THE GLOBAL EMPLOYMENT CHALLENGE

Capitalism has been a very successful economic system for centuries.  The current series of economic crises that had its first major appearance in early 2008 and that continues to persist in the developed world has caused many to seriously question the future of Capitalism.

 

Even though each country in these crises has its own set of problems the problem common to all is anemic economic growth. Insufficiency of economic activities in developed countries is causing these economic crises to continue; it seems that developed countries are running out of economically viable businesses or investments to undertake.

 

The inability on the part of developed countries to make adequate investments is translating into lackluster economic performances and higher unemployment rates. High unemployment and economic distress are the major forces driving the overall economic and social malaise in the developed world.

 

Temporary monetary and fiscal solutions are just pushing the problems down the line or buying time for development of a permanent fix. The fixes that are being currently debated e.g. infrastructure spending, tax cuts, fiscal austerity, reducing wealth/income inequality, income redistribution, erecting trade barriers etc. are all trying to address a symptom rather than the problem. This paper proposes a fix that will address the root cause of the problem and will be a permanent solution.

 

Inability to make adequate investments

 

Generally higher levels of development leave increasingly smaller room for further development and growth given a particular trajectory of growth. Those inherent challenges to growth in developed countries are, however, being further compounded by the tightening planetary constraints on resources and the environment.

 

Even though oil and other fossil fuel prices have recently been low it does not alter the fact that further growth on the fossil fuel trajectory is difficult for most developed countries; it does not alter the fact that use of these fuels cause environmental degradation; it does not alter the fact that oil and other fossil fuels are a dwindling resource and its end should be counted in decades and not in centuries. Long term trend in oil prices has been that of rising and it is likely to continue and accelerate. These facts factor into major (long term) investment decisions and produce adverse investment decisions and economic consequences; they will continue to do so in the foreseeable future.

 

The economic effects of planetary constraints are high in developed countries because of their high dependence on fossil fuels (energy). Because of the presence of fossil fuels in the foundations of most business activities further growth on the fossil fuel trajectory is becoming increasingly difficult for developed countries.

 

Developed economies, therefore, have to rapidly move away from their dependence on fossil fuel. Lasting economic recovery in the largest economy of the world will only come about if the foundations of its economy is shifted from fossil fuels to sustainable sources of energy and other raw materials.

 

Even if the US and the world in general is not interested in addressing the need for resource sustainability it has to nonetheless address the problem of unemployment and inadequate economic growth. The proposals in this paper squarely addresses the problem of unemployment and economic growth because they are directed at eliminating the root cause of these problems: unsustainable economic structure.  

 

Developing countries are not immune to the pressures being felt by developed countries on the fossil fuel trajectory; they will also face the same pressures in times to come. In the 21st century fossil fuel based development is an illusory dream which will never lead to long lasting prosperity. Developing countries such as Pakistan should stop chasing such dreams.

 

Low rates of return in sustainable energy industries

 

Since it seems that all countries need to gradually move away from fossil fuel, let us look at the general feasibility of sustainable and other sources of energy. Sustainable energy industries, like wind and solar power, have inherently low returns because they require many times the capital investment required in fossil fuel power-plants. For example: A one-gigawatt wind facility costs more than $2.5 billion to build, whereas a gas facility of the same capacity costs $600 million.

 

Interest on capital is no longer sustainable

 

The current financial system only allows allocation of capital to businesses that can pay interest. Most sustainable, resource adding or other futuristic industries don’t make profits high enough to be able to pay interest consistently. Temporary low interest rates don’t make these industries viable. As interest rates fall their probability of rising tends to increase; fear of higher interest rates in future makes investments in low return industries financially unviable. Government subsidies cannot support such a huge and exponentially growing part of an economy forever.

 

Sustainable energy industries have inherently low returns; many other industries in developed countries promise low returns for new ventures because of little room for growth on the fossil fuel trajectory, global competition and other global challenges. The overall financial return structure for new businesses in developed countries has shifted down significantly over the years of this century; this fact is reflected in near zero interest rates there for most of this century. The new normal for interest rates seems to have become zero in developed countries.

 

It seems reasonable to suggest at this point that developed countries may need to make zero interest rate a permanent feature of their economy; or in other words get rid of interest.

 

Interest is a relic of the gold system, which required payment of interest to keep the limited amount of gold (money) in circulation. Under fiat money interest is not necessary in that sense because money can be created.

 

NEW CAPITALISMTHE SOLUTION

 

The book titled “New Capitalism – Capitalism Re-engineered for 21st Century” presents a new model of a market driven economic system that will eliminate interest and thereby make most sustainable industries viable. By changing the foundation of the economy from fossil fuel to sustainable energy it will improve the business potentials of most other industries. It will start a new trajectory of sustainable economic growth lasting for generations.

 

The most pressing problem of this century is subpar economic performance in most of the world; the other side of which is high unemployment. New Capitalism will open up a huge range of investment opportunities that are required to build a new and sustainable global economic structure. New Capitalism will keep most of the global population employed for generations irrespective of the fact that human jobs will continue to be lost to machines and robots.

 

Sustainable energy and other futuristic industries are extremely capital intensive; therefore low capital cost is the key to environmental and resource sustainability which in turn are the keys to future economic and employment growth in developed countries. New Capitalism by eliminating interest and income tax will bring down capital costs to the level where environmental and resource sustainability becomes practical and profitable. The salient features of “New Capitalism,” include:

 

  1. Eliminating interest on money from the economic system;
  2. Discontinuing Income tax;
  3. Instituting Asset tax.

 

The proposed system basically replaces Interest and Income tax with Asset tax, an annual tax on all assets including cash. Asset tax will perform the functions of interest and income tax and much more. New Capitalism will bring in prosperity and economic growth by increasing investments in sustainable and other industries. Eliminating a major economic cost (interest) will significantly bring down costs and therefore tremendously increase the range of feasible economic activities.

 

Eliminating Interest

 

Interest has to be eliminated, because it is the major reason for most unsustainable choices being made in capitalistic economies. Interest currently only permits existence of resource intensive industries which translates into higher consumption of mineral and other resources. On the other hand, interest does not allow investments to pick up in sustainable energy and other similar industries because they cannot always pay interest. Interest also incentivizes rapid extraction and consumption of mineral resources because minerals in the ground don’t earn interest.

  

If interest is not eliminated most investments would continue to be made in unsustainable industries till the world manifestly starts running out of resources. In the meantime developed economies will suffocate from increasing resource constraints and lack of business opportunities; developing countries will be chasing an elusive dream. If interest is eliminated economies will have a chance to grow by investing in sustainable industries and simultaneously changing the mix of products in their economies to a sustainable one.

 

The threat of a devastating global war, potentially humanity erasing, will become real when the planet manifestly starts running out of resources including that of the environment. Interest has to be eliminated for a safe and prosperous future for humanity.

 

Discontinuing Income Tax

 

Income Tax has to be discontinued because it is not needed in the proposed system – New Capitalism.  Currently, income tax performs the function of generating revenue for the government.  Asset tax would do that with higher efficiency and fairness. Wealth is a far better measure of an entity’s ability and fair share of tax than its income in a particular year.

 

Instituting Asset Tax

 

Asset tax will perform the function of both interest and income tax.

 

  • Asset tax will perform the economic function performed by interest, i.e. allocating capital. Currently capital gets allocated only to entities that can pay interest; similarly, in New Capitalism, capital will get allocated only to entities that can pay Asset tax.
  • The proposed Asset tax system will incorporate incentives for investing in sustainable economic assets, and disincentives for unsustainable ones. This is accomplished by the Asset tax rate structure, e.g. low Asset tax for sustainable assets and industries, and high Asset tax for resource depleting and polluting ones.
  • Asset tax on cash will create the incentive for lenders to lend, i.e. to shift the tax burden to the borrower.
  • Asset tax will tend to increase investments: it creates two types of incentives for increasing investments. Asset tax on cash creates a push to invest or lend, while low asset tax on specific industries helps those industries attract (pull) investments.
  • Asset tax on cash is far more dependable than interest in making credit available, because it can be increased until liquidity is restored. Interest’s inability to go below zero causes it to often fail in making credit available (liquidity trap) and in increasing investments.
  • Asset tax is an efficient tool for maintaining high level of employment through incentivizing investments. Asset tax can also increase consumption because consumption is not taxed whereas savings (assets) are taxed.

 

Once interest is replaced by asset tax, economic growth driven by future potentials of sustainable and other futuristic industries and by low cost of capital will translate into attractive financial returns for investors in these and other industries. Financial return will again become a measure worthy of driving the capitalistic system.

 

Asset tax will replace income tax as a source of revenue for the government. Asset tax will be easier to assess and administer than income tax. As in any tax system, there will be exemptions, thresholds, moratoriums etc. to keep the system fair and productive.

The current economic landscape and New Capitalism

 

Economic growth is generally driven either by consumption or by investments. So far in this century, developed countries have tried to achieve growth through increasing consumption; in doing so they have hit many financial and economic constraints, including that of the planet. The world currently needs economic growth through investments in sustainable, resource enhancing, and future building industries.

 

The crises ridden economic landscape of the world can be described by the following features:

  • Plenty of available capital (both financial and real) and abundant capacity to build capital; i.e. abundant supply of capital.
  • Low demand for capital even at low interest rates.
  • Resulting in low economic growth and high unemployment of labor.

 

The interest based system is not very effective in allocating capital during times of abundant capital because of the zero bound in lowering rates. Interest is ineffective in dealing with overabundance of capital; it can only handle scarcity of capital well.

 

The ineffectiveness of interest during abundance of capital results in huge sums of unallocated capital which in turn increases speculative activities. Speculative activities increase asset prices and cause asset bubbles. In the presence of interest, money is far more likely to be invested in bubble forming assets than in low return industries. Asset bubbles can promise to pay interest, sustainable industries cannot. Currently the major reason for capital being wasted in asset bubbles is: interest.

 

New Capitalism will start a new trajectory of demand for capital for futuristic industries. Consequently it will also increase employment and economic growth. Employment is created when capital is produced and again when capital is employed. New Capitalism is inherently friendlier to investment, employment and other economic well being needs of individuals and societies. In short

New Capitalism is:   Planet friendly       Maximum Investment       Full Employment                                             Capitalism                        Capitalism                          Capitalism              

The current economic system was developed during the time when the environment and other planetary resource constraints were not real issues.  Now they are; therefore, the current economic system needs to be reformed to enable it to handle scarcities and constraints of planetary dimensions.

 

Bullet point summary of New Capitalism

 

The proposed New Capitalism economic system will adapt capitalism to modern times.

  • New Capitalism will provide economic tools to handle environmental and other planetary resource constraints.
  • The role of sustainability is so fundamental in New Capitalism that it could as well be called “Sustainable Capitalism.”
  • New Capitalism will start a new and long lasting era of sustainable economic growth, in which the entire production and supply chains of most products will be restructured or rebuilt.
  • New Capitalism will enable many new industries to develop. New industries will create jobs and help economic recovery. New sustainable industries and product mix will reduce dependence on fossil fuel. New industries are also needed in developed countries to replace those migrating to developing countries.
  • New capitalism, with zero asset tax, will make it feasible to invest in exploration and development of many new frontiers of human endeavors e.g. commercialization of space, harnessing wind, sunshine and tidal energy, building sustainable desalination plants and coastal cities, and cultivation of oceans. These will require advanced know how and innovation which in turn will enable developed countries to maintain their high wages and high standards of living.
  • The path to a prosperous future is through innovation, high tech and advanced knowhow; New Capitalism will provide the economic underpinnings and incentives to make that a business norm, rather than an exception.
  • Most futuristic industries because of their newness and capital intensive nature will require a sophisticated understanding of the risks involved. The interest based system uses crude mechanisms for pricing of risk (e.g. spread over treasuries) which results in unnecessary mispricing, surprises and even crises. Risks will be better understood, assessed, priced and compensated under New Capitalism because it will be done independently and as a separate business; it won’t be an appendage to interest rates.

 

New Capitalism will bring about a capitalistic revolution. It will create a global economy that will produce and use capital with abundance. The economic impact of the capitalistic revolution will be comparable to that of the industrial revolution.

 

New Capitalism is “Super Capitalism.”

 

For further details about New Capitalism please visit my website: www.newcapitalism.org

 

 

 

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