20.3 Predictability and stability

VoTa is economically unprecedented

VoTa changes several foundations on which existing economies operate:

  • Central Bank currency is constitutionally conserved and commercial banks cannot create it when extending credit.
  • Commercial banks have no special regulatory status: there is no bank-specific licensing or capital and reserve regulation, although banks remain subject to the same universal property, fraud, and contract laws as every other business.
  • There is no discretionary central-bank or government management of the economy through:
    • setting or manipulating interest rates;
    • expanding or contracting the currency supply or central-bank credit;
    • buying or selling assets to influence markets;
    • buying or selling government bonds through open-market operations, quantitative easing, or quantitative tightening;
    • government borrowing;
    • discretionary budget surpluses or deficits; or
    • changing tax rates or tax policy to steer economic activity.
  • The NDP removes cronyism, selective regulation, subsidies, bailouts, and other economic privileges, producing more open competition and making monopolies less likely.
  • Individuals and businesses decide what to produce and how to produce it, subject only to universal laws governing aggression, property, fraud, and contracts. The State does not direct production.
  • No politician, central banker, minister, or small committee has discretionary authority to impose decisions with economy-wide effects. Economic decisions remain distributed instead of making the stability of the whole system depend on the judgement of a few individuals.
  • Tax choice replaces central political allocation of funding for public services.

These are not isolated policy adjustments. Together they change the mechanisms governing credit, investment, business failure, rent-seeking, public-service funding, saving, prices, and the allocation of capital. No historical economy has operated with this combination of institutions.

Economic history therefore has limited value for predicting how an economy based on VoTa will behave. Historical experience can still illuminate particular incentives and causal mechanisms, but results observed under monetary expansion, political allocation, selective regulation, and government-created privilege cannot simply be projected onto a system from which those mechanisms have been removed. VoTa must be expected to produce economic behaviour for which there is no direct historical precedent.

No instability from endogenous money creation

The foundation of Steve Keen's financial instability model exhibits bounded cycles in employment and the wage share, arising from delayed negative feedback. These are not financial booms and busts.

The model becomes unstable when commercial banks are able to create money by extending credit (see A model of endogenous credit creation and a credit crunch). New credit creates additional purchasing power, which can raise investment and asset prices, encourage further borrowing, and turn bounded cycles into financial booms and busts. When credit growth reverses, the same process operates in the opposite direction.

This mechanism does not exist under VoTa. Commercial banks cannot create or destroy money; lending only transfers existing money from a lender to a borrower. Economic cycles may still occur, but the mechanism that turns Keen's stable model into an unstable one is absent.

Because the money supply is conserved, account balances are non-negative, and transaction velocity is physically limited, the monetary system is bounded. The unbounded monetary behaviour produced by endogenous credit creation in Keen's model is therefore impossible under VoTa.

Reasons to expect greater stability

There are multiple reasons to believe VoTa would be more predictable and stable than existing systems:

A bounded monetary system

  • The money supply is constant. Commercial banks do not create money to fuel booms or destroy money to make busts even worse. They cannot create new purchasing power that flows into assets, raises their prices, increases collateral values, and fuels further lending.
  • There is no central bank setting interest rates or buying and selling assets to manipulate markets.
  • There is no government debt and therefore no government bond market. This removes uncertainty arising from changing sovereign yields, refinancing and default risk, and intervention in government bond markets.
  • In existing systems, most broad money consists of commercial-bank deposits. A deposit is a liability of the bank and is often created alongside a borrower's debt. Everyday money therefore depends on the balance sheets and solvency of commercial banks. Under VoTa, money is held directly in Central Bank accounts and is not anyone else's debt. Loan repayment, default, or bank failure cannot create or destroy it.
  • Bank runs are impossible.
  • Bank failures do not disrupt the underlying monetary system. Commerce remains possible even when a bank fails.
  • There is likely to be long-term deflation. This reduces the pressure to make high-risk investments merely to preserve wealth, because people can save money without fearing that inflation will devalue it.

Market-disciplined lending

  • Lending is constrained by money that its owners have chosen to put at risk. Credit cannot expand merely because a bank issues a loan, and losses fall on the banks and investors that funded the lending rather than on holders of money or taxpayers.
  • There is nothing special about a commercial bank. Anyone can act as a financial intermediary, creating fierce competition between lenders. Those that consistently identify investments whose expected returns are commensurate with their risks survive; those that lend badly fail without threatening the monetary or payment system. This removes the rationale for treating banks as too big to fail and favours small local banks that understand the people, businesses, and conditions in their area.
  • There is no government-created moral hazard. Firms cannot assume that risky behaviour will be rescued because they are politically important or considered too big to fail.

Distributed economic decisions

  • No politician or small group of officials makes decisions with substantial economy-wide effects. Under VoTa, for example, tax allocation reflects the aggregate choices of millions of people rather than the decisions of a handful.
  • Tax allocation changes gradually. Because it reflects the aggregate choices of millions of taxpayers, funding is less likely to swing abruptly than a government budget decided by a small group.
  • There are no targeted subsidies, bailouts, or tax concessions. Businesses cannot base their plans on securing political favour or fear that competitors will receive special treatment.

Stable and understandable rules

  • The system is simple and understandable. Existing financial systems are fantastically complicated, beginning with the machinery of the state: government bond markets, treasury financing, the creation of coins and notes, central-bank interest-rate decisions, quantitative easing, open-market operations, changing policies and targets, reserve and capital requirements, and commercial-bank clearing. Few people understand how these mechanisms fit together or how they will change. A basic example is that many people, including many economists, do not realise that when a commercial bank makes a loan today, it normally creates a new deposit by crediting the borrower's account rather than transferring existing savings. VoTa replaces this complexity with a small set of transparent and predictable rules that ordinary people can understand.
  • Economic rules do not change with each election. Taxes, regulations, and economic privileges cannot be continually rewritten by changing governments.
  • Production is not taxed. Entrepreneurs can estimate costs and returns without anticipating changes to income, payroll, company, or capital gains taxes.
  • Enforcement is non-discretionary. Investors need not account for selective crackdowns, politically motivated investigations, or negotiated exemptions.
  • Property and contract rules are stable and universal. Businesses face general rules rather than rules that vary by industry, location, status, or political influence.

Automatic resilience

  • The UBI acts automatically. It maintains a basic flow of consumer purchasing power during downturns without requiring politicians to design an emergency stimulus.
  • Failures remain localised. Competitive providers can fail without requiring a system-wide bailout or disabling the monetary and payment systems.