Defining and Tackling the Moral Disaster of 21st Century Economics
Posted Jun 17, 2011

Defining and Tackling the Moral Disaster of 21st Century Economics

by Dr. Robert D. Crane

Part II: Tackling the Moral Disaster

    Truth and justice require not merely defining the moral disaster of 21st century economics but tackling it in both theory and practice.  How do we tear off the superficial band-aids that the so-called experts are using to hide the current bankruptcy of the tri-stage policy process in america, namely, academic thought, think-tank agenda formation, and government decision-making?

    Perhaps we could learn from what is now again being termed the economic miracle of Germany.  There both lower and middle class incomes are rising just as fast as upper-class incomes as a percent of the total economic growth, in contrast to decades of decline in America.  In Germany, high-value-added production is kept at home rather then being exported abroad, as a result of which Germany’s manufacturing sector as a percent of the gross national product is twice the size of America’s.

    In today’s Washington Post, June 16, 2011, Harold Meyerson attributes the German miracle to what he calls “Germany’s stakeholder capitalism”.  In his article “Germany’s Economic Example,” he defines this as “a broad agreement among business, labor, and government to keep wages competitive and high-value-added production at home”.  German federal law requires all corporate boards to have “an equal number of management and employee representatives”.  This is part of a grand strategy designed not only to “keep unions strong” and to keep wages high but to assure that the companies remain profitable enough to do so.  This is definitely not the ideal system, but we can still learn from it.

    Thirty years ago, I used say that the German system is designed to maintain a conflict system of management that will end up in de facto socialism or at best in a new system of “democratic fascism”.  There is no better argument, however, than success, so the Germans must have been doing something right.

    The secret is precisely what Leslie Gelb, the former president of the Council on Foreign Relations and the ultimate insider, calls the German “tripartite system” of business, labor, and government.  The Germans have managed to work out a system that has the advantage of employee ownership without any actual broadened ownership of productive assets.  This has managed to overcome the disadvantages that lack of broad-based citizen ownership might otherwise have produced, namely, a fascist combine as exemplified in Nazi Germany.

    In my view, as I have noted in my publications, an equally important secret, in addition to broadening the stakes of everyone in the productive economy, is decentralized financing.  In America the big banks provide capital with the single objective of maximizing profits for the elites that own the banks, regardless of what this may do to the American economy and to individual American.  In Germany, on the other hand, capital for economic growth is provided primarily by local banks, owned locally, and committed to local benefits for the local town, city, or region.  This decentralization of investment decision-making is one reason why the German unemployment rate is about half of that in America and is just about what is needed to provide flexibility as workers move around to advance their economic interests.  Such decentralized investment also provides the capital for innovative ideas in a world where failure to innovate leads to bankruptcy.

    The issue arises therefore how one can duplicate the German miracle in America without its potential downsides.  The answer is called Capital Homesteading, whereby the central bank (in America the Fed) creates money at no cost to anyone, except perhaps for a fraction of one percent for administrative costs, and transfers it in equal amounts to every citizen’s Capital Homestead Account for investment in productive enterprises, either one’s own or others.  Spending of these investment funds on consumption would be strictly prohibited, because the result of that would be runaway inflation and a series of booms and busts, just as we have them now.  $7,000 a year placed annually in such accounts from every person’s birth to death would produce a nest egg of about a million dollars by age 65 and also in the meantime more than enough to cover all costs of education and all health care except for catastrophic illness.  These are the big three expenses that cannot possibly be financed without major changes not only in our spiritual and moral bottom-line but in our institutions and policies.  The alternative chosen by government advisers today is to turn 300,000,000 Americans into wage slaves like rats running perpetually in a downhill treadmill.

    Spending on home mortgages would not be artificially promoted, because such mortgages divert money from productive investment, just as do credit cards and speculation in buying and selling any debt instruments, such as derivitives, which represent the opposite of real value.  In fact, funding anything from financial interest rather than from productive profits is not necessary.  Although Wall Street’s financial inventions and accompanying accounting tricks are used to increase a country’s Gross National Product, in fact they should be subtracted from it, as I recommended when I was the Principal Economic and Budget Adviser to the Finance Minister of Bahrain for one year thirty-five years ago.  The United Nations, with U.S. governmental support, forbade this, so I went on to other things.

    Unfortunately, the gurus of modern finance in America have been doing the precise opposite of what makes economic sense. The Germans have been avoiding this pragmatically but without addressing the real financial problem, which is the rapidly increasing concentration of capital ownership and inevitably the rapidly increasing wealth gap within and among countries, which, in turn, may be the principal cause of terrorism in the future. 

    The Germans have the right idea but not the best method, because it is still basically tweeking the system.  Much better would be the introduction of two-income (or binary) economics, whereby every citizen earns from both wages and capital.  This should be part of a new paradigm of compassionate economic justice.  Increasingly in a capital intensive world this framework for economic democracy and human dignity will be the secret to political self-determination, otherwise known as political freedom, because whoever owns the money owns the government and all the people.