Resources and Wealth

Resources. It’s a word we all hear and use every single day. In the office a manager tells the VP that without more resources (people) the project won’t get completed on time. In geopolitics we learn about natural resources such as gold, oil, trees, fertile land, fresh water and so forth. The more natural resources within a nation’s borders, the wealthier that nation is. But resources are much more than able bodies or abundant quantities of gold. Resources can be cultivated and increased. It is implicit in the definition of resources I gave above. There are finite resources such as precious metals and fresh water, but there are infinite resources as well. People, for instance, can procreate to the point where there are too many people than there are jobs for them to fill. Fresh water can be contaminated in so many, many ways that diminish the already finite available fresh water. And gold can be hoarded by individuals or nations. But ideas are infinite and ideas are made into reality by an educated populace, which is one of the reasons Ben Franklin, Thomas Jefferson, and Abraham Lincoln were all strong supporters of free public education, including college level.

What we can see is that by measuring a nation’s resources including the investment made into cultivating those resources we can fairly evaluate not how much wealth a nation has, but how it can improve that wealth in order to benefit all it’s citizens. Long term wealth is achieved by maximizing the value gained from scarce resources that are not infinite and by guaranteeing that potentially infinite resources are cultivated so that their wealth producing potential is not put at risk.

We have a way to measure the resources available to any nation, its called money. That was why we had a gold standard at one time. We used gold to represent the comparable resources of America against another nation’s resources that were also on some precious metal money standard. In reality though, using a commodity resource did not fairly represent the sum total of any one nation’s wealth.  Yet the idea that backing a currency with gold or some other commodity makes a currency more worthy than a currency based solely a nation’ resources. But the truth is exactly the opposite. The problem with gold is that one must trade existing resources to obtain more gold and thereby enhance their wealth or initiate a war which drains resources and the gold obtained may not equal the resources expended. By evaluating a nation’s wealth solely on its resources, then a nation can grow it’s internal wealth solely by nurturing it’s resources. Our dollar is backed by the nearly inexhaustible resource potential and by not recognizing this, we are at risk of losing that nearly infinite potential.

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MMT Discussion – Part 3 – My taxes paid for That!

BRADFROMSALEM

If you have not read Part 1 and are unfamiliar with the concept of Modern Money Theory [MMT], click here for a brief introduction. In Part 2 I cover 4 of the 5 reasons taxes are still necessary even though MMT explains that taxes do not fund Federal spending, click here to read about the first 4 reasons. Below, is the 5th reason for collecting taxes in an economy that honors the MMT economic descriptions.

The most popular feature of the MMT description of how money is created, circulated into the economy, and then ultimately destroyed is undoubtedly the approach to taxes. In the previous entry I described 4 reasons why taxes are collected even though the MMT description does not require tax receipts to fund government activities. Instead government activities are funded by money creation and taxes are ultimately destroyed. But MMT’s description of money creation limits that act to funding government expenses that serve a public purpose. Currently, in the news we have an expenditure that cannot be described as providing a public purpose. I use the example of the cost of maintaining a lavish and separate lifestyle for Mr. Donald Trump and his wife more for its notoriety than its dollar amount.

If we were funding government expenditures solely by creating whatever is required to pay for everything that is an expense, what is the public recourse? While there is little truth to the near myth that printing money will cause inflation, there is as my language indicates a path to that occurring. Also as I noted in the previous blog, should inflation start to accelerate, then raising taxes would brake that situation. To take the Trump example a little further, without a lever that the public can exercise to prevent extravagant spending by not just the President, but by all elected officials; who would gladly use that power to enrich each other along with their friends and others as well. It becomes evident that eventually the power will be abused and even with a remedy at hand (raising taxes) a better approach would be to allow tax receipts to be “allocated” as an accounting trick to certain government expenses.

This will allow taxpayers the right to proclaim, as they do now, that they do not want to pay taxes for Trump’s lifestyle choices. Taxes to serve the public purpose of maintaining citizen sense of ownership. In fact it’s more than a sense of ownership, it is real ownership. Something that rounds out the public purpose of spending. The question is then, how are public purpose expenditures separated from operational expenses that will not enhance serve the public purpose? One possible way is to fund all maintenance costs from tax collections. This would be items like road repair, upkeep of National Parks, along with salaries and expenses of Federal office holders and their direct staff. One critical expense would be all military spending, unless there is a true declared war.

Spending via money creation would be on all capital expenses. New infrastructure, Health Care, Social Security, Federal Job Guarantee, Basic Income Guarantee, and Public Education come to mind immediately. These are all items that serve a public purpose. Under the present arrangement these are the costs that are deferred, cut back or never even considered because it is believed we cannot afford it.

There are political advantages to restricting some expenses to be budgeted according to tax revenues. Using the model of assigning maintenance costs to those revenues is not perfect. There will be public purpose spending happening, but since the maintenance areas are the ones people care about the most means there is less push back from taxpayers when they have well maintained parks, roads and power grids.

There is one last caveat to the capital expenses that must be understood. The MMT descriptions only apply to the Federal government’s expenses, states, counties along with city & towns still must collect taxes to pay their bills. With an MMT model we do get more done with less taxes, but as I have shown taxes are a necessary and critical component of a healthy economy and a component essential to a dynamic democracy.

(I plan to write some more on other MMT aspects such as the Basic Income and Job Guarantee along with why it describes money so well and other descriptions are lacking.)

MMT Discussion – Part 2 – Lessen the Burden on Taxes

BRADFROMSALEM

If you have not read Part 1 and you are unfamiliar with the concept of Modern Money Theory [MMT] then please click here for a short introduction. There are 5 reasons why taxes are necessary even in an economy built to take full advantage of MMT descriptions of money. A central observation of MMT is that taxes are not required to fund the government. But still taxes have an essential role and of the 5 reasons the first 4 are listed below. The last reason will appear in a separate blog following this one.

  1. Collecting taxes payable in US currency establishes the dollar as a legitimate currency. If taxes must be paid, and you provide a service where you collect your pay in a barter agreement, then how will you pay your taxes? Some may romanticize using such a system for payments, but it is just not practical. Using dollars allows us to spread out our debts into manageable chunks, paying taxes in dollars reinforces that the dollar has a critical value.
  2. Taxes are the simplest means the government has to control the money supply allowing it to manage inflation, which by the way does not happen if the government creates more money. But, should other external events like the 1970’s energy shortage in the US and inflation gains momentum, raising taxes can take the wind out of that sail real fast. But, the tool also goes both ways, taxes can also be lowered to provide stimulus during a slowdown. Ideally, in a well-managed economy the tax tool will be needed infrequently. MMT, by noting that we overburden taxes by assigning conflicting economic tasks creates an economy that is easier to manage by lessening the workload we currently needlessly assign to money.
  3. Taxes and fines can be used to manage socially positive behavior. We do this now with taxes on alcohol and cigarettes, along with fines on selling those items beyond the legal parameters. This may be the most controversial issue of what taxes (and fines) but one must also consider that the use is not just for “sin” taxes but is also the justification behind a carbon tax and other environmental issues. Encouraging, not just people but business interests as well into acting for a Public purpose or not acting against a public purpose is a critical role of a civilization, and taxes are a powerful tool for enforcing that. Also, by adhering to the principle that taxes are not needed to fund the government’s expenditures, means that these sin taxes don’t end up as necessary to fund the government.
  4. When taxes are not driving all expenditures then tax collections can do all of the previous three tasks and help in the redistribution of unequal wealth acquisition. Yes, Robin Hood taxes may not actually redistribute wealth, but it does, at a certain point, force high earners to reconsider whether or not being paid only 30 cents of each dollar earned is a wise way to make more money. Forcing wealthy, highly paid persons to truly push their wealth back into the economy can significantly help to reverse current income trends.

In the next post I will discuss the 5th reason for we need taxes. And that reason is based on politics, not economics.

Modern Money Theory – Part 1 – Not a Theory, It’s a Description

BRADFROMSALEM

We all know that the US collects taxes and then uses those tax dollars to pay for whatever expenditures the US has. We also know that for nearly every single year of this nation’s existence, the taxes, tariffs, fines and fees collected were not enough to pay for those expenses, so the US borrowed money by issuing Treasury notes, to cover the difference. That is the annual deficit. Of course the deficit borrowing gets paid back with interest from taxes, tariffs, fines and fees [TTF&F] or new borrowing as each Treasury note matures.

All pretty well known and nearly universally accepted. Except, it does not represent fiscal reality. That reality is neatly described in an economic philosophy called “Modern Money Theory” [MMT] which posits that since all US Dollars originate from the US government (a legal fact, try to print your own US Dollars!) and all TTF&F must be paid in those same US Dollars. Then as those dollars come back to the Treasury where they were first created, each one of those dollars are effectively destroyed. That means that every dollar spent by the US is created by the Federal Reserve, an agency that was created for that purpose. The amount of money it creates is not in any manner solely dependent upon any part of the TTF&F collected. I suggest obtaining J.D. Alt’s book on Amazon that explains how this all works with simple language and drawings of bathtubs and other plumbing artifacts by clicking here.

But even though the US does not need your tax money to pay its expenditures, it still must collect taxes. In fact there are 5 reasons it needs to levy and collect taxes. I will cover those 4 of those reasons in a blog to be published in the next day or two, followed by a blog covering the 5th reason a day or two after that.

THE US BUDGET. IT’S NOT THE SAME AS YOUR BUDGET.

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Don’t be like Lester. Do your thinking outside the box.
  BRADFROMSALEM

The moment you apply the rules of balancing your books to a national budget, you have made a colossal mistake.  Read on, let me know if agree.

It is Budget season on Washington when various caucuses and even the President all submit a different budget for consideration.  And certainly there are many differences between the President’s budget, the Progressive Caucus Budget, the Democratic budget and this year’s winner, the Republican budget; which passed through both the House and the Senate. Now for all the complaints about the Republican budget and the others as well, they all share one very critical trait that deserves closer examination. But before I get to that, there is another item that is very important. A budget for the US Government is just an outline. There is little in there that enforces any cuts or increased spending. And the little that is in there for cuts and increases can be overridden when an actual bill is passed and signed by the President. It is all for show.

Back to that critical trait I mentioned, which is not just for show. All expenditures must be accounted for by taxes, tariffs and fees that the government collects. Any shortfalls are made up by selling Treasury notes that are repaid with interest. Similar to any loan that many of us take to pay for a house, car or college education. I call this method of funding the government Tax to Spend. The term is temporally correct since, first the government sets tax rates, then, as the money is coming into the government coffers, Congress authorizes spending. When there is a shortage, the Treasury Bonds are issued and sold. Those bonds represent what is called the deficit and every budget brought up in Congress targets reducing the deficit until the budget is balanced. In fact a balanced budget is the proclaimed purpose of creating a budget in the first place.

But what happens when there is an economic downturn? When millions of people suddenly turn to government to help fulfill their basic needs. Among those are unemployment payments and since the unemployed have no income they need subsistence assistance like food stamps so their lack of work does not let their families starve. Often economic downturns occurrences are coincidental with changes in the workplace so education and job training assistance are needed to provide access for the unemployed into this modified workscape. But also day care help makes certain that children are cared for when their parents are in a school or training or working at entry level wages.  When more persons are suddenly in the low wage end of the income spectrum, how should government pay for it all?  Most Conservatives will insist that by supplying people with “free” unemployment checks, education, low cost food and even housing the government is encouraging bad behavior, so just level fund all the programs so people will go get themselves a job.  Liberals will usually insist that we raise taxes on those that are still doing real well and use that increased tax income to fund all the programs and also create jobs. Conservatives counter that by taxing the wealthy, the wealthy will be unable to expand their businesses and restore jobs.

Surprise! The Conservatives are correct. Raising taxes in tough economic times increases the pressure on business to contract when demand is shrinking.  And taking taxes from persons with no income is very much out of the question. The government could “borrow” more to cover all the increased expenses during a downturn, but that just means that persons of considerable wealth are getting paid (interest) to put their money into the government instead their business. Putting money into funding the government where the interest rate certainty outweighs the risk of investing in any business and profits are not guaranteed. So we are left with a choice of increasing taxes or paying the wealthy to fund government expenses.

But, there is another way that government gets money to pay for implementing all the items in the budget, as they are enacted in law. The US Government and the US Government alone has the authority to actually ‘print’ or coin money.  Ever since President Nixon took the US off of the gold standard, the US Dollar is a floating currency. It’s worth is based on what people are willing to pay for it. Just like a Realtor will always tell you that your house is worth what a person is willing to pay for it, the same is true of the US Dollar. What this means is that probably by the stroke of the President’s pen alone all all tax deficits can be funded by the US Treasury requiring the Federal Reserve to “print” the necessary currency.  (Side note: Money is not actually printed, it is just an entry typed into the US’s ledger by the Fed)

With the funding question now addressed, what a bout taxes? If we eliminate them entirely why would Americans or American businesses use the US Dollar. That is because, by taxing as well as only accepting the US Dollar as a tax payment a value actually gets assigned to the US Dollar. It also turns out that taxes can be a great tool by which government can implement economic management via the tax collectors. I call this the Tax to Manage economic model. Managing economic conditions is something that all governments do, but with its spending role mostly eliminated the management function grows in importance. For example, historical evidence indicates that income inequality increases as the range of marginal tax rates shrinks. So, it would seem that by raising the highest tax rate over 50%, probably to 75%; income inequality will diminish. Also, since that rate will stay consistent across economic upticks and downturns, the negative impact of raising taxes on the wealthy is minimized. At the other end of the spectrum, taxes on lower income persons can be lowered significantly, especially if no taxes are collected until pay reaches past a living wage.

One last word about what most skeptics will reflexively bring up. Hyper Inflation.  And they are right, it is a risk, but not very likely. High inflation will occur when some critical resource that is needed by nearly everyone becomes scarce. The correction, when inflation starts to rise, is to simply manage it away by raising taxes and by addressing the shortage by some reasonable substitute. Once the economy stabilizes, return the tax rates to normal. In the final analysis, we need to alter how we fund government activities, so that government can meet the promise made in the preamble to US Constitution when it declares that the government as defined by the Constitution will “Provide for the general welfare”. By making money collected in taxes the major source of government income the US has weakened itself economically so that money cannot be used to mange the economy.

Gallery

LOWER TAXES CAN BE A PROGRESSIVE SOLUTION

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BRADFROMSALEM

Is that true?  Can lowered taxes lead to reducing economic inequality, more opportunity for all, an end to hunger and homelessness, a revitalization of the entire US infrastructure, and all while making green energy the most prevalent source of energy; with enough left over for full employment?  I’ll let you decide. But first lets take some things into consideration. Just lowering taxes will not create the opportunity to do anything constructive, at least not until our monetary system is radically revamped.  You see,  the trickle down folks actually are like a clock running backwards; it’s correct if you look at it from the other side. And doing that means a lot of other things get changed as well. But more precisely, our economy is mixed. There are services performed by the private sector and services performed in the public sector. The same is true for goods as well. Although the private sector provides mostly goods and the public sector provides mostly services.  These two sectors are intertwined so tightly, that putting everything into one or the other causes major disruptions in both. The recent economic crises is an example of try to fix a crises by moving everything entirely to the private sector does not facilitate recovery. But our economy also has mixed economic models. We have both socialism and capitalism. This is a healthy that can do much to keep the economy balanced and on an even keel. Less bubbles, more opportunity; less inequality, larger wealth for everyone. But, there is one thing that no matter if the economy is managed by the private sector, the public sector or by no one; there is one commodity they all have in common. Money.

What is money?  There are a couple of ways to think about money. First, it is a medium of exchange. I go over to your farm and tend your pigs every day. Each day I get paid for taking care of your pigs. Most times you pay me with some milk and other dairy products, or maybe a chicken. And every now and then I get a whole pig; and that is a week’s pay. But eventually I have to pay the man at the store for my clothes, and he doesn’t want 2 dozen eggs for a shirt. No, he wants cash. And why not? How is he going to buy that shirt to sell to me, or pay the rent on his store. So I ask you to start paying me in cash and If want a chicken or even a pig; then I will pay you back some of that same cash.  But, you don’t keep that kind of cash in the house, it is in your bank which is downtown right next door to the clothing store. So you give me a piece of paper, bearing your signature, every week for the same amount of money that you would get for selling one of your pigs. Then, when I buy the shirt,  I give the owner of the clothing store another signed piece of paper for the price of the shirt. The banker keeps track of it all.

Soon, I get a second client taking care of his pigs. So, I go to the banker and tell him I want to buy a house, so can you lend me the money to buy a house? Now I am paying a mortgage every month to the banker. And every month he gets back some of his money; plus interest. Whoa!  Where did that interest come from? We know where my money came from. When I worked, I got paid. I spent some of that pay for items, such as a shirt. But I also saved some money. The banker gave me some extra cash for allowing him to hold my money. And I give the banker some extra money every month just because he let me borrow some of the money he was holding for me and you.

This example shows two critical aspects of money. First, money can represent a trade value. I get paid the same amount of money each week that is the going price of a pig. (Sorta the pig standard!) And that is payment for a service, taking care  of your pigs every day. The shirt or the price of the pig are both examples of using money to represent something tangible. Time = 1 pig/week ;  Shirt = 24 eggs; house = 1 pig paid monthly?.  But how about the interest earned? There is no tangible item for it to represent, other than money itself. That money was just added into all the money that represents all real items and services, even though money is not real.

The second definition is simpler to say, but much harder? to comprehend. Money is just another unit of measure, like inches for example.  How many inches are there? Unless I restrict that to an ‘how many inches long is item X’  query the answer  can only be that there are an infinite number of inches.

Money is a unit of measure that is used to establish value of any item or service, even money itself. And when money is referencing itself, then more money is added to the potentially infinite supply. So what the heck, just put together a printing press or invent a secret algorithm and create all the money you may ever need. Wrong. Why should I take your freshly printed currency to pay for tending your pigs? Taxes are due this month and the IRS only accepts US dollars.  Taxes!  Did you read the title carefully?  If not, go look; I’ll wait.

OK, did you catch that it said Lower Taxes not No Taxes?  Good, because unless there are taxes being collected, there is no reason to trust even the US Dollar. Everything has its limit, and taxes cannot even approach zero let alone become zero without major, major economic disruption.

Currently what happens is that when Congress spends, the US Treasury draws from it’s account at the Federal Reserve Bank to pay the bill. Occasionally, the Fed will notify the Treasury that the account is about to run out of money. The Treasury then instructs the Fed to issue bonds to any interested buyer.  The income from those bonds are deposited into the Treasury’s account and the bills can be paid.  When the bonds become due, the original purchase price plus interest is paid back to the investors. They are always paid back in US Dollars.  The numbers also show that most of the persons investing in America are actually members of those that are part of the upper 2%  of  Americans with regard to income.  The relatively small amount that actually goes to China, is still paid out in US Dollars. If the Chinese don’t want to lose money, they would not do anything to jeopardize their investment in the US. Progressives (like yours truly) generally want to gain access to those investor’s dollars by taxes, instead of borrowing it from them.  And overall, that is true. it certainly is a better solution than lowering their taxes without paying for all those items I noted earlier. Besides, it is actually good to run an economy at a deficit, as doing so helps the private sector continue to grow.  As I noted, it is one way to keep US Dollars intact and thereby maintain the currency’s value, so that holders of that currency, upon spending it , or even saving it; strengthen the dollar.  Foreign nations such as China investing in the US Dollar, keep the dollar strong. By the way, foreign investment is the only debt we actually have to be concerned with. And that debt is perfectly OK to carry as long we can pay it back and as long as it remains in US Dollars.

But, there is actually a better solution than raising taxes so wealthy Americans and others don’t finance the nation, even if a dose of that is good. Remember I noted a mixed economy, what I am proposing is a change in the how the mix is allocated on the fiscal side. It would allow taxes to be cut and everything paid, it also defines exactly what our taxes do pay for and even what part of the budget is done through deficit spending.

The Treasury must take back from the Fed the ability to “print’ money as needed with a few very notable exceptions. It is important to note that money is not printed, it is actually just entries in a super secure spreadsheet. What this means is that Congress can allocate as much money as it takes to reinvent our infrastructure and provide for the hungry and  the homeless.  There are real world limits on how much Congress can spend however. But the limit is not infamous wheelbarrows of money from Post WW I Germany, just printing money alone will not create that kind of inflation. That inflation was caused by the incredible cost of reparations placed upon Germany by the Allies after the War. The reparations drained Germany of a large portion of it’s resources, leaving the private sector competing over scarce resources leading to inflation.  But right now the US has tremendous resources, people, land, abandoned properties waiting to be rebuilt, and natural resources as well. And Congress can accomplish the list of goals that I started this post with tax free.

So, what do we pay taxes for? The first one is the safety switch in case Congress does over reach the limits of our resources, and inflation starts to rise. To stop the inflation, just raise taxes and it will slow it down . But raising taxes, implies that taxes are in place; so during times when inflation is not a problem. So, we maintain a Progressive income tax rate to manage income inequality.  No matter what the economic situation is, keeping the top rate well over 50% has been shown to serve as a brake on income inequality; in other words, taxing the wealthy is good for the economy whether need their money or not, as it forces a better distribution of income.   The next tax item, serves a social good.  The entire military budget must be paid only from tax collections. By hitting persons with a potential tax increase every time we decide to halt the boogie man of the Century, (20th Century boogie man were Communists; 21st Century has Terrorists) it is very unlikely that people will jump at the opportunity to go into undeclared wars without cause. Of course, an actual declared war would be exempt from this requirement. Historically, the US Government has “printed’ money to support declared wars.  Also, any expenses directly paid to the 3 branches of government and their staffs would be paid from tax revenues as well as paying down any foreign debt.  Last of all, the US Government can continue to maintain fiscal balance by borrowing any money that is sent to the states.

So, yes it is possible to achieve full employment and reinvigorate the entire economy and there will be no excuses not to lead the world on the issue of Climate Change, with lower taxes.  If you agree, please like this blog entry and share it as well.     Thank You.

 

I would like to acknowledge the scholars at Modern Money Theory, who regularly blog on this subject. They are centered at University of Missouri – Kansas City. The overall framework is mainly drawn from their writings; the ideas and concepts regarding which categories of expenditures  should be paid via printed money, taxes, or debt are my own.

 

 

BANKS TO THE RESCUE!!

 

Our Wealth Overflows.
Our Wealth Overflows.

BRADFROMSALEM

Nearly every state has problems with balancing their budget. As a result schools suffer from a lack of funding, state and local roads crumble from the weight of trucks and SUV’s . Other infrastructure and citizen needs go unmet, because the state and/or the local government cannot afford to pay for it. Some of these expenses possibly can be pushed back to the Federal government to fund, but that would not entirely help. Even here in the so-called Peoples Republic of Massachusetts we have a flat income tax, a sales tax, and locally there are property taxes. All regressive taxes, hurting the functioning of government from modernizing traffic lights to updating the technology available to schools to making sure that all departments in critical areas such as Family services, court evidence labs, and compounding pharmacy oversight are fully staffed and oversight of the work being performed is in place. Other states also have similar problems.  One solution, of course, is to eliminate all regressive taxation completely, and replace it with a progressive tax rate on income.  But the hue and cry, especially from the Right, would be unbearable, unless! Unless we couple that with another source of state revenue. In my home state, Massachusetts, the state has authorized casinos to be built to provide for additional revenue. Unfortunately, the holistic data is pretty incomplete as to whether or not casinos actually generate a net gain in tax revenue once all the associated costs incurred are factored in. No, we want a sure thing.

The answer is rather simple. A state run banking system.

Banks are very profitable, it appears. Nearly everyone needs to do business with a bank at some time. Taking on a mortgages, buying a car or starting  a small business requires you do business with a bank. Only with a state bank, the profits (or the interest paid) goes back to the state. Think about that for a second. A state run bank would mean that instead of a bank taking a profit on your mortgage, your monthly payment actually reduces your state taxes. Profits over reserves goes into the state coffers, the rest is used to either increase state spending or lower taxes Once local government and state government agencies also use the state bank for capital spending, the money being returned to the state becomes significant.

Sure, big business will still do business with commercial banks, but you can go to a state bank for your home mortgage, which can be offered at better rates than commercial banks for ‘qualified’ home buyers. It also allows from some creative financing to occur. For example, a city may choose to offer owners of homes that are in disrepair to participate in a neighborhood home improvement project. Any home would be eligible to get a loan up to 50% (or maybe 25%) of the home’s appraised value. The loan is only paid back when the home sells. The payback is from the sale. So a city would lend a person 25K for repairs on a home appraised for 100K. If the house sells for 300K after the repairs and 5 years later, the city gets back 37.5K or 1/2 of the amount loaned prorated.  The numbers here may need to be tweaked for this example to work, but by having a state bank; the state, it’s communities, and it’s people get a bigger say in where money is invested.