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morality

The various basic income proposals floating around are often criticized for being unrealistic, and let’s face it, they often are. In a recent column, John Kay is asserting that “either the basic income is impossibly low, or the expenditure on it is impossibly high.”

This includes an implicit dismissal of the Keynesian arguments — that the basic income would create demand that would snowball into economic growth — of some basic income proponents. I happen to agree that this aspect is unlikely to deliver miracles, so let’s assume no such effect here.

Too high

It’s easy to agree that spending half of GDP on basic income would not be acceptable, but it’s also a good problem to have: humans are scarcity animals and do not work well when too far from need, as can be seen in the often sorry state of people benefiting from windfalls (third generation heirs, lottery winners, small “first nations” in rich and guilty countries, etc). Thus a basic income should probably be high enough to remove fear of survival (food and shelter) but not to so high as to remove the need to get out to the world to improve one’s lot.

Impossibly low is desirable…

In Western countries what some would describe as “impossibly low” does provide pretty decent survival standard. The Ikea/Lidl/Primark lifestyle is pretty okay, and way more comfortable than what the richest slice of society could afford a century or two ago. So a basic income in the region of say $500 a month for a tier 1 developed country would probably do the trick (assuming social housing and healthcare are not subsumed into it).

… and possible

Would simple arithmetic work for that? To design a realistic basic income we need some premises:

  • Assume the net expense on welfare remains constant, because it reflects what a society is ready to accept in redistributive pressure. This allows isolating the effect of the basic income as a redistribution technique from other ideas about changing the amount of redistribution (which can be done through any mean).
  • Assume the wealthier members of society (say the top half) do not get richer out of it, that is the (income) tax system is adjusted to increase the tax they pay by the amount of basic income they receive.
  • Some existing welfare mechanisms are abolished (such state unemployment benefits, child benefits) or restricted (e.g. pension age could be pushed forward) as the basic income replaces them.

Then what basic income is possible? It’s simply equal to:

basic income = removed welfare services budget + tax equalisation

Detailed number crunching would be required, but I’d expect it to come to $300-$600 per adult, again for a tier-1 developed country.

The main variable here is what services get replaced (and to what extent) by basic income so it computes at all times.

Radical realism

A realistic scenario is probably better thought with social housing, public education and public healthcare arrangements untouched, but the basic mechanism also applies should someone wish to privatise some or all of these services: then the fewer services are left, the closer you get to a basic income equal to the tax take, though the higher basic income might then buy less, depending on the distributional profile of each service (a most tricky issue on its own).

What are the benefits of a survival income?

A survival basic income wouldn’t abolish poverty, in so far as this is more or less defined as inequality — how much less one has than others, rather than the absolute level of what one has — but still have some interesting properties:

  • Improve the bargaining power of low-paid workers not forced to work for mere survival
  • Remove net tax discontinuities (being a net loser when taking a low paid job)
  • Simplified administration (some)
  • Increased acceptability of redistribution

The welfare illusion

The latter point is perhaps the most neglected while the most powerful point in favour of basic income. It makes no difference in pure economic terms whether the cash flow between the state and the citizen is done through tax or benefit payments, it’s the net that matters.

But, like with the money illusion in the monetary realm, optics matter. This can be observed today in the difference in perception between universal benefits (like child payments and some healthcare in many developed countries) and means tested ones (typically unemployment and safety net income). The former are often popular and well accepted, even by net payers, while the latter are seen as prone to abuse, and divisive. A basic income, even if compensated by tax, would probably quickly become part of the societal furniture.

Even if it was the only benefit, it’s probably worth doing for that alone.

Funny news about a granny who shred her cash stash to annoy her heirs. The local central bank will replace the banknotes!

Mattress safety

This bring interesting potential applications. How to make cash under the mattress safer? Just cut it in two and hide it under TWO mattresses in different locations. If you need to spend it, rejoin the two parts and redeem it for spendable currency at the central bank. (This doesn’t though cover the somehow unlikely scenario where the central bank ceases to operate but the banknotes still have some value.)

Paper multi-sig

This could also be used by a group of people who want to share a stash and only spend it when they all agree: cut each banknote in N-pieces where each party takes one. To spend, the parties must collaborate to reunite the parts and redeem them at the central bank. This is pretty similar to multi-sig addresses in Bitcoin — indeed it could be used to explain multi-sig to people who don’t get the explanation in cryptographic terms.

Shredded will

Back to the granny, a central bank representative is quoted as saying that “If we didn’t pay out the money then we would be punishing the wrong people.” I think it is the wrong attitude. Destroying a banknote is equivalent to making a donation to society, as the value of everyone’s remaining currency increases (there are fewer of them going around). From an accounting viewpoint it decreases the central bank, thus the state, liabilities as there are fewer banknotes to redeem (paper money in circulation show up as a liability on the issuer’s balance sheet). So, the act of shredding the notes was obviously a wilful act of spending on the granny’s side. She could have equivalently bought an expensive object and destroyed it so as to destroy its value.

Technicalities

The ECB says that they do not redeem banknotes damaged intentionally. The Bank of England seems more tolerant. Arguable if people started to use the procedure for mattress safety and paper multi-sig en masse, central banks’ damaged notes redeeming service could be overwhelmed, though economically or morally I don’t see a problem with operating the service, perhaps with a fee to cover direct costs.

Frances Coppola tries to understand why Greece’s creditors are apparently so stuck into recommending policies that are economically irrational for all parties. Her hypothesis is that the main players see the current programme as punishment — on a moral level — for Greece’s past misdeeds. While some people certainly think like this, it seems a far fetched idea that this explains the situation, or that it is the majority view of the main players.

Theoretical Plurality

First, while I broadly agree that a debt reduction and a stimulus programme (or at least no more austerity) would be best in the current circumstances, I don’t think that this view is universally agreed. Macro-economics is the study of complex highly interdependent systems and our analytical toolset, both theoretical and empirical, is extremely inadequate. Nobody knows for sure what works and what doesn’t. Everybody is making educated guesses, often tainted by ideological bias — when competing models are a draw based on facts, it’s only human to choose based on ideology.

So I believe it’s still possible for some to believe fiscal rectitude and austerity work. It’s all a question of degree: every measure under consideration, taken in isolation, works some of the time to some extent. Is it unbelievable that the like of Wolfgang Schäuble still genuinely believe more austerity would produce the best long term outcome for the Greek and European people? A hint is in the whole ‘schwarze Null’ nonsense, which is about applying a similar medicine to Germany itself. The negative effects are less drastic given Germany is doing okay at the moment, but are still negative in what Frances sees as ‘obvious’ economics. How to explain it then? Self punishment? I don’t think so. One can be rational — as much as one can be talking about economics — and accept the Washington Consensus, as one can be rational and reject it.

Institutional Inertia

Still, is this view that of a majority view of European policymakers, or even the insiders in the institutions? It’s not so obvious, many insiders, prominent academics and finance professionals are on record supporting what we could call the Varoufakis View. Still the institutions remain inflexible. My bet here is that the main culprit is institutional inertia. There’s nobody in the IMF, or in the European Commission, who is in charge of Theory.

Weak leaders like Lagarde, Moscovici or Juncker seem to consider it’s above their pay grade to discuss theory or make any change to the orthodox models their institutions have been using for the past few decades. Everybody under them follows — while on official business, despite some being critical in research papers or in op-eds as ex-staffers — and there’s nobody above them. Minister or head of state level meetings, as Varoufakis has reported, are not places where theory is debated. My view is thus institutional inertia is the main culprit here. The IMF is on autopilot, and it will take some grave trouble for someone to look at the settings of the theory autopilot. A little default on June 30 could well be cathartic.

This is also true at the Eurogroup or European Commission level. The orthodox model is embedded in treaties and the rule set underlying the Eurozone. And renegotiating treaties is hard. Still, it will have do be done, or undone, some day. The current setup is extremely fragile, and if it doesn’t fail during this crisis it will fail during the next.

Both the IMF and the Eurozone are in dire need of structural reforms.

Where’s SuperMario?

The ECB has been remarkably neutral. This can be seen when both sides claiming to have it against them. The Greek side complains being on a tight leash, and they are (no short term financing tricks allowed, ELA allowance always kept to a few days’ worth) but then the orthodox side sees an ever increasing ELA liability — that can be defaulted on in case of exit — that they think should have been suspended, and capital controls introduced, long ago. The official ECB position that Greek banks are solvent with a liquidity problem is a bit farcical to be honest. But maintaining that farcical position seems an astute way to spend the minimum political capital required until a deal is made at the political level. My bet is that Mario Draghi may have taken Varoufakis’ side, but his hand depends on everyone — including Varoufakis himself — not realising it.

It’s to note that a Greek IMF default may be considered a positive for the ECB, as it may help push the commission/eurogroup to do the obvious debt swap and move the shortly expiring Greek bonds off its books and onto the EFSF/ESM, giving more room for manoeuvring by eliminating the risk of outright default on the ECB — which would make it possible to do whatever it takes to keep Greece in the euro.

German bonus ball

It’s really a sideshow, as only some of the players in the Greek drama are German, but I think there’s a great cultural misunderstanding when outsiders blame Germans for being moralistic in a punishing way. First, the whole idea of being externally moralistic towards other cultures is quite alien to the whole postwar German culture, for very obvious reasons. Second, there seems to be a weird Germanic view of causality that’s easily mistaken for morality but is really purely functional. In a nutshell, the person who causes damage pays for it, regardless of whether the damage was intentional or accidental. It’s pure causality, free of moral loadings. Third, the bias towards austerity and balance sheet prudence can be observed in many aspects of German life, including people’s sex and love lives. And who could argue that excess savings in the bedroom are directed from the Bundesministerium der Finanzen?

Chaos German Style (paperclips) Advert

A sense of humour

Tickled by architect John Hill’s wonderful coverage of new storage facilities in New York City, I’d like to discuss the hypothesis that one of the core forces that drives American economics and society, and many others beyond but perhaps not in such a pure form, is the Pursuit of Storage.

What is the purpose of economic activity? In prosperous societies, the basics of food, shelter, and essential healthcare are pretty quickly covered and can only explain a small fraction of the frenzied economic activity that can be empirically observed.

The accumulation of artefacts seems central.

People buy stuff; and store it. Many an economist could then appeal to utility, and say that people buy objects because of the functions they provide to them. This is easy to disprove, because if people were interested in objects from a utilitarian perspective they would, most of the time, rent them. Many objects that people store in their dwellings, or even corporations and government agencies in their facilities, have a one-time or only occasional uses. If you don’t live in a ski resort you don’t go skiing every day, so owning skis makes no sense for most people. Still many part time skiers own skis. It is almost permanently idle capital, with the additional costs of storage and transport adding to the economic loss caused by the choice of ownership other rental. This can also be observed in wealthy people collecting multiple instances of easy-to-rent objects whose use is exclusive — due to petty quirks of the laws of physics, people cannot be in two cars at once — and where the benefits of ownership over rental are oft negative.

A Storage Deluxe facility

The American Dream (source: Storage Deluxe via John Hill)

The primacy of accumulation of inert artefacts over their use can be seen in the organisation of labour: if people wanted objects for their use, a natural balance between the time spent producing objects and the time using them would be attained. But in work-centric societies like America, a cult of long hours and short holidays can be observed, both in a cultural sense — long hours give high status rather than leading the culprit to be ostracised as it does in more relaxed societies — and in a functional sense — the more hours spent on the production side, the fewer left for the use of artefacts. Storage is leverage for the workaholic: it enables the production of many more artefacts than justified by function, by maximising idle capital.

We could further argue that it extends to immaterial things: in insurance and finance, a lot of activity is dedicated to accumulation of titles, deeds and scorekeeping which has no effective purpose other than the self-referential accumulation of inert claims. At least they are more environmentally friendly than their material counterparts, as long as their “storage facilities” (banks, brokerages, etc) don’t blow up causing collateral damage to the truly functional parts of the system.

The endless pursuit of storage is also visible in the built environment and in the structure of American cities. People value vast houses with ample basements, where they can store a great number of discarded objects, never or rarely to be used, but proudly stored. A kitchen with vast cupboard space will add to the value of a home, as will ample storage space in all rooms above ground. Technology has largely enfranchised man from objects — a late twentieth century home may have been full of books and engravings of single sound recordings, all of whom now fit nicely on a single USB stick and can be comfortably viewed by a handful of compact devices. Preferences such as vast houses with good storage facilities in distant suburbs over compact places in town near to work express the sacrifices people are ready to make to live near their store of objects. The home is self storage first, and place for living, second. The destiny of man is to be a custodian of the objects they collect, catalogue and keep protected from the elements.

Rendering of Uovo art storage facility under construction

Art storage shed near a rail line, reminding commuters of their life’s purpose (Uovo via John Hill)

This is where I part company with John when he complains that new storage facilities in prominent urban locations are eyesores. When the point of modern life is to acquire objects and store them, with a little bit of quick display for status building — the Uovo display rooms nicely mirror the squeezing of some living space between the storage and display function of private homes. These boxes are not out of place: they are a reification of the American Dream. They can remind people why they get up in the morning: so that they, too, one day, can have inert capital stored in a shed to their own name.

Bonus ball for actuaries

John’s post contains another wonderful nugget. The Uovo art storage facility is spit into two sections separated by some sort of fire wall, because “insurance companies don’t want too much art in one place.” It’s a spectacular realisation of regulatory arbitrage, poured in actual concrete, and as is customary with such constructions likely to fail, as most risks beyond fire seem bound to be extremely correlated — there’s apparently even an internal door between the spaces, presumably to facilitate burglaries. It’s reassuring for the financial industry — in so far as the high end art trade is not a branch of finance — to see that the dishonest practices it pioneered are spreading across society.

Estimates of the Bitcoin holdings of the network’s anonymous designer, Satoshi Nakamoto, seem to indicate he owns a minimum of 5-10% or the current issuance. He doesn’t seem to have “spent” them as the addresses known to belong to him have not seen activity — this can be checked in the blockchain, Bitcoin’s public transaction ledger.

If he’s not thrown away the keys in a spring clean, he effectively controls the currency. His holding is a multiple of daily volumes on all exchanges, so he could easily intervene on the markets to cap the price (like a regular central bank) and introduce a fixed or capped USD/BTC rate. He wouldn’t even need to spend much, just announcing “I’m Satoshi Nakamoto and I’ve decided to cap the rate at this value” would do it, as nobody has anywhere near comparable firing power so a successful challenge seems unlikely.

The market cap of Bitcoin-derivatives being even smaller, by extension he can also control the entire alttcoin movement.

If the protocol doesn’t fall apart, his capacity is still notionally limited as he can’t issue new Bitcoins — he’s surrended control of the algorithm long ago. But even then, he may have enough buying power to bribe enough nodes to be able to control the network if he so wished. He could similarly sell his stash at a discount to someone else who wants to control Bitcoin, easing the exit problem he has should he want to convert his holding to real world claims.

Overall that’s more power than any central banker — who have a monetary policy committee to contend with and can be removed by their parent government sponsor — has. If estimates of his holdings are correct, this “decentralised” currency is in effect an absolute monarchy, with an absentee, and so far benevolent, king.

I wanted to avoid jumping on the Cyprus bandwagon, but OK, I can’t help. As the most obvious things have already been said many times, let’s try to think about some interesting side angles:

The euro went (mildly) down instead of up

In general this is very good for the Eurozone that the euro goes down, as it creates inflationary pressure from import costs, and compensates for the ECB otherwise stern monetary policy relative to major currency peers, with all the positive impact a modicum of inflation has. So as such that’s good news, more of it please, but that’s not my main point. What we have here is the ECB not bailing out the Cypriot banks, that is not printing (more) euros to fill the hole in their balance sheet, which would make euros more plentiful and therefore cheaper. Things should go up on the news of a supply shock!

Communists against wealth tax!

It seems the “communists” in the Cypriot parliament are against what is effectively a wealth tax. I don’t know for sure if their position applies only to low deposits or to the whole thing but in general true proletarians are not long currency. They should at the very minimum support the >100K portion very enthusiastically (the higher the rate the better) and even for below 100K, I doubt that the median cash savings of ordinary people in Cyprus (or anywhere else outside Monaco) is much above 5K. So they should be fully supportive of the current proposals where the tax starts at 20K (last number I read for the draft law, probably obsolete by the time I post) which should cover the vast majority of their constituency.

Bank run on monday!

The weekend anglophone financial blogosphere was predicting a bank run in all of southern Europe on Monday. Hasn’t happened. It’s not surprising, rationally it’s been years since it has made sense for any resident of peripheral countries to keep any surplus cash (or their entire credit banking) in a Northern Eurozone bank, to avoid both local banking failures and hedge the euro exit risk. Electronic transfers (SEPA) work well and your euro payment card works everywhere at the same price as domestically — and sometimes better, SEPA can be faster than legacy domestic transfers, and you escape domestic out-of-network cash machine levies! So, whatever the reason that made southerners not run so far (or very slowly, which is not a run) is persisting. It could always change but again hasn’t.

A stimulus measure?

If your savings are at risk, then one of the best way to diminish that risk is to spend them. Perhaps frightening everyone will take some away from (excess) savings, which could actually be positively helpful in the current circumstances. In general I think a positive of this is to show that bank deposits are not sacrosanct (esp above >100K or wherever petty cash limit is set) and that could have some positive aspects. Fully guaranteed deposits are in effect synthetic government bonds, with the benefits of the guarantee in private hands, and that cannot sustainably work out fairly.  Now the art is in not blowing up the remaining useful bits of the financial system in the process.