Can the “Allocative Effect” of a UBI Restore the American Dream? And Is Now the Right Time?
The Great Resignation is the messenger of change.
I am not a financial wizard by any means but I do have two pennies worth of salt to add for due consideration in how to save the national economy and restore the American dream. So listen all yee folks!
My last post ended with a promise of an argument for the UBI (Universal Basic Income) said at the risk of being called a ”socialist”. The term ”socialist’ is thrown around on any occasion for any reason, seeming completely arbitrary. I ask Facebook frequent throwers to define what they mean, but thus far I have not received an answer.
My definition is based on the root of socialism- which is social, which has to do with society, which is composed of people, leading to the practical meaning of the word “socialism” as policy-making to benefit the people. Those throwing the socialist signifier about accusingly, shift to Communism, or control of the people by the State - in the name of the people. Statism is the inevitable danger in any governmental system that absorbs human nature onto itself in a mutually recursive relationship.
Unfortunately, the word “socialist” is weighted down by historical implications in much the same way that the swastika, a symbol of divinity and spirituality in Indian religions, can never escape being a symbol of the Nazi Party, in the West.
Since then I read a very informative article in Politico about Thomas Hoenig, who sat on the Federal Open Market Committee in 2010 as the singular Federal Reserve leader who consistently voted against quantitative easing as it was being used for the first time as an economic stimulus plan, rather than as a response to an emergency.
Inflation was a concern in Hoenig’s dissent against QE but Hoenig’s greater concern was about the wealth inequality that would result from the “allocative effect”.
… The historical record shows that Hoenig was worried primarily that the Fed was taking a risky path that would deepen income inequality, stoke dangerous asset bubbles and enrich the biggest banks over everyone else. …..
…..Hoenig, for instance, liked to talk a lot about something called the “allocative effect” of keeping interest rates at zero. ..Hoenig was talking about the allocation of money and the ways in which the Fed shifted money from one part of the economy to another…..
…..encouraging speculation and rising asset prices also shifts money between the rich and the poor because the rich own the vast majority of assets in the United States. Hoenig was worried that a decade of zero-percent interest rates would have the same effect.
Politico The Fed’s Doomsday Prophet Has a Dire Warning About Where We’re Headed By CHRISTOPHER LEONARD presents an in-depth history of the effects of the actions of the Federal Reserve on the economy and a very clear description of quantitative easing.
Hoenig identified two forms of inflation, consumer goods inflation, and asset inflation. Asset inflation adds negligible productive value to the economy:
The Fed’s own research on quantitative easing was surprisingly discouraging. If the Fed pumped $600 billion into the banking system in roughly eight months, it was expected to cut the unemployment rate by just .03 percent. While that wasn’t much, it was something. The plan could create 750,000 new jobs by the end of 2012, a small change to the unemployment rate but a big deal to those 750,000 people. Politico The Fed’s Doomsday Prophet Has a Dire Warning About Where We’re Headed By CHRISTOPHER LEONARD
I share Hoenig’s concerns as described in the article. Including this intuition:
“Do you think that we would have had the political, shall we say turmoil, revolution, we had in 2016, had we not had this great divide created? Had we not had the effects of the zero interest rates that benefited some far more than others?” Hoenig asked. “I don’t know. It’s a counterfactual. But it’s a question I would like to pose.”
These are my additional thoughts.
I believe in a small role for the federal government that should not include economic development but must necessarily include managing the currency because a currency has to be based on a common standard of value.
I accept that we have a fiat currency. I don’t see that changing any time soon. Fiat currency is still an experiment in management. If the distribution method used in the past has deepened income inequality then we need to apply a different approach designed to restore equal access to the greatest number of people. If a currency is effectively managed it equitably distributes resources needed to grow an economy to all.
I submit that the standard of measure of the distribution of fiat currency should be the GINI rating that must be retained within a specified acceptable range. It is well outside of that range today, and that missed mark is an allocation effect, caused by favoring the top of the economy over the whole of the economy since the 1970’s when the US went completely off the gold standard and the centralized economy instituted in The United States Intergovernmental Cooperation Act of 1968, Public Law 90–577i was implemented at the State level of government across the USA.
I believe that in readjusting the system toward a more equitable balance of resources, care should be taken in introducing new elements and dismantling others, but I suggest the UBI as an alternative tool in distributing currency into the system, a tool that distributes currency into the roots of the system, as opposed to the top as a no-questions-asked UBI, bearing no relationship to any other distributive programs, excepting the 24 financial firms called “primary dealers,” which will be diminished or replaced with the UBI.
These traders buy and sell assets from a select group of 24 financial firms called “primary dealers,” an ultra-exclusive club that includes the likes of JPMorgan Chase and Goldman Sachs. The primary dealers have special bank vaults at the Fed, called reserve accounts. To execute quantitative easing, a trader at the New York Fed would call up one of the primary dealers, like JPMorgan Chase, and offer to buy $8 billion worth of Treasury bonds from the bank. JPMorgan would sell the Treasury bonds to the Fed trader. Then the Fed trader would hit a few keys and tell the Morgan banker to look inside their reserve account. Voila. The Fed had instantly created $8 billion out of thin air, in the reserve account, to complete the purchase. Politico The Fed’s Doomsday Prophet Has a Dire Warning About Where We’re Headed By CHRISTOPHER LEONARD
Reversing the allocation effect of quantitative easing will come about when interest rates are raised. This will hurt the whole economy including those who never benefitted from QE and so it is appropriate to implement a UBI to the sector of the economy below the median income line. This would simultaneously reduce the enrichment of the top and seed growth at the roots of the economy.
Consumer goods inflation is complex as it reduces to purchasing power deflation. By increasing the currency circulating in the system, the purchasing power of the individual dollar is depreciated but at the same time, through a targeted UBI a greater number of dollars circulate within the roots of the economy, increasing the purchasing power of that sector.
Theoretically, there is a window of opportunity when extra purchasing power invested to increase earning power can avert potential negative consequences of expanding inflation. The great resignation creates an opportune moment to implement a UBI to achieve a reverse allocation effect within the productive working-class economy. Right now is the era of the “side hustle” in pursuit of a passive income. For simplicity’s sake, passive income means investments in assets, but the means to acquire capital to invest in assets is the “side hustle” or small business, independent of the worker’s corporate employment.
Now we are talking root-level economic growth, motivated by the will to leap across the wealth divide to join the ranks of those living off their assets, an economy that has been thriving through quantitative easing, but like a casino rather than as an engine for productive economic growth.
The ambition to live off a passive income is a product of the QE paradigm, but as that paradigm disperses the social context that influences the nature of ambition will change.
“Life is what happens to you while you’re busy making other plans” – John Lennon
The Great Resignation is a movement looking for a new way. The creator economy is booming as people seek their own individual freedom and that is just the impetus, the economy emerging from the roots will grow beyond the creator economy into new and diverse forms and sizes of entrepreneurial activity.
What may seem like a small insignificant small business translates into productivity brewing in a rising class of small entrepreneurs. A UBI distributed to a class motivated to build a better life and accustomed to working for their livelihood has potential as a productive experiment in fiat currency distribution.
The past assumption was that distributing fiat currency to the people benefits society through purchasing power, stimulating the economy through consumerism.
The new idea is that stimulating the bottom half of the economy can benefit society through investment in a new middle sector, not by government directives or design, but by the resourcefulness of the middle and working classes.
Implementing the UBI as an economic impetus seeds the lower half of the economy and flies through the heart of the hegemonic system that created the wealth divide, releasing the energy of the microscopic world trapped within that scatters like butterflies flapping their wings against the current and changing the world in unexpected ways, heralding a new era of discovery.
Other distributive programs can be gradually adjusted over time, or not, as the effects of the UBI are better understood. The UBI would be distributed to everyone at or below the median income line, no questions asked, no stipulations on how it is to be spent and protected from any form of seizure.
And then see what happens.
Why delimit the UBI by median income?
For those who desire to have an above-average income, there should be risk and effort involved. At the median income line, there is room to temporarily downsize income and expenditures in making the transition from average to above average. Take a chance!
What will it cost?
I do not have a figure in mind or a cost estimate. I do not foresee this happening in the current political climate and so at this point, cost is inconsequential. My intention is in support of opening up the conversation and looking at money for what it is, in this case, a currency used in an exchange. Money is a system of exchange invented by man and frequently reinvented. It just needs to work.
Also published in Data Driven Investor on Medium
It does matter a great deal that the "government" doesn't control the Federal Reserve. Biden's plan for the economy is Keynesian. And, it appears to be working (Keynes would have recommended price controls) in spite of price gouging and stagnant wages. A radical departure from Greenspan's "unforeseen flaw in our modeling" which led to the sub-prime crash. You still won't go wrong reading Jennifer Taub's Other People's Houses. It's an accessible timeline of financial policy from the mid-1970's to post sub-prime. Know thine enemy.
Plenty of arguments out there for UBI, as well as how-to get rich from crypto schemes. We would be far better off creating jobs, with a decent wage base and benefits IMHO. I favor compulsory military service with attendant benefits (like European socialist democracies).
A bit of background research will highlight the contrast between Milton Friedman and John Maynard Keynes. Keynes economic theories pulled us out of the Great Depression. Friedman and the Chicago School are notorious, both for their widespread influence and for the reality that Friedman's theories didn't work. Alan Greenspan was an acolyte of Friedman, also of Ayn Rand.
[btw: Medium is not only a platform, but a portal for 3rd party cookies, which appear to have been accessing the memory cards in my laptop (I suspect someone is crypto-mining on the sly). Anyway, I'm done with Medium. Clear history, remove cookies, empty trash … see if you computer isn't a lot happier...]