for luxury products will no longer be available.

   To minimize the risk of people ending up hungry or homeless, basic minimal incomes may be given as coupons that can only be used for basic groceries, housing and utilities, but cannot be used for luxuries and cannot be transferred to other persons.

5.2.4 Addressing problems of transition; fair compensation for losses       minor revisions/editing 12/2016
While outstanding loans are repaid and banks issue much less new loans, committees that represent the population are to determine ethical ways of allocating newly supplied money. Some losses are compensated, for example, new money is issued to family farms to at least partly compensate for the loss of their land’s investment value; some money is issued for people who saved for retirement and, de facto, pay double taxes when taxation based on income is changed to taxation based on consumption. As stocks lose value when no longer yielding profits, owners may be partially compensated, particularly if they recently invested or the investments represent much of their retirement. Some new money may be issued to accelerate payments on public debts to foreign countries. (Poor countries that are indebted should in most cases not be held responsible to repay all their debts, since the loaning institution should have ascertained that the loan would be used to improve the economy of the country and could be paid back without major deprivations of the people.)
Increasing taxation of investments reduces and then eliminates profits. Laws designed to decentralize enterprises may require that, first, all economic units or branches of large enterprises are, at least in part, locally owned, comparable to franchise enterprises. Further steps may include:
1. all economic units are at least 50% locally owned;
2. they are at least 50% owned by their workers;
3. they are partly owned by their workers (over 50%) and partly by people directly involved with design, and distribution or use of their goods and services (in case of production of parts and service providers).
In this process, factories bought by large corporations become independent again, and merged enterprises are broken up. Small enterprises, which may produce parts of machinery, work as free agents, relying on contracts rather than ownership structure for harmonious cooperation.
Decentralization of schools and other institutions is also pursued. The goals include a network of many small industries which cooperate, sharing technologies and parts of products, and many small high quality service providers and schools that are adapted to local conditions and needs. With improved education at all levels, small enterprises can be highly sophisticated and efficient; they create good jobs and produce high quality products and services.
Local development banks and consultants may propose and fund production changes. Where salaries and education levels are high, labor-intensive production plants may be closed (or moved to areas with unemployment) and workers retrained. Where very labor-intensive jobs produce few inferior products, loans or grants may gradually increase standards of education, productivity and quality of products. When productivity is high, work hours may be decreased. Unions may become partial owners of enterprises; they move from emphasizing worker salaries to concerns about working conditions, ecological considerations, quality of products, and their products’ impact on the quality of life in their community. An educational system that includes entertainment programs emphasizes efforts to take pride in honesty and in working carefully, and minimizing waste.

   Some features of the economic and educational development of Switzerland in the 20th century may be considered as a model (very decentralized high quality school systems; many small economic entities, producing high quality products and services while continuously adapting to local and world markets).

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