Economics

Thoughts about Economical Systems and their Credit Systems, Economic Fairness and Modern Infrastructure

Remark

• in work
• often brainstorming and sometimes not thoroughly thought through and not well researched/checked
• provides ideas how to take the current covid situation as an opportunity to improve the economical systems

• Summary
• Thoughts about Economical Systems
  • Capitalism
• Classical Support Measures
  • Acyclic Spending
  • Lowering the Interest Rates
  • Targeted Financial Support
  • Universal Financial Support
  • Financial Support versus Capital Services
  • Capital Services
• Capital Services for Everybody
  • Reasons for Universal Capital Services
  • Current Problem
  • Goals
  • Experiences with increased Availability of Capital Services
  • Proposals for Implementation
  • Comparison to Universal Basic Income
  • Fairness of Universal Capital Services
• Modern Infrastructure
• Economic System for Liberalism
• Summarized References
• References
• Appendix
  • Aspects of Economic Fairness

Economics

Science about the production, consumption, and transfer of goods and services.

Economical System

A framework specifying ownership and transfer of goods and services.

Baseline Principles

Principles assumed here.

1. We all should be able to live the life we want while respecting the rest of the world doing so too.
2. Building on 1. all should have economic opportunities to pursue the jobs wanted. All should be allowed to make mistakes and so (economic) opportunities are ideally available through the entire lifespan. Fairness in the following is used in this sense of different appealing/attractive opportunities to pursue the economic life (Inspired by John Rawls’ theory of justice). Fair in this sense does not necessarily mean equal in wealth or equal in the way of life.

3. Ideally fairness is achieved by increasing fairness for everybody and not by fixing unfairness for certain branches/subgroups. Singling out and supporting branches/subgroups can yield new unfairness and spinning the wheel one ends up with individuals. So the best is, to start right away with fairness for everyone.

   In the case for Covid-19, determine businesses needing temporary support is not straight forward. Some are effected directly (e.g. gastronomy), some indirectly. Even inside branches there are differences: A restaurant at an ideal location and appropriate menus for take-away can do well even though for most restaurants the earnings from take-away can be as low as the tip of a normal day, on the other hand a construction business specialized on large scale events may need to reorientate and thus need support.

   In my view, with connectedness we have today, I think improvements are best designed to work for all. Although I acknowledge, that the economic opportunities and benefits vary widely in todays world.

[in work]

Summary

[in work] From time to time parts of the economy are shaken, local or worldwide, in specific branches or uniform. Covid-19 does so in specific branches. Upon economic quakes governments usually support both companies and individuals. An ideal economical system would adapt itself to a changed environment. The goal here is to improve the financial system to make the economy more resilient, adaptable and fair.

1. First classical support measures are listed and pro and contras discussed.
   • targeted support is complicated and can be unfair since some fall through the nets
   • current methods to increase liquidity (e.g. lowering interest rates) poor money on banks and big companies (so much many don’t know what to do with it) but the money doesn’t flow well to individuals. Reasons are:
     • that handing out credits is work and so handing out small credits is not lucrative.
     • credits are often secured and those who need them most can often not provide any security.
2. A universal credit framework is proposed with the goals:
   • Enable everybody to design the economic life
   • and thereby create a fairer economy
   • Improves the resilience and adaptability of the economical system since everybody has the capability to reorganize and reorientate
   • Many existing social support systems (e.g. unemployment support, student loans) can be integrated to/replace by a universal capital/credit system.
3. Ideas to implement such a system are sketched:
   • Lower interest rates on money handed to financial institutions that is spend on small credits
   • Flexible payback scheme similar or based on tax systems. The idea is that those who are fortune payback much more than those who are less fortunate. The credits expire after some decades.
   • Financial services as basic infrastructure such as education or streets
4. The credit system is accompanied by a modern infrastructure framework. Till the 19th century, a save workplace and good transportation was often enough when combined with skill and work. Now in the 21th century more infrastructure is needed to provide everybody with fundamentals to succeed:
   • Education options (from child care to IT courses for seniors)
   • Transportation and Telecommunication
   • Health care
   • Accessible Production Infrastructure (as of 2020 only nfew goods can be homemade competitively)

Thoughts about Economical Systems

[in work] Most current economic systems are not optimal regarding the baseline principles:

• only few can/have to chance to freely choose: top down management and adaption
• sometimes unfair: unequal opportunities in the sense not everybody has equal chances to choose how to participate and design.

For the time being only capitalism is discussed.

Capitalism

Capitalism

An economic system where most goods are owned privately including the goods which are used for production and transfer.

In capitalism, those with capital control most of the production and thus the economy and thus have a lot power. So word capitalism is a fitting description.

In theory capitalism allows everyone to have an own realm and so design the economic part of life according to one’s own wishes. For that (co)owning production and transfer goods is necessary. However owning these goods requires sufficient capital. Sufficient depends on the situation, but it often means at least 10 times the annual living-costs.

// Everybody and every community smaller or larger having its own realm I think is a good thing. It is how we evolved and how we think and like to think. Capitalism can be a suitable system providing that. However most current implementations of capitalism fall short in the sense that access to capital (services) is not universal. Exploring I ideas how to adapt to achieve this are considered here.

Liquidity in Capitalism

In most implementations of capitalism liquidity is provided in two steps:

• A National Bank controls the amount of money and lends it to financial service providers (usually banks) with some interest rates
• The banks provide that money accompanied with financial services (e.g. advice) to the public. The fees for the services and together with the risk are earned back through interest rates.

Classical Support Measures

Government support options for the economy.

Acyclic Spending

Depends on what the state owns and whether a short term increase in spending is beneficial. Most states own/control:

• Infrastructure: e.g. transport and public buildings: Well suited for acyclic investment since the infrastructure usually last several decades and often there is some freedom in the timing of renewal.
• Education:
  • The need for education is steady and so short term push makes only sense in certain/rare situations. Exceptions:
    • Training shop owners how to add/move to an online business.
    • Training people with closed businesses some new skills. E.g. in the tourisms or event branches web-development skills are nice to have.
  • Education providence (especially teachers) often is limited so to scale up education is often not possible.
• Administration: The need for administration tends to be steady and so short term increase makes only sense in rare situations (e.g. contact tracing for Covid-19 is an administrative task for which a short-term increase during a Covid-19 wave is often adequate)

Adequate Situations

Acyclic government funding works especially well if the crisis involve construction branches. Construction branches since in many countries a large part of the infrastructure is government owned.

• Bank Crisis 2009 In the bank crisis acyclic investment in infrastructure was suitable because the real estate sector was hard hit and so acyclic investment in construction was possible.
• Covid Crisis 2020 Only targeted economies (international travel, gastronomy, culture) are hit and in these the government is often not involved.

Lowering the Interest Rates

The interest rates are set by the national banks. Though most are (some formally and/or to some extent) independent of the government, the national banks and especially setting the interest rates is part of governing an economy. The goals are defined in the constitution [to confirm]. Often the goal is to supply sufficient money for the economics to be running well and keep the inflation in an interval conforming the economic goals. Lowering the interest rates gets the banks access to cheaper money which in turn can provide cheaper credits to cooperates or individuals and they in turn invest the money. Usually these investments create additional demand

Adequate Situations

Low interest rates yield more liquidity. Liquidity in turn can yield more investments and thus can catalyze transformations of the economy and found new markets.

Pro/Contra

A main drawback is that the money flow is top down: From the large bank to large companies. Small businesses however only get a fraction of the liquidity provided and often additionally retarded.

• Slow effect since mostly top down: the banks lower their credits rates but mostly likely for large businesses only (small business credits require time to scale since risk checking and so on requires time and personal). Large cooperates discuss whether to take and what to do with additional money, then decisions need to flow through the hierarchy and possible multiple times. So until new jobs are created a lot time passes
• the jobs are created top down and may not be the jobs people reorganizing are looking for or qualified for.

Targeted Financial Support

[in work and incomplete] Targeted support for businesses or individuals.

Individuals

• Unemployment/Low income Support
• (Additional) support for (essential) services e.g. health care, education, food, transportation
• Support can be via businesses e.g. subsidize salaries

Businesses

• Compensate Income Loss
  • effect: businesses can keep running as before
• Support Salaries (the businesses are supported to pay the salaries. The businesses profit since they can keep the employees and thus are ready to restart)
• Liquidity measures: Credit scheme or guarantees

// Short-term support in case of sudden changes can be adequate to prevent disruption. Mid-term and long-term, credit markets mostly work for businesses. Businesses providing important social services can be considered worth supporting. However subsidizing important social services independent of any crisis is an alternative (i.e. support those providing social services but with requirements on the services).

Pro/Contra

[in work]

Universal Financial Support

Also called Helicopter Money. Hand out money to everybody. The idea is that the initial consumption starts economic cycles i.e. the initial consumptions yields well going businesses which then invest and generate in turn demands.

Effects

• Individuals/households tend to spend additional money quickly, so a timely increase in private consumption is the result.

  Pro/Contra

• timely

  Contra

• very expensive and thus increasing debt
• may not help those enough who need it most

  Experiences

• To tackle deflation in Japan in the 00’s there were rounds of helicopter-money.

Financial Support versus Capital Services

Financial services denotes capital support without any refund mechanism:

Financial Support

On this page: Financial Support denotes credits without repayment/refund nor any other financial obligation.

Capital services on the other hand, denote capital provided subject to some refund mechanism and possibly risk assessment (e.g. business plan checks) and advices.

Capital Services

On this page: Capital Services provide a legal person with capital and possible advices/guidance in trade to some owe value (e.g. shares) and/or return rule (payback and interest rates).

Examples of capital services are: classical credits with some interest rate, share/stock in return for initial capital and (convertible) loans.

Capital Services

Capital services such as credits/convertible loans and guarantees can be provided to legal persons needing liquidity. To provide business with capital these tools are often used. Examples are:

• loans to businesses often with interest rates below markets
• guarantees for credits
• convertible loans

Capital services usually are not available for private persons. However I consider these an important options since it would give universal access to rebuild or reorganize the life if needed.

Pro/Contra

• Unlike financial support, capital services can be provided near universally, since only those in need will take them.

Capital Services for Everybody

Reasons for Universal Capital Services

To fully take advantage a capitalism capital is needed. Today in most countries capital access depends on the capital status:

• Those with capital have access to a whole range of financial services either directly or through founding a new legal persons (e.g. joint-stock company). Companies can have limited liability and so are disposable in the sense that upon bankruptcy there’s no liability for the owners.
• Private credits for those without much capital are often limited to credits for goods which can be resold e.g. houses and consumption credits for electronics or cars. Often such credits have stringent liabilities.

Current Problem

Providing capital services is associated with work:

• Risk and credibility checking
• Check & advise & improve business plan
• Accompanying the capital e.g. check if interest rates are paid, adherence to business plan

The work is per credit and not per amount of credit. Therefore handing out small credits is often not lucrative for financial institutions.

Goals

Design Goals

• Give everybody opportunities to choose the preferred (economic) life-style:
  • going for further educations for
    • an academic pathway
    • acquiring skills for a new career/jobs/changing branches
  • going straight to work and getting shares of business either by owning/co-owning or buying shares of a friends business, the favorite local business or any other business.
• The goal of Universal Capital Services is not equality in every aspect e.g. not equal wealth and thus not redistribution of wealth.

  Implementation Goals

• Make capital services available to everybody by designing a framework which makes it attractive to hand out small and medium size funds.

Experiences with increased Availability of Capital Services

• Community Reinvestment Act (CRA) in the US: federal regulator rate banks how well they invest into different neighborhoods especially if they invest into low- or mid-income communities. The rating is considered for approval of bank mergers, acquisitions and such. (W Kenton, updated 18.8.2020, investopedia.com)
  • “Using recent empirical evidence, I demonstrate that over the last decade CRA has enhanced access to credit for low-income, moderate-income, and minority borrowers at relatively low cost, consistent with the theory that CRA is helping to overcome market failures.” Barr
  • “CRA loans have a statistically significant positive effect on small business growth” Rupasingha
• Micro-credits In Bangladesh and countries in South East Asia positive experiences have been gathered with micro-credits [in work].

Proposals for Implementation

• lower interest rates by the national bank on money handed out as micro & small credits (the rates likely need to be a couple percentages lower) => more attractive for banks to hand out small credits
• payback scheme ‘based on’ or ‘similar to’ a tax system => those with a large future fortune will payback more
• possibly payback with tax bill => easier to manage and structures already in place
• the credits/funds have an expiration date (a few decades) and so allowing a restart.
• the obtaining can be continuous (e.g. living cost of students) or all in go for the last 10 year or so (e.g. someone who work for that time and now wants to start his own business)

Comparison to Universal Basic Income

The proposed Universal Capital Services are in some situations very similar to a Universal Basic Income, however they are much more flexible and participation is voluntary including paying the costs i.e. only those participating will pay the additional cost respect to existing social support measures. The exact difference depend on the concrete implementation.

similar

• when accessing the credits over a continuous time period and not high future capital (which would yield pay-back e.g. through taxes in the credit scheme)

  different

• access can be all in one go e.g. for investments in a (new) business
• those already having enough capital don’t need to participate neither in taking nor in paying additional tax
• those taking capital and making a fortune with it will be subject to an increased payback (depending on implementation this can mean higher tax bills)

Fairness of Universal Capital Services

[in work] More fairness for choosing job/work options.

Modern Infrastructure

[in work]

Economic System for Liberalism

[in work]

Summarized References

[in work]

References

[in work]

• Rupasingha

  Rupasingha, A., Wang, K. Access to capital and small business growth: evidence from CRA loans data. Ann Reg Sci 59, 15–41 (2017). https://doi.org/10.1007/s00168-017-0814-9

• Barr

  Barr, Michael S. Credit Where It Counts: The Community Reinvestment Act and Its Critics. N. Y. U. L. Rev. 80, no. 2 (2005): 513-652. https://repository.law.umich.edu/articles/60

Appendix

Aspects of Economic Fairness

The section here is temporarily commented out - related but off topic thoughts on aspects economic fairness (economics and to some extent education is considered but not other topics). I’d like to think more and invest more time to consider more view points and experiences. The draft is accessible as comment on the markdown file. Rethinking and discussing is helpful. planned for spring 2021. For the time being the thoughts are left as commented draft to emphasis that they are incomplete. Feedback is appreciated.