The road to inequality
Not so long ago an economist wrote a book that sent a shock-wave through the economic world because of stating the obvious primary cause of wealth inequality. The return on capital usually is higher than the rate of economic growth. Because capitalists reinvest most of their profits, capital grows faster than the economy most of the time. It can be proven beyond any doubt that capital can't grow faster than the economy forever. Something will have to give at some point.
And what has this to do with interest? Interest is any return on capital. Interest income is the income of capitalists. That includes business profits and interest on bonds. The graph shows that labour income as part of the economy has diminished in recent decades in the United States. And that is because the capital share of national income has risen. In the past depressions and wars destroyed a lot of capital. Since 1945 there hasn't been a serious depression or a world war.
The capitalist economy is like a game of monopoly. First everyone is doing great and capital is built in the form of housing and hotels. At some point some people can't pay their bills any more. To keep the game going, the winners can lend money to the losers. But at some point the losers can't pay the interest any more. To keep the game going, interest rates must be lowered, so they can borrow more. But at some point some people can't pay the interest again.
Sounds familiar? This happens in the real economy too. In a game of Monopoly we can start all over again. In the real economy that's not an acceptable option. It would mean closing down factories in another great depression or destroying houses in another world war. So the game must continue. In Monopoly the rich can lend money at negative interest rates to the rest so that they can pay their bills. In the real economy this may be possible too.
Monopoly features a scheme that looks a bit like a universal basic income. Every time you finish a round, you get a fixed sum of money from the bank. At some point the bank may end up empty. The rich can then lend money to the bank at a negative interest rate to pay for it. This might seem a stupid thing to do because Monopoly is just a game. But the real economy is not a game. It may need an income guarantee for everyone financed by the wealthy.
An outline of the future economy
Can we have an economy that is humane and in harmony with nature? A few centuries ago no-one would have believed that we could live the way we do today and most people would have believed that it is more likely that unicorns do exist. If excess resource consuming consumption is to be curtailed, fewer options for consumers remain, for instance there may only be organic products, and the supermarket of the future might look a bit like those in socialist Germany.
That may not be so bad. People in socialist Cuba live as long as people in the United States despite the United States spending more on healthcare than any other country in the world. Cubans eat no fast food so they live a healthier life style. And Cubans suffer less from a negative self image than people who are exposed to the advertisement industry. Advertisements aim to make us unhappy with ourselves and what we have in order to make us buy more products and services. For instance, influencers on the Internet all do plastic surgery so that you think you need it too.
Like in former socialist Germany there isn't much freedom in Cuba. If the government is to regulate the fat content in fast food or the sugar content in sodas then we lose our freedom to become obese. And there may soon be illicit markets for those producs as there are already illicit markets for crack cocaine. Alternatively, the government could even end our freedom to destroy life on this planet and kill our children. That is of course economic oppression. But then again, having no alternative for a collective suicide could be an even more serious form of oppression
But it is bad for economic growth. And it doesn't stop here. You can think of measures that make air travel prohibitively expensive. Like in socialist Germany entire industries will be wiped out and perhaps you must take a train. And what will Google and Facebook be without advertisements? What use will their massive data gathering have? Because of all the excess consumption lots of resources are spent on guessing what we want and trying to make us buy even more.
So what has this to do with interest? The change will cause massive economic shock like the Great Depression. But it can be done and the economy will soon recover if interest rates can be negative. Before you say that it is more likely that unicorns do exist, the idea has already been tested during the Great Depression.1 The outcome of the test is dubbed the Miracle of WÃ ¶rgl for good reason. And evidence for the existence of unicorns has not yet been so forthcoming.
If interest rates are low then the creators of ideas and makers of things are rewarded more. They are the entrepreneurs and labourers rather than the owners of capital. It is in the spirit of Silvio Gesell who believed that labour and creativity should be rewarded and not the passive ownership of capital. Only when there is a shortage of capital or more demand for goods and services than there is supply, people need to be encouraged to save.
The economy is already constrained by a lack of demand rather than supply. That will be even more so when excessive consumption is to be curtailed and the rich have fewer options to spend their money on. And so it may become possible to fund an income guarantee with income taxes as well as negative interest on government debt. This can empower the bargaining position of labourers so that the need for minimum wages may reduce.
It is better to have an income guarantee rather than a universal basic income because that would be cheaper. There is little to gain from handing out money to people that already have enough. And the scheme should provide an incentive to work. A simple example can explain how that might work out. Assume there is an income guarantee of à "š ¬ 800 per month and a 50% income tax. The following table shows the consequences for different income groups.
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