Countries with a limit on how much money people can spend in a year

Question

A world similar to ours, but all countries have the following law: Each individual person is allowed to spend no more than a fixed amount of money every year ("fixed" in the sense that it is equal for each person, but the amount may change from year to year, e.g because of inflation). There is no limit to how much money each person can save in a year. This law is supposed to maintain a small difference between life standards of the rich and the poor.

How would the economy of these countries be like? Would it be stable?

Answer 1

Money is just a fictional thing to keep track of value and time. If money doesn't work, people find other ways around it.
A real world example you could study is the German Democratic Republic. Money was practically worthless, so high-quality items were traded in secret.

Let's say you can spend amount X per month. X is the amount an "average" job pays. This means for average people, not much would change (on first sight). For people with sub-standard jobs that pay less then X, nothing would change, either.
For people in jobs that pay more then X, but only a little, not much would change, either. The surplus would be saved so that they can use it up after retirement.

The problem lies with high-quality jobs. Jobs that pay a lot more then X. There would be little incentive to do these jobs anymore. And if you did these jobs, then you would likely only spend a few years doing them, and then retire, using up your saved money. This means that a lot less people would be practicing such jobs, leading to an increase in pay, and even shorter times they actually need to perform that job.

That is, if money were to stay. But that's not what will happen. People will simply create another system to keep track of time and value - a black market. Let's say you need to get a doctors appointment. Many people will try that, but there is little incentive for the doctor to see you. So you "sweeten the deal" by giving him something that isn't money. You trade your own labor or self-produces goods for his time.

This is exactly what happened in the GDR - money was worthless, since you couldn't buy anything -- so if you wanted to get something special, you had to have something of value to trade for it.

Certain goods were always very rare in the GDR due to the regulated market. if you tried to buy those, the merchant would always tell you "they are out of stock". But if you secretly handed him something equally rare, suddenly you ended up with getting exactly what you wanted. Without money, the problem is to define what "equally rare" means.

All in all, it's a recipe for disaster. Money works well because it has a standardized value and is recognized by all parties. If your population can't use money for their everyday needs anymore, they'll use something else, less standardized, less controlled, and even easier to abuse. People that are poor will be even poorer then before, because the little money they have isn't worth anything anymore and they likely don't have qualified labor to offer or much own ground to produce something.

Answer 2

People would do what they did in high tax countries (>90%). Cheat. Instead of taking a high salary, they would get benefits from their employer. Free housing. Free food. Free clothes. Free travel. Free education benefits are possible but tricky (since you usually get educated before working, not after).

Cheating actually helps the situation, because without it, people with high incomes would retire early. Why keep working if you already have more money than you could ever spend?

Black market barter of goods and services directly is also possible. This is economically inefficient but not as much so as not getting goods and services at all.

This would decrease the velocity of money, causing a drop in the money supply. That would cause deflation. Rather than having inflation, prices would fall as no one has enough (spendable) money to afford many things.

Answer 3

So several economists just cried a little.

Money would deflate in value to approximate its now current value, paychecks would be reduced, and where paychecks couldn't be reduced (due to wage laws) workforce would be reduced and costs would increase.

Some industries would just simply fold, unable to make a profit.

Answer 4

Money is simply a fiction used to account for time and value, so the value of work, goods and services would radically inflate or deflate according to circumstances.

People would be effectively "paid" the same regardless of what they did or how hard (or little) they worked, so incentives to work or do highly skilled jobs would disappear. Good luck finding either a plumber or a brain surgeon. Since you would be "paid" the same regardless of what you did, then any job would be done to the same high standards as the local DMV or the team which set up Hilary Clinton's email server (i.e. not at all). I might not recommend that you go to a restaurant to eat in this economy.

Indeed, the effective result will be everyone is forced to into subsistence farming in order to survive, since the social and economic underpinnings of society will erode away and infrastructure will collapse without routine maintenance. Venezuela is rapidly approaching this point despite having the second largest reservoirs of oil in the world, a temperate climate and fertile soil. In Canada, Quebec has the largest land area, a wealth of mineral, agriculture and hydropower resources, not to mention several large cities with modern industry covering a multitude of sectors, but decades of soft socialist governments have reduced what is potentially the richest province in Canada to receiving billions of dollars per year from other provinces just to pay the bills.

So TL:DR this plan is a recipe for poverty and social collapse.

Answer 5

Most paths I see for your world involve collapse. There's many paths it could take, depending on details you'd have to work out yourself.

The first and most obvious would be the development of massive loopholes. A fundamental problem people in your world would have to solve is that any money earned above the limit is basically useless to them. If the cap is \$100,000, and I'm earning \$100,000, there's no incentive for me to take on a job that would earn me \$1,000,000 every year, because \$900,000 of that is unspendable useless paper completely devoid of value because I can't spend it. Or can I? What if I am permitted to "donate" that money to the poor? What if I can "donate" \$20,000 to a poor person, in exchange for him "donating" me a \$10,000 car I couldn't purchase on my own because I'd hit my limit. Such loopholes would lead the rich to view the poor as tools, valued by how much of their limit they aren't using and how well they can be manipulated to provide goods and services to the rich.

So let's say we plug those loopholes. We've never been able to plug the loopholes in any major economic system, so I won't say how its done, but let's just handwave it away. So now any paycheck I get above my \$100,000 limit is worthless, right? Well, I did gloss over one use for this extra cash: vacations! I may earn \$1,000,000 one year, then retire for the next 9 years bleeding off those reserves! Now you have income equality, but the "rich" have more leisure time. Most certainly those rich who like their position in life will busy putting that time to lobbying for the jobs they want, locking the poor into a perpetual grind.

Of course, society could always just rebel against your system. Bartering would almost certainly become a solution immediately, so you'd have to put your foot down and demand that all barters be documented and counted at "fair market rates." But what's a fair market rate? What if nobody buys these things with cash? What would quickly happen is a massive deflation of your currency. A car that once cost \$10,000 might suddenly cost \$2,000, and wages would drop by 1/5 to support that. Now that the prices are devalued, the rich that were making \$500,000 are now only making \$100,000, which was the limit, so they can spend all of their money. All of this because you had to document bartering to prevent it from being a loophole.

Of course, you can also become a despot and fix the market rates for goods. In every documented case of price fixing ever, a black market springs up. You set the price of a coffee cup at \$10? No problem, someone begins selling a "topology teaching device: donuts" for \$5. It's purpose is to teach youngsters about topology. In topology, a donuts and a coffee cup are treated as the same shape, because they have the same number of holes in them. But you don't have a fixed price on tools for teaching higher order mathematics to children, do you?

In the end, things don't go the way you want. It's very hard to apply gross changes to a system as complicated as economics without massive issues. Changes have to be smooth and subtle.

Answer 6

• Your scheme would discourage ownership and encourage lease. No person would be able to buy a new car or a house, so they have to rent it.
• Or they create a company with themselves as owner and employee to assign themselves a company car. This would accelerate the erosion of workers' rights in the new "gig" economy.
• If old property can be inherited, it could stabilize economic differences between owners and non-owners.
• Your scheme would discourage saving because there are fewer ways to spend saved money. On the short term that could bring an economic benefit as the demand goes up, but on the long term the lack of investment capital would be harmful.

And I agree with Brythan that loophole abuse would be rife.

Answer 7

If the amount of expenditure is fixed and there is no meritocracy involved, so there is no way someone can expand that amount, and this amount is similar to the medium wage in a country of the first world, then almost the entire economy will need to be controlled by the state. That’s because producing goods and services needs investments, more than the average person can effort. If there are no rich people to invest money on it, then only the government can, or the economy will eventually collapse to a pre-industrial era. Otherwise there should be the possibility to exceed this limit only for some not-individual legal entities, but speculate on this and if it can be exploited needs a lot more assumptions.

There are others things a government can realistically do to reduce the social inequality without going so far, like giving a job for every unemployed person with the right amount of working hours and salary (and possibly without competing with the private sector), which is supported today by a lot of post Keynesian academics and is fully compatible with capitalism in a modern industrialized country.

Something important to consider about the modern industrialized economies, as opposed to e.g., pre-industrial societies, is that the interest of riches and of the middle class are much closer; having an amount of money distributed over all the citizens is appropriate to ensure that sales are done in the market, it grant goods and services for the consumers and income for the capitalists. If the expenditure amount is quite high, like over the average wage, this shouldn't be a problem, at least not from this side. Otherwise, if this amount is too low, this will lower the aggregate demand eventually reaching a deflationary crisis; unsold goods and services lead to low salaries and dismissals for workers and bankruptcy for companies. So the entire productive system will slow down, it will be like economic self-harm. With this in mind, I can’t imagine a good reason for all countries to adopt such a limiting rule, and if only one country abandoned it, it will probably gain economic power from that so that the other countries will need to abolish this rule as well, or they will be economically outclassed.

So if the only way of make it possible is to have a communist-like form of state, that means all the countries of the world needs to be ruled by this communism-like ideology or to be under the influence of a much stronger country which is under this ideology. That’s already quite far from what we have in the real world.

I also assume that the government should make the overnight rate (which affect rates of loans) stay really low or completely at 0% (that can be achieved without the needs of nationalizing the bank system, as we can see in a lot of examples in Japan or Europe), otherwise the bank system could have too much power from the needs for everyone to make loans for acquiring expensive goods like an house; otherwise there should be some exceptions to the expenditure limit rule. I guess also that the more expensive services (healthcare and education) should be completely public and accessible for everyone. In addition, eventually other services which can be easily monopolized like water, gas, telecommunication, transport etc should also be nationalized..