Policy Proposal:
Being the money monopolist, nothing comes in the way of the Government to provide basic and essential services to people and ensure functioning of critical and strategic sectors, at all times, even during recession and calamities like wars or natural disasters including climate catastrophe. So, Government has to segregate the economic activities in to three segments: essential basic services to its citizens, critical & strategic functions and other economic activities; and then be the lead and dominant player in the first two segments.
We are hanging on to the uncertainty of climate damage for not acting on that; if it happens, then it will be catastrophic for the entire world, particularly to the vulnerable segment of people; even if it doesn’t happen, there is nothing wrong absolutely about responsible and sustainable development; at the time of calamities, we may have to halt all our economic activities
Full employment, price stability, meeting the basic needs to ensure a decent living condition for all and sustainable, environmentally sensitive development should be the economic objective for any country; if not, it is meaningless for a Government to regulate the economic and livelihood activities which otherwise would run on its own. Delivering without fail on those objectives are what a Government is meant to do, particularly when it provisions itself by transferring real resources (goods & services including labour) from the non-Govt sector to itself in exchange for what it issues as currency of the country. Before the issue, the currency is worthless for the issuer and the value to that currency is imparted by the Government when it spends. As Mosler puts it, the absolute value to the State currency is introduced by the Government by the prices it pays when it spends, this is the only information transmitted with regard to the absolute value of the currency and all other prices are derived by the market expressing indifference levels between buyers and sellers..
"Taxation is the intervention that creates unemployment by design for the further purpose of the state being able to hire those, its tax caused to be unemployed. Residual unemployment is the evidence that the tax liabilities created more unemployed than the Govt hired. The JG works to transition the unemployed back to private sector employment and optimize output" - Warren Mosler and it is extremely difficult to determine the quantum of Govt spending necessary to reverse the unemployment, Job Guarantee is the only option.
So, if Govt understands how money gets created in a fiat money system and how monetary system really operates, then it could fully deploy its human resources in productive function.
What is monetary sovereignty? When a country has exclusive authority to issue and retire its own currency, it is monetarily sovereign. Also when it taxes its population in that same currency (which incidentally retires the currency), issues debt denominated only in its own currency and doesn’t fix the value of its currency to a foreign currency or a commodity like gold (In other words, monetary sovereign governments don’t follow the gold standard or other fixed exchange rate regimes), it satisfies the definition of monetary sovereignty. Plenty of nations do that.
Money gets created by keystrokes when Govt spends (as stated by Ben Bernanke & Alan Greenspan) and a bank lends (Bank of England: money creation in the modern economy) (Deutsche Bundesbank: The role of banks, non-banks and the central bank in the money creation process); as long as real resources are available to purchase, money created these ways will not lead to inflation; however, Govt doesn’t have to pay higher prices to purchase what it wants. Prices paid by Govt define the value of currency. It’s a simple case of monopoly. Govt being money monopolist could set the price (Warren Mosler: Government Is Money Monopolist, Therefore It Sets The Price).
Govt declares a paper currency as money unit of account and then imposes tax, payable only in that currency and Govt is the monopoly issuer of that currency; now, that currency has to be earned, directly or indirectly, from Govt by selling labour, goods and other services to the Govt; it implies that the tax-liability has created unemployment by design. This is how the cycle operates and Govt necessarily spends, as provisioning itself is the reason for the entire exercise. Unemployment created by tax-liability and employment generated by Govt spending may not match most of the time. Once the provisioning cycle is over, if there is unemployment, it is an evidence that the Govt spending is inadequate to reverse the unemployment created by tax-liability.
Private sector is the mainstay of the economy of a country and significant provider of employment. For the private sector, profit maximisation is the driving force, but for the public sector, social and strategic objective is vital. Important and inevitable roles of public sector are planned development to ensure economic independence to the extent possible, including building the basic infrastructure, maintenance of the infrastructure created, ensuring balanced regional growth, bridging the gaps in industrial structure, operating critical minimum capacity in essential sectors at all the time at any cost, counter-balancing the monopolies, investing to attain food, energy & technology independence, keeping buffer-stock of essential commodities, playing the role of stabilizer at the time of glut and shortage and creating financial & distribution infrastructure to the benefit of each and every citizen. The above are the critical functions of the public sector. Both public and private sectors are vital to the economy and mostly are complementary. Public sector should also act as counter-cyclical stabilizer, which is a critical role. Obviously, these roles cannot be driven by profit motive and the non reserve constrained monetary system suits this perfectly.
Provisioning the Govt is met by non-Govt sector (the individuals, enterprises and corporates) with men and material. Private Sector plays a significant role in the economic activities and the private sector should be the major employer. As the Govt controls and sets the terms of economic and livelihood activities (including how much of real resources - goods, labour and other services - is surrendered to public domain by private sector, thereby supplying currency to the economy, gets that currency back as tax, thereby draining currency from the economy, how much surplus spending to incur to meet the savings desire of the people, which acts as equity to the entire credit structure, that way being responsible for credit money creation) and creates unemployment by design by imposing tax-liability, transitional job guarantee becomes necessary, till private sector could absorb them. The provisioning structure also requires the non-Govt sector to be productive.
Private sector's utilization of human resources expands or shrinks dependent on market condition; public sector should play counter-cyclical role, acting as employer of last resort, releasing the productive capacity of the nation at all times; Govt being the currency-issuer and price-setter, public sector can act as buffering and stabilizing anchor in any market condition; as Govt is the currency monopolist, it cannot abandon this responsibility to the market forces. Markets operate within the institutional structure created by the monopolist.
As taxation creates unemployment by design, Government implementing transitional job guarantee program automatically increases government spending whenever jobs are lost in the private sector, and whenever the private sector expands, those under the transitional job guarantee program and the government spending will get reduced.
Present non reserve constrained money system could be utilized to create comprehensive public infrastructure in each village & make a state self-reliant with respect to basic needs and at the national level in all sectors; an institutional structure from the national to village level, on the lines of MGNREGA, has to be in place; complete overhaul of all the policies and frameworks is necessary to reflect the operational realities of the present monetary system. It will lay the foundation for growth and well-being through out the country, encompassing all its citizens.
Enormous benefits available to a currency-issuer would be lost if it is not backed by institutional structure based on exact understanding of monetary operation. Almost total dependence on own currency should be the policy goal. Self-reliance in all sectors, large investment in import-substitution and energy-independence, technology independence and food self-sufficiency have to be accomplished; payment system and communication infrastructure with indigenous technology have to be established. To achieve the above, both public and private sector have to play their part. For Central Govt and its Undertakings, there is no financial limitation, as explained above, for investment. But State Governments, Municipalities and State Undertakings are not currency issuers. So, they should be provided with loans at 0% interest or grants for the same. To achieve the above, monetary resource and human resource are not constraints for India.
Globally and locally, we need to admit, world only has limited common resource meant for all of us. At the rate, exploitation and depletion of natural resources is happening (including the critical water resource), the damage could be irreversible and we may be forced to cut-down abruptly. But, as usual, we will not respond to this caution. The option is, Govt to focus on creating basic infrastructure to meet decent living standards for all its citizens as a primary function and then on other development goals, but even this has to be segregated responsibly, keeping the exigencies in mind.
What are possible with the present non reserve constrained money:
India is blessed with huge human resources, very large market and vast infrastructure to be built, particularly in villages, all over the country – an ideal platform for (applying) policy options derived from the understanding of the monetary system which is not reserve constrained.
Vital role of public sector: Private sector is necessarily driven by profit maximisation; many years of market economy has widened the disparity massively, leaving billions of people vulnerable; Govt being the monopoly currency-issuer and the one which controls and sets the terms of economic activities, it cannot abandon public purpose to the market forces; without the 'deficit' spending by government, the private sector cannot achieve its desire to save; the private sector saving provides equity to the entire credit structure;
the way the structure is set up, public sector has to be the lead player in providing the basic services and infrastructure to people and also in the critical and strategically important sectors. Being the money monopolist, nothing comes in the way of the Govt to provide basic and essential services to people and ensure functioning of critical and strategic sectors, at all times, even during recession and calamities like wars or natural disasters including climate catastrophe. So, Govt has to segregate the economic activities in to three segments: essential basic services to its citizens, critical & strategic functions and other economic activities; and then be the lead and dominant player in the first two segments.
We are hanging on to the uncertainty of climate damage for not acting on that; if it happens, then it will be catastrophic for the entire world, particularly to the vulnerable segment of people; even if it doesn’t happen, there is nothing wrong absolutely about responsible and sustainable development; at the time of calamities, we may have to halt all our economic activities; instead of that, if Governments segregates their economic activities as suggested above, then during such exigency, the basic essential functions and the critical and strategic functions could be continued, so that the vulnerable segment, which would have got affected badly, will be protected and others also would get the basic services.
What are these three segments?
Essential & basic services: It means ensuring basic essential living condition to every citizen, including water, food, shelter, healthcare and education. Present fiat money system could be utilized to create all the assets necessary to make these basic services available.
Target areas are: piped water supply to every household (barely 18 per cent of India’s rural households have access to piped water, out of 178.7 million total rural households), increasing irrigation capacity, water conservation, recharge and storage using traditional methods, utilizing all possible means to store as much water as possible, to ensure food-security and greater income in the agriculture sector on which 65% of the population depends.
Food Park at every village affiliated to an Agricultural University which will be under an umbrella institution at the State & National level, cultivating, processing, storing and supplying grains, vegetables, fruits and other food products including milk (both at the regional and national level, it will be a coordinated & planned operation, as shown by Verghese Kurien, the 'Father of White Revolution', to achieve many objectives like controlled production to avoid excess supply, value-addition, profitable operation, farm-to-fork supply-chain to benefit both the farmers and consumers, food-security, nutrition-security and increased intake of fruits & vegetables in food). Seed preservation, support to organic farming, stubble conversion (stubble burning causes huge environmental problem), water management (including rain-water harvesting & run-off river water storage in ponds, barrage, dams and ground-water recharge), warehouse, cold-storage, food-processing, marketing assistance, assistance in contract-farming, end-to-end financing and insurance could be part of the food park activities.
Similar comprehensive programs have to be structured in housing, healthcare and education to make them available to every citizen.
Critical and strategic infrastructure: Critical sectors means sectors which are critical to the nation and whose incapacity or destruction will have a debilitating impact on national security, economy, public health or safety.
Strategists have identified different categories of sectors that are considered to offer vital services and thus require protection. These are the core sectors and possibly the areas where a large-scale interruption would be most devastating:
Energy: electric power, gas, and oil
Food: food supply, and food safety
Water supply
Critical manufacturing
Chemical and nuclear industry: transport, storage, production, and processing of dangerous materials
Transportation (air, surface, rail & water)
Banking & Finance: payments (bank retail) and financial transfers by the Administration
Telecommunication Infrastructure
Defence
Space
Law enforcement, security & intelligence
Sensitive Government organisations
Public Health: hospital and rural care, medicines, and vaccines
E-Governance
As the above functions are critical for the well-being and safety of the nation, it cannot be run with profit alone as the motive and so public sector has to play a major role or at least control critical capacity in these sectors.
Other economic activities: Economic activities, other than essential basic services and critical strategic functions, will come under this. Unlike the above two essential segments which have to be run at all times, recession or otherwise, other economic activities which is almost totally under private sector, will expand or shrink in response to market condition.
As most of the manufacturing and service industries would come under this, what is the best strategy for growth in this segment? “India’s GDP momentum sustained 7% growth for several years due to big expansion of roads, electricity and telecom to rural areas that boosted internal trade between states, producing the economic gains that small countries can gain only from international trade. But now over 90% of the country has roads, electricity and telecom, so further gains are tapering off. Also, in the 2000s, India produced three world-class industries — software, automobiles and pharmaceuticals. But in the 2010s, it hasn’t produced a single new world-class industry” - Swaminathan A Aiyar, TOI.
To have similar or superior impact on economy and people, rather than groping in the dark for probable means, the operational reality of the present monetary system itself could become the means and around it, projects could be structured to develop the essential basic infrastructure, the critical and strategic infrastructure, other economic activities to support those infrastructures and additional economic activities possible during expanding economy, without causing damage to environment and over-exploitation of resources.
As stated earlier, self-reliance in all sectors have to be established. As exports are cost to the economy, focus on it could only be to the extent of foreign currency needed for import; otherwise, we should strive to import paying our own currency.
As stated earlier, self-reliance in all sectors have to be established. As exports are cost to the economy, focus on it could only be to the extent of foreign currency needed for import; otherwise, we should strive to import paying our own currency.
As described in detail, understanding how monopoly money works would advance public policy formation a great deal. Unfortunately, government is not feeling the power of monopoly money. Once the policy makers understand that government spends new money into the economy (meaning, there is no separate currency printing or creation before spending; Govt, being a currency-issuer, creates currency as it spends) and in a non reserve constrained currency system, tax is not a revenue for a currency-issuer. Govt is the price setter & the price level is necessarily the prices paid by Govt when it spends and the so-called ‘deficit-spending’ only provides savings and equity to the non-Govt sector that supports the entire credit structure, then the twin-issue of monetary-resources and inflation are addressed and the quantum of Govt spending is whatever it chooses it to be.
