[Paradigm]

One of the principle arguments leveled against Georgism is the allegation that land values would not be a sufficient tax base to raise the revenue needed for the functions of government. While this argument in itself is questionable, it misses a much bigger point. The government has spent more than it takes in for a long time. Of course, under our current system, this is cause for concern. We worry about all the debt we are incurring, which is in fact an inevitable consequence of our current monetary system. The federal income tax was actually initially passed alongside the Federal Reserve Act as a means to pay off the interest on our national debt. The portion of tax revenue devoted to paying off this interest has grown continually since then. If we keep going down this path, it will eventually eat up our entire federal budget.

However, there is another way. If we simply nationalize the Federal Reserve, the government can then issue its own debt-free money for use on wealth-creating public projects. So long as the wealth created is equal to the money created, there is no inflation. Government could theoretically finance all of its functions in this way without having to take a single dime in taxes. It would not be mortgaging our children's future with more debt, but would simply be providing money for the production of goods and services.

Of course, this scenario is unlikely, because not every investment pays off equally, and therefore some government spending will end up being inflationary. Therefore, some mechanism has to be in place to monitor and control inflation. Taxes can fill this role by recycling money through the system and removing some of it from circulation when necessary. But what is important is that under such a system, the primary role of taxes is not to raise revenue, but rather to control inflation.

Thus, one of the biggest arguments against Georgism is defeated. It doesn't matter if land value taxes are a sufficient tax base, because the very concept of a tax base is rendered irrelevant, at least at the federal level. At the state level, taxes would still be needed for collecting revenue, with federal earmarks subsidizing them. And of course, land value taxation is the ideal tax for the state level. At this level, its efficacy is demonstrated by New Hampshire, which has no state income tax or sales tax, and relies almost entirely on property taxes to raise revenue.

The federal government could then abolish the income tax and turn to a power which was written into the Constitution long before the Sixteenth amendment: apportionment from the states. The amount to be apportioned would be rather small, as it would not be necessary for raising revenue. It would be just enough to control inflation, which would be closely monitored by the Federal Reserve, just as they do today. When inflation is spotted, a corresponding amount of money would be removed from circulation, thus achieving price stability.

There would, of course, be other purposes for taxes, aside from controlling inflation. The land value tax would still be an excellent idea because of its many utilitarian benefits, such as reducing in inequality, enhancing productivity, and discouraging speculation. Other incentive-based taxes such as a carbon tax would also serve a purpose. But the revenue these taxes bring in would all be irrelevant for the federal government. Instead of spending what it gets, the government would get what it spends.

[Dr House]

I can see two problems with this right offhand:

The first problem is it's difficult to keep the level of money supply growth closely tied to the GDP growth rate, which is necessary to keep inflation close to zero. Ths is not my biggest concern however as there are ways to tackle this.

The second and biggest problem is that this monetary policy creates uneven and unpredictable money supply growth, which causes malinvestment, because it causes entrepreneurs to forecast income that may not exist. For example: You print out money for a railway project. The railway employees spend it disproportionately in, say, bananas. The price of bananas rises, and investment in banana plantations jumps. The railway project ends, the employees are laid off and the central bank's pumps are cut to prevent inflation. The recently booming banana plantations go bankrupt.

[Paradigm]

The first problem is it's difficult to keep the level of money supply growth closely tied to the GDP growth rate, which is necessary to keep inflation close to zero. Ths is not my biggest concern however as there are ways to tackle this.

The idea is for money supply growth to cause GDP growth. However, since you say this isn't your biggest concern, I'll just leave it at that.

The second and biggest problem is that this monetary policy creates uneven and unpredictable money supply growth, which causes malinvestment, because it causes entrepreneurs to forecast income that may not exist. For example: You print out money for a railway project. The railway employees spend it disproportionately in, say, bananas. The price of bananas rises, and investment in banana plantations jumps. The railway project ends, the employees are laid off and the central bank's pumps are cut to prevent inflation. The recently booming banana plantations go bankrupt.

First, I should point out that government creating money for a project doesn't necessarily involve printing the money. They can simply create the money as credit. Anyway, I don't see why the central bank's pumps would necessarily be cut because of a project ending. Money would be taken out of circulation as a result of inflation appearing on leading indicators. Land values would actually be one of the prominent indicators, which is why taxing them would be a great tool for controlling inflation.

[Dr House]

First, I should point out that government creating money for a project doesn't necessarily involve printing the money. They can simply create the money as credit.

What do you mean, borrowing the funds from the central bank or lending the money to contractors? In either case it doesn't solve the problem, and may make it worse as credit trades future for present income.

I don't see why the central bank's pumps would necessarily be cut because of a project ending. Money would be taken out of circulation as a result of inflation appearing on leading indicators.

This is exactly the point. Inflating the money supply at a rate above GDP growth trends creates the necessity to slow its growth down at some point, which creates the disruption I just mentioned. It doesn't necessarily have to happen when a project ends, but it will at some point happen to stave off inflation.

This was one of the main catalysts of the 1929 crash. Demand forecasts were based on income expectations that included a 7.7% a year money supply growth. When the New York Fed cut the pumps due to mounting inflation, disaster ensued.

I would say spending money into existence is not a bad idea as long as yearly money supply growth is set to a fixed quantity somewhere between 3 and 4% of GDP and not deviated from there. Anything else would result in one bubble after another, just like our current system.

[Paradigm]

What do you mean, borrowing the funds from the central bank or lending the money to contractors? In either case it doesn't solve the problem, and may make it worse as credit trades future for present income.

"Borrow" from the central bank? I believe you have my monetary theory confused with our current system. The government can simply issue debt-free money, but it doesn't have to be printed money. Most money just exists as numbers on a balance sheet, and this would continue to be true under a debt-free monetary system.

This is exactly the point. Inflating the money supply at a rate above GDP growth trends creates the necessity to slow its growth down at some point, which creates the disruption I just mentioned. It doesn't necessarily have to happen when a project ends, but it will at some point happen to stave off inflation.

You seem to be adhering to the fallacious quantity theory of money. Look, it's really simple: The railroad project ends, and the workers find other jobs, which have been supported by the infusion of cash that the railroad project supplied. The money has been used to purchase goods and services, and will cycle through the economy, continuing to buy goods and services. There is no inflation risk if the initial investment is sound, and having a certain amount of money recycled through taxes and publicly owned industries simply allows for greater fine-tuning.

This was one of the main catalysts of the 1929 crash. Demand forecasts were based on income expectations that included a 7.7% a year money supply growth. When the New York Fed cut the pumps due to mounting inflation, disaster ensued.

Disaster ensued because people were investing with borrowed money, and thus went into debt when the interest rate changed. That has nothing to do with what's being discussed here.

[Dr House]

I'll have to chew this over a bit and get back to you.

One thing's for certain though, even if I don't 100% agree with it, the proposal is certainly sound and well thought-out.

[Paradigm]

Another idea that struck me is that the federal government could issue interest-free loans to state government for their infrastructure projects.

[QatzelOk]

If we simply nationalize the Federal Reserve, the government can then issue its own debt-free money

Simply?

And the rich families who take in billions of dollars and control the United States will let this happen?

We're talking extreme wealth here, and it's likely that America would find itself under attack by a foreign power (or some facsimile of warfare) if its president attempted to take away all this power from this handful of wealthy men.

[Figlio di Moros]

I'm sorry, but you're suggesting that using inflation as a means for government spending would hold a steady-value? While your premise is certainly true on the premise that government spending will create wealth equal to the expanding money suppy, it seems to not take into account, unless I'm mistaken, that the central, necessary functions of government don't produce what is spent on them. The military budget this year is $533 billion in the US, $1.3 trillion being spent on entitlement programs, fighting crime, etc. While they're necessary, aside maybe to the extent and patern of our entitlement programs, you don't produce anymore from a large military, large police force, or large entitlement programs than you would from spending the 1/5 of our GDP that is federal spending on digging ditches and filling them in.

[Dr House]

You seem to be adhering to the fallacious quantity theory of money.

Why is it fallacious?

Look, it's really simple: The railroad project ends, and the workers find other jobs, which have been supported by the infusion of cash that the railroad project supplied. The money has been used to purchase goods and services, and will cycle through the economy, continuing to buy goods and services. There is no inflation risk if the initial investment is sound, and having a certain amount of money recycled through taxes and publicly owned industries simply allows for greater fine-tuning.

And what happens if an infrastructure investment doesn't create enough additional production to increase the cash flow to make up for the infrastructure project ending? What happens then is that there is a disruption in the flow of income throuighout the economy, resulting in a market correction like I described earlier. Basically, it's as follows:

Scenario A: New train line encourages new factories to be built. Those factories creates as many or more jobs than were lost once the train line construction was finished. All is good.

Scenario B: New train line goes through inhospitable terrain and does not encourage new factories to be built. Workers laid off stop eating bananas, which they'd been eating a lot more since they found the new, higher-paying job making said train line. Since investors flocked to invest in bananas, production is now higher than demand for bananas. Production is cut, and with it more jobs are lost.

[Paradigm]

Ok, let's just back up here for a second and look at some facts: When banks create money loans, the loans are (hopefully) used to create wealth. Then the money is canceled out when the loan is paid back(the "impossible contract" problem of interest notwithstanding). Since infrastructure spending would increase land values, a land value tax would in effect be a way of paying off a loan by the government. Also, when we look at the money is spent now, about a third of tax revenue goes to paying interest on our national debt. Eliminate the debt-based system, and you've eliminated the need for 1/3 of all taxes. Our own government's experience of borrowing money shows that money spent by government doesn't need to equal money taken in. Such borrowing is considered "taxation on future generations" only because it incurs debt that will eventually have to be paid off.

As for your concerns about individual projects not succeeding, I think you have to look at it in the aggregate. Not all bank loans are paid off either, but a few bad loans don't create massive inflation(speculative bubbles and irrational exuberance notwithstanding). I think you also have to look at the money multiplier effect. Even if an individual project fails, the money doesn't go into a black hole. It can spurn production in other areas of the economy(the banana growers, for example).