19 April 2012

Money Matters: Idea 001

I've read several ideas about changing society's relationship with money, from giving people lump sums (from gift to zero-interest loan, $10,000 to $10 million) to canceling debts (student loans, mortgages) to invading a big country with enormous resources (that one was aimed at you, Canada.)

But Let's take the basic concept of fundamentally raising a society's economic average with barely one stroke and apply it to My Island. To frame the possible solution, We have to take into account that by global standards, My Brethren live in relative wealth, but by "Our standards," We are the poorest bananas in the bunch.

The reason I write "Our standards" is that We seldom compare Ourselves to Ourselves (how much progress We make or don't make versus Our past performance); We compare Ourselves to the 50 States of the richest, most powerful nation in history (even if it is in decline, it was all that.) So "Our standards" are skewed from "Our Island" to "Their Global-Motor Economy," a comparison akin to saying "Our electric fan versus that hurricane."

The fact is, We are not the U.S. of part of A., they treat Us like property, pillage profits from Us at a rate that would absolutely warm a pimp's heart and We are so wrapped up in Our desperate need to be taken care of that We fail to understand and thus act in Our own best interests.

But I digress. What's My plan to insert money into Our economy and make that "one wave of the magic wand" change?

Every adult in Puerto Rico is to receive $50,000 a year, non-taxable, for 10 years.

Before the why, here's the how:

At age 18, a person leaves fingerprints, retinal scans and a DNA sample and can begin receiving $50,000 a year at that time or any other time they choose. Shades of Big Brother, but it cuts down on fraud when you have that much ID evidence.

The money is given in one annual sum, the month of your birthday. Once you start receiving it, you have to continue receiving it, for any stoppage (death or request) ends the sequence. You are free to use the money in any way you choose.

At the same time this $50,000-a-year program begins, welfare--all welfare--is phased out over a 3-year period. No PAN, WIC, federal subsidies or any other social support, except unemployment, which is reduced every year by 10% until it is 40% of what it is now and then rises according to cost-of-living and capped at a maximum of 24 weeks. Health reform programs would continue and be expanded.

No one--no one--is allowed to receive more than 10 years, nor is it allowed to change the length of the 10-year sequence nor the amount of money given yearly. This is a de facto $500,000-over-10-years and it will not change until the first decade is complete. Then the amount given increases by the lesser of 10% or the inflation rate as evidenced by "Cost of basic goods" prices (food, gasoline, clothing, basic health care, rent, etc.)

If a person runs for elected office at any level, s/he cannot receive the $50,000 and renounces receiving it if still within their 10-year period. If still receiving the $50,000, any government employee, appointee or contractual hiring has his/her salary/fee capped at $50,000.

Prisoners cannot apply for their money while they are in prison. Once out, they can receive their money, but if they return to prison, they lose their future monies. And only residents of Puerto Rico with at least 5 years of proven residence are eligible, or can become eligible, to receive the money.

Now the whys:

1) Why $50,000? Because according to federal studies, a family of 3--notice the number--needs at least $44,700 to begin "climbing the economic ladder," rising from "lower class" to middle and upper. With $50,000, a local family could make that ascent, given that Our cost of basic goods is about 11% higher than Stateside.

2) Why 10 years? Because it focuses the person on doing something now with the money, or establishing it as a savings account to improve their future. Risk-takers could take their chances and the less risky can play it safe, but the money would be an incentive either way. If you want to start a business, great: you have a basic cashbox. Want to invest in mutual funds and use compound interest to become a millionaire? Great. Want to take your money and travel the world? Fine. Want to blow it all on drugs, gambling and drinking? Perfect. Hopefully you'll die before the decade is up.

3) Why non-taxable? Because it frees up use of the money for active investment or savings and forces the government to come up with ways to enhance the use of money in order to tax the increased revenue. Governments need taxes to function, but the incentive now is "tax whatever and spend whatever." With so much untaxable money, the incentive becomes "How to attract and support growth" rather than "How can We slice this pie to death?"

4) Why 5 years of residence prior to getting the money? Do you, Brethren, want to see an influx of millions of people just coming here to cash in on Our cash investment? Thought not. If you don't spend 5 years here, you can't say you have enough experience or concern for this Island to accept Our money and be trusted to use it wisely. Not that there;s any way to ensure it's used wisely, but why give it to Juanitos-come-lately who'll take it someplace else?

5) Why "No more if you say 'Stop'? The purpose of this money is to transform the economy now, not serve as some stop-gap measure when you get in trouble. That's called welfare and it doesn't work as a long-term economic solution. For another, becoming successful enough to not need the money becomes a badge of honor and a major pre-requisite for elected office, so We cut down on the "do-nothings" that use politics to line their pockets. And lastly, even a benefit should not be unilaterally imposed on anyone.

Where is the money coming from?

To give every adult in Puerto Rico $50,000 a year amounts to roughly over $116 billion a year. Round it up to $120 billion what with all the support systems. Heck, crank it up to $135 billion to cover future expenses. Who has that kind of money?

Banks. With an interest rate of 2%, banks would be receiving $22-28 billion a year, and the principal can be repaid from...wait for it...taxes and fees collected in Puerto Rico.

Not new taxes, but some new fees. The tax base stays the same (not very likely, but play along), but the revenue rises as there is more money spent, invested and created in and through the Island. And what new fees would We add? Let's add by subtraction, eliminating current incentives, which give away practically-free power and water to major companies. When the business world hears that a major--and I mean, MAJOR--consumerist society like Us is getting $50,000 per adult to spend as s/he wants, Our doors will be battered by frantic knocking.

Will We generate enough tax revenue to cover roughly $130 billion a year? Why not? Think of what will happen with an injection of roughly $115 billion into Our economy in one year. That alone roughly triples Our Gross National Product (GNP), which means a major change in the Island's socioeconomic profile. Can you imagine the buying spree unleashed as most of Us turn this money into empty wish fulfillment?  I daresay every major retailer in Puerto Rico would quickly adopt a 24-hour schedule and roughly double its employment base. Not to mention Disney World would see profits rise 20-25%.

Note I mentioned a buying spree. Corporations here are woefully under-taxed now and get free rides on other expenses to boot, so under the new system, with a greater number of purchases, more tax money would come into government coffers. Not to mention that personal income, even without counting the $50,000, would rise as the average income increases from the lack of welfare "stay-at-home" incentives and business expansion. And the current federal transfers could be eliminated in exchange for a more liberal trade policy, allowing Puerto Rico a better chance to expand its market reach and economic potential, instead of crawling along its belly as it does now.

WiIl this plan work? Why not? And if you disagree, what's yours?

The Jenius Has Spoken.

[Update: 26 April 2012: Happy Birthday, Zoila! From the good people at LearnVest comes this little tidbit: the new "price" of happiness is a $50,000 salary. I claim no psychic powers.]


Prometeo said...

I can't come up with a better idea. This experiment should be tried immediately.

Adelante y éxito.

The Insider said...

I love these out of the box ideas. I'm definitely for trying alternative methods of economic stimulation and paradigm shifts - even if they have almost 0 percent chance of happening. I've written about paying the poor to leave, and using sales tax revenues to distribute back to low income families before. This is in the same realm of thought.

Just some quick feedback:

Lump sum distribution - I think a monthly payment might be preferred to ensure spending would be more equally distributed throughout the year. It would also prevent people from spending it in a frenzy on large ticket items and then exhaust the funds early in the first few months. Perhaps special exemptions could be made for qualified expenditures such as new home purchases (downpayment + closing fees), automobiles under $30k, tuition within PR, credit liability pay down, etc.

Stimulating island economy - I would be concerned that too much money would be spent off island, such as trips to Disney (as referenced). This would stimulate external economies, but not Puerto Rico's. I think the monthly installment instead of the lump sum distribution would help keep more of the money on island.

Exiting work force - I would bet there would be a significant percentage of those eligible for the funds who would quit their day job and become a part of the middle-income-welfare class; leaving them in a desperate situation after 10 years. This could be particularly damaging to those starting at 18. Perhaps the age of eligibility might be increased. Fast tracking based on completion of a 1-2 year associates degree in Finance and Small Business Management would be an interesting option, or completion of a 4-year degree.

Inflation - There would definitely be inflation, which would reduce the actual value of the goods that can be obtained for the $50k within 1-2 years.

Educational Incentive - I would add an incentive for completing a post secondary education, a minimum of a 2-year program. Perhaps jumping the annual payment from $35k to $50k.

Ensure residence - Biometric scanning monthly before distribution is released? Concern would be those maintaining a local address to gain the incentive, but moving to the USA.

Debt restriction - The reliability of the income might encourage people to over-leverage and create greater debt with lines of credit and credit cards, etc. That shifts a big percentage of income into finance companies, where it would be better to keep that income directed at local market products and services (small business level). Perhaps central office could monitor credit liabilities and reduce annual disbursement when total credit liabilities exceed a threshold.

Job market impact - Those leaving the job market would create openings. This would technically reduce unemployment since many would choose to voluntarily leave the job market. However, the abundance of wealth could possibly cause average salaries in all fields to be reduced.

I know Gil likes to keep it simple and not burden it with too much regulation and criteria. I prefer to tweak the system, limiting some flexibility in favor of creating incentives to individual and collective progress.

Great brainstorm. Looking forward to reading 002.