Proposals for a Radical New Bulgaria

My Heterodox Proposals for the BTP

by Serban V.C. Enache

With these graphs, we look at Bulgaria’s macro economic situation in the last 10 years.

It is fortunate that the Foreign Sector is running a deficit against Bulgaria, supplying the country with net demand – otherwise, unemployment figures and idle capacity levels would be much higher. Domestic private sector leveraging, though steady for the last couple of years, is now moving up. The macro picture isn’t half bad. It shows that there’s still room for growth by employing idle resources, and perhaps more importantly at this point… the focus should be on eliminating waste and overhead.

Banking Sector Policy and Reforms

The following asset side rules would suffice in curtailing speculation and lowering rates on loans to firms and consumers.

Doing away with the inter-bank market, as it serves no public purpose. Make the Central Bank lend directly to member banks. Make it illegal for banks to mark their assets to market prices, to have subsidiaries, to accept financial assets as collateral for loans, and to sell assets to 3rd parties. Banks would only be allowed to service and keep those loans on their own balance sheet. They would be prohibited from engaging in any other profit making venture outside basic lending.

Central Banks pay banks interest on their reserve accounts: Interest on Required Reserves (IORR) and/or Interest on Excess Reserves (IOER). The USA’s Central Bank, for example, uses both channels, as shown in the graph below.

Since banks are constrained in their lending by their capital and the actual demand for loans, not by reserves, I propose the elimination of the reserve requirement. Thus, IORR and IOER would be eliminated. And just like BTP’s program insists, Bulgaria will run a permanent zero interest rate policy.

Government Models

Bulgaria works under a centralized model, despite the fact that the Private Sector accounts for 70% of GDP. The BTP will have to decide on the type of Government system it will implement, the centralized or decentralized model. From a pragmatic standpoint, a 50/50 model does not work, because it creates overlap in functions and confusion in responsibilities between the Central and Local Administrations. I will provide proposals for both systems.

Decentralized Government

The Council of Ministers proposes the regional governors. Bulgaria has 27 provinces. The public authorities in each of these provinces will bank with their region’s public bank. Each regional bank will offer a free checking account to all residents in its jurisdiction. The regional banks will establish their fee structure with near zero markups in mind.

The Local Authorities in each jurisdiction can issue loan guarantees for their respective regional banks to enhance the balance sheet of these institutions, with the purpose of supporting a particular lending program or programs. In essence, the bank uses the regional government’s IOUs as capital. The loan guarantees would only be cashed in by the regional bank in case its assets shrink in value enough to warrant usage of those guarantees – which is unlikely if the bank sticks to prudent lending behavior.

I envision the regional banks will acquire a majority of market share in their respective regions very quickly, a couple of months after they are established with their doors open for customers.

As an observation, the Decentralized model would require less HPM (reserves and cash) in the system.

Centralized Government

Give every citizen a free checking account at the Central Bank. Have the Central Bank take on commercial activities. Orient its fee structure to target near zero markups. The banking sector would be predominantly state-owned, and would serve as a counter-cyclical stabilizer. During times of private sector leveraging, bank profits would go up and be transferred to the Treasury. During times of private sector deleveraging, bank profits would go down or losses would be incurred, expanding the fiscal deficit as required to facilitate a speedy private sector deleveraging.

As an observation, the Centralized model would be almost fully liquid.

Circular Investments

This method would mostly be used in the Decentralized Government system. Circular investments require close collaboration with other Local Authorities and businesses. The mechanics are simple enough. Local Authority Y gives a money loan to Local Authority Z in exchange for Z’s promise to purchase output from Y’s jurisdiction. The loan would show up on Y’s balance sheet as an asset, and it would show up on Z’s balance sheet as a liability. A financial surplus obtained by Y’s jurisdiction against Z’s jurisdiction would obligate Y to recycle (reinvest) that surplus into Z’s jurisdiction. Such an agreement between the two Local Authorities would ensure a constant flow of funds between them, a permanent level of demand for each other’s services and labor.

Energy Policy

Reading about Bulgaria’s success of beating the Europe 2020 target ahead of time made me happy. At the same time, reading about the present chaos in the sector is a shame. For good reason, the public is fed up of hearing about green energy plans when establishment politicians have screwed it up so bad, that prices are going up – and this naturally makes people angry, despite the fact that the fossil fuel sector also receives subsidies and long term contracts.

In my opinion, subsidizing the end price of anything leads to inefficiency. Smart subsidies target businesses and consumers who acquire eco-friendly and efficient capital goods. Any other type of subsidy should be eliminated. The goal must be to get energy produced from green sources (bio-fuels do not qualify) to cost less than energy produced via conventional means. To this end, the purchase and installation of the respective capital must be subsidized, while the fossil fuel sector should be slapped with an excise. The ultimate goal must be nothing short of shutting down and dismantling coal-fired power plants and coal-mining. All that carbon should remain where it is, in the earth.

One of the first steps the BTP Government should make is to designate a team of experts (geologists, engineers, and the like) to conduct a national survey. This will pin-point the country’s resources and will estimate its potential for all the relevant sectors of industry. In its wake, the Government will prioritize investment and the real resources will be mobilized for production, expansion, and integration. A reliable transition to green energy cannot occur without massive investment in storage capacity – so as not to be wholly dependent on the weather’s whim.

Employment Policy

In the past, I wrote about the organizational challenges a Job Guarantee program would carry, particularly one in which the Local Administrations decide the jobs and the Central Authority covers the wages. It’s hard to keep bureaucratic overhead down in Government departments and agencies that have specific roles, let alone departments whose roles are ambiguous or whose roles can change from their own accord. Given Bulgaria’s workforce number, organizational troubles surrounding the Job Guarantee ought to be minimal. It’s easier to administer 100 people in the Job Guarantee. It’s harder to administer 10.000 people in the Job Guarantee. It’s way harder to administer 100.000 or a million. Real oversight costs and bureaucratic waste grow as a consequence of that. It is precisely why the macro economic goal for the BTP Government should be to maximize private sector employment and traditional public sector employment, and only then take in the residuals in the Job Guarantee. The best moment to implement a Job Guarantee is when the unemployment rate is low.

Since the Job Guarantee aims to be a counter-cyclical stabilizer of unemployment, a (nominal) price anchor, and to ultimately render people like the long-term unemployed, ex-cons, and people with disabilities as good options for private sector employers, workers in the Job Guarantee should not be allowed to unionize – as this would defeat its stabilization purpose.

Education Policy

Since people in the Balkans are familiar with how a centralized system looks like, I will focus on describing the decentralized approach to Education. Firstly, there’s no need for an army of civil servants just to transfer money from A to B. The Department of Education doesn’t maintain buildings, doesn’t choose the children, doesn’t rank the students, doesn’t choose or remove head teachers, it doesn’t lay down the curriculum, it doesn’t set mark exams. It doesn’t do anything that autonomous schools can’t plan on their own according to demand.

The Department of Education would be abolished in order to create a National Education Service. Parents would be free to send their children to whatever school they want (be it a private or public school), and the schools get paid per pupil by the Government. The Treasury would transfer funds directly to the schools. The whole scheme would mean that there would be a National Board of School Inspectors, and the Local Authorities would administer the public schools. Parents who don’t want an academic education for their children can send them to progressive schools instead.

Tax Policy

My proposition is simple. Replace taxation on property (improvements made to the land), on labor, on (basic) consumption, and enterprise with a land-value tax. Why? Unlike the other taxes, which carry deadweight, bureaucratic overhead, and regressive effects on income distribution, the land-value tax has negative deadweight. This means that it adds efficiency to the economy.

To understand the Georgist single tax policy, we have to differentiate between land, labor, and capital. Capital is the produce of spent labor. Marx called capital dead labor. Land, on the other hand, predates labor. Humans didn’t create the land. God or nature (if you’re an atheist) created the land. Land has no cost of production. Because of this, land must NOT be confused with capital.

Unfortunately, mainstream economic textbooks and government national statistics confound the two. In the US and the UK, land makes up over 50% of the total value of property. Land values going up is not the same as actual new wealth being created (like buildings or equipment). It is a consequence of the labor and enterprise of the private and public sectors – and it translates as unearned increment / windfall gains accruing to landowners and financiers. Any rent of location left untaxed is free to be pledged as rent to landowners, or as interest to money lenders. The cost of economic rent has been seriously downplayed by mainstream economists. In fact, classical economists like David Ricardo, John Stewart Mill, Adam Smith, and Henry George (and later on, economists like Friedman) – all supported the land-value tax. A market cannot be free if it isn’t free of rent-seekers.

Under the single-tax, land destined for conservation would no longer be regarded as productive land, and would be exempt from taxation. The land-value tax would ensure that land doesn’t go idle, and would capture economic rents, to the benefit of firms and workers.

To put it into historical perspective, Mencius, in Ancient China, proposed the land-value tax as the single tax to be applied in the Chinese provinces. The father of Nationalist China, Sun Yat-sen was a Georgist and supporter of the single tax. Sadly, his government was brought down in a coup by a warlord. During the 19th century, during the Meiji Restoration period, Japan replaced the grain tax with a money tax calculated on the land’s potential, not on its actual yield. In parts of Europe as we speak, political factions are coming out with proposals to replace regressive taxes (income taxes, VAT, company and property taxes) with a land-value tax.

Landowner capitalists would no longer be able to deduct their business’ inefficiency from their rent; and we as consumers would no longer subsidize them.

The single tax policy not only offers negative deadweight for the economy and social equality, it is also easy to enforce, as landowners can’t send the land away in an offshore tax haven; and the bureaucratic effort required to assess the land and collect the tax is much smaller than what we have today, simple, and quite transparent.

Site value assessment would be made in the first part of the year, and the deadline for payment of the LVT would be toward the end of the year. In this manner, landowners have a big enough time window between receiving the new value assessment and securing the funds to pay it. With no upfront cost of land, people wouldn’t have to negotiate a mortgage from a bank (paying it interest) to buy land – instead, they can simply acquire the land by promising to pay LVT to the Government. Note: under the Centralized model, LVT revenue would go to the Treasury – while under the Decentralized model, LVT revenue would go to the regional governments. The LVT rate and the methodology for assessing site values would be the same across the board.

Minimum Wage hikes

Wages are both a cost component and a demand component for firms. There is, however, a time delay between increased costs (due to a minimum wage increase – which also puts pressure on the upper tier wages) and higher sales via higher spending from people who have more disposable income due to the same cause (the minimum wage increase). Unlike the bigger firms, small enterprises have a harder time adjusting to minimum wage hikes. For this reason, to mitigate the lag effect, the minimum wage increase should come alongside a tax rebate for small firms. The tax rebate would be capped at, say, 10.500 leva in yearly sales. Then, for every leva above that threshold, the rebate would get reduced by a factor of 0.001. This would ensure the rebate targets only small businesses and it avoids any perverse effects associated with flat approaches  to calculation.

The same principle should be observed in progressive taxation. Most so-called progressive taxes aren’t progressive at all; they’re just a set of differentiated flat rates. If you are, say 100 leva above the lower income bracket rate, you automatically get bumped into a higher tax rate. For example: instead of paying, say 10%, you end up paying 20%. To mitigate this injustice, we apply the same method mentioned earlier. For every leva above the respective income bracket associated with the respective tax rate, the tax rate increases by a factor of 0.001. So if I’m 100 leva above the threshold, I pay a tax of 10.3% instead of 20%.

Naturally, in the context of the single tax, where VAT, obligatory insurances, income, building, and company taxes are eliminated, the one time aid to small businesses during a minimum wage hike would entail a direct transfer of funds from the Treasury to small enterprises. It would be a payment of 10.500 leva, not a tax rebate. For every leva above that threshold in yearly sales, the payment would get decreased by a factor of 0.001.

Trade Policy

Like I argued in this article on Trump’s Trade Wars, the Bulgarian Government can simply loan its own currency to partner countries, with the requirement that those funds can only be used by the debtor states to purchase output manufactured in Bulgaria. The country doesn’t need currency devaluation for it to secure demand for its exports sector. As for securing vital imports, Bulgaria can accept the same deal in turn. It can borrow in the partner nation’s currency to purchase imports from there, and in order to pay off the loan, Bulgaria exports output to that country. It’s the same logic in which Iran under the Shah and Romania under Ceausescu did business. The key difference is that Romania and Iran negotiated the loans in US dollars. From such contracts, US currency benefits freely from an increase in value. It is never wise for two sovereign countries to negotiate a loan in a third party’s currency.

At present, China is lending yuans at low rates to the Philippines, so that the Philippine Government can import the necessary capital goods to build infrastructure. In turn, China will buy Philippines output. Mutually beneficial trade.

Geopolitics

BTP’s decision to take Bulgaria out of the European Union and out of NATO is the boldest move there is. To survive, politically-speaking, as a sovereign non-aligned state in the Balkans is possibly the hardest challenge. NATO should be given 365 days to pull out all of their troops and equipment from Bulgarian soil. The costs of this evacuation should be borne by both sides. And during this phase, the Bulgarian Military and Intelligence Services should be on high alert to identify and neutralize any potential insurgency or act of sabotage, from within and without. Claims of independence, sovereignty, and non-alignment must be stated and restated to the West, to Russia, and to UN observers. Let no country or supra-national institution claim ignorance as an excuse.

For more on this, I shall invoke Emmerich de Vattel’s wisdom on Natural Law.

“A nation then is mistress of her own actions so long as they do not affect the proper and perfect rights of any other nation — so long as she is only internally bound, and does not lie under any external and perfect obligation. If she makes an ill use of her liberty, she is guilty of a breach of duty; but other nations are bound to acquiesce in her conduct, since they have no right to dictate to her.[…]

The end or object of civil society is to procure for the citizens whatever they stand in need of for the necessities, the conveniences, the accommodation of life, and, in general, whatever constitutes happiness — with the peaceful possession of property, a method of obtaining justice with security, and, finally, a mutual defence against all external violence.[…]

Whence, as this [Natural] law is immutable, and the obligations that arise from it necessary and indispensable, nations can neither make any changes in it by their conventions, dispense with it in their own conduct, nor reciprocally release each other from the observance of it.

This is the principle by which we may distinguish lawful conventions or treaties from those that are not lawful, and innocent and rational customs from those that are unjust or censurable.

There are things, just in themselves, and allowed by the necessary law of nations, on which states may mutually agree with each other, and which they may consecrate and enforce by their manners and customs. There are others of an indifferent nature, respecting which, it rests at the option of nations to make in their treaties whatever agreements they please, or to introduce whatever custom or practice they think proper. But every treaty, every custom, which contravenes the injunctions or prohibitions of the Necessary law of nations is unlawful. It will appear, however, in the sequel that it is only by the Internal law, by the law of Conscience, such conventions or treaties are always condemned as unlawful, and that, for reasons which shall be given in their proper place, they are nevertheless often valid by the external law. Nations being free and independent, though the conduct of one of them be illegal and condemnable by the laws of conscience, the others are bound to acquiesce in it, when it does not infringe upon their perfect rights. The liberty of that nation would not remain entire, if the others were to arrogate to themselves the right of inspecting and regulating her actions; an assumption on their part, that would be contrary to the law of nature, which declares every nation free and independent of all the others.”

Conclusion

The best tax to anchor the currency with, penalize the owners of idle land, capture economic rent, and add efficiency to the marketplace is the Land-Value Tax. It is the most economically efficient and morally just tax there is. It should be at the heart of any progressive political movement, whether its orientation is right wing or left wing; for land is not man-made, it is provided freely by nature and should belong to the nation as a whole.

With the ambition to exit the EU and NATO, the BTP Government will have to weather a massive campaign of demonization – which, no doubt, is going to be waged against them – a dramatic fall of the leva on forex markets, protests in the street (funded from abroad), and traitors within the political organization trying to sabotage the exit phase every step of the way. If the BTP maintains political stability during this phase, commercial activity will resume to normal and price stability will return along with it – in a tranquil, sovereign, and prosperous Bulgaria.

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