Aug 31

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Inequality and Oxidizable Money

Gold CoinsI’ve been reading a lot of David Harvey recently. He writes from a Marxist perspective and although I don’t consider myself a Marxist, there is much to be said about looking at modern American economics from this perspective. Last night, I was listening to a lecture he gave, The Contradictions of Capital. And one thing really stood out to me. He asked why people have always chosen gold and silver as a basis for their currencies. Why not an oxidizable metal like iron?

There are two primary uses of money. First, it is a mechanism of transferring wealth. Sure, you could give your doctor a chicken as payment, but it makes more sense to use money. Money is convenient: it doesn’t require us to be forever swapping things of value in order to end up with the things that we want at any given time.

The second use of money is more problematic: a mechanism for the storage of wealth. This is the area where I am most in opposition with libertarians. They see the ability to store wealth as being critical to the economy because people will only work if they know they can hang onto that wealth for the rest of their lives (and their children’s lives (and their children’s lives (…))). But at the same time, the storage of wealth is a primary cause of our continuing Greater Depression. Businesses are sitting on piles of money. In a good economy, they would invest it and hire people to make more money. But in the current economy, they don’t even have substantial inflation to disincentivize their money hording.

So what would happen if money was oxidizable? Imagine if any money held onto by an individual or business was taxed at, say, 10% each year. That would provide a very big incentive to spend the money. This would create much more demand in the economy. And clearly, companies couldn’t get away with just paying their CEO more, because his wealth too would be taxed at the same rate. It would tend to decrease inequality given how we’ve become so much of an aristocracy. This is the basic idea behind Thomas Piketty’s Capital in the 21st Century.

There are obvious problems with this system, but that isn’t to say that they can’t be overcome. In fact, many of them have obvious solutions. The most important is that people should be allowed to save some money. Clearly, some kinds of retirement accounts would have to be exempt and there would have to be some amount that people could save without being so taxed. That’s simple enough. I’m not clear about how such a system would deal with commodities. Would people be taxed on gold bars they hoard in the cellar? Again: that’s not too hard. I think it would be taxed — the same way the state of California taxes business inventory. (For the record, I hate that tax; it is very hard on micro-sized companies.)

The biggest problem is that the rich would just move their wealth outside the country. I believe that this is why Piketty is calling for an international wealth tax. We are seeing this with the various tax avoidance schemes such as corporate inversion. More and more, the only way that we can make the rich pay anything close to their fair share in taxes requires international efforts. Given how successful such efforts have been on the issue of global warming, I’m not hopeful. (Note the Catch-22 here.)

But the idea is intriguing. It is worth giving serious consideration. And maybe some day after things reach a point where the only options facing the rich are reform and revolution, they will choose the former. Does this mean I don’t believe in democracy? Not at all! I am a big believer in democracy. I just don’t think that much of it exists in the modern world.

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