The Basic Income and the Helicopter Drop

September 26th, 2011  |  Published in Political Economy, Socialism  |  17 Comments

I haven’t been a regular reader of Steve Randy Waldman, which I now realize was a big mistake. I just discovered a post of his from last year that relates to one of my political preoccupations: the idea that everyone should receive a “Basic Income” to which they are entitled as citizens and which is not in any way conditional on whether or how much they work. In the process of figuring out his argument, I also realized that the debate we’ve been having between “fiscal” and “monetary” solutions to the employment crisis is kind of a distraction from the real issues.

The Basic Income is, obviously, a fairly radical demand, and one that may seem implausible in the context of American culture and its Protestant work ethic. However, there are reasons to think that you could build a diverse political coalition around it. One reason is that the Basic Income is embraced not only by left-wing socialists, but by some right-wing libertarians. Of course, the right wing version of the policy is different, because right-wing proponents want it to do different things; in particular, they don’t want a basic income so high that it discourages people from working, whereas I regard that as a feature rather than a bug. Nevertheless, there is potential for alliances in the short run.

But thanks to Waldman, I now see that there is another argument for basic income; this one comes neither from the socialist left nor the libertarian right, but from the technocratic liberal center. For as Waldman explains, a form of Basic Income could be used by the Federal Reserve as a tool of macroeconomic stabilization and regulation of the business cycle.

Recall that the Fed is supposed to use its policies to keep unemployment as low as possible, while also keeping inflation under control. As Waldman explains in this post, there have been two different periods of Federal Reserve policy in the United States: one in which inflation was controlled by causing mass unemployment (and thus there was a direct tradeoff between the employment and price stability mandates), and one in which they focused on controlling asset prices and access to credit:

Prior to the Great Moderation, central bankers had to provoke recessions in order to control inflation. Broad-based wage growth led to increases in nominal cashflows by “spenders” that could only be tempered by creating unemployment or other conditions under which workers would accept wage concessions. In the post-Reagan world, growth in the sticky component of disposable income shifted to the wealthy, who tend to save rather than spend their raises. The marginal dollar of consumer expenditure switched from wages to borrowed money. The great thing about consumption funded by credit expansion, from a central banker’s point of view, is that it is not sticky downward — no one who gets a loan today assumes that she will be able to expand her borrowing by the same amount every year. Credit-based consumption is susceptible to monetary policy with far less impact on employment than wage-based consumption.

In other words, the stagnation of median wages and the funnelling of income growth to the top 1% is directly related to the pattern of credit expansion and asset bubbles that we’ve seen over the past 30 years. See Waldman’s post for an explanation of why, while it’s possible to have an ongoing dynamic where economic growth is fueled by repeated bubbles followed by debt cancellation, this isn’t a desirable state of affairs. What I’m interested in is the later post where Waldman gives a third stabilization strategy: having the Fed hand out free money, the mythical “Helicopter Drop”:

We should try to arrange things so that the marginal unit of CPI is purchased with “helicopter drop” money. That is, rather than trying to fine-tune wages, asset prices, or credit, central banks should be in the business of fine tuning a rate of transfers from the bank to the public. During depressions and disinflations, the Fed should be depositing funds directly in bank accounts at a fast clip. During booms, the rate of transfers should slow to a trickle. We could reach the “zero bound”, but a different zero bound than today’s zero interest rate bugaboo. At the point at which the Fed is making no transfers yet inflation still threatens, the central bank would have to coordinate with Congress to do “fiscal policy” in the form of negative transfers, a.k.a. taxes. However, this zero bound would be reached quite rarely if we allow transfers to displace credit expansion as the driver of money growth in the economy. In other words, at the same time as we expand the use of “helicopter money” in monetary policy, we should regulate and simplify banks, impose steep capital requirements, and relish complaints that this will “reduce credit availability”. The idea is to replace the macroeconomic role of bank credit with freshly issued cash.

He further elaborates that he thinks “central banks should make equal transfers to all adult citizens irrespective of income, job, or tax status.” Although he doesn’t use the term, this is just basic income by another name–the only difference (and obviously, it’s a significant one) is that the level of the the BI grant fluctuates rather than being set at a stable level. So you could say that there are now three distinct versions of the basic income, coming from across the political spectrum: the leftist version demands a high BI, the rightist version wants a low BI, and the centrist version advocates a varying BI.

But I’m not sure where any of these proposals would fit into Mike Konczal’s typology of ways to fix the economy. This is obviously a “demand side” argument, but it sort of cuts across the argument between people who think we can get back to full employment purely through monetary policy and those who think we need fiscal stimulus and/or debt deleveraging. Waldman is making a monetary policy argument in the sense that he’s advocating stimulus via Federal Reserve control of the money supply. But this isn’t anything like the way the Fed currently operates–indeed, as Waldman acknowledges, you’d have to change the law to allow the Fed to do what he’s advocating here, since at present they’re only allowed to exchange money for assets, and can’t just give it away.

So rather than break things down into “monetary” and “fiscal” camps, maybe it’s better to think of the situation as follows:

  • The big divide is between people who want to reflate the economy by continuing to channel money to the top of the income distribution and expanding debt for everyone else, and those who want to do it by a broad-based, redistributive program that puts money in the hands of the masses.
  • Within the “give more money to the rich” camp, there is a split between people who want to rely on tax cuts, fiscal austerity, and deregulation of business, and those who want to have the Fed print money and use it to inflate the price of risky assets.
  • Within the “give more money to everybody else” camp, there is a split between people who want the government to directly employ people with some kind of jobs program, and people who just want to start giving everyone money.

While I would prefer the job-creation version of egalitarian stimulus to either of the inegalitarian alternatives, I think it would be even better to have a smaller amount of job-creation spending for things we really do need (like infrastructure), combined with the Basic Income/Helicopter Drop plan. This woud be both more just and more radical; and as Waldman also points out, in some ways guaranteed income is a substitute for the declining labor movement:

If people grow accustomed to getting sizable checks from the central bank, that would change behavior. But not all changes are bad. For example, it may be true that many workers would be pickier about what jobs to take if government transfers generated incomes they could get by on without employment. Employers would undoubtedly have to pay people who work unpleasant jobs more than they currently do. But that’s just another way of saying that workers would have greater bargaining power in negotiating employment, as their next best alternative would not be destitution. That we’ve spent 40 years increasing the bargaining power of capital over labor doesn’t make it “fair”, or good economics. Supplementary incomes are a cleaner way of increasing labor bargaining power than unionization. Unionization forces collective bargaining, which leads to one-size-fits-all work rules and inflexible hiring, firing, and promotion policies, in addition to higher wages. If workers have supplementary incomes, employment arrangements can be negotiated on terms specific to individuals and business circumstances, but outcomes will be more favorable to workers than they would have been absent an income to fall back upon.

Of course, there are other important things that unions do, like intervene in politics and advocate for better conditions in the workplace. For that reason, I won’t go all the way to the “unions bad/redistribution good” argument that Waldman seems to be making and which characterizes a lot of progressive neoliberalism. However, I do think this is a useful counter to the argument of people like Doug Henwood that stimulus via monetary policy doesn’t do anything to increase the power of labor. It all depends just what kind of “monetary policy” you’re talking about.

Responses

  1. Tuesday PM Reads | The Big Picture says:

    September 27th, 2011 at 4:42 pm (#)

    [...] • Budget like it’s 1995 (LA Times) see also The Basic Income and the Helicopter Drop (Peter Frase) • Firestorm Over a Trader Interview (Dealbook) • Top hedge fund mixes Ayn Rand, behavioral [...]

  2. Stan says:

    September 27th, 2011 at 5:13 pm (#)

    Excellent analysis !

    You will probably be interested by the social credit theory en.wikipedia.org/wiki/Social_Credit which advocates more or less what you’re explaining here.

    More, do you know about open udc ? This is a alternative currency that intends to apply this kind of monetary rules : http://open-udc.org

    Please contact me if you want more information. Congrats for this great article.

  3. Galuel says:

    September 27th, 2011 at 5:19 pm (#)

    There is also a theorital drastic change of paradigm concerning basic income. Consider-it as a mutual credit money system in space and time, considering each individual as basis of mutual credit.

    http://www.creationmonetaire.info/2011/09/le-monopole-du-code-monetaire.html

  4. anon says:

    September 27th, 2011 at 6:23 pm (#)

    Thank you for this. I’ve been banging this drum for 3 years.

    I’m glad to see the idea is getting some traction. Now, if it could just get some traction among those with the power to implement it…

  5. Asif Itellyou says:

    September 27th, 2011 at 6:54 pm (#)

    This right-wing libertarian just about hurled at the very thought of a “basic entitlement income.” Communism doesn’t work; period.

  6. Lincoln Kennedy says:

    September 27th, 2011 at 10:15 pm (#)

    ^Say what you will about the suggestion on the merits, it may be the worst idea since the AOL/Time Warner merger, but it certainly isn’t communism, nor does it bear any resemblance whatsoever to the economic theories or practical applications in the experience of any communist regime. The guy who expects adults to be above name calling just shed one solitary tear.

  7. Jay says:

    September 28th, 2011 at 1:05 am (#)

    Free lunches for everyone! If it were as simple as helicopter dropping everyone in an economy money, then why are there no modern economies who have successfully implemented a policy even remotely like this?

    I guess one answer might be that no economic policymaker understands the implications of their fiat money systems. A more likely reason is that in a floating exchange rate system, this would not work. How would you get any non-US citizen, presumably ineligible for the helicopter-dropped money, to have any demand for dollars whatsoever?

    If Australian dollars are exchanged for activity someone deems productive, and both the AUD and productivity are growing at similar rates, then that dollar is a sort of fixed claim on the economy’s productivity. If only some U.S. dollars are exchanged for productivity and a growing amount are exchanged just because, then it’s a diminishing claim on productivity. Thus, if I sell something on an international market, say, oil, I might sell it for a stable price in Australia, in exchange for that fixed share of productivity. I’d sell it for an ever rising price in America.

    The amount of helicopter drop small enough to avoid this effect would also be too small to be a meaningful basic income. I can’t see how a helicopter drop large enough to provide the entire populace with a basic income, and a political regime to do so on an ongoing basis, if enacted just by one country, wouldn’t cause that country’s exchange rate to swiftly collapse, and just as swiftly destroy the purchasing power of that income.

  8. Stan says:

    September 28th, 2011 at 6:03 am (#)

    @Jay : just one question : who is enjoying the free lunch right now ?

    i’ll give you a hint : it starts by a B and finish by a K.

  9. Marko Kraguljac says:

    September 29th, 2011 at 2:40 am (#)

    Its the right way forward but it must be implemented globally, for each country amount being proportional to some agreed basket of commodities. In each country (as long as they exist; my opinion: only a few more decades) people must be enabled to live modest life without being “free” to starve. Economic violence and hypocrisy must end. Introduction of unbiased global reserve currency would also help and would be its backbone. Most important part for this to succeed is to aggressively employ already available technology. Once upon a time, economic woes were somewhat averted through public works and rebuilding of infrastructure (sadly, war also, multiple times); today, exit is in introduction of massive, fully automated (>99%), optimized and environment friendly super factories and farms which would produce basic nutritious food and necessities of life. It is complex but far from impossible. Such system would ensure world stability and schemes such as BI. We are mostly what environment makes of us. Fed and clothed people not afraid of starvation if not on someones leash will return to society multiple times in just a few trauma-free generations. Voluntarism of free people would be enough to serve 95% of societies needs. It already has impressive impact; imagine how it (volutarism) would flourish in a world free of subservience and fear. Not to mention certain drop in mental illnesses, criminal, violence, marketing.. Less traumatized population will create something not yet seen on Earth. Keep up the good work.

  10. Bonnes lectures de la semaine #4 | Tête de Quenelle ! says:

    October 1st, 2011 at 5:52 am (#)

    [...] The Basic Income and the Helicopter Drop (Peter Frase) [...]

  11. Jay says:

    October 4th, 2011 at 9:23 am (#)

    @Stan — I’ll be the first to shout that the current system is not working. But part of the reason we’ve ended up with such terrible policy is we’ve allowed the following fuzzy argument:

    Person 1: There is a problem with X. We need solution Y. Person 2: Why solution Y? P1: I see you are an apologist for X and the banksters. P2: No, I am just curious why Y and not something else. P1: Don’t you see how bad problem X is? That’s why we need Y.

    Alas, this may win arguments. It will not actually help fix anything. Meanwhile, if anyone has an explanation of how this could work in a floating exchange rate system….

  12. g says:

    October 15th, 2011 at 10:50 am (#)

    @jay

    (disclaimer:i’m new to the subject, i’m not an economist, i might make gross misunderstandings)

    if i’ve understood well what at least one advocate of “helicopter drop” systems say, in extreme synthesis:

    1.in our current monetary systems, the overall monetary mass (M3) increases steadily (except during recessions, when it is stable). 2.the “helicopter drop” proposition replace all mechanisms that are currently generating the M3 increase with an helicopter drop. (btw: it sounded like a theoretical exercise more than a political proposition)

    The implicit assumption of the author i’ve been looking at seemed to be that, in a non-growing economy, inflation=rate of M3 increase.

    on a theoretical basis, could it work?

  13. Pour une politique monétaire du XXième siècle | Tête de Quenelle ! says:

    January 4th, 2012 at 10:21 am (#)

    [...] exemple, a été cité et abondé par des blogueurs « influents » tels que Peter Frase, lui même repris sur ThinkProgress par le célèbre Mathew [...]

  14. Allocation universelle, revenu de vie, revenu citoyen : une condition pour la société du futur ( le futur c’est maintenant ) | singularite says:

    February 1st, 2012 at 11:29 am (#)

    [...] Frase nous propose en Anglais une très bonne argumentation descriptive et comparative “the basic income and the helicopter drop” qui démontre une fois de plus que la compréhension du sujet arrive à la surface partout, [...]

  15. The solution is right here - but who dares to look at it? says:

    September 25th, 2012 at 11:53 am (#)

    [...] later proposal was applauded by Peter Frase, while Mathew Yglesias added: There’s no particular reason why monetary policy [...]

  16. Pour une politique monétaire du XXIème siècle « LE MESSAGE DU PLAN C says:

    December 18th, 2012 at 5:39 pm (#)

    [...] Steve Waldman, par exemple, a été cité et abondé par des blogueurs « influents » tels que Peter Frase, lui même repris sur ThinkProgress par le célèbre Mathew [...]

  17. Collection de perles certifiées | Création Monétaire says:

    January 24th, 2014 at 4:07 am (#)

    […] Frase nous propose en Anglais une très bonne argumentation descriptive et comparative « the basic income and the helicopter drop » qui démontre une fois de plus que la compréhension du sujet arrive à la surface […]

Leave a Response