Category: Debates in economics

The Politics of Universal Basic Income

The Universal Basic Income (UBI) has a long history. The idea to provide all citizens with an unconditional and regular income cash benefit without means-test or requirement[1] has been discussed as far back as the 18th century[2].

Thinkers on the right are attracted to its simplicity, which contrasts with the current complex welfare state arrangements in most advanced economies, its minimalism and its low adverse effects on work incentives, since it is paid irrespective of labour market participation.

On the left, people emphasise its universalism and unconditionality which would reduce the gaps in coverage of current benefits and ensure labour is decommodified, thereby increasing the power of workers to bargain for better working conditions and wages.

Its detractors are similarly located across the ideological spectrum. Many liberal economists see UBI as prohibitively expensive and inefficient insofar as it directs resources to those who may not need them.

Others on the left see UBI as a dangerous legitimisation of capitalism and an implicit acceptance that not everyone will be provided a job. They also emphasise UBI’s limited ability to address all the social risks that individuals face in a market economy.

Finally, some trade unions, particularly in Bismarckian welfare regimes, oppose what they see as releasing employers of their social responsibility. Trade unions also voice concerns that this will reduce their institutional power which lies in their key role in managing the administration of social insurance benefits.

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Buiter on the “triad of Teutonic fallacies”

Excellent recent speech by Willem Buiter on “Unemployment and inflation in the Eurozone: why has demand management failed so badly?”. As always he makes many insightfull points, but I just highlight two which I found particularly important.

The first concerns the issue independence and the scope of the mandate of the ECB:

“The notion that central banks should focus exclusively on their mandates and not be active participants in wider public policy debates, let alone be active players in the negotiations and bargaining processes that produce the political compromises that will help shape the economic, social and political evolution of our societies is, I believe, sound. Alan Blinder described this need for modesty and restraint for central bankers as “sticking to their knitting”. Both fiscal policy and structural reform have clear and often significant distributional consequences. They are, therefore, deeply political. As regards fiscal policy, this is so obvious it does not require elaboration. But structural reform too, including labour market liberalization, opening up the professions, and opening up product market to greater domestic or external competition, is not just about efficiency gains or the size of the pie, but about the distribution of the pie. What looks as an artificial barrier to entry to an economist is a source of rents to the protected worker, professional or firm. When central bankers take part in the often very partisan political debates on fiscal policy and structural reform, they compromise and undermine their independence.”

“The President of the ECB, Mario Draghi, like his predecessor Jean‐Claude Trichet, is actively trying to influence and shape euro area (EA) policies in the areas of fiscal policy and structural reform, using a range of possible monetary policy interventions as sticks or carrots to get national governments and the European Commission to do what he considers to be ‘the right things’. His recent address at the Jackson Hole Conference organized by the Federal Reserve Bank of Kansas demonstrates how broad the range of economic issues is on which the President of the ECB feels comfortable to lecture, some might saybadger, the political leadership of the EA (Draghi (2014)). Regardless of the economic merits of Draghinomics, there is something worrying, from a constitutional/legal/political/legitimacy perspective, if unelected central bank technocrats become key movers and shakers in the design and implementation of reforms and policies in areas well beyond their mandate and competence.”

The second concerns the current fallacies that hinder an appropriate policy response:

“In the Euro area, demand stimulus through fiscal policy has been severely handicapped by the widespread acceptance of the Triad of Teutonic Fallacies. The first of these is that there are reckless and/or stupid borrowers/debtors but no reckless and/or stupid lenders/creditors. As we are talking about the same transactions, that position is rather difficult to defend. It is, however, firmly believed by many living north of the Rhine, and it gives the creditors a sense of moral superiority or even outrage that diminishes their cognitive capabilities. The second fallacy is that expansionary fiscal policy is contractionary. There are indeed models in which this is the case. Provided any fiscal deficit expansion resulting from a fiscal stimulus is monetised, however, this will never be the case in a world with excess capacity and inflation below target. The third fallacy is that any increase in the balance sheet of the central bank will inevitably get monetised and lead to an undesirable increase in the rate of inflation. The fact that this is analytical nonsense does not mean it is not an influential view.”

Akerlof’s lemons were rejected 3 times…before getting the Nobel

Akerlof’s article excerpt:
“By June of 1967 the paper was ready and I sent it to The American Economic Review for publication. I was spending the academic year 1967-68 in India. Fairly shortly into my stay there, I received my first rejection letter from The American Economic Review. The editor explained that the Review did not publish papers on subjects of such triviality. In a case, perhaps, of life reproducing art, no referee reports were included.

Michael Farrell, an editor of The Review of Economic Studies, had visited Berkeley in 1966-67, and had urged me to submit “Lemons” to The Review, but he had also been quite explicit in giving no guarantees. I submitted “Lemons” there, which was again rejected on the grounds that the The Review did not publish papers on topics of such triviality.

The next rejection was more interesting. I sent “Lemons” to the Journal of Political Economy, which sent me two referee reports, carefully argued as to why I was incorrect. After all, eggs of different grades were sorted and sold (I do not believe that this is just my memory confusing it with my original perception of the egg-grader model), as were other agricultural commodities. If this paper was correct, then no goods could be traded (an exaggeration of the claims of the paper). Besides — and this was the killer — if this paper was correct, economics would be different.

I may have despaired, but I did not give up. I sent the paper off to the Quarterly Journal of Economics, where it was accepted.”