posted on 09 December 2015
Written by Derryl Hermanutz
Many small businesses that pay minimum wage -- convenience stores and other independent retailers, little restaurants and fast food outlets, etc. -- can't afford to raise the wages they pay. These businesses are competing in an actual free market so they can't just raise their prices to cover the higher labor costs. If they all raise their prices, customers will just stop coming, because their customers are not rich either. Many stores operate at break even or small money losses most months. Rent and utilities and wages consume all of the sales earnings, and more. The owner may be working for nothing, and the minimum wage employee is earning more than the owner.
In his 1948 paper, A Monetary and Fiscal Framework for Economic Stability, Milton Friedman advocated a negative income tax to put spendable money in the hands of poor people who spend all their income ratheer than save or invest it. This would stabilize demand for consumer goods. In the same paper Friedman -- who was a student of monetary system reform advocate Irving Fisher -- stated that governments should always issue, never borrow, the money they deficit spend.
Money is Credit Issued by Banks
Fisher and Friedman knew that the present money system is a commercial bank-issued credit/debt money system, not a government-issued fiat money system. In the present system, the government finances its deficit spending by issuing interest-bearing bonds that it sells to primary dealer banks. The banks "pay" for the bonds by crediting a brand new "bank deposit" into the government's bank account. The government then has spendable "money in the bank". The bank deposits "are the money".
Commercial banks fund their lending and bond purchases by "creating" brand new credit/debt money. The credit-money that is issued by banks, is loaned against debt that is issued by private and government borrowers. The economy and the government use credit/debt money that is issued by commercial banks, not fiat money that is issued by governments.
The Government Does Not Issue Money
The government gets spendable money by taxing the economy and by selling bonds to banks. Primary dealer banks then sell some of the Treasury debt into the secondary markets where investors can buy the interest-paying assets with their savings. But it was bank lending of new bank deposits that originally created the money that a borrower spent, and an earner earned and saved. It is the same dollar of bank credit that is created, loaned, borrowed and spent; as the dollar that is earned and saved.
We live in a buy-sell money economy. One party's spending of money to buy something, is the other party's earning of money by selling something. Spending = earned income, dollar for dollar.
Incomes Grow Only with Issuance of More Debt
If Joe Sixpack is already spending all his income, then businesses are already earning all the spendable money as their sales revenues. If Joe has no money savings and has already reached his personal debt ceiling, then he cannot add "deficit spending" to spend more money than his take-home pay. If savers have earned and saved all the credit-money that debtors have borrowed and spent, then the only money available for spending is Joe Sixpack's take-home pay.
"Wealth inequality" happens when buyers borrow and spend all the bank-issued money supply into the economy, and sellers earn and save all the money. If savers don't spend the money back into the economy, then debtors can't earn their money back to repay their bank loans. The economy stalls for lack of demand spending, even though in aggregate there is "plenty of money" in the economy's money supply. The problem is that people who tend to save have all the money, and people who tend to spend owe all the debt.
Friedman's solution was for the government to issue its own fiat money to fund a negative income tax. Poor people would receive the "free" government money, and spend it buying stuff, and businesses who sold that stuff would earn the money. This is a demand-stabilization program that adds spendable money into the economy, without first taxing that money from other people, or borrowing new money from commercial banks.
It's a good idea.
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