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August 19, 2010 9:56 AM   Subscribe

Goodwill: Monetary policy for the 21st century
Here's my proposal. We should try to arrange things so that the marginal unit of CPI is purchased with "helicopter drop" money. That is, rather than trying to fine-tune wages, asset prices, or credit, central banks should be in the business of fine tuning a rate of transfers from the bank to the public.
[R]outinizing transfers from the central bank to citizens might reshape society. "Free money" would certainly carry consequences, both good and bad, foreseeable and unforeseeable. My suggestion would be that the central banks should make equal transfers to all adult citizens irrespective of income, job, or tax status. That would be simple to understand and administer, and it is "fair" ... flat transfers are guaranteed to put money in the hands of cash-constrained people who will spend it. Flat transfers are much more effective...

The most obvious hazards of monetary policy transfers have to do with dependency and incentives to work. If people grow accustomed to getting sizable checks from the central bank, that would change behavior. But not all changes are bad... Employers would undoubtedly have to pay people who work unpleasant jobs more than they currently do. But that's just another way of saying that workers would have greater bargaining power in negotiating employment, as their next best alternative would not be destitution.

...it is possible that too many people would choose to "live off the dole", or that people would come to depend upon income from the central bank, limiting the bank's flexibility to reduce transfers when economic conditions called for that. So here's a variation. Rather than distributing cash directly, the central bank could make transfers by giving out free lottery tickets. The winnings from these lottery tickets would constitute transfers from the central bank to the public. But the odds that any individual would win in a given month could be made small, in order to prevent people from growing dependent on a regular paycheck from government. Plus, it would be easier for the central bank to reduce the "jackpot" offered in its free lottery than to scale back payments that people have come to expect...

I know this all sounds a bit crazy, a new normal under which central banks would print money to fund lottery payouts and then fake an asset on their balance sheets to offset the spending. But these are perfectly serious proposals.
BONUS
unemployed = 21st century draft horse? - "In one of the most thought-provoking economics books of our times, A Farewell to Alms, Gregory Clark, discusses the concern that improved machines would reduce demand for labor."

What's the actual problem in the labor market? - "The overriding impression is of most Americans actually doing OK, with an unemployable underclass bearing the brunt of the recession... think of these unemployed individuals as having gone down economic corridors which are no longer promising and not facing any easy adjustment to set things right again."

Zero marginal product workers - "the complementarity view leads one to ask how we might mobilize positive complementarities (rather than leaving orphaned factors of production) more quickly"

All the king's horses and all the king's men - "In a highly specialized modern economy, it is much easier to prevent jobs from being destroyed than to create them again, at least assuming those are 'good' jobs in the first place. (Yes, people thought they knew this but it's an even stronger difference than had been believed.) The U.S. auto bailout, for instance, worked better than did most of the stimulus program."

The crisis of middle-class America - "Most families in the US have been struggling with flat incomes for more than a generation. The story is not about the recession, but a long-term decline in fortunes."
What, then, is the future of the American Dream? Michael Spence, a Nobel Prize-winning economist, whom the World Bank commissioned to lead a four-year study into the future of global growth, admits to a sense of foreboding. Like a growing number of economists, Spence says he sees the Great Stagnation as a profound crisis of identity for America.

For years, the problem was cushioned and partially hidden by the availability of cheap debt. Middle-class Americans were actively encouraged to withdraw equity from their homes, or leach from their retirement funds, in the confidence that ¬property prices and stock markets would permanently defy gravity (a view, among others, promoted by half the world’s Nobel economics prize winners, Spence not included). That cushion is now gone. Easy money has turned into heavy debt. Baby boomers have postponed retirements. College graduates are moving back in with their parents.

The barometer is economic. But the anger is human and increasingly political. "I have this gnawing feeling about the future of America," says Spence. "When people lose the sense of optimism, things tend to get more volatile. The future I most fear for America is Latin American: a grossly unequal society that is prone to wild swings from populism to orthodoxy, which makes sensible government increasingly hard to imagine. Look at the Tea Party. People think it came from nowhere. While I don’t agree with their remedies, most Tea Party members are middle-class Americans who have been suffering silently for years."

Spence admits he is thinking aloud and going "way beyond the data". And he concedes that America probably still retains its most vibrant strength in its still world-beating capacity for technological innovation. Most economists are not as bleak as Spence. But it is in the neighbourhoods among ordinary Americans that his pessimism gets its loudest echo. "To be pessimistic about the future is so new for Americans and so strikingly un-American," says Spence. "But most people grasp their own situations way better than any economist."
Reseeding the Economy - "let's discuss the third bullet point in what you might call an agenda for 21st century capitalism: recapitalizing the economy. (The first being having an economic purpose and the second creating higher quality demand*) ... The real problem's deeper than fixing a handful of today's broken industries. It's in the institutional structure of the economy ... Yes, we've got to recapitalize the economy. But not with low-potential capital, like cash and machines. With higher order (more productive, more enduring, and more fundamental) kinds of capital." cf. Why Economic Recovery Hinges on Values

Cutting the corruption tax - "Many of us take it for granted that government officials will obey the law. In the US, news that the police department in New Orleans committed and covered up crimes like rape and murder reminds us that this needn't be the case. It also reminds us that living with the lawlessness of a weak state might be better than living under a strong state that officials can abuse."

Health Care, Uncertainty and Morality - "Uncertainty and asymmetry of information about the quality of goods or services being traded is not, of course, unique to the medical care market. It is ubiquitous in modern economies that trade in highly complex goods and services. We find these characteristics, for example, in financial transactions... How society responds to this flaw in markets depends on the severity of its consequences." cf. Is Health Care Special? & Chinese Hospitals Are Battlegrounds of Discontent - "In 2006, patients or their relatives attacked more than 5500 medical workers, reflecting wide discontent with China's public health care system."

Emergence of collective memories - "We understand the dynamics of the world around us as by associating pairs of events, where one event has some influence on the other. These pairs of events can be aggregated into a web of memories representing our understanding of an episode of history. The events and the associations between them need not be directly experienced-they can also be acquired by communication. In this paper we take a network approach to study the dynamics of memories of history.

"First we investigate the network structure of a data set consisting of reported events by several individuals and how associations connect them. We focus our measurement on degree distributions, degree correlations, cycles (which represent inconsistencies as they would break the time ordering) and community structure. We proceed to model effects of communication using an agent-based model. We investigate the conditions for the memory webs of different individuals to converge to collective memories, how groups where the individuals have similar memories (but different from other groups) can form.

"Our work outlines how the cognitive representation of memories and social structure can co-evolve as a contagious process. We generate some testable hypotheses including that the number of groups is limited as a function of the total population size."

---
*A Deeper Kind of Joblessness

- Dogs improve office productivity! Bring your dog to work every day :P
- Unlimited Vacation Time Not A Dream For Some
- Across America: The Urban and the Natural -- nice listening paired w/ (ambient) epic pop :P

cheers!
posted by kliuless (20 comments total) 12 users marked this as a favorite

 
"Cheers"? I see no cheer here. =(
posted by maryr at 10:05 AM on August 19, 2010 [1 favorite]


I never know if economics bloggers know what they're talking about or are just yanking my chain. Steve Randy Waldman is apparently a computer programmer and accountant, not an economist, so I'm inclined to believe he's less Marginal Revolution and more Timecube. Can anyone who actually understands his proposal weigh in?
posted by miyabo at 10:22 AM on August 19, 2010


It's going to take me forever to read all these (YAY), but the lottery wouldn't boost spending, according to the permanent income hypothesis, right? You wouldn't be able to count on it, couldn't plan ahead for it, so you'd be less likely to make any decisions based on your future winnings.
posted by mittens at 10:23 AM on August 19, 2010 [1 favorite]


Can anyone who actually understands his proposal weigh in?

His first proposal (the non-lottery version) is a basic income guarantee, which is a special case of the guaranteed minimum income. They are not new proposals and they have some backing from 'proper' economists: "Winners of the Nobel Prize in Economics that fully support a basic income include Herbert Simon, Friedrich Hayek, James Meade, Robert Solow, and Milton Friedman."
posted by jedicus at 10:28 AM on August 19, 2010 [2 favorites]


What's really wrong with the economy is that we have too much systemic debt, more than we can carry, and the economy is completely dependent on a huge flow of new debt every year just to stay functional. Doug Noland over at the Prudent Bear guesses that we need about $2T in new debt each and every year just to keep the bloated financial system operational.

If we want to get healthy again, we have to pay that debt down. And when government debt issuance alone is 10% of the entire national GDP, that means we have to go through a very sharp and lasting contraction just to stop the problem from getting worse, never mind improving things.

We've consumed all our savings, and we've consumed the savings of the Japanese and Chinese to fuel our bubble. We ate our own seed corn long ago, and now we're eating everyone else's, too. Printing money is never the solution to this kind of problem. That doesn't add any wealth to the system, it just adds more claims on the wealth that already exists, and it's the people at the bottom who get wrecked. Rich entities can protect themselves against bad monetary policy, but poor people just get killed, sometimes literally.

We have to pay for what we use, and no shenanigans with money will change that.
posted by Malor at 10:37 AM on August 19, 2010 [3 favorites]


Basic income as a variation of consumption-tax-with-rebate would be okay, but I prefer the latter solution as it does away with the IRS/CRA and all related recordkeeping expense and overhead except as an office of two people who run a couple of spreadsheet macros once a year to calculate how much everyone gets back.
posted by seanmpuckett at 10:37 AM on August 19, 2010


Is this just Social Credit by another name?
posted by Chuckles at 10:46 AM on August 19, 2010


kliuless: "the concern that improved machines would reduce demand for labor"

I do manual labor. Our warehouse is automated, but there are many jobs that just cannot be automated efficiently at this point. Right now we are having a hard time filling positions in a US city with a very high unemployment rate. Hardly anybody with a degree wants to make a living as a material handler. For that matter many people without degrees would rather collect unemployment or work a less physically demanding job with less job security for less money.
posted by idiopath at 10:56 AM on August 19, 2010


What's really wrong with the economy is that we have too much systemic debt

Did you know I didn't even have to look at the end of the post to know who posted it?

We know, man. We know that's what you think. Combined with the fact that there's no indication in what you posted that you've digested anything in kliuless's post, it's easy to let the annoying squeak of the hobby horse you're ridding drown out whatever merit might be in your words.

And there's at least an interesting core of an idea presented in what's above the fold alone. Monetarists seem focused on investment, but money is mostly "shenanigans" wrapped around labor, so that's an indirected focus. Focus on policy that gets things out the general consumer/laborer population and you're not only addressing issues of aggregate demand you're actually closer to the heart of what money represents.

Don't like the concept? Fine, but please at least grind the axe against the topic.
posted by namespan at 11:04 AM on August 19, 2010 [3 favorites]


What's really wrong with the economy is that we have too much systemic debt, more than we can carry, and the economy is completely dependent on a huge flow of new debt every year just to stay functional. [...]
If we want to get healthy again, we have to pay that debt down.


Surely the very last time we need to be paying that debt down is precisely when we don't have the income to do so.

Say you're in negative equity, struggling to keep up with the mortgage repayments. Then you lose your job. The last thing you can afford to do at that point is start paying off additional capital on the mortgage, especially if it means you or your family starve instead. What you need to do is defer the mortgage, negotiate an extension or haircut with the bank, or just stop paying and hope you get a job before you get foreclosed. When you're back on your feet again, earning money, then you can start paying off the mortgage.
posted by Electric Dragon at 11:19 AM on August 19, 2010


Rather than distributing cash directly, the central bank could make transfers by giving out free lottery tickets.

If the average return is enough to live on, then people will happily form syndicates to even out the amount they receive.
posted by topynate at 11:29 AM on August 19, 2010 [2 favorites]


It's true, as Electric Dragon points out, that however much trouble the US may be in as a result of excess debt, it is also not in a good financial position to start paying off that debt. However, debt reduction is not entirely a lost cause. There really is a lot of government waste. For example, the entire War on Drugs is a waste. Instead of spending countless billions of dollars to prevent people from using the drugs that they want to use, legalize the drugs, sell them in drug stores, and collect sales taxes from those sales. A large expense is converted into a large source of income. To a limited extent, regarding marijuana only, the state of California is serious considering this strategy - the referendum is coming up. I think it is obvious to most (or possibly all) readers of this site that the whole issue of national defense could be managed more efficiently as well. The US has been the global policeman for a long time, and it is an expensive and thankless task. That needs to be re-thought. Some forms of waste are bizarre. The government adds to its strategic stockpile of helium gas every year, just in case there should ever be a need to build a fleet of zeppelins. I think we should either build the fleet, or stop buying helium. There are a thousand other examples of government waste, it is endless. We have to get serious about this.
posted by grizzled at 11:47 AM on August 19, 2010


basically, it'd be as if bernanke finally just dropped the hammer and started going "free money! whee :P" at which point now that we have all the money we ever wanted, what would we do then? this is otherwise known as the monetary illusion...

pulling back the veil tho, what do we get? the way i increasingly see it is that monetary architecture evolves with current modes of production; barter in hunting and gathering days, coin during the agricultural era, and sort of empire-based credits in the industrial age... but what kind of monetary system do we have for a post-industrial situation, in a so-called information-based knowledge economy? i think we're still adapting to that.
posted by kliuless at 12:00 PM on August 19, 2010


The government adds to its strategic stockpile of helium gas every year, just in case there should ever be a need to build a fleet of zeppelins. I think we should either build the fleet, or stop buying helium.

Think of the jobs! Not just design and assembly, but the tailors who could make the elegant uniforms the pilots, attendants, busboys and bootblacks would need to wear on these Galleons Of The Air!
posted by mittens at 12:23 PM on August 19, 2010 [1 favorite]


The government adds to its strategic stockpile of helium gas every year, just in case there should ever be a need to build a fleet of zeppelins. I think we should either build the fleet, or stop buying helium. There are a thousand other examples of government waste, it is endless. We have to get serious about this.

Are you sure?

By 2007, the Federal government was reported as auctioning off the Amarillo Helium Plant. The National Helium Reserve itself was reported as, "(S)lowly being drawn down and sold to private industry."

In 1996, Congress voted to start selling off its stored helium on the open market, pending a study by the National Academy of Sciences. The government ultimately decided to deplete the reserve for commercial purposes by 2015.

“At the present rate of withdrawal, it’s going to be gone much sooner than that,” Sears said.

posted by Comrade_robot at 12:30 PM on August 19, 2010


I think the last thing we need to do is pay down debt at this time. While interest rates are near zero we should load up on 30 tbills and create lasting infrastructure that will provide both jobs and lasting economic benefit. Let's say we borrow 3.0 trillion dollars now, put it into lasting infrastructure that will generate at least 150billion in tax receipts in 5years the net result would be short term stimulus and long term acceleration effect that pays for itself. Simply dropping money on people in the form of tax cuts or social stimulus results in no lasting value and contributes to our kong term indebtedness.
posted by humanfont at 5:06 PM on August 19, 2010


The Helium Reserve is not an example of government waste! Helium has several vital uses, including cooling the magnets in MRI machines and all kinds of scientific and industrial uses. It's also an exceedingly finite resource. Once released into the atmosphere, helium escapes into space. It's produced not by extraction from the air but as a byproduct of natural gas production. There's only so much of it on Earth, and once it's gone it will be well and truly gone, since it's an element and we can't synthesize it in significant quantities. It was privatized under a Republican Congress and they were short sighted and ignorant for doing it.
posted by jedicus at 6:33 PM on August 19, 2010 [2 favorites]


I could argue that just because helium is a useful element, does not mean that the government should stockpile it. Isn't the US supposed to have a free market economy? However, clearly helium is not just being stockpiled in the event that we should decide to build a fleet of zeppelins, since it has many other uses. I did not do justice to helium. In any event, the helium supply is now the subject of its own separate discussion - coincidentally enough.
posted by grizzled at 6:32 AM on August 20, 2010


Nobel prizewinner: We are running out of helium

It was a bad example to hang your point on, grizzled. Maybe you should pick a better one & try again.
posted by scalefree at 7:13 AM on August 20, 2010


yea, someday we'll need it :P

next post, pls... helium credits?

cheers!
posted by kliuless at 6:09 AM on August 21, 2010


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