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Critique of Richard C. Cook Program for Monetary Reform

Richard C. Cook has written a paper titled, An Emergency Program for Monetary Reform. It is based on re-defining the terms "Gross National Product" and "national income," which most economists consider synonymous, to be different, and then proposing that the difference be paid to all U.S. citizens as a cash stipend. Cook writes:

"In 2006, our Gross Domestic Product was about $12.98 trillion, with the enormous trade deficit of $726 billion figured in. Our total national income was $10.23 trillion, including wages, salaries, interest, dividends, personal business earnings, and capital gains. Of this amount, at least 10 percent, or $1.02 trillion, would have been reinvested either at home or abroad, including retirement savings, leaving total available purchasing power of $9.21 trillion"

"The primary method [the Social Credit] system would use to implement public creation of credit would be through a cash stipend paid to all citizens known as a National Dividend" And the right to the dividend would not be tied to whether or not a person had a job"

"Instead [of privately controlled creation of credit], if we'd had a Social Credit system in place, the $3.77 trillion gap in the 2006 U.S. economy between production and earnings " the bounty of our productive genius " would have been bridged by a National Dividend averaging $12,600 for every man, woman, and child (legal resident or citizen) in the nation.

"Looked at from another angle, this payment has some relationship to a "basic income guarantee,' which has been advocated by many economists, politicians, and reformers in the U.S. for decades, including Milton Friedman and Dr. Martin Luther King, Jr., and which is the idea behind the current citizens' dividend of about $1,000 per resident under the Alaska Permanent Fund."

Cook does not cite his sources, so it is unclear where he gets these statistics (he probably makes them up), but I suspect that his technique is related to Montagne's third premise, which I have countered elsewhere. Specifically, I write:

"Finally, in regards to Montagne's third premise, even if there were people systematically cheating the rest of us, that would not make an economic collapse 'inevitable.' After all, their income is a part of national income statistics in the same way that Montagne's and mine are. Economists count everybody's income when they compile those statistics, not just the incomes of the people that they like.

"Böhm-Bawerk denounces 'the tendency among English economists " often and quite justifiably censored " to regard workers as producing machines; that view made their wages a component part of production costs, and counted them as a deduction from national wealth instead of a part thereof' (1959, v. 2 pp. 72-73). Montagne is making exactly the opposite mistake: He is counting only the proletariat's wages toward national income, while excluding the income of those wicked money lenders who prey on them."

Obviously, a trip to any dictionary is all that it takes to refute the Social Credit premise. Gross National Product and national income are synonymous; they must be equal, within round-off error. (It is possible that Cook is confusing gross and net income.) Also, equally obvious: Printing paper money is inflationary whether it is used to buy Treasury Bills or is spent directly into the economy. Arguing with socialists is a bit like Alice's meeting with Humpty Dumpty " common words like "inflation" and "national income" just seem to mean whatever the socialist chooses them to mean.

Regarding Milton Friedman, he did indeed advocate a negative income tax, but only to reduce administrative costs. "The arrangement that recommends itself on purely mechanical grounds is the negative income tax," Friedman wrote, "If enacted as a substitute for the present rag bag of measures directed at the same end, the total administrative burden would surely be reduced" (1982 , pp. 91-92).

However, by definition, a negative tax comes out of the positive taxes that other people pay. Friedman never proposed giving every man, woman and child in America $12,600 of freshly printed paper money. He did not re-define GDP and national income to conjure up trillions of dollars of "missing" money and he did not attempt to re-define inflation to exclude a central bank spending money directly into the economy rather than of buying Treasury Bills.

In the past, I have criticized Friedman for being an essayist, not an economist, but I have generally agreed with his essays. But this one I do not agree with, for three reasons:

1) A camel poking its head in one's tent may not seem like much of a bother but, if it is not driven out, one soon gets the whole camel. The difference between a negative income tax and pure communism is one of degree, not one of principle. While one may negotiate to a compromise, one should never concede one's principles to socialists.

2) A negative income tax has the problem of moral hazard. There is shame in presenting food stamps at a grocery store, especially in a small town, which America was mostly composed of in 1962. But, since every wage earner is encouraged to (foolishly) over-pay his taxes so that the government can collect interest on his money before returning it, with a negative income tax, there is no way to tell who is on the dole and who is just getting a tax refund.

3) A negative income tax is not really any less expensive than the "rag bag of measures" that Friedman complained about. The mass of inane paperwork had three effects: it ran up administrative costs, it made it difficult for people to get on welfare and it made it difficult to get people off welfare.

a) The negative income tax addresses only administrative costs, but I believe that the moral hazard problem costs far more than the salaries of some bureaucrats.

b) A negative income tax requires a years delay before receiving one's dole and the existing system requires jumping through hoops so, in different ways, both systems make it difficult for people to get their first payment. This is bad: While I want to shame people while they are on the dole, I also recognize that the ones who truly need it are in a time crisis. If misfortune has come to people, making them wait a year or fill out endless piles of paperwork does not help. A few hundred dollars now can pay their mortgage, but a house that has been foreclosed on cannot be repurchased and a family that has broken apart cannot be brought back together.

c) Not only do we want to shame people while they are on the dole, we want to make them continuously re-justify why they need it. The "rag bag" that Friedman complained about did not do this, as all the paperwork was filled out during the initial application process. However, as I understand it, President Clinton's reforms largely accomplish this third goal by making people continuously re-justify why they are on the dole. So, three cheers for Clinton " he reformed welfare without resorting to Friedman's negative income tax. Of course, old people are not required to justify their dole " once they pass the magical age of retirement, they just collect, collect, collect " and that is what is going to drain us dry. A single mother collecting a few hundred dollars a month for a year or two before she gets bounced out of the system does not cost much compared to the five to ten thousand dollars a month it costs to keep an old person alive for the last decade of their life.

Finally, the Alaska Permanent Fund comes out of taxes, unlike Cook's cash stipend, which is just printing paper money and giving it to people to spend directly into the economy. And the Alaska Permanent Fund Dividend is not a basic income guarantee; it is an inducement for oilmen to bring their families to Alaska and for single women who want to find husbands to move to Alaska. Alaska has plenty of money but a miserable climate, while places like Appalachia have a beautiful climate but no money. They must follow very different paths to correct these problems.


Carroll, Lewis. [1871] 1992. Through the Looking Glass. New York, NY: Bantam Doubleday Dell Books for Young Readers

Friedman, Milton. [1962] 1982. Capitalism and Freedom. Chicago, IL: University of Chicago Press