Public Banks: Taxation Without Appropriation
Fast Company reported that support for public banks is increasing. It isn’t difficult to qualify an increase, but an increase does not constitute popularity. The article proposes how public banking could finance the Green New Deal, but like the GND, the details of how this would be accomplished is not specific. (1)
A public bank is no different than a private bank with the exception of funding and ownership. A public bank is owned by the government and most likely funded through a tax. The article asserts that public banks will be more inclined to lend for projects of public interest, and to small businesses where the profit margin of the loan may not meet risk verses reward standards. The article implies public banking will offer loans at reduced rates. The article provides the cost to finance the Bay Bridge as an example. The project cost 6.4 billion dollars to complete, but cost the California DOT 13 billion because of the cost to finance it through the private banking system.
How does a public bank reduce the costs? If California had 6.4 billion dollars free within the budget, it wouldn’t be forced to borrow. Where does the money come from for the public bank? Through taxes. (2) A public bank, to fund public projects, like those described in the GND is an exercise in inefficiency, and a way around appropriation disclosure. A public bank is created through a tax, to lend money to the government to help finance large scale public projects is the purpose cited in this story. The question is, how does this increase the amount of funds available for public projects? If you have a large scale project, the existence of a public bank doesn’t increase the amount of funds available for the project, because the funds used to finance the bank could be directly applied to the project.
The counter argument to the last paragraph is the banking practices of the public bank, and government deposits will generate profit to increase the amount of funds at the public banks disposal. How much money can a public bank intend to make? There is one example of a public bank, which is the Bank of North Dakota established nearly 100 years ago to provide loans to farmers. In 100 years, the bank has an annual income of 132 million dollars(3) and 7.2 billion dollars in assets. If North Dakota had a project with costs as large as the bay bridge, it would not be able to finance it without liquidating its assets, and much of those assets consist of loans.
Public bank advocates highlight how officers in private banks are only concerned about the banks bottom line, and a public bank would make loans with minimal interest attached, being more concerned with the “consistency of capital” than with profit. They claim a public bank is more apt to make loans to small businesses than private sector banks. Charging interest on loans is not only done for the purpose of making a profit, which is the motivation of lending money to begin with, but to cover the cost of loans that will go unpaid. On the subject of small business loans, 1 in 6 small business loans end in default.(4) The idea that a public bank is going to open the door for small businesses to obtain loans not available to them through the private sector’s federally insured SBA loans, is a point of sale, not a realistic application.
What’s interesting about the Bank of North Dakota is the institution does very little direct lending. BND states explicitly “Mostly by practice we do not make direct loans.”(5) Most of BND’s business is providing loans to lead lenders, credit unions and other financial institutions who are actually engaged in lending. The important part of the statement made in the BND FAQ document, is “by practice”. This is important because following this disclaimer the BND has a variety of direct lending programs for farmers, ranchers, and various small business start up and expansions. Which is to say you can intend a purpose for an institution but practices may preclude intended purposes.
A portion of the profits are transferred into the states general account. Since 1945, 555 million dollars has been transferred from the bank profits to the states general account. Not a very significant sum over a 74 year period.
In the only example we have of a public bank, the example is consistent with the foreseeable purpose: the creation of an institution that will mildly supplement a states budget with minimal to no impact on the lives of most people. In the short term, to fund immediate projects the bank is an inefficiency, taxing people to create a public bank and applying the funds to a project. Why not create a tax that applies directly to the projects and eliminate the creation of a middle man? The federal, state, or municipal government is going to apply tax dollars to the creation of a public bank, including the cost of operations, and then borrow from its bank at interest to finance a project for the public? Doesn’t make a whole lot of sense. Unless the aim is to raise taxes which is effectively what a public bank does. Raises taxes based on the pretext of the purposes of public bank, to increase the amount of money the government can decide how to spend. This was what was meant in the third paragraph when I said a public bank circumvents appropriation disclosure. You are applying money obtained through taxation to fund something (private bank), which will fund something, and the government exercises authority over the bank in ownership. A public bank is taxation without appropriation.
A public bank is under the authority of the government where it is chartered. The same politicians who are largely beholden to the interests of industry will be managing the bank. The article referenced on public banks does assert the charter can include mechanisms for public participation and oversight, but no specifics are provided. In the only example of a public bank, the BND, and including other government managed assets, the inclusion of public participation and oversight directly is nearly non-existent. This is an assertion for which there is no precedent. Where has the government created something in the publics name, and allowed for meaningful participation in the management of the asset?
The referenced article listed other alternative methods for raising capital for a public bank. The first idea is crowdfunding. The largest crowdfunding campaign I found raised 43 million dollars for a watch company that is now defunct.(6) Crowdfunding as a method to raise money for a public bank expected to finance multi-billion dollar projects is not realistic. Since the money raised is going to be used to create a bank owned by the government, crowd funding for a public bank is essentially voluntary tax given the allocation of the funds.
A second method cited is bond sales. Returning to the only example of an active public bank, the BND, attempted to raise capital through bond sales but was unable to when it was first created. Naturally, banks are the most prolific purchaser of bonds and as the BND discovered, it doesn’t make a lot of sense for banks to finance the creation of competition.
A third option mentioned is a long term loan from the federal reserve. The probability of a loan from the federal reserve is equal to the interest that commercial banks have in the creation of public banks. The directors of the Federal Reserve Banks are elected by member banks, the very banks advocates of public banks are intent on eliminating from domestic banking. The article goes on to say a federal public bank would rely on the federal government for capital, and in nearly any realistic scenario we are talking about a tax to start a public bank.
The article foresees public banks taking over most domestic banking activities “This would not, Brown says, mean that existing big, private banks like Wells Fargo and J.P. Morgan would go away entirely; they play an important role in international trade. Rather their roles would be diminished…”. To a large degree the goal is to nationalize the domestic banking sector. If you are creating public banks to eventually eliminate private participation you are nationalizing banking without expropriating their assets. The article also mentions Marxist Economist Richard Wolff’s belief that privately owned banks could be nationalized outright. Do you think banks would lobby against nationalization legislation or legislation intent on the creation of public banks to eliminate them from the national market? I think they would, and in addition to being adverse to private banking interests, you still have to sell the idea to a public that likely recognizes its interests will go unserved.
Even absent the fulfillment of replacing private banking, public banking provides little to no benefit to the general population. The BND describes it’s loan programs as ““market driven” in terms of the rates, terms and conditions offered to a borrower.” Meaning the only living example of a public bank in the US is not offering anything different than the accessibility to credit as determined by the market. Everything the public bank is being sold as in regard to offering better rates, terms, and conditions is contradicted by the public Bank of North Dakota.
A Center for Economic Planning is not a government institution but chartered as a private company owned by the population where it is created. Public participation and oversight is spelled out in no uncertain terms, allowing people to directly decide how money should be invested and how profits should be spent. A Center for Economic Planning could own a bank should the people decide, but this bank is a private institution, owned by private institution participating as such in the market economy. The businesses owned by a Center for Economic Planning don’t seek to monopolize the market, but participate in it, as the owning representative of a group of people, no different than a corporation.
A Center for Economic Planning increases the amount of opportunities available to the public as well as increases the quality of opportunity. It allows people to decide investment, provides people with a stake of ownership in the economy, and the profit from the businesses owned by any people’s Center for Economic Planning are under the direct direction of the public, which includes the means to compete with industry in influencing political outcomes.
I mention Centers for Economic Planning because some have mistaken the idea for public banking which it is not. The other reason I mention the Center for Economic Planning is because all the time spent on vague psuedo-socialist ideas, would be better spent considering the implementation of Centers for Economic Planning.(7)
1: Fast Company “The One Strategy that Could Finance the Whole Green New Deal”. 6/26/2019, by Eillie Anilotti https://www.fastcompany.com/90364616/public-banking-can-finance-the-green-new-deal
2: Fast Company (2019), “A national public bank could access initial capital from the federal government”
3: https://en.wikipedia.org/wiki/Bank_of_North_Dakota#cite_note-1 Source: 2016 Annual Report. Pg 21.
4: Nerd Wallet “1 in 6 SBA Loans Fail, Study Finds”, 10/3/2017. By Kevin Voigt and Caren Weiner Campbell. https://www.nerdwallet.com/blog/small-business/study-1-in-6-sba-small-business-administration-loans-fail/
5: Bank of North Dakota FAQ https://web.archive.org/web/20111017114915/http://banknd.nd.gov/about_BND/pdfs/faqs.pdf
6: The Wall Street Journal“10 Biggest Crowdfunding Campaigns Where are They Now?”, 4/30/2018. By Deborah Gage. https://www.wsj.com/articles/the-10-biggest-crowdfunding-campaigns-where-are-they-now-1525140660
7: Center for Economic Planning Outline http://orioncs.net/centers-for-economic-planning/