The Equivalency Doctrine

Solving the Problem of Democracy Paralysis

My goal here is to suggest a way around a significant roadblock that lies in the path of using Modern Monetary Theory (MMT) to undertake and accomplish real initiatives benefiting the well-being of collective society. The roadblock has been thrown up by the struggle democracy has in reaching consensus—a struggle which today has nearly exhausted the democratic process itself. Not only are our representatives in government unable to agree on a constructive path forward, the conversations and deliberations they engage in cannot even focus on the crucial topics affecting our future welfare—topics which, if they are to be addressed, require ACTION sooner than later.

The particular problem this poses for the aspirations of MMT lies in the interrelated facts that (a) most of the big things required for our collective wellbeing do not generate financial profits and must, therefore, be undertaken by Public Spending; and (b) the money for Public Spending must be appropriated by Congressional consensus before the Treasury can issue the fiat dollars to pay for the doing of them. And because the big things are not even being discussed in Congress, MMT never has the chance to show its stuff. It is truly painful to watch.

Meanwhile, down at the other end of the street, the Reserve Banking System is chock-a-block with profit-making ACTIONS private enterprise has decided—on its own—to undertake and accomplish. And the FED is busy as a bee issuing new fiat dollar Reserves, as necessary, to keep flowing the clearing/payments process generated by all the bank loans being issued to support all the profit-making ACTIONS.

It’s worth noting that this Federal Reserve money-generating mechanism operates irrespective of whether a profit-making initiative provides any BENEFIT to the collective good. It proceeds EVEN IF the profit-making initiative risks a collective harm—or a “public cost” that must eventually be paid (so long as the profit-making initiative itself doesn’t have to pay those costs). Finally, it proceeds even if the profit-making initiative produces NOTHING OF VALUE at all except the financial profits themselves—(in which case, it can genuinely be argued, we are no longer talking about the economic commerce of Adam Smith but a casino gambling enterprise).

So, it’s a bit startling to realize that while the Reserve Banking System is generating trillions of dollars for all kinds of profit-making ventures, the things we really struggle to have, like healthcare, childcare, and affordable housing—things which require the assistance of Public Spending because most people can’t afford to pay a profit-making price to have them—are held hostage by the roadblock of Congressional appropriations. And it gives one a fatalistic turn of the stomach to realize that the ravages of climate change—super-storms, wild-fire conflagrations, extensive droughts and water shortages, sea-level rise—things we need to quickly take BIG ACTIONS to prepare for and adapt to—are not even being discussed in the halls of debate where the spending of sovereign fiat money is appropriated.

Thus, with a growing sense of desperation, I propose an end-run around the roadblock of Congressional consensus.

The Equivalency Doctrine

In a nutshell, what I propose is that a quantified cost-benefit analysis—what I will call a “Public Benefit Certificate” (PBC)—shall be considered EQUIVALENT to Treasury securities for the purpose of Federal Reserve balance sheet operations.

What this means is quite simple but, I believe, profound: Just as the FED currently accepts Treasury securities in exchange for new Reserves—putting the securities on one side of its balance sheet and, on the other side, keystroking new fiat dollars into one Reserve account or another at the central bank—under the “Equivalency Doctrine” it will also accept quantified “Public Benefit Certificates” in exchange for new Reserves.

Here is a quick illustration: A private, not-profit-making organization—for example Preschool Care & Learning Services LLC—would be able to use a certified, cost-benefit analysis to initiate a zero-interest loan-grant* application with a non-profit, federally chartered Public Bank.

The Public Bank, in turn, after verifying the non-profit’s cost/benefit analysis through its own underwriting process, would issue a quantified “Public Benefit Certificate” valued at X dollars. (The specific value would reflect the dollar-denominated public benefits that will be realized by the proposed childcare services.)

The Public Bank would then trade this “Public Benefit Certificate” to the FED in exchange for Reserves which the FED, after putting the PBC on its balance sheet, keystrokes into the Public Bank’s Reserve account at the central bank.

The Public Bank then keystrokes new bank-dollars into Preschool Care’s bank account (executing the zero-interest bank loan). As Preschool Care LLC spends these bank-dollars to provide free childcare services, the bank-dollars make claims on the Public Bank’s fiat dollar Reserve account—which is able to meet the claims by virtue of the new Reserves it has received in exchange for the PBC.

In essence, what I’ve just described is a process whereby a NOT-profit-making initiative (free childcare) which would otherwise need to be funded by Public Spending appropriated by Congress, is, instead, funded by the fiat money operations of the Federal Reserve banking system.

Crucially, “Public Benefit Certificates” could be issued for any number of not-profit-making initiatives that can demonstrate quantifiable public benefits: food-banks, regenerative farming conversions, workforce housing, community land trusts, wild-fire mitigation and recovery services, drought-resistant plant research, rural medical clinics, etc.—a veritable laundry list of the things we need but struggle to have because they do not generate profits.

There is, of course, a Catch-22….

Congress must APPROVE the “Equivalency Doctrine”!!

But this would only involve a single act of consensus—a single piece of legislation that would enable a diverse multitude of NOT-profit-making initiatives to pursue our collective well-being. And it would not be about any one of those initiatives in particular—a focus that inevitably would draw the ire of one political faction or another. It would only be about a general, demonstrated, COST-BENEFIT value to society as a whole. That is a more difficult thing to argue against.

Most important of all, perhaps, the legislative debate would provide the perfect context for Modern Monetary Theory to place its arguments squarely in the public arena: The demonstrated BENEFITS of the “Equivalency Doctrine” can be obtained without raising taxes, and without federal borrowing that must be repaid with future taxes. The employments generated by the not-profit-making initiatives can be coordinated with a national job-guarantee program that creates full employment and price stability.

Furthermore, (putting as many demons to bed as possible), the benefits can be obtained without increasing “deficit spending,” without increasing the “national debt,” and without debating, posturing, and holding government operations hostage to something called the “debt-limit.”

In essence, what the “Equivalency Doctrine” is saying is that we are perfectly capable of generating fiat money to pay for NOT-profit-making initiatives—if they demonstrate true, quantifiable benefits—in the same way we generate fiat money for profit-making initiatives.

All Congress has to do is get it together to pass ONE piece of legislation—the “Public Benefit Equivalency Act” of 2028 (which would include the chartering of federal Public Banks). Having put this mechanism in place, Congress can then go back to its political strategizing about what it considers to be the important issues of American life—like whether transgender kids should be able to use public restrooms.

Meanwhile, as Congress is busy making sure it’s ready for the next fundraising-election cycle, local and regional organizations and businesses across the country, in conjunction with federally chartered Public Banks, will actually be GOING TO WORK and drawing paychecks to undertake the NOT-profit-making tasks and initiatives we need to secure the future well-being of our local and regional communities.

*What is a “zero-interest loan-grant”? At this point let’s simply say it is terminology referring to the fact that because Public Banks don’t have to generate profits or pay dividends to shareholders—and because the PBCs generate new fiat dollar Reserves to back up each “loan-grant”—terms can be extremely flexible. They can be designed, in fact, to enable each applicant to achieve its public benefit goals. Which, of course, is the point of the whole exercise.