Removing Government External Debt

Debt has two faces. It is good when we invest it for a profit. It is bad when we invest it for a loss. A good way to ensure we invest for a profit is to make sure we have buyers who also invest in our products and services. Buyers, investors and producers interests become aligned.

It is the same with governments. The buyers and users of government services are taxpayers. Taxpayer’s interests align with the government by raising debt from taxpayers. The debt is repaid by reducing future taxes.

There is an extra benefit. Those with spreadsheets can experiment and will discover something quite extraordinary.  Savers who prepay get a discount on taxes. Savers will receive a higher return than interest on money in a bank while paying less tax. At the same time the government has a lower cost of debt. A community can fund double the infrastructure for the same amount of debt. Or investors can get double the return for the same investment. This happens because this innovation makes more efficient use of money.

Any government can do it and in doing so remove the cost of external debt from the community and balance their budgets.

Funding Light Rail

The techniques used to carry out Cost Benefit Analysis matter. The techniques taught and used today are designed to skew the results towards the short term. They favour systems that cost less to build but more to operate.  When we apply this approach to public transport we get continual road works and resistance to integrated public transport networks involving a mix of transport modes.

If we change the way we do our Cost Benefit Calculations to remove short term bias then we find that an integrated transport system that includes Light Rail gives the greatest long term benefit. We also get fewer roadwork upgrades.

Removing the bias means we have to change the way we fund long term projects away from debt. We can change to the community issuing and benefiting from its own credit.  This is called Crowd Funding or getting the users of services to fund the services they will use in the future.  This gives users both the benefits of the service and the income from funding. This means that over the long term the total cost of projects like Light Rail come back to the community; including the profits from funding.

Economic Fairy Tales

Ross Gittens in the CT Nov 2nd 2015 wrote that the only advice economists give governments is to put a price or tax on things.  A good illustration of how this blinkered view creates absurdities is Leo Dobes article of CT Nov 11. Dobes says, in referring to people who build large houses on small blocks, that “the loss of greenery and the associated lifestyle reduces their psychological enjoyment of their residence”.  He then says that the difference between what a person is willing to pay for a large house on a small block and the actual market price represents the net happiness or satisfaction the person obtains from buying a large house on a small block.  This is nonsense.

Cost benefit studies are tools to justify political decisions.  The ABC TV series Utopia illustrates their absurdity.  Next year we might get a series called “Tax it or Lose it” to give us a few laughs around the current tax conversation.

There are other economic tools. We can use computational thinking to test models of the economy. We can run real experiments on the economy.  We can make rational decisions without putting a price on everything.  Let us stop telling economic fairy tales. Let us have the debate we should have around the political issues of unemployment, disadvantage, unearned rents, obscene uneven distribution of wealth, damage to our environment and to our social fabric. Let us create a science of economics.

Road Rewards

The government can fund infrastructure without increasing community debt with a user pays consumption tax on existing infrastructure that is fair to those who pay the tax and to those who don’t.

A government can fund the construction of public transport infrastructure to relieve the pressure on roads by applying a tax to the use of roads.  The tax would be applied to each car using a road.  The amount of tax would be calculated according to the frequency of use, the time of day, the type of vehicle, and the road being travelled.  The tax paid by road users would be given as a Reward to people who used the same roads outside peak hours or used public transport.  Rewards must be used to purchase loans from the government to build public transport infrastructure that reduces the demand on the roads.  The loans would have a high fixed interest where the loan amount outstanding is adjusted for inflation. Repayments of loans reduce the capital value of the loan and interest on loans does not attract interest.  Interest will be taxed and hence the government can afford to pay a high interest to make the investment attractive to taxpayers.  The money for the redemption of loans will come from general tax revenue. A limit on redemptions in any one year could be something like the amount of road tax reinvested. Loans can always be sold to other parties at any time.

A Youtube video is at https://youtu.be/NoETxtekpyE