7 7 The spectrum is just as much a national resource as our national forests. That means it belongs to every American equally.
What Alaska has done with oil, our whole country can do with air, money, and other co-owned assets. But before I show how, it’s worth exploring other ways to spread nonlabor income broadly.
A citizen s income. A basic income guarantee, or citizen’s income, is an equal amount paid by government to all, with the money coming from general taxes. There’s no means test and the income is unconditional. Leading advocates have included economists Robert Theobald and Nobel Prize winner James Tobin.1 In 1968, Paul Samuelson, John Kenneth Galbraith, and 1,200 other economists signed a document supporting the idea.2 Four years later, a modest version ($1,000 per person per year) was proposed by presidential candidate George McGovern, whom Tobin advised. Called a “demogrant,” it was poorly explained, badly received, and quickly withdrawn. No major US politician has proposed anything like it again, though the idea has caught on in Europe (see chapter 9).
A guaranteed minimum income. This approach is similar to the citizen’s income, in that funding would come from general taxes, but different in that would not be universal: it would go only to people who need it and cover only what they need to reach the minimum. Milton Friedman’s “negative income tax,” first proposed in 1962, is the most prominent version of this model.3
Friedman’s idea was that people whose yearly earnings fell below a politically set line would receive a tax “refund” equal to the difference. The refund would be paid even if the recipient owed no taxes. The advantage of using the tax system to top off low incomes, he argued, was that it had a built-in means test and cash distribution system.
The closest Congress ever came to adopting a form of negative income tax was in 1970 when, after years of riots in American cities, President Richard Nixon proposed his so-called Family Assistance Plan. The plan was intended to help, or at least quiet, the urban poor by guaranteeing every family of four a minimum of $1,600 a year. To appease liberals, who thought $1,600 was a paltry sum, Nixon added a 50 percent federal subsidy to states that increased the minimum above $1,600. To attract conservatives, he included a requirement that able-bodied men—though not single mothers—be willing to accept “suitable work,” which if they did would reduce their family assistance. Nixon’s bill passed the House but died in the Senate. Interestingly, Friedman lobbied against it because it didn’t eliminate welfare.
A scaled-back version of the negative income tax is the Earned Income Tax Credit, or EITC, which focuses on low-paid workers. First created in 1975 with bipartisan support, it has been increased over the years to a maximum of $5,750 for a family of five. In 2010, about 27 million low-income households received some benefit from the EITC, but few got the maximum because as recipients earn more by working, the tax refund phases out.4 And students, the unemployed, and retired people get nothing.
Universal stock ownership. One of the most original economic thinkers of the last century, Louis Kelso, took a different approach to spreading nonlabor income. Kelso was a San Francisco lawyer and investment banker who is best known for inventing employee stock ownership plans, or ESOPs, which now cover about ten million Americans.5 He’s less known for his deeper analysis of modern capitalism that sheds considerable light on the plight of our middle class.
In modern times, Kelso argued, most of the gains in economic productivity come not from labor but from new technologies and systems. Since capital owners benefit far more from technology and systems than workers do, capitalism as we know it increasingly shifts income to capital owners. A democratic and still capitalist remedy is to give increasingly more people access to corporate stock. Employee stock ownership plans are a step in this direction, and Kelso’s breakthrough was to create a way to finance them (through trusts that buy stock on credit) and get them favorable tax treatment.
ESOPs, however, have two limitations: they’re limited to workers in companies that choose to adopt them, and they suffer from the fact that putting all one’s eggs in a single company’s stock isn’t as safe as putting them in a diversified portfolio. A larger leap toward broad stock ownership would be a plan that covered everyone and included stock in a broad assortment of companies.6
Just such a plan was proposed in 2007 by Dwight Murphey, a follower of free-market economist Ludwig von Mises. Unlike many conservatives, who blame the poor themselves and government programs for poverty, Murphey acknowledges that most modern poverty is due to a lack of jobs that pay well. Murphey also recognizes that the shortage of good-paying jobs now affects the middle class as well as the poor. Given these realities, and given his preference for minimal government, Murphey proposed a “shared market economy” in which everyone receives income from corporate stock.7
At the core of his model is a family of mutual funds, governed in a way that would assure their independence from politics. These mutual funds would invest in a broad cross-section of companies. Over time, they’d accumulate substantial holdings and, like the Alaska Permanent Fund, pay dividends from their earnings. The capital to acquire the holdings would come from the US Treasury, which would borrow it from the Federal Reserve.
The mutual funds themselves would be owned by all Americans, one person, one share. The result, Murphey argues, would be “a broad distribution of the ownership of competitive capitalism, providing incomes and purchasing power to all, while at the same time furnishing business firms with abundant capital.”8
IN THINKING ABOUT THESE MODELS, it’s easy to get lost in the details. What concerns me here, though, aren’t the specifics of each model but the philosophical and political choices that lie beneath them. Of these, the most important are whether eligibility should be universal or based on need, and where the money should come from.
The answer to the first question depends on the goal being sought. If the goal is to reduce poverty, a good case can be made for basing eligibility on need. On the other hand, if the goal is to sustain a large middle class, the case for universality is much stronger.
Need-based distribution necessarily divides society into two camps, higher-income payers and lower-income recipients. The former resent that money is taken from them, while the latter resent being viewed as welfare recipients.
Need-based distribution also creates a work disincentive that the middle class won’t appreciate any more than the poor. In all means-tested programs, the amount recipients receive necessarily declines as their earnings increase. Suppose that for every $2 you earn by working, you lose 50 cents in nonlabor income. That’s hardly an incentive to work.
Universality, by contrast, unites society by putting all its members in the same boat. The income everyone receives is a birthright, not a handout. There’s no means test and no penalty for working. This changes the story, the psychology, and the politics. No one is demonized, and a broad constituency protects the system from political attack.
The chief argument against universality is that it’s wasteful. Why give Bill Gates money he clearly doesn’t need? The reason is that if the aim is to sustain a broad middle class, excluding the richest few percent saves only a small amount of money at the cost of broad political support. Better to include everyone and tax the income at each recipient’s marginal rate.
As for the second question—where the money should come from—the options are individual and employer contributions, taxes, and co-owned wealth. Individual and employer contributions are appropriate for retirement and insurance plans, such as Social Security and Medicare, but not as supplements to labor income; indeed, they’re most often taken from labor income. That leaves taxes and co-owned wealth.
THE CASE FOR TAXES IS MILTON FRIEDMAN’S: we have a tax system in place, so why not use it? The answer is that the four-million-word tax code is a permanent political war zone. Lobbyists whittle at it every day; nothing is fixed, everything is up for grabs. Moreover, any money that comes in through taxes is likely to be used by government for one program or another, or to reduce the federal debt, rather than to pay dividends to citizens.
Co-owned wealth provides a different playing field. The typical income source isn’t a tax but a user fee, and it’s collected not by the IRS but by an entity representing co-owners equally. This means the revenue bypasses government coffers and all the battles that surround them. It also means that the income can be dedicated to dividends, just as social insurance contributions are dedicated to benefits.
It’s sometimes said that user fees are just a euphemism for taxes. If the revenue goes to government, that case can certainly be made. But if it goes to all of us as co-owners, it can’t—for two reasons. First, whoever pays the user fee gets something of value in exchange. Whether it’s permission to pollute our atmosphere or to benefit from our financial infrastructure, the user is paying for value received in a voluntary transaction. No coercion is involved.
Second, the fee is for the right to use another person’s property, whether it’s an ecosystem, an electromagnetic field, or a monetary system. Normally, when we use someone else’s property, we pay them. This has nothing to do with government or taxes; it’s how capitalism works. To not pay for using someone else’s property is called trespassing.
In addition, dividends from co-owned wealth don’t offend liberals or conservatives. They help the middle class and families with children in particular. They don’t increase taxes or borrowing, expand government, or diminish liberty. So what’s not to like?
It’s no secret that Americans don’t like redistributory schemes in which government taxes money people have already received and transfers it to other people. On the other hand, we love income from property. So why not derive dividends from wealth that’s rightfully ours and eliminate a host of philosophical and political objections?
As evidence that shared ownership trumps taxes as a source of nonlabor income for all, consider the following exchange between Fox News commentators Bill O’Reilly and Lou Dobbs:
O’REILLY: It’s my contention that we the people own the gas and oil discovered in America. It’s our land and the government administers it in our name. … Land and water are the domain of we the people.
DOBBS: The oil that we’re talking about belongs to us, as you said. … In Alaska, there’s a perfect model for what we should do as a nation. We should have—let’s call it the American Trust. Have the oil companies put their fees into that trust, not to be touched by the Treasury Department or any other agency, but for investment on behalf of the American people. A couple of things then happen. One, it reminds everyone whose oil this is. And it even puts a little money, a little dollar sign, on what it’s worth to be a citizen.9
HOW MIGHT DIVIDENDS FROM CO-OWNED WEALTH work in practice? One possibility would be the following:
Imagine that whenever Americans get a Social Security number, they get two things along with it. One is the familiar retirement account; the other is a dividend account. Essentially, the latter represents a nontransferable share in a mutual fund that receives income from assets we co-own. Like a twenty-first century version of Paine’s idea, the mutual fund would periodically wire dividends to its share-owners’ personal bank accounts.
Why connect dividends to Social Security? One reason harks back to Milton Friedman: it has a distribution system already in place. That system is universal, efficient, and trusted. In over seventy-five years, it hasn’t missed a payment. Its customer service is excellent, and Americans like it far more than the tax system.
A deeper reason is that shared wealth dividends enhance middle-class economic security and are a logical sequel to social insurance. While social insurance has eased many life risks, it hasn’t achieved the fuller vision of Roosevelt’s 1935 Commission, “an adequate income to each human being in childhood, youth, middle age, or old age.” Fulfilling that larger vision requires revenue beyond individual and employer contributions, and that revenue could, and arguably should, flow from jointly owned wealth.
Like the existing Social Security revenue stream, the new one would be self-renewing and permanently dedicated—once in place, it would require no further congressional action to continue flowing. In other respects, the new revenue stream would differ from that of Social Security. First, it would add to, rather than subtract from, labor income. Second, it wouldn’t encumber future generations; money paid out would never exceed money taken in. And third, it would require polluters to pay for their pollution and bankers to forgo some unearned profits, ancillary benefits that Social Security doesn’t produce.
Co-owned wealth dividends would have one further benefit: they’d keep our economy humming by maintaining consumer purchasing power. Most economists agree that what drives economic activity is aggregate demand, a fancy term for consumer buying power. Our vast productive machine can churn out an endless quantity of goods, but if people can’t pay for them, there’s no point in making them. Businesses that do so will go broke.
Economists differ on how best to sustain aggregate demand—my father thought government should buy unsold durable goods—but virtually all agree that money spent right away stimulates economic activity better than money siphoned into speculative betting. That’s because spent money has a multiplier effect. As Robert Reich has put it, “High aggregate demand creates a virtuous cycle.”10 When consumers buy more, businesses sell more, invest more, hire more workers, and create even more demand for goods and services. This turns the wheels of commerce faster than does money in a speculative cloud. The latter leads to asset bubbles and subsequent crashes but does little to create consumption, production, or real wealth.
WE’RE LEFT WITH THE QUESTION of how to fill the co-owned wealth pot—what assets, and in what quantities, should we put in it? This is a question that has no right or final answer—selecting which co-owned assets should pay dividends will always be a work in progress. But we can draw some general guidelines.
First, the pot should include a variety of assets, high among which should be our sinks for industrial wastes, especially the atmosphere. This asset is discussed more fully in the next chapter. Other potential assets include our monetary infrastructure, electromagnetic spectrum, and intellectual-property protection system. Further discussion of the value of these assets may be found in the appendix.
The reason why our monetary system is on this list goes back to Article I of our Constitution, which assigns the power to create money to Congress. In practice, however, over 90 percent of the money circulating today is created by commercial banks, at considerable benefit to themselves. This can properly be described as a privatization of the ’coin of the realm,” which historically was issued by the sovereign. If the sovereign today is no longer a king, neither is it a consortium of private banks. It is, according to our Constitution, we the people, as represented by Congress. And in reality, we the people are the backers of our national currency. If banks—or at least big banks—fail, we pick up the pieces. So if anyone should get the benefits from issuing new US currency, it should be us.
How do private banks create official US dollars? They do it through a process called fractional reserve banking. If you deposit $1,000, the banking system uses your money as a reserve to lend about $10,000. To make loans beyond your deposit, a bank simply creates the money electronically. As long as it holds about 10 percent of its loans in reserve (in case depositors want to withdraw cash), the bank is in compliance with the law.
What’s the problem with this? One is that almost all the money in our economy is owed back to banks with interest. This means our overall debt burden is considerably higher than it needs to be.
Another is that private banks are walking off with a lot of money that could otherwise flow to us. Instead of letting banks create money by lending it to us, the Treasury or Fed could wire equal dividends to us directly, without interest or principal repayment required. This wouldn’t create any more money than banks now do; it would just create it in a different way.11
Think about the board game Monopoly. Cash is added to the game every time a player passes Go. Absent those infusions, there wouldn’t be enough money to build houses and hotels, and no one would get rich. We take this feature of Monopoly for granted, but notice: the new money isn’t lent by the bank to players and then repaid with interest. Rather, it’s given to players directly, equally, and debt free. This helps everyone buy property, increases general prosperity, and prevents the bank from hogging wealth.
One oft-heard objection to debt-free money distribution is that the Treasury would print too much of it, thereby triggering inflation. Banks, after all, are limited to lending a multiple of the money in their vaults, whereas government has no such limit. This danger could be averted, however, by having an independent board such as the Fed decide the quantity of money to be created, based on a mandate to prevent inflation.
The idea of debt-free distribution of money isn’t new. During the Civil War, President Abraham Lincoln, rather than borrowing from banks, paid Union soldiers with freshly minted “greenbacks.” Beginning in the 1930s, a succession of eminent economists, including Irving Fisher and Henry Simons, proposed returning the money-creation function to government.12 Milton Friedman memorably imagined government “helicopter dropping” new money into the economy.13 Recently, Lord Adair Turner, Britain’s former top bank regulator, made a similar proposal, and even Ben Bernanke, former chair of the Fed, floated the idea—not for the United States but for Japan.14
To be sure, the primary concern of these economists and regulators wasn’t to pay dividends; it was to reduce the amount of debt and systemic risk in our economy. Their preferred method for dropping money into our economy was for the federal government to print and spend it. But that’s not the only way to do it. With Social Security’s database and a few computers, it’s just a hopstep from having the government spend new money to having the people spend it instead.
Directly issuing new money isn’t the only way to generate revenue from our co-owned monetary infrastructure. There are also securities and currency trading systems we create, regulate, and rescue when they threaten to collapse. These trading systems are the casinos from which investment banks and hedge funds extract so much rent. If we were running a casino in Las Vegas, we’d take several percent off the top. But we charge Wall Street virtually nothing.
We could change that in several ways, however. The simplest would be to charge a small fee—half a percent or less—on trades of assets held for less than a year. This would encourage long-term investing as opposed to short-term betting. And the income from these fees could be added to the fund from which dividends are paid.
As TO THE TOTAL QUANTITY OF ASSETS to put into the co-owned wealth fund, my suggestion is: keep adding until society decides the pot is full. Like social insurance, co-owned wealth dividends will grow by laying pipes first and then filling them with water. The long-term goal is to pay dividends that modestly supplement labor income for everyone. When that goal is reached is for the people, through politics, to decide.
Still, it’s worth estimating the quantity of money that could flow through shared wealth dividends if the will were there. For the next several decades, a sizable chunk could come from selling a declining number of carbon pollution permits. In addition, revenue could flow from our monetary infrastructure and other shared resources. Figure 7.1 lists five potential sources, along with estimates of their possible yields. It shows that a mature system could generate close to $5,000 per person per year, or $20,000 a year for a family of four. The numbers are explained in the appendix.
Consider what $5,000 per person per year would mean. If a child’s dividends were saved and invested starting from birth, they’d yield enough to pay for a debt-free college education at a public university. In midlife, $5,000 per person would add 25 percent to the income of a family of four earning $80,000 a year. In late life, it would boost the average retiree’s Social Security benefit by about 30 percent.
Figure 7.1: POTENTIAL SOURCES OF DIVIDENDS (in billions of 2013 dollars)
AN OFT-CITED RISK OF PAYING PEOPLE money they don’t work for is that they’ll get lazy. This is the scare story that’s thrown at every suggested method of reducing inequality, so it’s wise to be skeptical. Has this happened to Alaskans, now exposed to twenty-five years of dividends? Sarah Palin wouldn’t say so. And neither would any economic study.
Besides lacking empirical support, the road-to-laziness argument lacks logic. Why does it apply only to those at the bottom and middle of the income scale and not to those at the top, where immunity to the perils of nonlabor income happily reigns? One could argue that the rich have more “moral fiber” than the poor, but that would be difficult to prove. A more logical thesis, if one accepts the premise that the need for money motivates people to work, is that those at the bottom will always work at least as hard as those at the top.
The flip side of this argument is that even if some people did work less because of dividends, it might not be such a bad thing. Americans are among the most overworked people on the planet. According to the Organization for Economic Cooperation and Development, Americans in 2012 labored about ten weeks more per year than the Dutch and Germans, three weeks more than the British, and two weeks more than the Canadians.15 We also have less vacation, sick leave, and family leave than workers in most other affluent nations. If dividends eased the pressure to work, we would likely be less stressed and healthier than we are now. And wages might even go up if employers really need us.
If Americans work fewer paid hours in the future, the chief reason won’t be because we get dividends. It will be because technology and our economic system produce more wealth per hour of labor than they do today. And if that happens, we should celebrate and raise our dividends. We’ll have more time to devote to family, friends, communities, and other interests. An ever-larger number of us will be able not only to pursue happiness but to enjoy it.