We all know that more loanable funds = more investment which is good. We all also know that expanding the money supply via low interest rates and therefore making it look like people are saving more creates business cycles and therefore is bad. So is there a way to genuinely increase the saving/investment without below-market level interest rates?
Yes. Say government puts a 5% tariff on all goods entering the country. Instead of spending that money, the government loans it out to the national bank, which then loans that money out to other banks. The government and central bank both earn interest (which they then reinvest), while loanable funds/investment increases permanently, not temporarily as with monetary expansion. I know I’m making a lot of assumptions (like full reserve banking and no credit creation by the CB), but…
Throwing all moral questions aside, what do you think of this? Could this genuinely increase the loanable funds, thereby accelerating capital accumulation and the rate at which the economy grows? Or am I forgetting something essential here?
Well, the 5% would obviously come out of consumers’ pockets who have to pay more for foreign goods. THAT is a bad thing.
At the same time, however, that money is invested indirectly, increasing loanable funds, whereas a consumer would spend some portion of that 5%, the government invests all of it. The tax doesn’t have to be a tariff. It could be a sales tax or a property tax or anything else for that matter. From a consequential POV, wouldn’t an increase in loanable funds be a good thing?
Wouldn’t that just reduce the income of these individuals further, causing them to shift consumption patterns, and perhaps reduce saving? How does the government even know where to invest to begin with?
We don’t know that just because more “loanable funds” exists that more real saving is occuring. All we know is that real savings, that is the creation of capital, increases output. Whether this is good depends on who you ask. Some may prefer more immediate consumption over later consumption.
Sure, government could force people to spend money in ways they don’t want to. I’d never call that good.
Well, let’s assume that people save 10% and there’s a 5% sales tax that the government loans out. If you buy a $100 product, you pay an extra $5 in taxes. Had you not spent (in this case invested) the $5 in taxes, you would’ve saved/invested only $0.50 of that money.
I’m not sure how human behavior would change in response to such a tax, if they would save more or spend more. My guess is that if you have to pay more for products, you’ll buy less and try to save the same amount you did before. Then again, it probably also depends greatly on the type of tax you’re paying. My guess would be that human behavior wouldn’t be changed enough to make the tax necessarily bad from a consequential POV.
Also, I’m speaking of investment in indirect terms (loans). If the gov’t loans out the money to the national bank, that national bank would act much like the Fed does today when it loans money out to select banks. This would increase the loanable funds of banks, which would lower interest rates and therefore help stimulate economic growth. The gov’t and nat’l bank would both earn interest and the gov’t would also benefit via bigger dividends from the bank stocks it owns. Of course, the interest earned would be minimal and would greatly depend on already existing loanable funds supply and demand.
Well, real saving would be occurring since the 5% you pay in taxes would be invested (“saved”) by government. More saving/investment means greater capital accumulation and therefore higher real wages. On the other hand, greater consumption means less capital accumulation, destruction of presently existing capital (as people don’t have the funds to fix capital), and a general trend towards lower real wages.
Take a look at hunter-gatherer societies vs. modern society. A hunter-gatherer society consumes almost everything and saves/invests very little, while a modern society with a capital intensive economy saves a lot for upkeep and expansion of capital and therefore of output. To summarize, lots of consumption = less investment = less capital = less output; while more investment = more capital = more output.
Of course you can critique the idea by saying that people’s money isn’t going where they’d like it to go, but wouldn’t that be a small price to pay for “the greater good?”
P.S. I am an anarchist and I’m opposed to government on the basis that I believe in competition among protection agencies, private courts, etc. I would always prefer no government to a government that invests my money for the “greater good,” but this tax/invest topic is a very interesting thought I’ve had recently. In my mind, competition between police forces, courts, etc. would outweigh the benefits of gov’t enforced saving (and therefore monopoly police and courts).
The tax will reduce disposable income, and consequently will most likely be a disincentive to save, as I remarked. It depends on what you tax, of course, how great an effect this will have, but here we are merely discussing a matter of differing degrees of impact. BTW, if it loans this money out to select banks, will it, as the Fed, also lend out a multiple of what real resources it has? Isn’t this just a way to force this model onto consumers who otherwise would be unwilling to patronize it? As JonBostwick said, I think this is merely the government acting in defiance of consumer preferences.
The key here is what kind of distortions the tax will have. If the tax will increase aggregate saving/investment, that is, if the greater investment from the taxes will outweight the less saving/investment by individuals, the economy will become more capital intensive and you will see rising real wages. The entire point of what I’m describing is to avoid credit expansin, so the equivalent of the Fed would rely on these taxes for the money they can loan out. Would this run contrary to the time preferences of consumers? Yes, but it will benefit those very consumers and their children in the long run when increased capital accumulation cause rising real wages.
What’s better, a desert island or a city? The inhabitants of a desert island consume almost everything they find, which slows capital accumulation, while the inhabitants of a city are able to consume less and save/invest more, which accelerates capital accumulation. The difference between the desert island and the city is that there is no capital on the desert island, making it hard to survive while there is a lot of capital in the city making life much better. This plan isn’t a subsidy of any sort, although it is coercive. It’s simply a plan to accelerate the rate of capital accumulation and therefore of economic growth by increasing the amount of loanable funds.
Let’s assume it does work as planned; it’s still paternalistic. If consumers feel they can benefit from saving, they will do so. Otherwise, try convince them! If you need to involve government, you are doing so against their wishes, and thus are violating their preferences, as they do not believe saving will benefit them more than immediate consumption, as they place a greater weight on present gratification. Even on consequentialist grounds, this is not necessarily justifiable. The effects of investment only matter if they’re desired by the participants. I’m still curious what the bank would do though - would it loan out in multiples of the cash it received via taxation, i.e. would it be FRB?
Jon, the plan would be full reserve banking. If there would be fractional reserve banking, the tax would be pointless. Why tax when you can print more money? I’m not using this as a justification for the state, because competing police agencies and private courts would probably produce a superior outcome in utilitarian terms than a government could possible hope. I’m arguing that if we already have a state that taxes for basic services, couldn’t such a tax increase net investment and therefore the utility of the entire population?
I don’t buy into the argument about consumer preferences, mainly because the people would benefit from lower consumer prices due to greater capital creating greater output. Even if a 5% tax only creates 3% greater saving/investment (due to changing preferences), that 3% greater investment still is a hell of a lot of money that allows the economy to grow faster.
Bostwick, only because you “fail to see” something doesn’t mean it’s not there. Also, your contention that the taxes would increase is ridiculous. The taxes would actually decrease right along with the prices of consumer goods. If a good costs $5 and then it decreases to $4 due to greater capital intensity, doesn’t that mean that you’ll be paying less taxes as well (from $.25 to $.20)? And, again, take the example of a desert island vs. a city. Capital is what differentiates the two, it is what makes life livable in the city. Since the tax I propose would increase investment and therefore capital accumulation, it could only help everyone. Would certain people be helped more than others? Yes. But everyone would benefit, just some to a lesser degree than others.
Yeah, and people who dislike smoking think banning smoking would be great for consumers too, regardless of what consumers want. This is a clear violation of the consumer’s preferences. Modern utilitarianism argues in terms of preferences to avoid devastating reductiones ad absurdum that plague the moral system in more traditional forms, so again, you cannot just stridently argue they don’t matter, or that the government knows what’s good for them and they do not. The whole point of free markets is that they help consumers satisfy their preferences, whether that entails growth or not.
In my opinion the tax will decrease the incentive to save and increase the incentive to consume. This alteration of time-preferences is the fatal flaw of this system. When the gov. tries to invest the tax revenues in capital clearly it cannot do so because the incentive to accumalate capital (saving?) is gone and this is similar, I believe, to the business-cycle theory. In the latter, savings seems deeper because of the plenty of money and so businesses expand and make more roundabout production processes, essentially, buying capital. But when (usually half-way through their projects) they realize the consuming masses has no need for these processes and that furthermore the easy credit was highly illusory, they will enter a business cycle. In the former scenario, what is accomplished by taxation was accomplished by inflation except this time the theft is even more recognizable to the senses. It is curious to note, just surmising here, that your system may very well result in what marx meant by capitalism. The owners would literally steal from the workers and when the money wasn’t forthcoming from said workers to purchase the what the owners marketed, there occured a depression. This is similar to what I stated first.
But even without this objection I think I rest on solid ground in asking that even if this process could work, you would run into the economic calculation problem inherent in gov. too. So this too may be an objection.
This is simply a different take on the broken window fallacy. You may get “increased investment” in certain areas for a time, but ultimately it is hiding the costs of the increased prices due to an extramarket entity sticking its nose, at it were, where it doesn’t belong.
A way for government to increase investment would be possible through “5-year plans”. By limiting people’s current consumption to only the basic necessities, government could invest in building transportation, powerplants, steel mills, factories etc, all these things making people better off because their future consumption would be so much higher.