In the previous post, it was suggested that the unearned income of landlords, rentiers and capitalists should really be the equal entitlement of all citizens. Such an equal entitlement could, in part, take the form of basic income or a social dividend. Public banking would be one way to facilitate a move in that direction.
Consider the following straightforward governmental and monetary setup, which obviously differs in some respects from the current one:
— The Treasury simply spends and taxes through direct crediting and debiting of reserve accounts. No government bonds are issued.
— Reserves mount or deplete in response to the government’s net spending.
— The central bank sets the interest rate on reserves, preferably to zero.
— Government, as now, sets the regulatory framework and incentive structure for public and private enterprise.
— A public banking sector is established to grant: (a) interest-free loans for democratically approved purposes; and (b) interest-bearing loans to private enterprise for strictly productive purposes after due deliberation by an independent but democratically appointed loans-assessment board.
The public banking sector could promote various social objectives.
As stated, the system of public banks could extend both interest-free loans for democratically approved purposes and interest-bearing loans for commercial purposes. Approved purposes of interest-free loans might include not-for-profit production of public infrastructure, small business activity meeting specified conditions and mortgages for low-cost housing. Interest-bearing loans to for-profit enterprises would be evaluated by the assessment board along commercial lines, necessarily taking into account the incentive structure put in place by the democratically elected government.
A benefit of this setup would be that the interest paid on loans extended by the public banks would function as taxes, with the funds being extinguished (reserve accounts debited) rather than being captured by financial rentiers as is presently the case. This would be in addition to taxes on profit, since private enterprises already pay both interest on loans and taxes on profit, as well as taxes on land.
If desired, some fraction of the profit, rent and interest income taxed out of the economy could then be offset by a cash payment to citizens as a social dividend or basic income. In this way, society as a whole would share in income that would otherwise have been extracted by a privileged minority. Of course, rather than paying a social dividend or basic income, government could instead spend the corresponding amount investing in areas of public benefit. That would be a political choice.
Tying a basic income or social dividend partly or wholly to taxes on profit, rent and interest would be a partial safeguard against cronyism, since citizens, and therefore democratically accountable governments, would have a stake in seeing that public loans to for-profit enterprises were going to the most viable projects. This would exert discipline on the loan-assessment process, enhancing the probability that loans would be extended to enterprises most likely to meet their debt obligations and generate taxable income.
At the same time, the monetarily sovereign government, being responsible for sound macroeconomic management, would be disciplined by the same community expectations to deliver strong demand conditions that gave private enterprises every chance to meet their interest obligations to the public bank.
Similar considerations apply to housing. Low-cost housing could be provided free of charge through fiscal policy or through interest-free loans administered by the public banking sector on payment schedules reflecting the income of the loan recipients. Housing at a price above some threshold level could be purchased on loans at positive rates of interest granted by the public bank.
Any interest on housing loans would function as a tax, just like the interest on loans to for-profit private enterprise, and could be factored in to the calculation of the social dividend or basic income paid to citizens.
