Questions on RUA’s Preferred Method of Transition

Dick McDonald

My astute friend Ray Kraft a hard working Lawyer/Author poses a well thought out question on the proposed method of transition of retirement funding from a public responsibility to the personal responsibility of each individual American as outlined in the abbreviated synopsis of my book (Make the Poor Rich and America Wealthier) called Rise Up America(RUA).  Ray writes:


Dick

In your article at GAJ on the complete outline of RUA, you propose that the US simply print money to pay SS benefits, in order to make the transition, while all new SS taxes go into private accounts.

As I understand it, this would be an increase in the money supply MO of roughly $1 trillion a year.  Wikipedia states total US money supply M3 at approx. $11 trillion, so this would increase money supply almost 10% in the first year, and in slowly declining percentages each year after that, as M3 increased, so that each year's SS print would be a slightly smaller percentage of M3, and as, in about 20 years, the number of people on Old SS began to die off, which is when the printing presses could slow down.

Question - Wouldn't this be quite inflationary?  10% in the first year, nearly as much in following years for a generation?

Yes, the economy would grow, but in real (inflation adjusted terms) the real economy can only grow as fast as productivity growth plus population growth, and since the US is a mature economy and most large US industries are mature industries, I do not see productivity growth plus population growth keeping up with money supply growth if money supply is growing at 10% per year.  Thus, inflation.  In very rough terms, money supply growth minus productivity growth minus population growth equals inflation rate.  So if MS grows at 10%, productivity grows at 2%, and population grows at 1%, we have approx. 7% inflation.

Right?  Wrong?


Ray poses so many questions it would take several books to fully answer them.  However, let me take a stab at it.

1.The long article I wrote entitled Rise Up America was merely a snapshot of my book, Make the Poor Rich and America Wealthier it was not a “complete” outline. Regarding Ray’s major question – the printing of money solution – is only one of many ways the book explores how to pay for the transition. My preferred monetary solution will no doubt become unnecessary within three to five years of its hoped for enactment because the explosive increase in income tax receipts the infusion of trillions into the capital markets will trigger.  Increased income tax receipts again is only one of the many other ways to finance the transition explored in the book.  There is no way the monetary solution will last for over five years much less a generation.
2.The money supply – say the $11 trillion – is only one asset of America; namely ready cash or cash equivalents used to transact every day business.  The true worth of a country and the intrinsic value of its currency includes the value of all of its assets, capabilities and collective economic personality.  For arguments sake let’s assume America’s net worth is $400 trillion.  Now printing $1 trillion of new money would dilute the value of the country’s assets by 1/400th.  However, under RUA another $1 trillion that is normally expended to support retirement and as a economic result reduces the value of the assets of the country (an expense on the Profit and Loss Statement) is placed in personal accounts of America’s taxpayers and invested in the capital markets. Now this $1 trillion is a new asset of the country increasing the value of its assets (the $400 million) to $401 trillion, Then economically that annual $1 trillion investment grows exponentially over the years. At a normal 10% rate of return on investment (3% of which is price inflation) the value of those accounts compounds and grows to $442 trillion in 40 years. The cost of that investment was the printing of $40 trillion – there is no cost to printing just dilution in value.  Therefore the cost to benefit ratio was 442 to 40 or 11 to 1.  When you evaluate the alternative – an increase in taxes and/or decrease in benefits in existing entitlement programs – you begin to realize what a mistake taking 15.3% in payroll taxes from the poor and middle class is.
3. Ray asks the question wouldn’t the infusion of that much cash into the money supply– 10% per year – be inflationary. On the surface it would appear so but ask yourself the question was printing $100 trillion of new money to reduce interest rates to 1% inflationary or was the decrease in the value of the dollar the cause. I believe the answer is a chicken and egg puzzler – one feeds off the other.  The rate reduction saved America from a deep recession but it reduced the value of America’s assets in the eyes of the world and the world wanted more dollars for their products – especially oil. 
4.Another way to approach the inflationary potential of RUA is to ask whether or not “investment” causes inflation. Here we are adding a $1 trillion investment to the capital pool each year. It will trigger enormous economic activity but is that inflationary?  It can be – but in a good way. The immense diversion of monies heretofore “consumed” into “investment” will put pressure on the labor market because we will have more money chasing smaller numbers of educated workers.  That in turn will trigger higher salaries and more emphasis on educating those who didn’t get a proper one in school. The latter will bring our business sector into the education business which will be positive for the country.
5.Ray strings a number of negatives together to make a case for inflation due to the massive infusion of capital into the market.  He admits the economy will grow but states that our economy’s growth is limited to its population and productivity and since we are a mature economy by inference it can’t handle a new $1 trillion investment. I, on the other hand, believe that $1 trillion a year is a pathetically small investment of new capital into the market.  A $400 trillion country should be investing $10 trillion a year and under RUA it will be investing $10 trillion within a decade by reinvesting profits.  Today Americans consume more than they earn. They add nothing to the capital markets, they spend it all. Wall Street is looking to foreign sources for new capital every day and because of their lack of savings Americans are falling behind new democracies which are “investing” and limiting “consumption”.
6.The argument that America’s basic industries are “mature” is valid.  However our growth is being fueled by new “basic” industries created in the last generation. Many new major industries have been come on line - many brought into play by digital technologies. We are struggling to finance the explosive growth of these new innovative and creative industries. The 21st Century may prove to be one of rapid change – organic computers, replaceable body parts, expert systems, artificial intelligence,  extension of life and hopefully an economic revolution like RUA is proposing. To my way of thinking America is running on one cylinder, letting the government take enormous sums out of the capital market through taxation - that practice has to stop for America to reach its full potential.
7.At a personal level, we believe RUA will be non-inflationary even if labor is in short supply. Not everyone wants to slave away 16 hours a day to get ahead.  There are those who would opt for a better family life and more leisure time.  Under RUA the pressure is taken off the stable individual who just wants to enjoy life because he doesn’t have to be highly educated nor demand an exorbitant wage. He can work as a gardener, take home a reasonable paycheck and still retire a millionaire.  In many respects, RUA may be deflationary. We know it will improve the quality of life on the planet for many.
8.Ray poses a population question that I may not have answered fully. Another writer has questioned my demographic solution regarding having children inasmuch as under RUA women could go home, raise a family, never work a day in their life and retire a millionaire opening up the way to have 4 children or more. The writer says that will double our population.  Well maybe this writer’s prediction will solve Ray’s problem - we will domestically increase our working population internally and raise the number of laborers we will require.
9.Ray also infers our productivity will limit our growth and cause inflation.  I don’t think this is a valid concern. It was not inflationary when we reduced the telephone operator population from 450,000 to 75,000.  It won’t be any more inflationary when we cut 5 million government workers down to 1 million.  We are limping along in America not having the capability to replace clerical type workers with expert system, machine vision technology, dedicated software and artificial intelligence.  Those capabilities need financing and we believe that $1 trillion will only scratch the surface.  Further much that government does so inefficiently can be privatized letting competition among private sector firms wring that inefficiency out of the system.

All things considered, I believe RUA has potential areas in which inflation could cause temporary imbalances in the economy but it will have counter-balancing deflationary effects as well.  Generally speaking America (and the world in general) needs more capital to overcome poverty and to ignite growth. It needs capital to maintain and continue building up our infrastructure. We believe only
countries seriously dedicated to investment will thrive in the 21st Century. We believe those dedicated to redistribution and consumption will decline. We are dead set against punitive taxation of the poor and middle-class and are promoting the elimination of payroll taxes as a first step in that economic reformation.