Helicopter money and basic income: friends or foes?
Spurred by Milton Friedman, the concept of “helicopter money” – under which central banks would distribute money to citizens – is making headway in economic debate, but is often confused with the idea of basic income. This article intends to clarify the distinctions and overlaps between these two concepts.
“Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.”
When Milton Friedman wrote those lines in 1969, he probably never thought that “helicopter money” would become a buzzword in the 2000s post-crisis era. Friedman’s thinking was indeed quite radically unorthodox. How did the prominent neoliberal advocate come to suggest people should receive free money and that we would all be better off as a result? Far from philanthropic thinking, Friedman was in fact simply trying to illustrate his theory of the neutrality of money. If you need to make more money, you should consider renting out your spare room.
What would happen if we were to drop freshly printed notes over a population from a helicopter, just like rain? Nothing other than inflation, suggested Friedman, one of his main beliefs being that any increase in the money supply automatically leads to a proportional increase in consumer prices. Through this thought experiment, Friedman drew the conclusion that central banks can always avoid deflation by producing money and causing it to circulate in the economy.
In fact, however, the idea that we could create money and distribute it to the people goes back much farther than Friedman. In 1924, British engineer Clifford Hugh Douglas elaborated his theory of the “social credit”, its main component being the distribution of a monthly “national dividend” generated from money creation, the level of which would vary according to national production.
Although Douglas did gain some notable following at the time, especially in Canada, the idea was ultimately consigned to the oubliettes of history, leaving Friedman with the alleged paternity of the idea, centre-staging the helicopter analogy with it.
The concept wasn’t much thought of for 30 years following Friedman’s discussion, however, and it might have been forgotten again if it hadn’t been brought back to public attention in 2002 by one of the most influential voices of monetary policy. In a famous speech, the Federal Reserve chair Ben Bernanke alluded to this concept, making the case that, under important deflationary trends like that seen in Japan, the central bank could resort to helicopter money-style instruments to achieve its 2% inflation target.
Yet, far from initiating serious consideration, these remarks only caused Bernanke to endure mockery and “helicopter Ben” as a persistent nickname.
This is probably because the concept runs counter to the whole ideological turn of the 20th century in terms of monetary policy. Starting from the 50s, money creation has been gradually shifted from the sphere of public sovereignty into the quasi-monopolistic realm of the private banking sector. This process ultimately resulted in the outright prohibition, in most jurisdictions, of monetary financing of government budgets. Helicopter money sounds very much like a reversal of this trend, and a dangerous one to the ears of many mainstream economists.
An alternative form of money creation
There is recurring confusion around the exact meaning of helicopter money, which is probably caused by the simple fact that the alleged proponent of the idea, Milton Friedman, never seriously intended to implement it.
Thus, the concept finds itself often described in very diverse terms, ranging from the old-fashioned monetization of public debt to its purest form (and probably the one Friedman actually had in mind): the distribution of money directly to all citizens by central banks. The latter will be the one we assess in this article.
Helicopter money can thus be defined as the creation of money, without corresponding assets, and its distribution into citizens’ bank accounts.
It is therefore an alternative form of money creation, which is strictly different from the most common way in which money is created today: through the banking sector’s credit issuance functions. It is worth clarifying this point here: as the Bank of England has clearly demonstrated, today’s monetary supply is almost entirely controlled by private banks issuing credit into the economy. This is sometimes referred to (somewhat misleadingly) as the “fractional reserve banking system”. Although the benefits and pitfalls of such an arrangement are subject to never-ending controversy between academics, the way in which this system functions is nowadays largely undisputed.
Money tree sculpture in front of the Central Bank of Ireland.
The key advantage of helicopter money resides precisely in the fact that it would bypass banks as money creators, and is therefore one way for the central bank to maintain the money supply regardless of whether banks play their role as suppliers of money into the economy. In its purest form, helicopter money also bypasses governments’ treasuries, and is therefore not legally prohibited under the monetary financing rule (Art. 123 of the EU Lisbon Treaty).
A second clarification is also required at this point: helicopter money is also different from the so called “quantitative easing” (QE) policies that have been implemented by several central banks, although they pursue a similar objective: boosting the money supply to avoid deflationary pressures.
Under QE, central banks create money (the so called central bank’s reserves) and mobilize those reserves to purchase financial assets on a large scale and over a certain period of time. Usually, central banks purchase sovereign bonds with the intention of pushing down interest rates on those bonds, to encourage the financial sector to move away from investing in sovereign bonds and to instead lend money to riskier projects under the so-called “portfolio rebalancing effect”. This type of money creation is therefore targeted to the financial sector, with assets as collateral on the central bank’s balance sheet and, more importantly, is a temporary operation: the central bank destroys the money once the bonds it holds come to maturation.
Helicopter money is therefore very different from QE. In fact, it is precisely because of the many shortcomings of QE that helicopter money is being presented by a growing number of people as a superior alternative.
Helicopter money as an alternative to quantitative easing
The assessments of QE programmes in the US, Japan, and the UK have been subject to a wealth of contradictory conclusions. In Europe, the ECB’s QE programme was first applauded as progress, after years of speculation and resistance to implementation of QE when it was desperately needed – when the Greek crisis hit. However, it is becoming clear that QE recipes, in Europe and elsewhere, never really do the trick.
Generally speaking, QE does cause lending conditions to improve, but it does not automatically lead to an increase in bank lending. In other words, the “transmission channel” of monetary policy does not work so well under QE. To be fair, this is not the banks’ fault: there is little banks can do when conditions are so bad that virtually no companies or households want to take on debt because the economy is already over-indebted.
Economists talk of a “liquidity trap” whereby injections of cash into the private banking system by a central bank fail to stimulate the real economy. QE doesn’t overcome this trap.
Even worse, QE is often accused of creating asset bubbles and increasing wealth inequality, because the massive injection of money is narrowly targeted towards financial asset disproportionately owned by the rich. The Bank of England itself estimates that its own QE programme has increased by 40% the wealth of the richest 5% of Brits.
Against this background, helicopter money is experiencing a comeback, perhaps with even more strength than Friedman could ever have imagined. Since the start of the crisis, prominent economists and commentators, including Martin Wolf, Steve Keen, Anatole Kaletsky, Willem Buiter, Adair Turner, John Muellbauer, Bradford Delong and Martin Sandbu, have advocated for central banks to implement some form of helicopter money. Anatole Kaletsky and Steve Keen almost simultaneously proposed re-branding the concept “QE for People”, which later became the name of a European campaign (for which the author currently works).
Conference about “Quantitative Easing for People” at the European Parliament
The case for QE for People is quite straightforward: since the banking sector is not currently able to “transmit” the central bank’s monetary policy accommodation by increasing their loan’s issuance, why shouldn’t the central bank do it by itself? If the main task of central banks is to maintain inflation at around 2%, certainly the most effective way would indeed be to distribute money to people so they can spend it.
The debate on helicopter money took another turn when it was mentioned by the ECB’s chief Mario Draghi, under the spotlights of a press conference on March 9th 2016 and later by other senior ECB officials. “Helicopter money is a very interesting concept” Draghi said, while adding that the idea was not yet being considered by the ECB. Whether one think this was sincere curiosity or a clumsy statement on Draghi’s part, the fact is this single sentence provoked a historic tide of comments and debate on the idea, including within policymaker spheres.
How about basic income?
Similarities between helicopter money and basic income have led some commentators to offer very confused explanations, claiming, for example, that Finland was already undertaking a “helicopter money” programme (the basic income experiment).
Undeniably, there are resemblances between the two concepts, as both involve making unconditional payments to all citizens and usually without means-testing. Basic income’s principles of universality and unconditionality can also be found in helicopter money.
Key differences quickly emerge under careful analysis, however. Under a helicopter money regime, there is no clear commitment from the central bank to make payments periodic. Quite the contrary in fact, as most proponents of helicopter money (read the prolific Eric Lonergan for example) are keen to be clear on the fact that this should be an exceptional measure, to be used on a one-off basis, with the possibility (but not the commitment) to renew if necessary.
There is nevertheless some theoretical overlap with basic income. In addition to Douglas, several key advocates of basic income have put forward the case that money creation could be used to finance the benefit, either as a “boot” phase or as a way to supplement the fiscal means to finance basic income schemes. The French economist Yoland Bresson made the case that perpetual low interest sovereign bonds could be used to kick off the basic income in a first stage, thus leaving time for the government to implement all the necessary reforms of the tax-benefit system to make UBI fully functional.
These theories relate to the understanding of basic income as a mechanism of pre-distribution (as opposed to redistribution), whereby basic income is a recognition of the intrinsic value of all participants in society, or even as common inheritance. If all citizens create value “because they exist”, then it makes sense to “pre-validate” this economic value using money creation. If we are all richer today because of our predecessors’ work and heritage, then one can argue that more money should be introduced into circulation to recognise this added wealth.
These are, however, only marginal justifications today, put forward to support neither helicopter money nor basic income. Beyond some theoretical common ground, the differences between the two policies are most clear when one understands that they pursue different objectives.
Put simply, helicopter money can be framed as a punctual measure (extreme, one may say) with a rather narrow purpose: to stimulate economic activity by boosting people’s incomes under some strict circumstances, that is, when the economy is under threat of deflation.
Basic income, on the other hand, pursues a very wide range of objectives from poverty alleviation to work emancipation, gender balance incentivization, social protection modernization, more aggressive redistribution and so on. In contrast, stimulating people’s purchasing power is certainly not the main argument for doing basic income.
From those different objectives also stem different institutional frameworks. If the objective of helicopter money’s proponents is merely to stimulate demand, then transfers to citizens is only one practical means by which to achieve this single clear goal. From this viewpoint, it also makes sense to give independent central banks the legal capacity to distribute a citizens’ dividend as a new instrument in the monetary policy toolbox.
If basic income pursues more numerous and complex objectives, by contrast, it then makes sense that it should be the responsibility of elected governments to design and implement it, just like any other fiscal policy.
In conclusion, helicopter money could be seen as one of many “partial basic income” proposals: schemes that share some of the characteristics of basic income but not all of them. Yet given the very clear institutional distinctions just covered, it does not make sense then to associate too closely the two concepts. In this light, it might be more meaningful to refer to helicopter money payouts as “social dividends” or “monetary dividends” as opposed to “basic income”.
Can helicopter money lead to basic income?
Despite all the institutional and practical distinctions drawn above, it is quite enlightening to recognize the political porosity between the two proposals. Helicopter money proponents tend to also favor basic income (though not all do) and vice versa.
This is probably because the two ideas, to some extent, share some common strategic interests and help one another in the struggle for cultural acceptance of each proposal, especially in regards to unconditionality and the disconnection of money from labor.
From a basic income viewpoint, the rise of the helicopter money discussion is a useful addition to basic income’s financing question. If central banks can create money, then surely it would be easier to finance a basic income.
On the other side, it is also convenient for helicopter money proponents that the basic income discussion is making headway in the argument for universal payments to citizens: it levies an important moral blocage.
Even more strategically, perhaps, there is a case for seeing helicopter money as a necessary step to the implementation of a full-fledged basic income policy.
This is a particularly relevant argument when it comes to the European Monetary Union, which is currently deprived of any significant common fiscal policy. Because of this, it will probably take years before we might see something like a eurodividend (an EU basic income scheme financed by an EU budget) as articulated by Philippe van Parijs.
Speech by Philippe van Parijs on the Eurodividend at the European Social and Economic Committee in Brussels.
To circumvent this cumbersome and very long-term political route, Slovenian economist Jože Mencinger has repeatedly suggested the use of helicopter money as an “ideal experimental possibility” to kick-start a form of basic income in the EU.
Instead of QE, the ECB could start a helicopter money scheme by giving 200 euros per adult citizens for one year – no strings attached, no taxes involved, simply courtesy of the ECB’s (digital) printing presses. This would involve about three times less money printing than under QE and yet would be more likely to fulfill the ECB’s objective.
If this works and garners favorable public opinion, there would be even greater political momentum for implementing something like a permanent eurodividend scheme. The ECB’s temporary scheme would allow some time for EU policymakers to create the institutional and fiscal infrastructure for such a eurodividend to be functional.
In the long run, nothing forbids us from thinking that the ECB could permanently fund such a eurodividend scheme at a certain level, as Kevin Spiritus and Willem Sas have sketched. Yet such funding cannot be seen as an obligation for the ECB under the current legal framework. More intellectual debate will be required before policymakers come to the conclusion that some form of permanent helicopter money is necessary and desirable.
There is still much work to be done before either basic income or helicopter money can be put in place. However, 10 years after the financial crisis, it is clear that central banks’ models have not delivered as they were expected to. There is clear mismatch between the massive size of their balance sheet interventions and the bleak outlook of the economy.
There is a growing case that the whole central banking theoretical framework must be revised. Helicopter money is certainly one idea that is usefully challenging the monetary policy status quo. It will surely take another leap of determination and audacity for central bankers to take this step forward, but we should not rule out that it might also be the most pragmatic thing central banks can do at some point in the future. When things get to this point, the basic income movement must stand ready to play its part in facilitating the move towards helicopter money, while making sure to build upon this gigantic central bank experiment towards a permanent and sustainable basic income.
Thanks to Genevieve Shanahan for proofreading this article.
Credit pictures: Courtesy Financial Times; Positive Money, picturesbyJOE, UBI-Europe
Will basic income cause inflation?
I recently led a roundtable discussion on basic income at National Chengchi University (NCCU), which was attended by students from various countries. The participants vigorously debated whether a basic income would result in inflation, with some parties worrying that the greater spending power will push up the demand for goods and, in turn, prices. The increased prices could possibly erode much of the spending power from a basic income.
To confirm whether these worries were justified, I reached out to three experts on basic income (BI), co-editors of the Ethics and Economics of a Basic Income Guarantee, to see what the research says about basic income and inflation.
It turns out: it depends.
Overall, the scholars agreed that there could be some areas where prices are pushed up, but that it would depend on how the BI is implemented.
Knowledge about the topic is limited since none of the BI research has looked at inflation, nor have the experiments been long enough to get a true idea of the BI’s effect on prices.
Dr. Steven Pressmen, former professor of Economics and Finance at Monmouth University, said this means economists “therefore must fall back on theory to answer the question about the inflationary consequences of a BIG (basic income guarantee).”
Dr. Michael Lewis, associate professor at Silberman School of Social Work at Hunter College, added that “multiple variables affect inflation”: if government spending is reduced in some area after a basic income is introduced, there would be a simultaneous push-and-pull effect on inflation.
Pressman also said that the outcome of a basic income on inflation will be based on “the overall condition of the economy and how a BIG is financed.”
According to Pressman, there are several potential scenarios that could play out.
If the economy is near full employment, then a BI would likely “push up prices rather than employment.” Also, since much of the gains in income from a BI would go to people in poverty and “people with low income tend to spend any extra income that they get,” then total spending will increase along with inflation.
On the supply side, Pressman said there are two important factors: taxation and labor.
If a basic income is financed by sales tax or value added tax (VAT), then this will increase prices and inflation. Second, if BI gives employees more leverage to increase wages, firms may “try to pass along these costs to consumers in the form of higher prices,” Pressman said.
On the other hand, Pressman said that financing a BI is paid for by reducing other government spending means “there should be little or no inflationary impact of a BIG.”
Dr. Karl Widerquist, co-chair of BIEN and associate professor at Georgetown University SFS-Qatar, said that Denmark’s economy demonstrates that spending on welfare such as basic income should not lead to inflation “taking away all those workers’ gains.”
“There is nothing special about Basic Income spending. It is not any more likely to cause inflation than any other spending,” Widerquist said. “It is not any more difficult to use taxes and borrowing to counteract inflationary pressure caused by Basic Income spending than it is to counteract inflationary pressure caused by military spending or any other kind of spending.”
Regardless, some inflation may not be such a bad thing for the economy, according to Pressman. He pointed to the Japanese deflationary spiral in the 1990s as to why some inflation may help an economy.
For policymakers considering a basic income, it may be useful to think about adjusting the BI benefit depending on economic conditions.
“It also may (make) sense to think about a variable BIG — one that increases as unemployment rises and falls as the economy gets closer and closer to full employment. This too will reduce the inflationary impact of any BIG program,” Pressman said.
Although more research needs to be done, it appears a basic income is unlikely to contribute to inflation in a substantial way because there are so many factors that influence prices.
“Policy matters, and sensible fiscal and monetary policies can ensure that more egalitarian social policies are consistent with low inflation,” Widerquist said.
AUSTRALIA: Fabians Host Well-Attended Panel on UBI
On September 9, the New South Wales Fabians hosted a discussion of universal basic income in Haymarket.
The event featured a lineup of three speakers. First, Ben Spies-Butcher (Department of Sociology at Macquarie University) argued that Australia should pursue a universal basic income as a way to provide individuals with more freedom and control over their own lives and work. Next, Peter Whiteford (Crawford School of Public Policy at Australian National University) outlined the cost of a UBI. Finally, Louise Tarrant (formerly of United Voice) laid out many of the pros and cons of the policy. The three individual speeches were followed by the question and answer session with the audience.
About 80 to 90 people attended the event, which had been widely publicized on social media. Lachlan Drummond, president of the NSW Fabians, states that this crowd was the largest that the group has seen at any of its events over the past three years.
Among the unexpected attendees were two Italian members of the Five Star movement, who video-recorded the entire event:
The NWS Fabians have also released an audio-recording of the event as a podcast.
Drummond explains that several factors prompted the NSW Fabians to organize and host the event. First, the Fabians were interested in opening discussion of UBI simply because it is a “big transformative economic idea” that is already being talked about by the British Labour Party and some think tanks in the UK, as well as by other groups in Europe, Canada, and elsewhere. Second, the group saw a gap in Australian political discussion surrounding UBI:
We’ve seen some far-left and even some right wing groups talking about it here in Australia but none on what we might call the “mainstream centre left”. We wanted to help push that debate along. We know there are people in both the Greens and the ALP [Australian Labor Party] who are keen on the idea, but as yet we hadn’t seen one event where everyone was all brought together to discuss it.
Third, Drummond notes that many members of the Fabians are personally undecided on the issue of UBI–and yet, previously, UBI had never been given a fair hearing at any NSW Fabians event. When previous guest speakers had broached the issue, their comments were negative and dismissive. Notably, at a March event on The Future of Work, Dr. Victor Quirk of the University of Newcastle spoke against UBI in favor of a return to full employment.
Not content with such a swift rejection of UBI, Drummond said that the NSW Fabians “wanted to look at the policy in a systematic way–to go through the positives and negatives, to look at the numbers, and the political realities, and whether pilot studies have shown it to actually work”.
According to Drummond, the main goal of the event was to leave the audience better informed about the issues surrounding UBI–both moral and practical–and that, by this measure, the event was a “big success”:
I think when you see a big progressive idea like this, it can be easy to jump on it and say it’s a great idea without knowing the arguments and practicalities (or even some potential alternatives).
Ben Spies-Butcher was great on the moral arguments, and how it should interact with other parts of the welfare system. Peter Whiteford gave us some useful numbers on how much it would cost and what pilot studies had actually discovered. Louise Tarrant was also very clear headed on the positives and negatives, both practical, economic and political.
We also had great impromptu contributions from Eva Cox on shorter working hours, and Luke Whitington who rebutted the argument about inflation by stating we are currently in a deflationary environment, and by outlining some creative and progressive ways it could be paid for. The audience was really engaged and asked great questions.
Luke Whitington, Deputy Chair of the NSW Labor Party Economic Policy Committee, found it “well-organized” but believes that all three features speakers overlooked one of the most important reasons to support UBI:
None of the speakers talked about deflation, either in relation to the specific term of falling prices, nor in relation to the more general term for a long term low growth period, as exemplified by Japan since the 90s and the world in the 30s, and in milder form, advanced economies since the 70s, compounded and accelerating now with financialisation and automation. That none of the panel speakers raised the necessity of basic income as a counter deflationary mechanism was a pity, especially as Yanis Varoufakis’ speech on the topic has been on YouTube for a number of months. They did, however, inform the audience on a wide range of ethical and economic issues that a BI would affect.
As Drummond pointed out, though, Whitington was eventually able to broach the issue of deflation himself, in response to issues raised by Tarrant. On Whitington’s view, based on his experience as an organizer in the Labor Party, the most politically viable approach to a UBI in Australia is to promote the policy as a counter-deflationary measure and to support its financing through a sovereign wealth fund. This, he notes, was not stressed by the pro-UBI speakers at the NSW Fabians event.
In Australia it would be much more difficult to argue that unemployment benefits be paid without any activity or eligibility tests (which Spies Butcher correctly pointed out would immediately improve the lives of hundreds of thousands of people currently stuck in the welfare ‘safety’ net), than to set up a fund that collected mineral or other revenue and distributed it equally to all citizens as a dividend.
Douglas Maclaine-Cross, who has previously worked with Whitington to promote UBI, also attended the event. Maclaine-Cross was struck by the apparent level of agreement: “Generally nobody seemed to object to the policy [UBI]; on the contrary it seemed that most people were very keen on it”:
[P]eople generally agreed that it could be afforded though it would of course mean raising more revenue. The estimates and suggested amounts involved a more generous payment than I was thinking of, which I took as a positive sign. …
From the floor there was a plea on commercial grounds from a libertarian. There were a few very positive and inspiring comments. I heard the word utopia mentioned a few times. There seemed to be a consensus from the audience that growing inequality was a very real problem and needed to be addressed somehow. So perhaps it was a case of preaching to the choir. However having made the case to people from a broad spectrum of politics myself, there is a chance for bipartisan support; so I have very high hopes for the policy in Australia.
Basic income will be at the core of monetary policy in the 21st century
To tackle spiraling deflationary trends, governments and central banks will soon have no other choice but to resort to printing money and giving it directly to the people.
Article by John Aziz, originally published on azionomics.com under the title “Universal Basic Income Is Inevitable, Unavoidable, and Incoming.”
The last time I saw universal basic income discussed on television, it was laughed away by a Conservative MP as an absurd idea. The government giving away wads of cash responsibility-free to the entire population sounds entirely fantastical in this austerity-bound age, where “we just don’t have the money” is repeated endlessly as a mantra. Money, they say, does not grow on trees. (Only as figures on the screen of a computer).
In this world, universal basic income seems like a rather distant prospect. Yes, there are some proposals, like Finland which is set to start local experiments in 2017 and Switzerland which is holding a referendum on universal basic income next month. I don’t expect the vote to pass. The current political climate is just too patriarchal. We live in a world where free choice is unfashionable. The mass media demonizes the poor as feckless and too lazy and ignorant to make good choices about how to spend their income. Better that the government spend huge chunks of GDP employing bureaucrats to administer tests, to moralize on the virtues of work, and sanction the profligate.
But this world is fast changing, and the more I study the basic facts of economic life in the early 21st century, the more inevitable universal basic income begins to seem.
And no, it’s not because of the robots that are coming to take our jobs, as Erik Brynjolfsson suggests in his excellent The Second Machine Age. While automation is a major economic disruptor that will transform our economy, assuming that robots will dissolve jobs entirely is just buying into the same Lump of Labour fallacy that the Luddites fell for. Automation frees humans from drudgery and opens up the economy to new opportunities. Where once vast swathes of the population toiled in the fields as subsistence farmers, mechanization allowed these people to become industrial workers, and their descendants to become information and creative workers.
As today’s industries are decimated, and as the market price of media falls closer and closer toward zero, new avenues will be opened up. To that end, Canada has seen a surge in startups in recent times. Towns that were once oblivious to people in the country have become a melting pot for fresh Fintech startup ideas. Case in point is this FinFund Media app that aims to simplify getting loans in The Pas for individuals by leveraging the power of local rural communities to send and receive money. Similarly, new industries will be born in a never-ending cycle of creative destruction to keep the economy churning. Yes, perhaps universal basic income will help ease the current transition that we are going through, but the transition is not the reason why universal basic income is inevitable.
Welcome to the world of hyperdeflation
So why is it inevitable? Take a look at Japan, and now the eurozone: economies where consumer price deflation has become an ongoing and entrenched reality. This occurrence has been married to economic stagnation and continued dips into recession. In Japan – which has been in the trap for over two decades – debt levels in the economy have remained high. The debt isn’t being inflated away as it would under a more “normal” rate of growth and inflation. And even in the countries that have avoided outright deflationary spirals, like the UK and the United States, inflation has been very low.
The most major reason, I am coming to believe, is rising efficiency and the growing superabundance of stuff. Cars are becoming more fuel efficient. Homes are becoming more fuel efficient. Vast quantities of solar energy and fracked oil are coming online. China’s growing economy continues to pump out vast quantities of consumer goods. And it’s not just this: people are better educated than ever before, and equipped with incredibly powerful productivity resources like laptops, iPads and smartphones. Information and media has fallen to an essentially free price. If price inflation is a function of the growth of the money supply against growth in the total amount of goods and services produced, then it is very clear why deflation and lowflation have become a problem in the developed world, even with central banks struggling to push out money to reinflate the credit bubble that burst in 2008.
Much, much more is coming down the pipeline. At the core of this As the cost of superabundant and super-accessible solar continues to fall, and as battery efficiencies continue to increase the price of energy for heating, lighting, cooking and transportation (e.g. self-driving electric cars, delivery trucks, and ultimately planes) is being slowly but powerfully pushed toward zero. Heck, if the cost of renewables continue to fall, and advances in AI and automation continue, in thirty or forty years most housework and yardwork will be renewables-powered, and done by robot. Water crises can be alleviated by solar-powered desalination, and resource pressures by solar-powered robot miners.
And just as computers and the internet have made huge quantities of media (such as this blog) free for users, 3-D printers and disassemblers will push the production of stuff much closer to free. People will simply be able to download blueprints from the internet, put their trash into a disassembler and print out new items. Obviously, this won’t work anytime soon for complex objects like smartphones, but every technology company in the world is hustling and grinding for more efficiency in their manufacturing processes. Not to mention that as more and more stuff is manufactured, and as we become more environmentally conscious and efficient at recycling, this huge global stockpile of stuff acts as another deflationary pressure.
These deflationary pressures will gradually seep into services as more and more processes become automated and powered by efficiency increasing machines, drones and robots. This will gradually come to encompass the old inflationary bugbears of medical care, educational costs and construction and maintenance costs. Of course, I don’t expect this dislocation to result in permanent incurable unemployment. People will find stuff to do, and new fields will open up, many of which we are yet to imagine. But the price trend is clear to me: lots and lots of lowflation and deflation. This, ultimately, is at the heart of capitalism. The race for efficiency. The race to do more with less (including less productivity). The race for the lowest costs.
I’ve written about this before. I jokingly called it “hyperdeflation.”
Global Japanization
And the obvious outcome, at the very least, is global Japan. This, of course, is not a complete disaster. Japan remains a relatively rich and stable country, even after twenty years of deflation. But Japan’s high level of debt – and particularly government debt – does pose a major concern. Yes, as a sovereign currency issuer borrowing in its own currency the Japanese government runs no risk of actual default. But slow growth and deflation are stagnationary. And without growth and inflation, the government will have to raise taxes to cover the deficit, spiking the punchbowl and continuing the cycle of debt deflation. And of course, all of the Bank of Japan’s attempts at reigniting inflation and inflating away that debt through complicated monetary operations in financial markets have up until now proven pretty ineffectual.
This is where some form of universal basic income comes in: ultimately, the most direct stimulus for lifting inflation and triggering productive economic activity is putting cash in the people’s hands. What I am suggesting is nothing less than printing money and giving it away to people – as opposed to trying to push it out through the complicated and convoluted transmission mechanism of financial sector lending. This will ultimately become governments’ major backstop against debt deflation, as well as the temporary joblessness and economic inequality created by technological acceleration. Everything else, thus far, has been pushing on a string. And the deflationary pressure is only going to become stronger as efficiency rises and rises.
Throw enough newly-created money into the economy, inject inflation, and nominal tax revenues can rise to cover the debt load. Similarly, if inflation gets too high, cut back on the money-creation or take money out of circulation and bring inflation into check, just as central banks have done for the last century.
The biggest obstacle to this, in my view, is the interests of those with lots of money, who like deflation because it increases their purchasing power. But in the end, rich people aren’t just sitting on hoards of cash. Most of them do have businesses that would benefit from their clients having higher incomes so as to increase spending, and thus their incomes. Indeed, in a debt-deflationary spiral with default cascades, many of these rentiers would face the same ruin as their clients, as their clients default on their obligations.
And yes, I know that there are legal obstacles to fully-blown ‘helicopter money‘, chiefly the notion of central bank independence. But I am an advocate of central bank independence, for a variety of reasons. Indeed, I don’t think that universal basic income should be a function of fiscal spending at all, not least because I think that dispassionate and economically literate central bankers tend to be better managers of monetary expansion and contraction than politically motivated – and generally less economically literate – politicians. So everything I am describing can and should be envisioned as a function of monetary policy. Indeed, what I am advocating for is a new set of core monetary policy tools for the 21st century.
