Democratizing Sovereign Spending

By J.D. Alt

This past month I have been diligently working to complete my entry in a design competition to envision the “Residential Tower of the 21st Century”. At first, I did not intend to enter the competition because I have believed, for many years, that the challenge of future architectural development was horizontal rather than vertical—how to organize and “enable” high density , “piecemeal development” into horizontal communities (using people-mover technologies as a “horizontal elevator” core.) I even named this development model “The Horizontal Skyscraper”.

So I began a letter to the competition sponsors complaining about how they had framed their challenge in a way that precluded the best solution—but, halfway through explaining all of this this, I suddenly realized that what I have for so long been calling “enabling structures” really could—and should—go UP as well as sideways. So I hit the delete button on the letter and began working on my Tower. The bigger surprise came when I got to the part describing how the Tower would be paid for.

In an earlier essay (MMT and the Struggles of Political Democracy) I ventured to suggest a strategy for bypassing the budgeting gridlock that grips our political democracy—a gridlock that prevents Sovereign Spending from buying the goods and services we really need to improve the quality of our collective lives (like, for example, urban people-movers that would enable us to organize our architecture in more cohesive, sustainable, and economically vibrant clusters.) The fact that our “democracy” seems to have been wholly seized by the plutocratic power structure of giant corporations (which are now considered by our Supreme Court to be “people” in the fullest sense) is a special difficulty that will be hard to overcome. (Recall that John D. Rockefeller, founder of Standard Oil, had all the electric streetcar systems in the United States bought up, then tore the tracks from the streets to make way for gasoline powered buses! It was something he no doubt thought he had the right to do because he had the financial means to make it happen.)

As I suggested in the earlier essay, If people are to seize hold of the real power of their democracy, it seems to me that MMT will have to play a leading role in the effort. That’s why I’m enthusiastic with how my “Residential Tower for the 21st Century” has turned out—especially the part about how it is to be paid for. Before I make a fool of myself, however, I thought it might be a good idea to run it by the NEP community for comments and input. Here is the text portion of that page in the design entry:

“THE ADVENT of Modern Money Theory makes way for SOHO Towers to be among the first examples of ‘democratized’ Sovereign Spending (DSS) in the 21st century. DSS goes beyond acknowledging the Federal Government’s unique power to issue Fiat Currency (money) to achieve public goals and purposes. DSS enables local, non-profit groups to envision, engineer, and then implement specific projects for their collective benefit. While Congress will continue to negotiate budgets to achieve and ensure the general welfare, DSS enables well-organized, cooperative groups to avoid the politicization of Congress and directly tap Sovereign Spending to create collective goods at the local level.

“As an example, the SOHO Tower proposed here would be designed, financed, and built as follows:

  1. A non-profit cooperative is formed for the purpose developing and owning a vertical Co-Housing Tower.
  2. A regional Economic Development Bank provides a “DSS Project Team” which works with the Co-op group to develop the project.
  3. The Economic Development Bank then assists in preparing a low-interest, “consul” bond issue with a value equal to the projected development costs of the project. (A “consul” is a bond with no maturity date for the principal, paying interest-only on a long-term basis.)
  4. The Sovereign Central Bank (the Federal Reserve in the U.S.) purchases the “consul” bond, making an electronic dollar deposit in the Co-op’s local bank account. As the Co-Housing Tower is constructed, costs and expenses are paid for out of this account.
  5. The Co-op makes a relatively small, annual, interest-only payment to the Sovereign Central Bank—a payment which is shared by the Co-op members.”

There is an exploded illustration of a portion of the Tower which makes clear which part of the architecture is “collective infrastructure” owned by the Co-op (and financed with the low-interest “consul”)—and which part of the architecture is privately owned and paid for with market-based financing. The captions explaining the illustration are as follows:

“The small-scale, Design-Build projects lease the Loft-Shells from the Co-op, and pay for their individual build-outs with conventional, market-based financing. The completed units can be family-owned or rented. In either case, their amortized “cost” is affordable because it does NOT include the costs of the SOHO Tower & Shell infrastructure.

“The SOHO Tower & Shell infrastructure is owned as a “collective utility” by the non-profit Co-op. This “building-site infrastructure” is paid for by issuing interest-only “consul” bonds, which are purchased by the Federal Reserve (Sovereign Central Bank) thus injecting Sovereign Spending directly into a local, democratic process to create collective goods.”

I’m especially indebted to Joe Firestone for planting the notion of “consuls”—but why can’t the Federal Government  buy them as well as sell them? Any ideas about this will be most appreciated.

18 responses to “Democratizing Sovereign Spending

  1. I’ve seen it spelled “consol” in other posts here. Apparently this is a UK English word, so maybe in the US it is “consul”.

    What is “SOHO”?

    And the Federal government (Federal Reserve) does already buy bonds, and not just those issued by the government. Apparently there is no legal constraint in this regard, but under current law it would have to be considered a contribution to their “dual mandate”, which should not be impossible. You just have to convince the board of governors.

    Furthermore, if the Fed can lend money this way, they could also lend to cities and states, at low interest rates and perpetual maturities, for their general purposes.

    The objection would be that this is “printing money”, so MMT must be fully entrenched before it will gain popular support. But it is (Fed lending rather than Congress spending) a way to decentralize the political decisions involved, so it should be attractive to small-government types.

    • I wonder if this sort of thing – lending by the Fed at low interest (in the extreme, 0% interest) and perpetual maturity – is not a perfect substitute for a fiscal deficit, in macroeconomic effect. Perhaps all state and local spending of an investment nature (projects, not day-to-day expenses or maintenance) should be financed this way. Perhaps a positive interest rate, or some other statutory constraint is necessary to prevent abuse of “free money”. Maybe a 90-10 cost split, like the Interstate Highways used to be (maybe still are?).

    • Actually, the Fed is specifically enjoined from buying municipal bonds. Bernanke was asked about this during Congressional testimony a couple of years ago, since just a tiny fraction of the money the Fed has spent propping up the banks would be needed to dig cities and even states out of their fiscal holes, but he said the Fed is not allowed to do that (whether they would if allowed, he didn’t say).
      I doubt he can buy corporate bonds either, except maybe indirectly form the banks, as part of a toxic asset purchase designed to increase bank reserves, like with MBS’

  2. The Reconstruction Finance Corporation (RFC) which was active from 1930 until the early 50s could have financed your project. It made many self repaying loans as your project could be described. At one time it was the largest bank in the world and it was a public bank, outside the Fed/commercial bank circuit.

  3. While this sort of utility is admirable it assumes an absence of economic and political illiteracy. Cooperatives are often occupied by trolls and other dysfunctionals who very often exploit such “intentional” communities. Consideration of Gresham’s dynamic as a process of economic and political capture needs at least to be a major concern. Artifacts alone tend to be thin way to reproduce a commoning culture. I have witnessed numerous players who have made a career based upon assumptions of a commons without a process of principled commoning. The nature of being in the economic world by way democratic functionality has to be at the forefront. Democratizing, except as held to functional capacities, tends to become available for antithetical occupation including fictions of democracy, racism, colonialism, celebrity based (faux nobility)authoritarianism, and so forth. You might want to look at the Twin Oaks Intentional community’s labor credit system which oddly enough bears a close resemblance to MMT principles.

  4. I appreciate your endeavor. If you do it via the non-profit, you lose the greatest mechanism for efficiency that exists–profit motive. It’s the combination of MMT with the benevolent and virtuous effects of the profit motive that could really make an impact.

    • Bob, I appreciate your point. Something not clear in the essay–but which is a central aspect of the Enabling Structure architecture (and the competition entry)–is that the Tower creates a context in which a great number of independent, small-scale, design-build, FOR PROFIT architectural projects unfold. Each dwelling unit in the Tower is a SEPARATE for-profit project. The aggregate affect is more spending spread over a larger number of designers, carpenters, electricians etc. than if the Tower were completed as a conventional large-scale project. MMT is used to create the CONTEXT in which the for-profit activity flourishes.

      • I agree with Neil and will add a point. There is something stronger than profit motivation. Profit motivation is coupled weakly to individual survival and to the even weaker drive of greed. On the other hand serving others as they in turn serve you is a group survival drive and knowing that is the only option for us as a species makes it even stronger. It is a needed message and it is easily learned and once learned it can spread. I will point out too that what we believe often establishes our personal reality. I suggest it is time for us to understand and believe that serving others is a very strong group survival drive, not profit, and thereby make it our reality.

        • Charles – Would that you were right and that we did accept the intrinsic strength of a group survival drive but I live two short Congressional districts away from Speaker Bohener and I am certain he and his believe nothing of the sort. More importantly, they legislate accordingly. On the other hand, look at the change one freshman Senator has wrought. Senator Warren arrived and suddenly the Volker Rule grew teeth and Janet Yellen started talking, out loud, about the regulatory responsibilities of the Fed. So, maybe you are right. Maybe we should live (and work) in hope.

          • Group survival instinct shows itself most strongly in situations where survival is a real issue. Think about real catastrophes such as a monster storm, an earthquake or a fire where people come together and help each other to survive individually and as a group. I agree it is harder to find that same instinct among people when the issue is only money but I do believe a part of that is due to the definition of money imposed on us by the money handlers. And I do relate to your other observations…

    • “you lose the greatest mechanism for efficiency that exists–profit motive.”

      The easiest way to make profit is to cut corners, whip staff and employ smoochers to smooth things over when the facade slips.

      That’s how all the outsourcing operations work.

      Non-profit is a misnomer. Non-profits often make a better profit than narrow owned businesses – because everybody is engaged in driving the business forward.

      ‘non-distributive to narrow owners’ is more descriptive but not as catchy.

  5. These comments are much appreciated. An omission in my post is the acknowledgement of Gar Alperovitz whose book “What Then Must We Do?” has as its subtitle: “Democratizing wealth and building a community-sustaining economy from the ground up.” This book was recommended to me in one of the comments to my earlier referenced post, and I’m much indebted!

  6. Pingback: Democratizing Sovereign Spending | New Economic Perspectives | euzicasa

  7. J.D.

    I have no wish to rain on this admirable parade – in fact, I think the thrust of it is great. But I don’t think there can be privately-issued consols. The idea of a consol (which I think originated in medieval Italy) was that the government’s debt could credibly claim to be perpetual. The thing worked like a tax – every nobleman’s wealth was assessed, and he was then obligated to buy a certain number of these consol-bonds at some face value; the bond then paid a relatively small interest in perpetuity, with the principal never repaid. In return for up-front money to avoid (say), getting conquered by Genoa, the Doge of Venice guarantees his nobility a perpetual cut of his usually-very-ample action. What income stream could credibly guarantee a private party’s consol in perpetuity? At first glance, I don’t see it. The Co-op could default or just fall apart.

    If a case could be made that the project would so greatly increase to location-value of the land itself that the deed could stand as surety for the loan, I could begin to see it. But even then, this is not a perpetual income stream – changing events could undo this effect (and forever is widely believed to be a long time). Also, the norm is the other way around – i.e., public infrastructure spending is what adds to the location-value of private real estate.

    I think an MMT-aware party or faction has to win state-wide, at least. States can do a lot – found banks, levy taxes, issue bonds, amend constitutions. Maybe a state could even do what Rob Parenteau thinks Eurozone countries can do. ( I.e., issue bonds against future state tax revenue, which would be accepted in payment of state taxes later. Such a move, if not specifically barred by law, doing it would just appropriate a little dollop of monetary sovereignty for the state government. Such securities would immediately acquire the status of a currency and would logically circulate at par once the credibility of the tax-commitment was established.

    I really do love co-ops, intentional communities, green buildings, and saving human civilization from its own folly as much as the next guy. But I also think that money is a social construct, the essence of which is sovereignty itself. Can’t see a way around that.


  8. First, for those unfamiliar with Alperowitz’s work, take a look at his speech here.

    As for the “Fed buys the bonds” … it’s prohibited from buying longer-term bonds, but the idea was respectable enough to prompt this in the NY Times.

    Of course this proposal would work, even given the presence of coop trolls. But not mentioned: The current unemployment and downturn is a feature, not a bug. See the Republicans’ scorched-earth victory strategy called “Two Santa Clauses.”

    …essentially: run up as big a deficit as possible when in power (“Reagan proved deficits don’t matter”–Dick Cheney), then complain as bitterly as possible about debt and deficits when out of power.

    Nice to see MMT connecting the dots.

  9. Isn’t sovereign spending already democratized? Isn’t the Congress a democratically elected body that authorizes sovereign spending? If the idea is that Congress is too centralized a body to reflect the democratic preferences at a local level, how about the money being ditrsibuted through state and local governments which too are democratically elected bodies? The local governments could issue the consols that are purchased by the state governments, which in turn issue consols that are purchased by the federal government which issues consols purchased by the Fed. The local governments (which too are non-profit organisations) could then fund the development of the infrastructure as suggested.

    But a truly democratic solution would be for the federal government issue infrastructure development coupons to every citizen that they can transfer to an infrastructure development company which can issue consols to be purchased by the Federal government in proportion to the coupons they received. Effectively a project gets funding in proportion to the number of people it has convinced about its proposal. Wonder how many prefer a true democracy where people and not their representatives take such decisions.

  10. While I 100% agree and appreciated the article on MMT and the Struggles of Political Democracy, I just don’t see pushing for “cooperatives” as the solution to the problems we face today. I understand Chomsky’s views on this, but it just doesn’t work as a policy strategy for US Congressional candidates where we need to organize and have an effect.

    The proposal would require a massive cultural zeitgeist on our society far beyond the simple understanding that our Federal government isn’t revenue constrained. Yes, the issue of fiscal discipline needs addressed, but I simply can’t follow that accurate analysis to the conclusions of what I see as the “far left”.