The number one priority of all modern states is the eradication of poverty.
Traditional systems for addressing poverty fail necessarily in a number of ways. All such systems can be sorted into two groups. Firstly, providing goods directly (social housing, food banks, clothes, books, etc.) or providing coupons (food stamps, medicare coupons, etc.) to those in poverty. The main problem here is that recipients cannot choose what they get, and so what they get might not meet their specific needs. Also, the fact that one cannot purchase one's goods, but rather is given directly by someone else, can be harmful psychologically and socially, i.e. can be stigmatizing. The second system is to give cash through an application procedure. There are two problems here too: first, the application may require documents which those in poverty are not able to acquire; also, the application process often has an element of arbitrariness, and moreover the reviewer has the power to probe into the privacy of the recipient; second, while those not in poverty receive their cash through work, those in poverty are singled out as those who receive cash without work, and this singling-out can again have deep psychological and social consequence for the recipient.
These problems are well-documented in multiple countries, so there is no need to go into the details of them. The main take-home point is that an effective system for eradicating poverty should include a way to distribute cash to the poor in a way that is not stigmatizing and does not single out the poor from the rest.
Given this constraint, the options for a viable social security system becomes quite limited. In fact, it seems as if the only viable option is a basic income system.
At a general level, there are roughly two criticisms commonly leveled against basic income as such. The first is that basic income will make people lazy, i.e. it will disincentivize work. The second is that the government simply does not have the money required to hand out basic income.
At this level of generality, neither criticism is to be taken too seriously, as there is ample evidence that basic income in principle does not disincentivize work, and that there is a way to design a sustainable taxation system as well as an optimal amount of basic income to make it work. However, no country in history has actually implemented a basic income system. This means that there is no empirical material to rely upon in order to make claims about the feasibility of implementing this system on a national scale. Therefore, the discussion tends to be based on simulations. Simulations require statistical data, and such data vary from country to country. Therefore, at this point, further, more detailed discussions on how to design a feasible basic income system becomes country-specific.
The take-home message is that basic income is feasible in principle, but there needs to be more detailed simulation at the national level before it can actually be put into practice.
Basic income is paid for by the state budget. Therefore, the state has an interest in keeping the supply of money under control in order to prevent inflation. This is because, if the supply of money dramatically increases, while state revenue stays more or less the same, then the value of the basic income becomes lower relative to the total money supply. In other words, inflation not controlled by the state can compromise the basic purpose of basic income, namely, the eradication of poverty by providing the means of subsistence to all citizens equally.
Therefore, in order to make the basic income system work, it becomes necessary for the state to also implement a monetary system which controls the money supply and prevents the kind of inflation that is mentioned above.
This is where the "Sovereign Money System" (SMS) enters the picture. A clean and concise blueprint of the SMS has recently been laid out by Frosti Sigurjónsson in this report.
How does the SMS keep the money supply under state control? According to Sigurjónsson, the problem with the currently predominant system is that the state is forced to bail out banks which are "too big to fail." This not only gives the big banks an unfair competitive advantage by allowing them to raise their interest rates recklessly, but it also incentivizes big banks to engage in reckless and predatory lending. In order to ensure fair competition, and in order to discourage reckless lending, the new monetary system needs to free the state from the implicit and unwritten obligation to bail out big banks.
The main purpose of a massive bail-out is to ensure that ordinary customers can withdraw their deposit money in cash. Therefore, the new money system needs to ensure that the banks always have enough cash in their reserves to cover the total amount of deposits in all deposit accounts. In other words, there needs to be not a fractional reserve system, but rather a 100% reserve system.
The SMS is just such a system. According to Sigurjónsson, the SMS divides all bank accounts into two types. The first is the Transaction Account. This is the account where all deposits are 100% guaranteed. Banks are expected to run these accounts by charging fees for various transactions. The second type is the Investment Account. Here, there is no guarantee of deposited money. Therefore, it will be the customers' and the banks' responsibility to ensure that the original deposit plus interest gets paid according to the agreements.
Next, the SMS requires that banks only use the money invested in the Investment Account for lending activities. In this way, the money in the Transaction Account becomes fully protected. If banks fail in their investments, either the customers lose their original deposits, or the bank goes bankrupt. In either case, the state has no need to bail out the bank in any way, since the cash in the Transaction Account is fully protected.
Finally, the power to create money is separated from the power to allocate money in the SMS. This means that, assuming that there is no corruption - a big assumption, but is also a necessary assumption for any constructive debate on alternative systems - neither the creators nor the allocators of money have the power to single-handedly inflate the economy for private gains. As mentioned, the big issue here is how to prevent corruption - a hand-shake between the creators and allocators of money is enough to trigger such an inflation. However, this is an issue which must be addressed regardless of which monetary system is in place, and so it is in a way irrelevant in this context.
An added bonus of the SMS is that all newly created money first becomes state revenue. This means that the state is in charge of distributing the newly created money. This is good news for a system like basic income. Also, the state does not have to pay interest on the newly created money that it acquires. An interest-free money means reduction in state expenditures. The reduced need to sell bonds (which are not interest-free) to generate state revenue means that it allows the state to spend more money in the real economy, whether this may be in the area of social security or in national security.
Basic income coupled with the Sovereign Money System is still insufficient for the eradication of poverty. This is because of the problem of affordable housing. Even if a citizen receives enough cash each month to survive, and even if inflation is under control, if the price of housing is too high, the basic income might become relatively valueless. Therefore, it becomes very important to think about how to manage real estate prices and to think of a new system for the buying and selling of real estate.
The first problem is the method of payment. Somebody needs to purchase a house in order for the house to be put into use. In order to purchase the house, the buyer typically needs to take out a loan. In the SMS, banks can only lend by putting either itself or the customer at risk. Is it sufficient that the bank assesses the risk and gives loans only to those who are most able to manage repayment? This is the first serious question to be addressed.
The second problem is how to control housing price. This applies both at the level of immediate purchase and at the level of secondary buying and selling, including renting. The higher the real estate price, the higher the amount of the loan required for the purchase of that property. This means that fewer customers are able to purchase that property, which reduces the chances of that property being put into productive use. Indeed, this is the very problem that permeates the United States with its 6 million + houses in foreclosure. How could the housing price be effectively regulated? The key here is to not rely on explicit state regulations - rather, the task is to design a system, similar to the SMS, which automatically disincentivzes the owners of real estate to recklessly pump up the price.
In addition to the problem of housing prices, another issue is how to fund business start-ups. This might be less of an issue compared to housing, since in the basic income system, citizens do not depend on the success of their private business enterprises for their survival. If citizens choose to run their businesses irresponsibly, it would be up to them to take responsibility for their failure. Nonetheless, since some business start-ups do require funding in the form of loans, there is the question of whether certain types of businesses might be perceived by the banks as being too risky and thus cannot be funded. In some cases, this is actually a good thing - risky businesses should not be too hastily funded. On the other hand, substantial reduction of commercial activity means reduction in tax revenue, which may escalate to the point where it no longer becomes possible for the state to hand out basic income. In addition, since thanks to basic income more citizens will be engaging in productive activity outside of the marketplace, there might not be a need to fund start-ups at all in order to encourage innovation which serves society. The issue here is therefore quite open and diverse, requiring careful thought.
This is the story so far concerning the blueprint for a state which adequately performs its duty to eradicate poverty and to protect the right to live of its citizens.
