Solutions that do and don't work
Discussing wealth and inequality with Ran Prieur
Thanks to Ran Prieur for recently posting some of the links I sent him. I thought people might want to see the other half of our conversation, so I’ve posted some of it here, expanded and edited for Substack.
Demurrage Currency
The fundamental problem Ran identifies is correct—the more money you have, the easier it is to make more of it, while the less money you have, the easier it is to lose what little you have. This is often called the Matthew Effect, after a passage in the Gospel of Matthew1:
“For to every one who has will more be given, and he will have abundance; but from him who has not, even what he has will be taken away.”
What initially prompted my letter to Ran was his mention of a demurrage currency. I’ve heard about this concept before—money that loses value over time. But, to me, this concept makes little sense since that’s what tends to happen to money anyway! That’s quite literally what inflation is—money losing value over time. This is already a natural tendency of money2.
This is one of the textbook reasons for a modest amount of inflation. If money is losing value over time, it prompts people to spend it on goods and services rather than hoarding it or putting it in a box in the backyard. Of course, everyone acknowledges that too much inflation is bad. Money has to retain some of its value, or else it becomes unusable (i.e. a hyperinflation scenario).
Now, this makes some people very mad. You’ll frequently hear complaints from the overpaid nerd-ghouls of Hacker News, for example, about the how value of their obscene paychecks is being eroded by inflation, as if this were an affront to them personally. To them, any inflation is hyperinflation, and they demand a return to the gold standard.
But, in fact, money should lose it’s value, because it’s a means of exchange, not a store of value. As Barry Ritholz puts it, ‘Dollars Are For Spending and Investing, Not Saving:’
“Money is NOT a store of value – to be useful, a dollar must maintain its value long enough for me to pay my rent or mortgage, buy food and energy, fund my entertainment and travel, pay my taxes, and get invested. It does that splendidly.”3
Sure, it now takes $1.84 to buy that dollar of 1999 food. But had you put that into a simple investment like the S&P500 instead of holding the dollars, it would have grown at an annual rate of 6.94% per year and be worth about $5 dollars. You could buy those groceries and still have $3.16 left over.4
So, in actuality, we already have demurrage currencies. But it hasn’t really solved anything.
And this illustrates the problem. If money loses value, the rich will just shift their assets into something that doesn’t. In the past, that was scarce resources like land or precious metals like silver and gold. Today it’s things like stocks and bonds (and real estate).
The rich don’t have their money in cash. They have it in investments, and investments grow in value over time. The rich make their money and hold their assets in economically productive (or extractive) enterprises. Land, factories, services, arms, etc. are the real storehouses of wealth. For the rest of us, we need to sell our time in order to survive.
This post, Do We Need Billionaires? points out that,
$1 in 1988 is worth $2.82 in 2026. That’s 2.76% annual inflation.
$1,000,000,000 in 1988 is worth $2,815,046 in 2026.
$6,700,000,000 in 1988 (e.g. Sam Walton) is worth 18,860,811,496 in 2026.
Despite this, he finds that the wealth of the richest people in America has increased by 10-12 percent per year on average since the Reagan era.
How did they become so much richer? This interview from Current Affairs, Money Is A Measure of Nothing But Itself, contains this observation:
[25:35] “[In Thomas Piketty’s book Capital in the Twenty-First Century] he says, the reason the wealthy grow wealthier is because they own useful, productive things—machines and so on—and they use the output of those to buy more machines which produce more stuff, and so on. It’s a process where you saved your income, you accumulated it in the form of concrete stuff, and you have more generation by generation. And, it’s just not, as a factual, historical matter, that’s not how the share wealthy has grown at all. What actually happens is that people have some sort of claim on production, in the form maybe of corporate stock or ownership of land, and the value of that claim that they already exercise gets greater over time.”
“If you own land in a major city, the value of that land is likely to go up over time and you are going to become wealthier. This has nothing to do with saving, it has nothing to do with accumulation. It’s exactly the same land, but your wealth goes up because the relative value of that land relative to other things has increased.
And if you look historically, why is the share of wealth—which is one of the things we call capital—so much larger relative to income than it was a generation ago? It’s all capital gains. Its all that the existing claims on production have became more valuable. And that is in part because the share of output that’s flowing to profits—the income of capitalists—has gone up. If you own shares in a business and that business decides we can get away with paying less in wages and now were going to pay more in dividends, the value of your shares is going to go up. That sort of process explains a lot of the increase in wealth. It has nothing to do with accumulation or increases in output.”
It would be one thing if this massive surge of wealth came in the midst of a period of overall abundance. But at the same time these fortunes are soaring, life is becoming more difficult for everyone else. We’re constantly told about the things we supposedly “can’t afford,” from universal child care to Social Security. Rural hospitals are closing. Schools and infrastructure are falling apart. Despite these riches, there’s never money for anything which benefits the average person. We’re told to tighten our belts, or to make do with less. Or we hear how much in debt we supposedly are as a nation, despite the fact that it’s the rich who own that debt. This article reports that there were a million new millionaires around the world lest year, yet the majority of people actually got poorer. The top 1% now owns more of America’s total wealth than at any point since the early 1990s. Meanwhile, the bottom 50% of Americans collectively own less than 3% of the country’s total wealth.
The Color of Money
I like the framing Stephanie Kelton gives in her book, The Deficit Myth. In that book, she asks us to think in terms of “green” dollars and “yellow” dollars.
Green dollars are easy to understand (at least if you’re in the United States where our money is green). It’s basically the cash in your wallet or your savings account that you can use to buy stuff. Increasingly that cash does not take physical form. Today you can swipe a card and the vendor is credited with an amount equal to the price of the goods you just bought, while that number is adjusted downward in your bank account. No dollars change hands anymore—it’s all electronic.
“Yellow” dollars, Kelton tells us, are government bonds which are also held in bank accounts. You can’t use them to buy groceries, but, unlike green dollars, they pay interest, meaning they hold their value over time. Therefore, people who hold their money in yellow dollars typically wish to save. This is especially true for people who earn money in foreign exchange and investments which they can’t spend domestically. That’s why central banks hold their assets in reserves.
The sum total of all these outstanding bonds is the national debt. Bonds are nominally “loans” to governments, but in reality are savings vehicles for banks, governments and other individuals and institutions.
In order to dispel the hysteria over the national debt, Kelton describes what happens when these bonds become due (“mature”). The amount is simply transferred via keystrokes from an account to another—from a reserve account denominated in yellow dollars at the Fed to a savings account denominated in green dollars. That’s it. She writes,
“The difference gave China a $420 billion trade surplus (the US carried the opposite, a $420 billion trade deficit with China). Americans paid for those goods with US dollars, and those payments were credited to China’s bank account at the Federal Reserve. Like any other holder of US dollars, China has the option to sit on those dollars or use them to buy something else. Uncle Sam doesn’t pay interest on the dollars China keeps in its checking account at the Fed, so China usually prefers to move them into what is effectively a savings account at the Fed. It does this by purchasing US Treasuries.
“Borrowing from China” involves nothing more than an accounting adjustment, whereby the Federal Reserve subtracts numbers from China’s reserve account (checking) and adds numbers to its securities account (savings). It’s still just sitting on its US dollars, but now China is holding yellow dollars instead of green dollars.
To pay back China, the Fed simply reverses the accounting entries, marking down the number in its securities account and marking up the number in its reserve account. It’s all accomplished using nothing more than a keyboard at the New York Federal Reserve Bank.”
So that’s all it is. Money is transferred from one account to another via keystrokes. One type of money pays interest, the other does not. One type is fungible and can be used to purchase things (“liquid” in the lingo), the other is for saving. When you put it that way, the hysteria over the national debt seems way overblown, doesn’t it?
In that spirit, I’m going to introduce one other form of dollars—”blue” dollars. These are corporate stocks5.
Now, admittedly this is a stretch. Stocks aren’t any type of currency—they are denominated for sale in dollars, but they are not dollars. They are a form of ownership—equity in economic jargon—in this case, of some kind of money-making enterprise. Stocks are portions of ownership in corporations. Their value derives from the revenue of the corporation—both current and expected in the future. And—importantly—their value is based on what other people are willing to pay for them, making them effectively into casino gambling chips.
The reason this is important because all of the richest people in the world have the lion’s share of their wealth in blue dollars and relatively little to none in green or yellow dollars. The reason Elon Musk is (or was) a trillionaire has nothing to do with cash. It’s because he owns a massive amount of “blue” dollars that suddenly surged in value. That same goes for every centibillionare sociopath.
Note that this is precisely the inverse of everyone else.
Most of us sell our limited time on this earth in exchange for green dollars which we need to get in order to survive. Our wealth is mostly tied up in green dollars stashed away in savings accounts which we need to write checks against to pay our bills and subscriptions. Those are easy to quantify and tax. Relatively little wealth is in stocks and bonds, even with retirement accounts—roughly 90 percent of stocks are owned by the wealthiest 10 percent of households6. The largest investment most people own is their primary residence (i.e. shelter, which, like food, they also need to survive). And that asset is taxed in the most unfair way possible. People end up actually paying taxes on an asset they don’t even own!
Every year, we assess the fair market value of people’s houses and demand a percentage of that value be paid to the local government in taxes. And even more perversely, we demand people pay taxes on the entire value of the house, even though they only typically own a small fraction of it unless they have paid off their mortgage or bought it in cash. In fact, for the first half of the loan term, people are often just paying off interest on the loan, meaning they own effectively none of the asset they are paying taxes on. And, to add insult to injury, they have to pay 100 percent of the cost for insurance and upkeep on what is, effectively, an asset of the bank.
Meanwhile trillions of dollars in stocks and bonds owned by the billionaire class are not taxed at all unless it’s turned into cash, which it almost never is. And the value of those blue and yellow dollars can be used as collateral to take out ultra low-interest loans from the banks in green dollars which are not taxed at all, and are passed down in perpetuity. This is the so-called “buy, borrow, die” strategy.
Wealth Taxes
Which is why you currently hear so much talk about wealth taxes. We tax income, which lowers the incomes of workers, but we don’t tax wealth at all allowing wealth to accumulate without bound. And even when we do tax wealth, we tax it at a much, much lower rate than salaries (known as capital gains taxes).
Wealth taxes are now on the ballot in California, the world’s fourth largest economy. And, as expected, the wealthy are deploying their vast resources to stop it. In fact, the amount of money they are spending to defeat these tax proposals is far in excess of the money they would pay under them. That ought to tell you something about the mentality of the super-rich.
The arguments against it boil down to: 1.) We can’t assess the wealth of the rich accurately; 2.) It will hurt retirees, or 3.) The rich will just flee.
I don’t find any of these convincing. Or, rather, they some have validity to them, but I think these issues can be overcome. It seems to me the height of unfairness that the poor and middle class bear the burden of taxation because their wealth is legible, while the people who own almost everything pay next to nothing because theirs is not. Incomes are easy to quantify. Sales taxes are easy to quantify, And, as we’ve seen, the only asset that most middle-class people own—their house—is taxed in an unfair way that effectively makes it a subsidy to the banks7.
Another proposal I sometimes hear is a debt jubilee. This was popular in leftist circles a few years ago. But I don’t understand that, either. Why forgive everyone’s debt when most loans are paid off just fine? Once a loan is paid off, that money is destroyed, just like with taxes. Why not just write off underperforming loans, or those which are impossible to repay?
We already have a system to do that. It’s called bankruptcy.
So I guess I don’t understand the concept of a debt jubilee where all of the debts are cancelled. It doesn’t make any sense to me, plus it would crash the economy since most of our money is debt. One exception I might make is the cancellation of student loans and medical debt. In fact, the Biden administration tried to do just that, earning it exactly zero points from the Bernie left which had spent years advocating for this exact proposal. What stopped it was the Supreme Court—the same far-right court that’s now taking a blowtorch to the regulatory state and the US Constitution. So you would need to deal with that first. And forgiving the sovereign debts of poor countries is also a worthwhile idea.
Sometimes I think these silly ideas are circulated on purpose as a kind of psy-op to make sure proposals that would actually make a difference don’t get any traction.
Learn how the system works
Which leads me to my major complaint about the political left in America—you need to understand the systems you’re critiquing otherwise you’re not going to able to effect any sort of beneficial change and just end up ineffectively griping.
The stuff I described above is incredibly basic, 101-level stuff that everyone should know about how the economy works and why some people are rich and others poor. I don’t have any formal training in economics, yet even a dummy like me can figure this stuff out. If you want to change the system, the first thing you should do is learn how the damn system works.
The discussions I hear on the left are just so frustrating. I recall one person lamenting how much more Elon Musk’s trillion-dollar “salary” was than his own. When I gently pointed out that Elon Musk does not earn a salary—he owns stock in various companies—I just got inchoate anger and opprobrium in return. It’s impossible to have a sensible discussion with these people. And the people who do know what they’re taking about and point out the flaws in some of these ideas are deemed insufficiently radical by the populists and dismissed as ”wonks,” traitors, and sell-outs.
Recently, the knives came out on the populist left for Gavin Newsom for opposing the wealth tax proposal for the state of California. But, in fact, Newsom has proposed a wealth tax at the federal level, where it belongs. He’s also pointed out the flaws in the current proposal, leading to his opposition. To me, I think he makes a good case. Wealth taxes by states lead to the wealthy fleeing to lower-tax states, whereas federal taxes cannot be avoided except by leaving the country—and the US taxes citizens abroad. While it’s true that the Federal government does not need to raise money from rich people in order to spend (as MMT correctly tells us), that revenue could be dedicated to state governments which do depend on taxes to fund themselves.
So, in conclusion, I don’t think proposals like a debt jubilee or demurrage currency deserve any more of our attention. We already have those. Instead, we need to look for other solutions like wealth taxes, antitrust, and public ownership of the means of production.
However, in regards to demurrage currency, there is one thing interesting to note. The periods of lowest inequality in our nation’s history happen to coincide with the periods of highest inflation. This was in the mid-nineteen-seventies. Under high inflation, the value of debts is rapidly eroded, including mortgage and student loan debt. Meanwhile, inequality has exploded under a sustained period of sub-2 percent inflation since the 1980s. And the high inflation we most recently experienced actually reduced inequality. The lowest earners gained ground relative to the upper income brackets—something you probably didn’t hear about. So maybe there is something to the idea of a demurrage currency after all.
Links
I always like to send Ran links and see what his take on them is. I think he posted most of them, but I’ll put a few more of them here along with some comments.
Mangrove forests are healing after decades of human destruction (BBC)
Recreating the complex cuisine of prehistoric Europeans (Ars Technica) We’re constantly told our remote ancestors spent all their time hungry and starving, but instead it appears they had a rich culinary tradition. The same was probably true all over the world.
Get with the times — here’s what a ‘Luddite’ means today (NPR). Regarding the AI data center backlash. The parallels are striking. The Luddites did not oppose technological advancement—they opposed the exploitation of the working classes using technology for the benefit of elites at the expense of everyone else.
Football Stadium Turned Community Garden (Kottke)
Why a decades-old forest planting practice from Japan is gaining traction in the U.S. (NPR) The Miyawaki method in Tacoma, Washington.
Interstellar Space Travel Will Never, Ever Happen (Jason Pargin’s Newsletter). This is the best explanation I’ve seen for why space travel is a fantasy. The author makes a convincing case that a future like Game of Thrones or Harry Potter is much more realistically achievable than the kind of future envisioned by Star Trek, yet the former are regarded as wild fantasies while galaxy-spanning science-fiction scenarios are commonly presented as some kind of realistic future for humanity. Funny and thoughtful.
I think Ran featured this, but it’s my favorite article from the last six months: At the Rubber Tramp Rendezvous, nomads find community in the Arizona desert (NPR). I think this is a glimpse of the future. Related, The reality of life for young van dwellers priced out of Cornwall’s housing market (The Guardian). Also a glimpse of the future, for better or worse.
I think he posted these as well: Reality Drift in Everyday Life (Reality Drift Archive) and Worse on Purpose. So much for everything getting better in perpetuity, despite more and more millionaires and billionaires.
The rich aren’t your role models – they’re your oppressors (The Slow Burning Fuse)
Here’s a new link: The Demoralization of The White-Collar Worker (No One’s Happy)
Here’s meaty one that I’m still working my way through:
Finally, I take Ran’s ideal economy to be one where people are free to follow their own paths and proclivities without coercion to contribute to society. It’s funny—if you suggest this on places like Hacker News, the spergs would scoff and chide you for being naive. They strongly believe in an ultra-Hobbesian world view where no one will lift a finger to do anything without the whip and the lash of hunger, starvation and destitution to motivate them. Yet, at the same time, you will often see posts there where programmers talk about getting into computers and IT because of intellectual curiosity and the love of it, but are unhappy because they are forced to do things they don’t want to do to for profits, or are burned out and demoralized due to the corporate grind. That tells us something, I think.
Here’s what I said to Ran about this vision:
Your distinction between the “capitalist” left and the utopian socialists reminds me of the contrast between Edward Bellamy’s Looking Backward and William Morris’s News From Nowhere. Bellamy saw the economy as kind of like a collective “army of production” owned by the state, wherein if you put in your twenty years of service in the factory you could retire with a full pension and enjoy the fruits of the economy. Meanwhile, William Morris was horrified by this idea, and wrote his novel in a direct response. According to Wikipedia:
In the novel, the narrator William Guest falls asleep after returning from a meeting of the Socialist League and awakes to find himself in a future society based on common ownership and democratic control of the means of production. In Morris’s society, there is no private property, no big cities, no authority, no monetary system, no marriage or divorce, no courts, no prisons, and no class systems. The society functions simply because the people find pleasure in nature, and therefore they find pleasure in their work...The book offers Morris’s answers to a number of frequent objections to socialism, and underscores his belief that socialism will entail not only the abolition of private property but also an end to divisions between art, life, and work.
I’ll be interested to hear what he thinks.
Also Luke 19:26: I tell you, that to every one who has will more be given; but from him who has not, even what he has will be taken away.
Money either increases in value (deflation) or decreases in value (inflation). Why can’t everything stay the same price forever? Well, that’s beyond the scope of this post, but my guess is it’s because most money is debt and must be repaid with interest over time. Plus, it’s never happened before in modern history.
I had to Google images of stock certificates, since very few people own paper stocks anymore. They come in a variety of colors, but blue seems pretty common, so I chose that.
I’ve often said that the 401K is the killer app for neoliberalism, because all our hopes for retirement and an easy life are dependent upon policies that are hostile to workers and favorable to the investor class. Essentially, they have us all hostage. Plus, because the only way to make money is the stock market, money keeps pouring in, meaning shares always go up regardless of the underlying value of the companies the shares represent. It’s just a casino.
Which may be why they allow mortgage interest to be deducted from taxes, which is still ultimately a subsidy to the banks.