Trending

Newsletter

Building a New Economic Model

By: Frank Worley-Lopez - Sep 7, 2013, 5:48 pm

Like all good ideas, this one was stolen. Okay, borrowed and expanded. It begins with the question, can government operate as a for-profit entity?

Under normal circumstances and with history as a guide, the unequivocal answer is “no.” Economic problems drive elections and often drive politicians and officials to come up with unsustainable solutions in the form of social or public assistance programs. These drove Greece into bankruptcy and threaten many nations including the United States.

With that in mind, finding a new economic model that resolves, properly manages, and properly promotes a good economy is essential to fighting off the suicidal tendencies of socialist reformers. There is no question that capitalism works in this manner when allowed to work, but capitalism also has its pitfalls. It is vulnerable to corruption from both cronies, who use their influence over politicians to get trillion dollar bailouts, and public officials who seek to create the next handout in order to buy votes in the next election.
The Alaska Model

So, is there an example of a government operating for profit that has actually worked? Yes. Way up north in Alaska, the public amended the constitution in the mid 1970’s to take a share of oil profits, put them into a trust fund, and then pay residents of the state an annual dividend.

Review the Alaska Permanent Fund system here.

In a nutshell, a portion of oil and gas revenues are deposited into a fund and invested, and a portion of the earnings and total value of the fund are then paid to residents on a yearly basis. The article linked above also mentions that residents sought to take at least a portion of the revenues out of direct political control, since public officials, in the eyes of some Alaskans, had misused some of the past monies.

So the Alaska example indicates that government can run at least one agency for profit, although that the agency benefits from at least some protection from political interference.

Following the payment schedule over the thirty plus years since its creation, one sees that, while some years have been better than others and the total fund has increased dramatically since its inception, the payouts to individuals have remained roughly stagnant after peaking at US$2,000 in 2008. By comparison, this year’s dividend is expected to be around US$800.

While some Latin-American countries, such as Mexico and Venezuela, have oil like Alaska, most do not. Additionally, if the management of their respective economies (Venezuela and Mexico) is any indication of future actions, it is clear that political leadership in its traditional sense is not going to get the job done when it comes to managing multi-billion dollar funds.

Every country in Latin America, however, does have something of value. Be it tourism or food production, oil or mining, manufacturing or ecology, each country has a product or service worth marketing to the world. Even currently illegal products such as prostitution, drugs, and gambling can be a source of revenue if appropriate laws are in place.

The New Model

This new model starts with an old concept: free market capitalism. While capitalism has gotten a bad rap of late, some of it deserved, it remains the most effective economic system ever invented. The next phase of the model is the establishment of a trust, similar to the Alaska Permanent Fund (APF), and the useful exploitation of one or more resources, products, or services.

First let us construct the model from the ground up. We will start with vice, a problem that exists in every country. In Puerto Rico, for example, individuals spend an estimated US$3 billion per year buying drugs on the island. Roughly half of that amount is gross profit — about US$1.5 billion. Using the Alaska model on oil revenues, it is conceivable that the government of an independent Puerto Rico could legalize, regulate, and tax drugs, prostitution, and gambling and locate these activities in Amsterdam-like “Red Light” districts.

Business owners agree to pay 25 percent (in my book A Puerto Rican Manifesto I actually ask for 50 percent) of their net earnings to the trust fund in exchange for being able to operate their business with minimal interference from the state.

That would amount to roughly US$375 million tax revenues per year from drugs alone. Prostitution and gambling would increase that amount to probably as much as US$500 million per year, beginning the first year of operations.

A small portion of the money would be sent to the legislature for use in the annual budget, part to charity funds, part to emergency funds, and part to individual citizens. No less than half would be invested in a wide range of instruments from venture capital, to blue chips, bonds and funds, R&D, precious metals, and sovereign debt.

The following year the same distribution plan would take effect not only on direct revenues from vice operations, but also from the dividends and interest earned from the previous year’s investments with the same 50 percent being reinvested. So each year the fund would grow by additional direct revenue and from dividends and interest.

A second source of revenue would be taxation. The proposal recommends that ten percent of all tax revenues also be sent into the national trust. At present, Puerto Rico tax revenues reach about 8.5 billion dollars per year.  So that would add an additional 850 million dollars to the trust annually.  In the early years post-independence, this number would likely and naturally fall.

In other words, the fund would grow by about one billion dollars per year give or take.

The Alaska fund started with 734 thousand dollars in 1976 and grew to a whopping 42 billion in 2012.  Imagine starting a fund with a billion dollars and adding an additional 500 to 750 million dollars each year (after distribution) plus interest and dividends compounding over 40 years.  The 42 billion dollar holdings of the APF are more than 5,000 times the size of the original investment.

So what is one billion times 5,000 over a 40 year time? That would amount to about US$5 trillion in holdings. Interest alone on that amount of money would be able to fund the entire government’s operations with zero tax revenue, which is one of the eventual goals of this proposal: eliminate all taxes over time. This is not exactly apples and oranges, but it is a reasonable ball park comparison. It is impossible to know the exact returns, world events, or which markets Puerto Rico would be able to access.

Something for Something

Recent history, however, teaches a tough lesson on giving such money away for free. While the United States has doled out trillions of dollars to help the poor, the result has been more poverty and dependence. While Europe has practiced “socialism-lite” for decades, the reality of commonsense economics has come home to roost in Greece, Spain, and even to an extent France.

The cost of government, big government, unyielding regulations, military adventurism, and the entitlement programs threaten the very existence of the US American system if you are one to believe the doomsayers of the economic world. Current evidence regarding the size of the US debt and future obligations lends great credibility to those doom and gloom forecasts.

So managing the cost of government has to play a role. How then do you manage the cost of government and make people “earn” a piece of the pie?

Service. In our day to day lives we understand the basic law of cause and effect. If we need a new shirt we go to the store and buy it, but before we can go buy our shirt we have to get a job, earn some money, and then get the shirt.

Transitioning people away from the habit of government social programs will not be an easy task, but it is essential for the long term economic survival of any government. So the proposal asks people to give a little now, in order to receive more in the future.

As you read this article, there are government employees sitting at a desk answering the phone (or ignoring it) and filling out reams of useless paperwork while charging anywhere from minimum wage to US$20 an hour. If you are curious what federal government employees are paid take a look at this chart from the office of personnel management.

The lowest paid federal government employee makes a little over 9 dollars per hour, but from my own experience, most administrative employees are graded out at a GS level of five or six, which mean they earn about 15 or more dollars per hour.  Other positions can be paid differently. For example, law enforcement, fire fighters, pilots and attorney’s all have special pay schedules.

The proposal offers to trade out all current social programs in favor of this long-term wealth creation program over time, thus reducing government by about half of its size and limiting it from future expenditures. However, the proposal also requests service of each prospective “member-citizen” in order to receive payments from the trust at a later date.

In essence, the bulk of remaining public employees at all levels would be replaced by part time workers completing their minimum service requirement. That is to say that you go to your normal job which you have to find and keep on your own, but much like the national guard or reserve, a few days per month and a few weeks per year you would report to your chosen service position in order to work for a minimal wage. That’s not minimum wage mind you but a minimal wage — less than one dollar per hour.

By replacing the bulk of the government workforce with these part-time, zero-benefit employees and by eliminating or phasing out current social programs, the size and scope of government could be reduced by up to 50 percent. (Using mostly part time employees would also require the streamlining of law and regulation so that the “weekend warriors” could be successful at the jobs they fill.)

The beauty of the proposed system is that it would not be limited to military service. Every basic service provided by government, from police, fire, ambulance, military, disaster response, garbage collection, beautification, and even infrastructure could be an acceptable category for service. Even volunteering at a non-profit could fulfill the service requirement. The individual chooses but must be qualified for whatever service he wishes to provide.

Choice, Responsibility, and Long-Term Stability

The proposal includes two critical opt-out choices. One is not to participate at all and receive no benefits. The other is to opt out of a managed savings and retirement plan which is based on the current federal government Thrift Savings Plan (basically an IRA or 401k) and use or invest the money as you choose.

Either way, the government promises no future benefits of any kind outside of this program. Any so-called social programs would be constitutionally prohibited.

For each year of non-combatant service an individual would receive one credit or share of the national trust. Theoretically these “shares” could be negotiable financial instruments. For each year of combatant service which includes military, police, intelligence, and firefighting (less face, it fire fighters are “under fire” as part of their regular jobs) the member gets two shares.

A minimum of four years of service at about 500 hours minimum each year would be required for full “membership” in the trust.

That, however, is not all. The proposal also eliminates all employer contributions to all programs in favor of a regular lump sum payment into each individual employee’s account. Right now, it costs employees (pre-Obamacare) roughly US$1.35c per face-value dollar in salary or wages paid. That figure fluctuates from jurisdiction to jurisdiction depending on the status of local, state, and federal laws.

All of those individual programs like Social Security (FICA), workers comp, and Medicare would be eliminated in favor of a smaller lump sum dollar amount paid into the managed individual account. The proposal recommends 25 percent, but it can change up or down. The employee must also deduct an additional 10 percent of his own wages and have them deposited in his individual account.

The result is that each employee would set aside the equivalent of roughly a third of his own wages each year into an account that would be half retirement and half insurance needs. That is to say the second part of the account is how an individual would pay for their health, life, car, unemployment, and disability insurance, if he so chose.

Add to that payments from the national trust, and over time each person in the country — even those earning minimum wage their entire lives — would be able to look forward to a comfortable retirement and even have some left over for the kids. Estate tax would be eliminated completely under this proposal, and all money left in an individual’s account on their death would roll over into the accounts of his immediate family members.

There is an added bonus to this system. The holdings in the national trust would be used as the basis for the creation of the new country’s currency down the road. Not just a gold based currency, but a hybrid, multi-asset based fiat currency.

This system would provide long term economic stability that would be the envy of the entire planet.