VC for the people
Oddly (very oddly), I found myself last week at the INET Economics conference in Toronto. Larry Summers was the final speaker. His presentation was excellent. Whatever I might object to in Summers’ history or politics, he’s brought to the mainstream a set of views I’ve long held, and he is an engaging, cogent presenter.
I had a question for Summers that I didn’t get to ask. So I’ll ask it here.
Early in his talk, Summers pointed out, accurately, that economists really need to rethink the standard “labor / leisure tradeoff”. Almost no one prefers a life of pure “leisure”. Human beings like to regard themselves and to be regarded by others as “productive”. They like to “make a contribution” or “pay their own way” or “kick ass” or “dominate others”, to do something that they believe confers value and status. As Summers pointed out, retirement is often not so good for people. The luckiest people, young or old, are those whose work is fulfilling and enjoyable, not those who do not work at all. As people grow wealthy, they become more free to choose the ways by which, and the terms under which, they will do useful or important things. Wealth is better understood as conferring upon individuals a greater freedom of choice over what kinds of work they wish to do than as endowing lives of “leisure”. A person with wealth can explore roundabout and risky production processes (become an artist, write a novel, start a business), can opt for work with no hope of remuneration (volunteer, help raise a child or grandchild), or can hold out for only the most fulfilling or best-paid market labor. A person without wealth may be forced to accept degrading and poorly paid work, just to pay the bills.
Summers’ talk was the capstone of a conference whose theme was “innovation”. In an excellent session a day earlier (see John Cassidy for a full write-up, ht Mark Thoma), there was surprising agreement among several panelists that speculative bubbles help support innovation. William Janeway distinguished between bubbles in productive vs nonproductive sectors, financed by banks vs nonbanks, and argued that productive-sector, not-bank-financed bubbles promote socially useful innovation at modest social cost, despite high private costs to investors. He went so far as to suggest that agency problems in the delegated investment process, specifically the inability of career-minded fund managers to stay away from bubbles regardless of any personal reservations, make an important contribution to innovation. Steven Fazzari (whose work on inequality this blog has featured before) described research showing that R&D expenditures of young firms are constrained by external finance and increase in bubblicious periods. Ramana Nanda investigated whether investments made at the top of bubbles were poor, and found that they were not. They were just riskier. Firms funded by venture capitalists in heat were unusually likely to crash and burn, sure, but they were also unusually likely to succeed spectacularly. In an earlier panel, Mariana Mazzucato described the importance of “mission-oriented” investment by the public sector. States determined to gain military advantages or put humans in space accept experimentation and failure that would be intolerable to private venture capitalists (whose enthusiasm for risk, she argues, is in general overstated). The common thread in all these accounts is that too much market discipline can be socially counterproductive. If (nonbank-financed) speculative bubbles create social value that exceeds the costs borne by investors and entrepreneurs, then the fact that market participants fail to impose privately optimal discipline on their own portfolios is beneficial. If revolutionary developments in technology depend upon states accepting large, nonrecoverable expenses, a managerialist insistence on quantifiable performance metrics may be foolish. Even in the private sector, powerhouses of invention like Bell Labs and Xerox PARC thrive primarily within cushy monopolies, where they are sheltered from quotidian fretting over the bottom line, where market incentives are present but blunted.
So, Summers argued (as he has now argued for a while), Western economies may have entered a period of “secular stagnation” in which the “natural rate of interest” (the rate at which the resources of the economy, human or otherwise, would be fully employed) is so low that we cannot achieve it, or should not try (because rates so low become ineffective at spurring demand or carry with them other costs). He emphasized infrastructure investment as a solution, a near free-lunch which simultaneously increases the economy’s capacity as it spurs aggregate demand. I have no quarrel with that. Infrastructure investment would be a great thing to do, if we could solve the political and regulatory problems that have rendered competent public enterprise nearly impossible.
But we do have other options. If it is true, as Summers seems to think, that humans prefer to do important things even when they are not forced by a labor-market cudgel, and if it is also true that financial constraint causes people to accept safe and sure work rather than take chances on activities that might be speculative but more valuable, then there might be social return in having the state absorb some of the risk of failure faced by individual humans. In effect, the state could provide venture capital to the people. If ordinary citizens had a small but reliable annuity, too modest to live comfortably but enough to prevent destitution, then at the margin, we’d expect people who currently seek or accept unfulfilling, underpaid work to opt for entrepreneurship, or education, or art, or child-rearing, or just hold out for a better gig. “VC for the people” would combine a reduction in labor supply with a lot of new labor demand, forcing employers to increase wages and encouraging substitution of capital for the least desirable jobs. Both the wage effect and the annuity itself would increase the share of national income available to those without direct claims on capital, reducing inequality. In his talk, Summers mused (wonderfully) that he’d prefer we not evolve to an economy in which people are employed providing increasingly marginal services to the rich, working as specialized “knee masseurs” and the like. A straightforward way to preclude that is to ensure that everyone has the means to refuse those jobs and take chances on more meaningful and ultimately more valuable work.
“VC for the people” would reduce market discipline, but it would certainly not eliminate it. People do not require the threat of destitution to cultivate ambition. It is much better to supplement ones modest annuity with a vigorous market income than to crouch inertly in a hovel. Most people (like most of you, my not-nearly-destitute readers) will still try hard to achieve economic success. It’s just that people who have options are much more likely to actually find success than people who don’t.
“VC for the people” has a more common name. It is called a universal basic income. Properly implemented, it is not means-tested and carries no disincentive to earn. It is inflationary via increased purchasing power of ordinary people, the best kind of inflation, especially desirable in disinflationary times. Its level is a policy instrument and need not be indexed to prices. If it “works too well”, positive interest rates can tamp down spending, and, presto, no more secular stagnation.
So, what do you say, Larry Summers? Would you support a universal basic income?
Note: The title of this post is a bit of a play on Anatole Kaletsky’s QE for the people, which is similar to my own Monetary Policy for the 21st century, as well as proposals by David Beckworth, Ryan Cooper, Ashwin Parameswaran, Matt Yglesias, Haitao Zhang, and I’m sure many others.
However, it’s important to note a difference between those proposals (for fiscalist central banks that “cut checks” to regulate the macroeconomy in addition to using traditional monetary tools) and proposals like this one, for a universal basic income. A fiscalist central bank must be able to tighten as well as loosen when macroeconomic conditions change. In order to retain policy flexibility, recipients of “helicopter money” must not come to depend upon it as permanent income. A fiscalist central bank would have to take care to cut its checks irregularly, or (as I suggested) wash its transfers to the public through a lottery to avoid recipient dependence.
A universal basic income, however, is intended to be depended upon. Its purpose is to alter people’s behavior, to render them more risk-tolerant, to increase their bargaining power in wage negotiations. Macroeconomically, a universal basic income might provide a low-frequency “reset” to positive interest rates, but it should not be adjusted monthly or quarterly like a central bank policy instrument. A universal basic income should be determined like the minimum wage, via acts of Congress. “Helicopter money”, on the other hand, should not depend upon acts of Congress. Its purpose to offload a macro-stabilization component of fiscal policy from legislatures to central banks. (Larry Summers, in his talk, admitted confusion as to the point of helicopter money proposals. Don’t fiscal expenditures plus open market operations amount to the same thing? In terms of net flows to the private sector, they do amount to the same thing, but in institutional terms they are very different. Central banks are much more agile, more nimble, than legislative bodies. If fiscal policy is to be used as a macro stabilization tool, then some aspects of fiscal policy must be delegated to an agency capable of responding at the frequency required for macro stabilization. That is the attraction of “helicopter money”.)
Update History:
- 16-Aprr-2014, 3:55 p.m. PDT: Added David Beckworth and Haitao Zhang to list of helicopter money (-ish) proposals. Added “start a business” to list of risky, roundabout production process things.
The counter arguments will be fueled by the invasion of market theory into common sense that is being mentioned some in the blogosphere these days. My experience in Reaganist comment threads has taught me that a sizable percentage of GOPers believe that financial incentives govern every human behavior. At extremes, they suggest that people would fail to care for their children if tax policy made it financially advantageous.
April 16th, 2014 at 5:03 pm PDT
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I totally agree with you about the benefits of a citizens’ dividend type set up.
I’ve also wondered that a high level of debt acts as a sort of opposite to a citizens’ dividend. It causes people to become more wedded to low risk “wage-slavery”. In the UK our “economic recovery” seems to be being built on laying on more household indebtedness. Perhaps that is a wrong direction.
April 16th, 2014 at 5:18 pm PDT
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waldman: [give guaranteed minimum income]
Subsidize part-time criminals with guaranteed minimum income, eh?
This problem is one of the reasons serious people favor a wage rate subsidy, it only subsidizes legal jobs.
THE ADMINISTRATION OF A WAGE RATE SUBSIDY
April 16th, 2014 at 5:37 pm PDT
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Better for whom? It is far easier to rule over people who are crouching inertly in their hovels. Right up until the day the tumbrels roll — and that day might never come.
April 16th, 2014 at 8:04 pm PDT
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This post really faked me out. I thought you were going to talk about the democratization of venture capital with the upcoming implementation of the JOBS act for crowdfunding investments with non-accredited investors.
April 16th, 2014 at 8:28 pm PDT
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This is a nice story, based on plausible but unsupported assertions. Where’s the data? Similar claims get made for universal health insurance schemes– supposedly when people don’t have to worry about losing their health insurance they’ll be more willing to leave their stable jobs and go start a startup– but I am not aware of any studies proving this out.
Note too that besides the explicitly stated unsupported assumptions, you’ve got implicit egalitarianism doing much of the work here. If the sort of people whose desired work activities have positive expected value but high variance are already those who don’t have to worry about destitution anyway, insulating everybody from destitution is not going to increase the amount of positive-EV risky activity. You’re relying on a sort of leftist faith that among the economically insecure are a huge bunch of wonderful artists and entrepreneurs just waiting for greater security to enable their schemes.
April 16th, 2014 at 9:27 pm PDT
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“Properly implemented, it is not means-tested and carries no disincentive to earn.”
We already had that. It is called unemployment benefit, and it has been slowly chipped away since the War until it doesn’t exist very much any more.
We have a state pension paid to all, but it has been run down over time in favour of pointless ‘saving for your retirement’ – like we can all do that in aggregate in reality.
Why? Because your peers resent you getting something for nothing and will therefore politically agitate to have it removed – and the evidence shows that even people receiving the same sort of income themselves want it removed from others who they deem ‘not worthy’. That’s the reality of working with human beings. Quid Pro quo is wired into our DNA.
Additionally for any sort of basic income to work, tax rates have to be be about 50% – because of course you have crippled one half of the automatic stabilisers.
Fully costed basic income idea here
The basic income idea is based upon rational economic man – which doesn’t exist. You can’t just tweak interest rates sufficiently to cause people to voluntarily tax themselves via savings – that’s not how people behave. They get enough savings and low enough debt and stop saving. You can’t pay millionaires a basic income and expect people to sit and take it. (Here in the UK, £20 per week paid to every child has been stopped for ‘high earners’ because they “don’t need it”). You can’t pay people who refuse to reciprocate by showing that they are doing something useful for their income. You just get resentment.
Basic income falls into the category of ideas that are neat, plausible and wrong. Because reality has messy awkward humans in it who will refuse to behave according to simplistic theory.
April 17th, 2014 at 1:46 am PDT
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“but I am not aware of any studies proving this out”
How about the rest of the world has public health cover, much lower health costs and amazingly the world doesn’t end.
The Canadian system works very well. The UK system is old, but still works well. Australia has national health cover.
It’s a no brainer. Markets can’t work if ‘no deal’ stops being an option. You don’t tend to go shopping around when you are dying of cancer.
April 17th, 2014 at 1:52 am PDT
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Ed Dolan made a nice look at one, coming up with a figure of about $6K a year. One difficulty is there are always people that need more, so a one size fits all tends to be procrustean.
April 17th, 2014 at 1:54 am PDT
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The other advantage of a citizens’ dividend type set up is that it could help avoid so many start up enterprises going to waste. Nowadays an unfortunate cycle of corporate evolution seems to be that an innovative start up gets going and starts creating a much needed new product, then the funders need to cash out their investment so they sell up to a large moribund conglomerate. The parent company ineptly mismanages the acquired start up and so destroys it before it can provide what it could have done to the economy/society/civilization. Under a citizens’ dividend, the start up employees could afford to have much larger stakes in the start up because they would be living off of the citizens’ dividend. They would not need to sell up, so the company could be continued to be run by people who knew how to do so and so the innovative enterprise would not get strangled at birth.
Neil Wilson- unemployment benefit is not quite like a citizens’ dividend. Unemployment is not payable to those who are not looking for work but rather trying to create a job for themselves -as such it drives people into waiting on the sidelines rather than creating employment for themselves/coworkers.
April 17th, 2014 at 3:20 am PDT
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April 17th, 2014 at 5:36 am PDT
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@ 6
My experience and anecdotal history back Waldman’s view.
You misleadingly paraphrase (as is the rightwing’s tendency):
“You’re relying on a sort of leftist faith that among the economically insecure are a huge bunch of wonderful artists and entrepreneurs just waiting for greater security to enable their schemes.”
Waldman actually says:
“If ordinary citizens had a small but reliable annuity, too modest to live comfortably but enough to prevent destitution, then at the margin, we’d expect people who currently seek or accept unfulfilling, underpaid work to opt for entrepreneurship, or education, or art, or child-rearing, or just hold out for a better gig….
In his talk, Summers mused (wonderfully) that he’d prefer we not evolve to an economy in which people are employed providing increasingly marginal services to the rich, working as specialized “knee masseurs” and the like. A straightforward way to preclude that is to ensure that everyone has the means to refuse those jobs and take chances on more meaningful and ultimately more valuable work.”
Not only that, the rightwing syncophantic dream results in an Oligarical Doom Loop where the economy increasingly suffers a shortfall in demand which further impoverishes the servant class worsening further still all sorts of social ills.
April 17th, 2014 at 10:47 am PDT
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a) why wouldn’t this just be captured by rents?
b) what is the advantage of this over Warstler’s GI/CYB?
I like the Warstler’s proposal admits the worker/entrepreneur distinction. Not everyone will be an entrepreneur; not everyone’s comfortable with that. They’d prefer someone else to do the messy (risky) business of choosing teams, finding clients and a market, negotiate around the rules and regs etc. They’d prefer to know what the job is to be done, turn up and do it. GI/CYB starts from the job definition. The real happy ideal-BI innovator can still go ahead: they need to find a local sponsor, but at $40 a week (and with the jobs platform for marketing) that should be possible.
The more fundamental change required are the regulations around land, urbanism. The small entrepreneur has no hope in the face of regulations that separate uses, mandate parking minima, setbacks etc. The pop-up market, the customer arriving on foot, the food truck, the live-work unit: almost all illegal or hugely discouraged by public infrastructure investments and laws. No amount of trickling BI
April 17th, 2014 at 12:21 pm PDT
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Conservatives have a predisposition to believe that if you give someone resources, they will waste them. Liberals have a predisposition to believe that if you give someone resources, they will use them well.
We actually have the ability to run tests and see what happens. [Or find the naturally occurring tests and analyze them.] It’s not easy to see past our starting biases. Yet we are learning more about how to do that.
It’s unfortunately not easy at the moment to have the U.S. Federal government act on the results of those tests, either.
Still… we may be able to find some way to look at reality and make changes that work based on what we find. I’m optimistic that way. And the points here make a good case that a universal basic income is at least worth being one of the possibilities we test.
April 17th, 2014 at 4:28 pm PDT
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April 17th, 2014 at 6:10 pm PDT
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a positive nominal risk free level of income instead of a negative nominal risk free level of interest rates
April 18th, 2014 at 1:50 am PDT
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Nicholas Weininger@6, I just remembered this study that does provide evidence of the efficacy of universal basic income arrangements -at any rate in terms of reducing delinquency to such an extent that it saved more than the payments cost (apologies if this has already been flagged up and I realize reducing delinquency is a different thing from encouraging innovation).
http://opinionator.blogs.nytimes.com/2014/01/18/what-happens-when-the-poor-receive-a-stipend/?_php=true&_type=blogs&_r=0
http://www.ncbi.nlm.nih.gov/pmc/articles/PMC3049729/
“The natural experiment consisted of an income supplement given to every member of the Eastern Band of Cherokees when a casino was opened on their reservation in 1996. Every tribal member receives a percentage of the casino’s profits, paid every 6 months. Children’s earnings are paid into a bank account held for them until age 18. By 2006 the payment was around $9,000 a year.”
April 18th, 2014 at 1:14 pm PDT
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Stone: Thanks for mentioning those studies because they reminded me of this book that shows (from a much more thorough qualitative viewpoint) much the same benefits happening with basic income payments in Florida.
High Stakes: Florida Seminole Gaming and Sovereignty
While I am generally supportive of a universal basic income, it would be an absolutely enormous change to an economy and it’s not hard to imagine there could be some crazy consequences from general equilibrium effects or whatever else. As mentioned already, rent capture could also be a big problem. And the idea of debt become very interesting if everyone has guaranteed income flows.
April 18th, 2014 at 4:57 pm PDT
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I’m a bit confused about the “rent capture” objection to a universal basic income. In the UK we have had a clear example of welfare payments getting captured as rents. It occurred when the government agreed to pay “housing benefit” to allow poor households to pay “the market rate” for private housing rents. Banks then lent to landlords in “buy to let” schemes so the landlords bid against each other and inflated house prices. As house prices were pushed higher, the landlords still managed to get bigger and bigger buy-to-let-mortgages and were able to charge higher and higher rents and pledge all of the rent as mortgage interest to the banks. So basically the government was providing a bottomless well of income to the banks and enticing the participation and support of the landlords with the prospect of increased wealth from capital gains from house price inflation.
http://www.housing.org.uk/media/press-releases/working-londoners-forced-on-to-housing-benefit-as-house-prices-pass-1m-mark
From what I can see, that rent capture scenario depended on the feedback effect of the housing benefit being linked to the market cost of housing rent. With a universal basic income, there is just a redistribution without any such introduction of feedback loops. Rather than the government paying housing benefit, the government would pay out a fixed say $6000 (or whatever) irrespective of what level of rent the rent setters attempted to charge. The universal basic income would be in place of current welfare benefits and I guess any excess above that might be funded by increased taxes. I don’t see how that provides more exposure to potential rent capture? To my mind the best way to tackle rent capture is to shift taxation to being just a tax on asset values. Such an asset tax would come from what currently gets captured as rents.
April 19th, 2014 at 2:52 am PDT
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If there is a decrease in the labor pool for unskilled/degrading jobs, and raises subsequently rise (which I agree with), the unintended consequence will be that costs of normal goods – trash collection, food, etc – will all rise.
This starts a spiral where the guaranteed annuity has to be raised to be valuable, which subsequently increases costs of goods, etc.
Not unlike inflation or minimum wage today.
April 19th, 2014 at 2:55 pm PDT
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Matt Pfeil@20, as Steve described, one consequence of not having such a large “desperate for any job” labor pool is more investment in labor saving capital equipment. Such investment has beneficial macro-economic consequences doesn’t it? A key source of profits is such reinvestment of previous profits and profits drive economic activity. It can kick the economy out of stagnation.
eg: http://www.levyforecast.com/assets/Profits.pdf
“Net fixed investment is typically the largest and most important profit source in a capitalist
economy”
April 19th, 2014 at 4:02 pm PDT
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Matt Pfeil@20, anyway is it really true that collecting trash or producing food constitute “degrading” jobs that people will refuse if they get a universal basic income? Lots of people like growing food. People even volunteer to collect trash to tidy places up. My guess is that there would be no shortage of people happy to do those jobs at current rates of pay with the universal income just as a supplement. Perhaps unsociable hours and such like would need to be sorted out and that might entail more investment in capital equipment.
The jobs that might be harder to fill might be full-on “bullshit jobs” as David Graeber called them -jobs that the employees view as pointless or destructive -selling bad products to unsuspecting customers etc. I don’t think anything but good would come from such jobs disappearing.
http://www.smh.com.au/national/public-service/the-modern-phenomenon-of-nonsense-jobs-20130831-2sy3j.html
“Huge swathes of people in the Western world spend their entire working lives performing tasks they secretly believe do not really need to be performed.”
April 19th, 2014 at 4:24 pm PDT
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April 21st, 2014 at 10:07 pm PDT
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aka enlightened taxation without representation?
April 21st, 2014 at 10:10 pm PDT
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Why isn’t the “natural” rate of interest the rate(s) that would exist absent the government meddling with them via QE, ZIRP and the like?
It’s a near free lunch for the government and its cronies as evidenced by the fact that we just gave them ~$1T for infrastructure investment in 2009 amidst gaseous clouds of “shovel-ready” hoo-haw…and roughly nothing has been built or repaired since.
But if we hand out another trillion or so via a “venture capital” government program then A) the money will actually go where it was promised this time and B) political and regulatory problems won’t hamper all the new business ventures – right? Remember we throw the book at kids running lemonade stands now.
You should get out more. I know this is the rap in places like Davos but on the contrary almost all people are naturally quite lazy and require rigid, sharp-edged incentive structures to prod them into doing anything remotely productive – including stopping themselves from committing suicide with a fork. Even-more-free-shit is not an incentive to get out of bed early on Monday morning and work at something difficult and uncertain.
April 21st, 2014 at 10:32 pm PDT
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“You should get out more. I know this is the rap in places like Davos but on the contrary almost all people are naturally quite lazy and require rigid, sharp-edged incentive structures to prod them into doing anything remotely productive – including stopping themselves from committing suicide with a fork. Even-more-free-shit is not an incentive to get out of bed early on Monday morning and work at something difficult and uncertain.”
Statements like this make me sick.
April 22nd, 2014 at 4:29 am PDT
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Steve I’ve identified the current pathology and the cure… Uber for Welfare is inevitable.
Is Liberalism a Handicap?
https://medium.com/p/801a2aacf6ce
April 22nd, 2014 at 1:36 pm PDT
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April 22nd, 2014 at 4:50 pm PDT
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April 23rd, 2014 at 4:54 pm PDT
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You start by offering the premise that “the sort of people whose desired work activities have positive expected value but high variance are already those who don’t have to worry about destitution anyway”. This makes no sense to me. If a group of people’s work activities have positive expected value but high variance, then there is good reason to believe that some members of this group will experience a return on the low end, while other members of the group will experience a return on the high end. That’s what you would expect given high variance. While those who have been fortunate enough to experience a return on the high end may not have to worry about destitution anyway, those who have experienced a return on the low end may well have to.
I’m actually surprised to hear this premise offered, as it possibly suggests that many individuals who end up with out-sized rewards may not be any smarter or more skilled than their peers, but instead just luckier. The question then becomes how many individuals in society are in that “peer” category. For example, is the average hedge fund manager so uniquely smart and talented that only a small subset of the population could ever hope to add the same productive function (yes, I know this assumes they have productive function), or could large swathes of the population (and animals randomly pointing at things) do just as well or better.
In short, your own premise (that there are people whose work has high EV and high variance) seems to suggest that there are in fact people whose work has high EV but who are economically insecure (because in the past the high variance resulted in their work product not paying many gains).
Also, your use of “the sort of people whose desired work activities have positive expected value but high variance” seems to be suggesting a contrast with some other “sort of people”. I hope that this sounds way worse than you meant it to, because it sounds really bad.
April 29th, 2014 at 8:17 pm PDT
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