Tuesday, 10 November 2015

Affluent People Have a Debt to Pay

Bertrand Russell said that John Maynard Keynes was the most brilliant mind he had ever met. Keynes had been a member of the Bloomsbury group with writers like Virginia Wolf and E M Forester.  Up until the publication of his most influential works during the Great Depression of the 1930s, the two big names were Adam Smith and Karl Marx – and they were poles apart.

In 1933 the deepest year of the depression, Keynes published The Means to Prosperity, which contained specific policy recommendations for tackling unemployment in a global recession, chiefly counter cyclical public spending. The Means to Prosperity contains one of the first mentions of the “multiplier effect”.  While it was addressed chiefly to the British Government, it also contained advice for other nations affected by the global recession. A copy was sent to the newly elected President Roosevelt and other world leaders.

Keynes' best-known work, The General Theory of Employment, Interest and Money, was published in 1936, and became a benchmark for future economic thought. It also secured his position as Britain's most influential economist.  Ever since, governments have routinely run deficits during downturns to avoid economic stagnation.  But when you have a case like South Africa where there are more people receiving some kind of direct government assistance than the number of people in the work force, you have to wonder when the time will come to throw away the crutch because the leg has healed?

I have written a lot about Inequality and the widening wealth gap.  South Africa’s guru on Poverty is Sampie Terreblanche.  He is an academic, a researcher, and his book Lost in Transformation was a landmark.  Everyone now is talking about what to do, and Roelf Meyer recently called for an “economic CODESA” to try to negotiate a new Social Contract between rich and poor.  New parties are forming on the Left like the Economic Freedom Fighters.  And the Democratic Alliance, seen by many as a white party on the right of centre has just adopted “poverty, unemployment and inequality” as its new mantra and elected a black youth as its national leader.

So I was eager to read the cover story in this week’s issue of The Economist, and it did not disappoint… The great distortion (a dangerous flaw at the heart of the world economy)  TAX-FREE DEBT.

Now I am not an economist, nor do I have a high IQ like John Maynard Keynes.  I have barely grasped the article on first reading.  But it is incisive.  It calls tax-free debt “a senseless subsidy” and does a great problem analysis and some solutions.  For example:
“Tax breaks for debt come in two principal forms.  Interest rates on mortgages are tax-deductible for personal tax purposes… And across the world, firms can deduct interest payments to debt-holders from their taxable earnings.” 
“Today, tax-breaks for debt are embedded in all economies and viewed as the natural order of things.” 
“So what would happen if these subsidies were removed?  It would be a revolutionary step because the breaks are embedded in the way firms and home-buyers behave.  That suggests it would cause some short-term disruption.  But the longer-term pay-off could be immense” 
“Reforming the bias in the tax system is not the stuff of public campaigns.  A vast web of contracts has been woven around a fiscal technicality, guarded by huge vested interests.” 
“But the moment for change may never be better.  Interest rates are low, profits are high, and house prices stable.”
Basically to use debt as an instrument, you have to have some leverage and that means it helps the rich more than the poor.  As Muhamed Yunus once put it (founder of Grameen poverty lending): “Banks ask: Are the people credit-worthy?  We ask: are the banks people-worthy?”  Ahem.

In the Nazareth Manifesto (Luke 4), Jesus read from the prophet of a time when the blind would see, the lame would walk, and “the acceptable year of our Lord” would come.  He was referring to the year of Jubilee, every 50 years.  Now every 7 years you had to leave the fields fallow, just like every 7 days you had to stop working and rest.  But every 7 x 7 years (= 49) you had to take a year (#50) to level the playing field.  By forgiving debts, setting slaves fee, and so forth.  Call it Reform.  He was calling for that like The Economist is calling for it.  Reforming this distortion could have a very positive effect on closing the wealth gap that is only getting wider.

I have a dream.  I dream of the affluent in South Africa and also overseas making “social investments”.  Not donations, but investing surplus savings into reliable funds.  If you won’t need those surpluses for a period, let’s say 3 years, then the fund manager calculates how much can be skimmed off, leaving enough to grow back to par over that period, in the fund.  So that your money can be returned to you.  In other words, biblically, you give the “increase”, but you keep your own capital.

The funds skimmed off are deposited into a Social Equity Investment scheme in South Africa – to enable youth who are trained and economically active.  (Not those who are idly sitting around waiting for Kenyesian assistance.)  Our problem at C4L is that we can tap funds from government for training, but when the youth finish their entrepreneurship and technical training, they have no funds for tools and start-up.  They need a hand-up, not a hand out.  They should not borrow.  They should not beg.  They should attract investment, along the lines outlined in the May 16 – 22 issue of The Economist.  Where ever possible, entrepreneurs always need mentors too.  And when they succeed, the fund will grow not from loan interest, but from economic growth.

In the past I have often said that I am not blaming the rich when I lament about Inequality and the needs of the poor.  To my way of thinking, BOTH rich and poor are caught in a system that is mal-functioning.  This article in The Economist is an excellent example.  Reform is needed, because debt gives an advantage to the rich, and disadvantages the poor.  Equity investment is better for all the reasons outlined.  So if you have prospered for 50 years, then commit yourself to “the acceptable year of our Lord” and help level the playing field.

No comments:

Post a comment