Rebuilding the Economy after Covid19
Governments throughout the world are addressing the downturn in economic activity by increasing the money supply. In Australia, the Reserve Bank is selling bonds at low-interest rates to Australian Banks. The government is also distributing money using Job Seeker and Job Keeper payments.
While this response keeps the economy ticking away it is not a long-term solution. The long-term solution is to get business back into producing and selling goods and services that consumers want. The traditional approach of market economies is to provide the funds to business through the banking system and through direct grants and loans. Since the global financial crisis, this has taken the form of quantitative easing where banks have been given money to private banks to lend to private businesses for productive purposes. Unfortunately, most of the new funds have gone to the already wealthy and wages and conditions have stagnated and there has been little productivity improvement.
To get out of the Covid19 economic crisis governments need to try something else and that something else could be to give loans to consumers to invest in productive goods. This approach is guaranteed success, will give the government a good return on investment, does not increase government debt, and will free up funds tied up in unproductive or overpriced assets. It does not require any new legislation and it is remarkably easy to implement.
The approach is for consumers to invest by prepaying for some goods and services and to get their investment returns in the form of discounts. It is most efficient and equitable if all sales are made with prepayments — even if some are of short duration.
With traditional investing (Figure 1), the investor lends money to a business. The business uses the money to create products and sells the products. The business returns the loan plus interest to the investor. The consumer and investor are different people.
With prepayments investing, the consumer provides the funds to produce the goods. The consumer investor receives their money back plus a return on investment but only after the goods are sold. The consumer investor provides the money to the producer in the form of prepayments and gets their return in the form of discounts.
In comparing the two systems we have the relationships shown in figure 3. The amount of production is the same. The lender gets the same return on investment but the consumer does not have to pay extra money I as interest. This money is available to consumers as it is money they do not have to spend. In a market economy with many suppliers, the returns are meant to come in the form of lower prices. With prepayments, they come to consumers in the form of lower prices but with consumers gradually taking full ownership of the capital — but not necessarily the means of production.
Consumers have to be organised to take advantage of the approach and one way to organise consumers is with not-for-profit consumer-owned cooperatives. The cooperative can borrow money to invest in the production of goods and services that the cooperative consumers already use and need. The areas of the economy include housing, energy, water, health services, education and transport. When consumers get a return on investment, they have an incentive not to allow price increases or to make excessive profits as they are the ones who pay for goods and services. Instead, consumer investors have an incentive to reduce costs by making the production of goods and services more efficient and lower priced. Consumers are also able to direct investment into the areas where they have an unmet need.
With consumer cooperatives, the government indirectly directs loans to existing businesses. The cooperatives repay the loans plus a fixed return when the consumers purchase the goods and services. The cooperatives take a share of the profits in the form of lower prices.
Here is one way the government can lend money to local Prepower cooperatives and get a 5% return on their investments. (Readers can apply to join an existing cooperative here). Alternatively, governments can encourage banks and superannuation funds to lend money to the same cooperatives and get the same returns.
Governments can lend money to Community Funding Resident Cooperatives and get a 3.5% inflation-adjusted return on their money.
Governments and existing institutions can lend money to consumer cooperatives to buy water authorities, hospitals, schools, freeways, roads and railways. The returns they get can depend on the risk associated with the enterprises.
The approach works because it reduces the financing costs of business. Instead of businesses going into debt and having to pay interest on the debt, businesses, that are profitable, distribute their profits as lower prices. It means that the businesses produce the same amount of goods and services but for less money than companies who have to rent money.
Businesses do not change. The ownership can stay the same. The holders of debt can sell their debt to the people who use or consume the output from the assets the debt finances. The holders of existing debt now need to seek other investments to get a return on their funds. This, in turn, will increase economic activity and it is likely that relatively few funds will need to be lent by governments.
The approach turns consumers into capitalists with social democratic principles. Political parties of the left, right and centre can support it as it makes any community who adopts it economically efficient. It preserves a market economy while sharing new wealth across the whole community. It leaves the wealthy with their wealth preserved.