...Archive for April 2014

VC for the people

Oddly (very oddly), I found myself last week at the INET Economics conference in Toronto. Larry Summers was the final speaker. His presentation was excellent. Whatever I might object to in Summers’ history or politics, he’s brought to the mainstream a set of views I’ve long held, and he is an engaging, cogent presenter.

I had a question for Summers that I didn’t get to ask. So I’ll ask it here.

Early in his talk, Summers pointed out, accurately, that economists really need to rethink the standard “labor / leisure tradeoff”. Almost no one prefers a life of pure “leisure”. Human beings like to regard themselves and to be regarded by others as “productive”. They like to “make a contribution” or “pay their own way” or “kick ass” or “dominate others”, to do something that they believe confers value and status. As Summers pointed out, retirement is often not so good for people. The luckiest people, young or old, are those whose work is fulfilling and enjoyable, not those who do not work at all. As people grow wealthy, they become more free to choose the ways by which, and the terms under which, they will do useful or important things. Wealth is better understood as conferring upon individuals a greater freedom of choice over what kinds of work they wish to do than as endowing lives of “leisure”. A person with wealth can explore roundabout and risky production processes (become an artist, write a novel, start a business), can opt for work with no hope of remuneration (volunteer, help raise a child or grandchild), or can hold out for only the most fulfilling or best-paid market labor. A person without wealth may be forced to accept degrading and poorly paid work, just to pay the bills.

Summers’ talk was the capstone of a conference whose theme was “innovation”. In an excellent session a day earlier (see John Cassidy for a full write-up, ht Mark Thoma), there was surprising agreement among several panelists that speculative bubbles help support innovation. William Janeway distinguished between bubbles in productive vs nonproductive sectors, financed by banks vs nonbanks, and argued that productive-sector, not-bank-financed bubbles promote socially useful innovation at modest social cost, despite high private costs to investors. He went so far as to suggest that agency problems in the delegated investment process, specifically the inability of career-minded fund managers to stay away from bubbles regardless of any personal reservations, make an important contribution to innovation. Steven Fazzari (whose work on inequality this blog has featured before) described research showing that R&D expenditures of young firms are constrained by external finance and increase in bubblicious periods. Ramana Nanda investigated whether investments made at the top of bubbles were poor, and found that they were not. They were just riskier. Firms funded by venture capitalists in heat were unusually likely to crash and burn, sure, but they were also unusually likely to succeed spectacularly. In an earlier panel, Mariana Mazzucato described the importance of “mission-oriented” investment by the public sector. States determined to gain military advantages or put humans in space accept experimentation and failure that would be intolerable to private venture capitalists (whose enthusiasm for risk, she argues, is in general overstated). The common thread in all these accounts is that too much market discipline can be socially counterproductive. If (nonbank-financed) speculative bubbles create social value that exceeds the costs borne by investors and entrepreneurs, then the fact that market participants fail to impose privately optimal discipline on their own portfolios is beneficial. If revolutionary developments in technology depend upon states accepting large, nonrecoverable expenses, a managerialist insistence on quantifiable performance metrics may be foolish. Even in the private sector, powerhouses of invention like Bell Labs and Xerox PARC thrive primarily within cushy monopolies, where they are sheltered from quotidian fretting over the bottom line, where market incentives are present but blunted.

So, Summers argued (as he has now argued for a while), Western economies may have entered a period of “secular stagnation” in which the “natural rate of interest” (the rate at which the resources of the economy, human or otherwise, would be fully employed) is so low that we cannot achieve it, or should not try (because rates so low become ineffective at spurring demand or carry with them other costs). He emphasized infrastructure investment as a solution, a near free-lunch which simultaneously increases the economy’s capacity as it spurs aggregate demand. I have no quarrel with that. Infrastructure investment would be a great thing to do, if we could solve the political and regulatory problems that have rendered competent public enterprise nearly impossible.

But we do have other options. If it is true, as Summers seems to think, that humans prefer to do important things even when they are not forced by a labor-market cudgel, and if it is also true that financial constraint causes people to accept safe and sure work rather than take chances on activities that might be speculative but more valuable, then there might be social return in having the state absorb some of the risk of failure faced by individual humans. In effect, the state could provide venture capital to the people. If ordinary citizens had a small but reliable annuity, too modest to live comfortably but enough to prevent destitution, then at the margin, we’d expect people who currently seek or accept unfulfilling, underpaid work to opt for entrepreneurship, or education, or art, or child-rearing, or just hold out for a better gig. “VC for the people” would combine a reduction in labor supply with a lot of new labor demand, forcing employers to increase wages and encouraging substitution of capital for the least desirable jobs. Both the wage effect and the annuity itself would increase the share of national income available to those without direct claims on capital, reducing inequality. In his talk, Summers mused (wonderfully) that he’d prefer we not evolve to an economy in which people are employed providing increasingly marginal services to the rich, working as specialized “knee masseurs” and the like. A straightforward way to preclude that is to ensure that everyone has the means to refuse those jobs and take chances on more meaningful and ultimately more valuable work.

“VC for the people” would reduce market discipline, but it would certainly not eliminate it. People do not require the threat of destitution to cultivate ambition. It is much better to supplement ones modest annuity with a vigorous market income than to crouch inertly in a hovel. Most people (like most of you, my not-nearly-destitute readers) will still try hard to achieve economic success. It’s just that people who have options are much more likely to actually find success than people who don’t.

“VC for the people” has a more common name. It is called a universal basic income. Properly implemented, it is not means-tested and carries no disincentive to earn. It is inflationary via increased purchasing power of ordinary people, the best kind of inflation, especially desirable in disinflationary times. Its level is a policy instrument and need not be indexed to prices. If it “works too well”, positive interest rates can tamp down spending, and, presto, no more secular stagnation.

So, what do you say, Larry Summers? Would you support a universal basic income?

Note: The title of this post is a bit of a play on Anatole Kaletsky’s QE for the people, which is similar to my own Monetary Policy for the 21st century, as well as proposals by David Beckworth, Ryan Cooper, Ashwin Parameswaran, Matt Yglesias, Haitao Zhang, and I’m sure many others.

However, it’s important to note a difference between those proposals (for fiscalist central banks that “cut checks” to regulate the macroeconomy in addition to using traditional monetary tools) and proposals like this one, for a universal basic income. A fiscalist central bank must be able to tighten as well as loosen when macroeconomic conditions change. In order to retain policy flexibility, recipients of “helicopter money” must not come to depend upon it as permanent income. A fiscalist central bank would have to take care to cut its checks irregularly, or (as I suggested) wash its transfers to the public through a lottery to avoid recipient dependence.

A universal basic income, however, is intended to be depended upon. Its purpose is to alter people’s behavior, to render them more risk-tolerant, to increase their bargaining power in wage negotiations. Macroeconomically, a universal basic income might provide a low-frequency “reset” to positive interest rates, but it should not be adjusted monthly or quarterly like a central bank policy instrument. A universal basic income should be determined like the minimum wage, via acts of Congress. “Helicopter money”, on the other hand, should not depend upon acts of Congress. Its purpose to offload a macro-stabilization component of fiscal policy from legislatures to central banks. (Larry Summers, in his talk, admitted confusion as to the point of helicopter money proposals. Don’t fiscal expenditures plus open market operations amount to the same thing? In terms of net flows to the private sector, they do amount to the same thing, but in institutional terms they are very different. Central banks are much more agile, more nimble, than legislative bodies. If fiscal policy is to be used as a macro stabilization tool, then some aspects of fiscal policy must be delegated to an agency capable of responding at the frequency required for macro stabilization. That is the attraction of “helicopter money”.)

Update History:

  • 16-Aprr-2014, 3:55 p.m. PDT: Added David Beckworth and Haitao Zhang to list of helicopter money (-ish) proposals. Added “start a business” to list of risky, roundabout production process things.