This post is a slightly modified version of an essay I submitted as part of an application to a fellowship run by the very cool RadicalXChange foundation in December 2020 (I wasn’t accepted ¯\_(ツ)_/¯ ). It definitely helps to understand what a quadratic matching fund is before reading it.
Stable, liquid, usable money is a public good. Currently, central banks operate with the goals of keeping inflation steady and, in some jurisdictions, keeping the economy at full employment. In doing so, they need to grow the money supply by injecting new money into the economy, but who gets to capture the value of that newly printed money? What would monetary policy look like if its goal were to provide an optimal balance of funding for private and public goods based on current economic conditions by printing money into a quadratic matching fund? What is the social opportunity cost of monetary policy which seeks only to stabilize inflation and maximize employment?
My proposal is for central banks to increase the money supply by printing money directly into a quadratic matching fund that will be used to democratically fund all kinds of public goods. Monetary policy would be structured not to optimize for inflation and employment levels, but instead to optimize for standard of living by balancing funding between public and private goods. A smaller amount of money in the matching fund would mean less money for public goods and thus comparatively more resource allocation to produce for private goods markets. A larger amount of money in the matching fund would mean more money is used to match citizen contributions to fund public goods. Central banks would need to decide whether public goods were overfunded or underfunded, and adjust the size of the matching fund allocation accordingly. There might be exactly enough funding in that money pool for full employment, with otherwise unused resources being used to create public goods, or there might be more than enough money such that well-funded public goods projects are increasingly able to outbid private goods projects for resources.
In this system, the role of inflation and employment as metrics would be different. Inflation would be a symptom of money printing at a scale where publicly funded firms begin to outbid firms creating private goods, but this might be okay if that were a better public/private good balance. Inflation is an implicit tax on money holders, and maybe this tax is optimally higher than 2% or so per year. Low employment would mean resources are underutilized and would signal the potential for a larger supply of labor to be devoted to producing public goods at a good price.
To better understand how this system would work and still meet our monetary needs, we need to discuss how new money enters the economy and who benefits from that current process. To keep up with economic growth and avoid deflation and liquidity crises, there’s some need for the money supply to increase year over year. One way that central banks can increase the money supply is by adjusting banks’ ability to lend more or less money based on the deposits they hold, which are typically insured by the central bank. By insuring these deposits, the central bank also subsidizes the practice of loaning out these deposits. What if lending weren’t subsidized and lenders were left to fend for themselves? If the money supply were to grow via the matching fund instead of the lending ecosystem, lenders would still be incentivized to lend more in order to find returns on their now devaluing money. In this way, central banks could still incentivize lending by putting more money into the matching fund to push up inflation.
Another way that central banks currently increase the money supply is through a policy called quantitative easing, where central banks buy up long term securities in exchange for cash that they print, which enters the economy and grows the money supply. In this scenario, the originators of the securities benefit because demand for their debt rises, lowering their interest rate and subsidizing their access to capital. In many cases, the issuer of this debt is the government itself. However, in other cases, the central bank buys non-government debt and effectively subsidizes private debt-issuing entities, which are firms that typically produce private goods. These firms’ debt is subsidized in order to increase the positive externalities of employment and demand in the economy, whereas my proposal could achieve full employment and demand as a side effect of funding more purely public goods without enabling those debt-issuing entities to capture the extra value and instead capturing it in the matching fund.
The money from the quadratic matching fund would regularly be emptied out entirely into the accounts of projects that received donations from citizens, with more money going to projects that are funded by more people and, diminishingly, by more money, according to the Capital-constrained Liberal Radical mechanism. Though the equilibrium of the economy might look different in a world where public good makers have the ability to outbid private good makers for resources, the matching fund would be larger during periods of expansionary fiscal policy, and smaller during periods of contractionary fiscal policy.
Hopefully, with a fleshed-out version of the monetary system that I’ve described, the Wikimedia Foundation would be a booming tech giant, local news would be well capitalized, and critical projects like WhatsApp, Android and even pharmaceuticals development currently funded by firms with invasive or misaligned business interests could stand on their own. Public domain research would be more diverse and extensive than ever before. Funding for urban infrastructure and clean power wouldn’t rely on the funding or vision of governments, only their permitting processes.
While monetary policy might sound like a nontraditional place to target democratic reform, central banks have proved to be quite nimble over the past several decades, and change there might be easier to achieve than building efficient consensus in electoral politics in the current polarized climate. With a built-in quadratic matching fund, central banks could become important democratic institutions that fund higher quality of life for all, not just those with the resources to organize and lobby in electoral politics.