Mitt Romney has joined the chorus of voices calling for all Americans to receive free money directly from the government.
As the U.S. is scrambling to deal with the forced shuttering of restaurants, bars, theaters, and other businesses, even some fiscally conservative Republicans agree that giving money directly to people might be the best response. Today, Senator Mitt Romney proposed sending every U.S. adult a $1,000 check to help with short-term obligations—rent, groceries, whatever it may be. The idea sounded familiar to followers of the 2020 Democratic primary race, specifically those who have watched the businessman Andrew Yang—who ran an outsider campaign based on what he sees as the need for universal basic income, or UBI.
I spoke with Yang two hours after Romney’s announcement to discuss the renewed push to give people money. The conversation that follows has been condensed for length and clarity.
Adam Harris: Your campaign’s central plank was the “freedom dividend.” Now Mitt Romney is saying we need to send Americans a $1,000 injection. Why was that freedom dividend so important to you?
Andrew Yang: We’ve been in the midst of the greatest winner-take-all economy in the history of the world for the past number of years, where the gains of continued progress and innovation have not been felt in the day-to-day lives of the vast majority of Americans. And that was only going to accelerate in the days ahead, as artificial intelligence leaves the lab, and more companies automate more of their activities. You can see it in the shuttering of 30 percent of stores in malls around the country. People don’t think about that as automation, because it’s not like a robot showed up to the mall. But those stores are closing because of Amazon. And Amazon’s fulfillment centers are wall-to-wall robots and machines. So to me, it was vitally necessary and is vitally necessary to rebalance the economy and have it work better for people and families.
Instead of talking about automation, I should have been talking about a pandemic.
Harris: These coronavirus closures will put a lot of Americans in financially precarious situations. Does a onetime injection of money help? Or is this something that needs to be continuous?
Yang: It would be immensely helpful right now in this time of crisis. I think it should be $1,000 per month of economic lockdown. And the CDC just announced that they’re advising against gatherings of 50-plus [people] for eight weeks. So we should be looking at a minimum of two months at $1,000 per person. But we don’t know if the world’s going to reopen in eight weeks. It’s unclear what data we would have that would enable the CDC or other policy makers to give us the all clear. So it should be $1,000 a month until this crisis is over. And obviously anyone who knows anything about me knows I think it should then just continue in perpetuity.
We should do this right now to help keep millions of American families above the waterline. Seventy-eight percent of Americans are already living paycheck to paycheck; almost half can’t afford an unexpected $400 bill—and that was before we shut down hundreds of thousands of businesses, not just bars and restaurants and theaters. If you look at the ripple effect of every canceled sporting event, every canceled conference; hotels are firing people right and left right now. You’re looking at, essentially, a negation of a significant proportion of our economic activity for a month. There’s really no effective way you can try and make workers whole that does not involve putting money into everyone’s hands.
And this is one thing I find ridiculous and frustrating when politicians talk about making people whole. It’s like, how do you make a parking attendant who just lost all of his shifts whole? You know, he’s not paying a payroll tax now.
Harris: To add to that, the gig economy has always been very insecure. Does providing people with a baseline of money add some security to the system?
Yang: I’m for a universal basic income of $1,000 a month in perpetuity for all American adults. I think it’s necessary in the face of how our economy has evolved where the vast majority of new jobs that are getting created are temp, gig, or contract jobs that get disappeared any moment, are precarious, and do not have any benefits attached to them, typically.
We should have universal health care for similar reasons. The fact is our employment-based health-care system is purely an accident, based on our experience in World War II, where there were pay caps and companies bolted on health insurance trying to attract workers. And now we’re stuck with this completely messed-up hodgepodge where your insurance is tied to a full-time job that exists for fewer and fewer Americans. Because again, most of the new jobs that are getting created are gig and contract jobs. So these are massive economic and social changes that we just have adapted to in a meaningful way. And this coronavirus crisis is going to be devastating for millions of Americans—socially, economically, physically. But a lot of these vulnerabilities existed prior to the coronavirus highlighting them.
Harris: Even with Mitt Romney’s support, do you think it is something that Congress will do? Where do you place the likelihood of this happening?
Yang: I’m getting more and more encouraged. Because if you look, you see a range of economists from Jason Furman to Nouriel Roubini coming out for it. Commentators from Anand Giridharadas to Geraldo Rivera. And now with Mitt Romney coming out, you have Republicans as well as folks like AOC and Ro Khanna. So people are waking up to the common sense that the only way we’re going to help our people manage this crisis is by putting cold, hard cash into our hands as quickly as possible. I’m increasingly optimistic that common sense will prevail and Congress will pass this before too many lives fall apart.
Harris: So that groundswell of support is giving you that optimism?
Yang: It’s common sense. If you are any American who is exposed to any part of the economy, you see it’s being upended by the coronavirus. And you know there are limited ways that your neighbor or your co-worker or your former co-worker are going to be able to make ends meet—and you know that everything policy makers are talking about will be ineffective except for cash. The people know this. Politicians are quickly realizing it. And one reason I’m optimistic that it’s going to pass is: What is the political downside to giving everyone cash? I don’t see it. It’s like, you pass it and you look like a hero; you don’t pass it, you’re a moron. Even members of Congress can see that calculation.
Harris: And if you had one selling point to legislators who were still on the fence about this, what would that be?
Yang: You are going to be able to say to your constituents in your district: “I got money in your hands during this moment of need. When push came to shove, I came through for you.”
An orgy of borrowing, speculation and euphoria has left the markets on the verge of catastrophe
Financial markets have experienced the fastest ever crash over the past few weeks. Even during the dotcom bust and the Lehman crisis, stocks did not fall this quickly. In less than a month, we have seen major indices fall almost 30%, and stocks in sectors such as oil and travel down by 80%. We are experiencing terrifying daily declines not seen since the 1929 stock market crash that preceded the Great Depression.
We are at a watershed moment: the coronavirus Covid-19 is a catalyst fast bringing many long simmering problems to the boil. It is exposing the creaking financial systems around us and it will change the way economies function. Economic and financial pundits, however, have been focusing almost exclusively on the short-term effects of coronavirus and so are missing the much bigger themes at play.
Epidemiologists tell us that when it comes to the virus, we are looking at a once in a century event. It is highly contagious and highly lethal. Experts are not comparing Covid-19 to SARS or Swine Flu, but to the Spanish influenza of 1918 that killed between 50 and 100 million people worldwide.
We do not have good data on what the stock market did during the 1918 flu, but we do know that it led to a severe recession. The connection between influenza and recessions is well documented. Going as far back as the Russian flu in 1889-90, the Spanish flu in 1918, the Asian flu in 1957-58 and the Hong Kong flu of 1968-69 — they all led to recessions. This one will be no different.
But this recession will not only be driven by the economic loss of able-bodied workers, it will be helped along too by the steps political leaders take to avoid the spread of the coronavirus. In medicine, the immune system’s response can often be worse than the disease. When the body goes into septic shock, the immune system overreacts, releasing what doctors refer to as a cytokine flood, which can reduce blood to vital organs and lead to death. Sepsis is common and kills more than 10 million people a year. Today, the political reaction to Covid-19 is causing something akin to a septic shock to the global economy.
The recession is likely to be very sharp and but brief. Recessions are self-regulating. De-stocking of shelves and warehouses leads to re-stocking. Collapsing low interest rates and oil prices eventually spur spending and borrowing. Government spending and central bank easing eventually feed through to the real economy. While there will be massive panic and bankruptcies today, there is little doubt that markets will be better in a year, and certainly will be in two to three years,
But the structural changes to how our economy operates, however, will be felt for decades to come. And this is in large part because we didn’t learn the lessons of the last crash.
Over the years since the 2008 crisis, central banks have been trying to stamp out every single small fire that flares up (the European crisis in 2011-12, the Chinese slowdown in 2015-16, the slowdown last year); but suppressing volatility and risk only creates bigger fires. Risk is like energy and cannot be destroyed. It can only be transformed.
Forest fires are a useful analogy. California has infrequent, devastating forest fires; the Mexican state of Baja California has many small frequent fires and almost no major catastrophic fires. Both states have a similar climate and vegetation, yet they have vastly different outcomes. That’s because when there are very few small fires, underbrush grows, vegetation increases and creates greater kindling for the next fire. Suppressing small risks only makes them emerge eventually as very big ones.
In politics and economics, massive change events tend to happen not in orderly sequences, but in sudden spasms, like the Arab Spring, or the collapse of the Eastern Bloc. Watching events unfold is often like watching sand grains pile slowly on top of one another until a final, random grain causes the entire pile to collapse. People knew the Arab countries were fragile and that the Eastern Bloc might eventually fall, but predicting which grain of sand would do it precipitate either was impossible.
Physicists call these transitions critical thresholds. Critical thresholds are everywhere in nature. Water at moderate temperatures is disorganised and free-flowing, yet at a given critical value, it has an abrupt transition to a solid. It’s the same with the sandpile: one grain too many can trigger collapse — but which one?
In 1987 Per Bak, Chao Tang, and Kurt Wiesenfeld found that while sandpiles may be individually unpredictable, they all behave the same way. The critical finding of their experiments was that the distribution of sand avalanches obeys a mathematical power law: The frequency of avalanches is inversely proportional to their size. Much like forest fires, the less frequent they are, the more catastrophic they are.
It’s the same with financial markets and the economy. We will experience years of quiet, interrupted by sudden avalanche. Years of slowly adding grains of sand can end abruptly — to our great surprise. Today in financial markets, many unsustainable trends have been building, and the coronavirus is merely the grain of sand that has tipped the sandpile.
It would be controversial to say that the stock market reaction to the coronavirus would not have been very big had we not been in the middle of an orgy of borrowing, speculation and euphoria. Of course, stocks would have fallen with coronavirus headlines, but it is unlikely they would have crashed the way they did without those exacerbating factors. Furthermore, without enormous underlying imbalances of high corporate debt, the prospect of poor sales would not have driven so many stocks to the verge of collapse.
This aspect of the current crisis has so far gone unreported. But not unmentioned. A few weeks before the crash, Charlie Munger, vice chairman of Berkshire Hathaway and Warren Buffett’s longtime business partner, issued a dire warning, “I think there are lots of troubles coming,” he said at the Los Angeles-based Daily Journal annual shareholders meeting. “There’s too much wretched excess.”
Speculative euphoria was at record highs. As Sir John Templeton once said, “Bull markets are born in pessimism, grow on skepticism, mature on optimism and die on euphoria.” Investors were all on the same side of the boat, and it capsized, as happens in market crashes.
- Investors were buying a record amount of call options, or bets on stock prices rising further. According to SentimenTrader, by early February, “We’ve never seen this level of speculation before. Not even close.”
- Asset managers were betting in record quantities on stock futures, which are instruments to bet on underlying indices. Positioning in S&P futures hit a new high as of February 11.
- Hedge fund borrowing to buy stocks was at a 24-month high. They were highly confident markets would keep rising.
It was not a coincidence that there was such euphoria. Retail brokerages had announced over the past few months that they were eliminating all commissions on trading activity. Buying and selling stocks was suddenly “free”. It was like pouring truckloads of kerosene on a blaze. At Charles Schwab, daily average trading revenue exploded 74% after the change.
In scenes reminiscent of the dotcom boom, stocks were doubling overnight. Virgin Galactic Holdings, with no revenue, was worth over $6 billion dollars. Tesla, which has never made money selling cars, had a market capitalisation greater than any other car manufacturer. Its stock price quadrupled in less than three months. The market was so stretched that it would have crashed due to its own absurdity — with or without coronavirus.
The source of this “free” trading came from high frequency trading firms that are supposed to act as market makers, executing buys and sells for clients. Except that they are not really disinterested middlemen; they are running their own trading strategies to make money off retail investors. They execute the order flow of so called mom and pop investors and profit from these “dumb money” retail traders, in the words of Reuters.
The brokerages which sell retail orders receive hundreds of millions of dollars in return from the market makers. This means that, essentially the market makers are bribing the brokerages to profit from retail traders. For example, E*Trade received $188 million for selling its customer order flow last year, while TD Ameritrade made $135 million in the fourth quarter alone. The market makers are willing to pay so much because they almost never lose money — they trade fast and know where the market is going.
As Warren Buffet once said, “As they say in poker, ‘If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.’” Retail is the patsy.
Ken Griffin is the owner of Citadel Securities the biggest market-making firm, and his business is so profitable that he has gone on one of the greatest property buying sprees of all time. In 2015 Griffin paid $60 million for multiple condo units in Miami. He paid a U.S.-record $239.96 million penthouse in New York City, a $122 million mansion in London, and over $250 million in Palm Beach properties. Market making against “dumb money” is a fabulous business.
As the mania deflated in late February, though, mom and pop were abandoned. As the crash started, market makers pulled back and provided less liquidity. Retail investors were left high and dry. It is no wonder prices fell so quickly.
The high frequency market makers have since been pleading for more capital, and rumors swirl that many are experiencing financial difficulties. The illusion of benign market makers looking after retail investors has vanished.
There are echoes here of the old problems from the Lehman crisis; but they have mutated into different forms. During the Lehman crisis, mortgage bonds were pooled together, and insurance companies and pension funds bought them. Today, retail investors have been buying popular funds known as Exchange Traded Funds (ETFs). These are easy to trade and cheap, but they have a fundamental problem. While ETFs have simple tickers like HYG, JNK, LQD that the average retail broker can trade on their screen, they are really holding hundreds of individual bonds inside of them that the investor is unaware of. These bonds are not easy to trade at a moment’s notice and are highly illiquid. But while the ETFs rose slowly and steadily, and investors poured more money in, lulled by a false sense of security.
While the ETF shares trade daily by the second, the underlying bonds are not easy to trade on their own. In the old days, insurers and pension funds bought these bonds, put them away in a drawer and never traded them. Today, though, investors expect instant liquidity from an illiquid investment. Liquidity mismatches are as old as banking itself (deposits and cash are highly liquid, while mortgages and loans are often completely illiquid); the problems of ETFs have been known all along, and the outcome has been inevitable.
As the coronavirus panic spread, the ETFs started trading at big discounts to the underlying value of the baskets of bonds. Markets are broken, and the gap is a sign of how illiquid the underlying holdings really are.
But these ETFs should never have been allowed in the first place. In the words of Christopher Wood, an investment strategist at Jefferies, “they commoditise equity and bond investing in an insidious way which ultimately creates a dangerous illusion of liquidity. True, ETFs are cheap. But so is fast food.”
While ETFs may appear technical and unrelated to the broader problems in markets, they share the same underlying problem. We have had the illusion of safety and liquidity for some time, and it is the coronavirus that has exposed the gaping holes in financial markets.
The coronavirus won’t kill companies. But it will expose their bloated, overleveraged balance sheets. Corporate debt in companies has never been higher and has now reached a record 47% of GDP.
Rather than encouraging moderation, central bankers and policy makers have been reloading the all you can eat buffet and persuading everyone to come back for third and fourth plates. The European Central Bank and the Bank of Japan have been buying corporate bonds, and central banks have kept funding at zero rates, which has encouraged a massive increase in indebtedness over the past decade.
Central bankers have long promoted high corporate leverage because they see it as a way to stimulate demand. Even now, many economists see no problems on the horizon. In the New York Times, Nicolas Veron, a senior fellow at the Peterson Institute for International Economics in Washington, was openly mocking anyone advocating prudence, “The prophets of doom who thought that more debt was more risk have generally been wrong for the last 12 years.” Like most central bankers for the past decade, he argued, “More debt has enabled more growth, and even if you have a bit more volatility, it’s still net positive for the economy.”
But while debt has encouraged growth, it has also introduced much greater financial fragility, and so the growth is fundamentally unsound. We are now finding out that less debt, rather than lower rates is better for financial stability.
The global economy has gone mad
According to FactSet, 17% of the world’s 45,000 public companies haven’t generated enough cash to cover interest costs for at least the past three years. Debt has been used to finance more debt in a Ponzi fashion. The Bank for International Settlements looked at similar economic measures globally and found that the proportion of zombie companies — companies that earn too little even to make interest payments on their debt, and survive only by issuing new debt — is now higher than 12%, up from 4% in the mid 1990s.
Entire industries are zombies. The most indebted and bankruptcy prone industry has been the shale oil industry. In the last five years, over 200 oil producers filed for bankruptcy. We will see dozens if not hundreds more bankruptcies in the coming year. They were all moribund with oil at $50 dollars; they’re now guaranteed to go bust with oil at $30.
Only now, belatedly, are groups like the IMF waking up to the scale of the problem. In a recent report they warned that central banks have encouraged companies to pursue “financial risk-taking” and gorging on debt. “Corporate leverage can also amplify shocks, as corporate deleveraging could lead to depressed investment and higher unemployment, and corporate defaults could trigger losses and curb lending by banks,” the IMF wrote.
According to the IMF, a downturn only half as bad as 2008 would put $19 trillion of debt—nearly 40% of the corporate borrowing in major countries—at risk of default. The economic consequences would be horrific.
Corporate debt has doubled in the decade since the financial crisis, non-financial companies now owe a record $9.6 trillion in the United States. Globally, companies have issued $13 trillion in bonds. Much of the debt is Chinese, and their companies will struggle to repay any of it given the lockdown and the breakdown in supply chains.
We have not even begun to see the full extent of the corporate bond market meltdown. One little discussed problem is that a large proportion of the debt is “junk”, i.e. lowly rated. An astonishing $3.6 trillion in bonds are rated “BBB”, which is only one rating above junk. These borderline bonds account for 54% of investment-grade corporate bonds, up from 30% in 2008. When recessions happen, these will be downgraded and fall into junk category. Many funds that cannot own junk bonds will become forced sellers. We will see an absolute carnage of forced selling when the downgrades happen. Again, the illusion of safety and liquidity will be exposed by the coronavirus.
The average family is encouraged to save money for a rainy day, in case they are fired, or they face hardship. Saving some money is considered prudent. It’s quite different for business. Companies pocket the profits in the good years and ask Uncle Sam to bail them out in the bad years. Heads shareholders win, tails the taxpayer loses.
Industry can’t be blamed for not expecting an act of God or force majeure, but in the past 30 years we have seen two Gulf Wars, 9/11, SARS, MERS, Swine Flu, the Great Financial Crisis, etc. Saving for a rainy day should only be expected in cyclically sensitive industries.
But rather than do that, companies have been engaging in a rather more reckless strategy: borrowing to buyback shares. This may boost their Return on Equity (ROE), but it is not remotely prudent and makes their companies highly vulnerable. Borrowing to prop up their own shares means they have less on hand when hard times come.
According to Barons, “Stock buybacks within the S&P 500 index totaled an estimated $729 billion in 2019, down from a record $806 billion in 2018.”
And then along came coronavirus.
Of those industries that are now seeking a bailout, none has saved for a rainy day. Boeing, the poster boy of financial engineering and little real engineering, bought back over $100 billion worth of stock over the past few years. Today it is asking the government for a backstop to its borrowing.
According to Bloomberg, since 2010, the big US airlines have spent 96% of their free cash flow on stock buybacks. Today, they’re asking US taxpayers for $25 billion.
Airline CEOs have been handsomely paid while not saving for a rainy day. Delta Airline’s CEO Ed Bastian made the most, earning nearly $15 million in total compensation. American CEO Doug Parker $12 million, while United CEO Oscar Munoz earned total compensation last year of $10.5 million.
Corporate buyback culture is financial engineering not value creation
The cruise liners were little different. Over the past decade, Carnival Cruises paid $9.2 billion dollars in dividends to its billionaire owners and bought back $6.7 billion of shares. Royal Caribbean, which is a smaller company, paid out $2.7 billion in dividends and $1.6 billion in buybacks. And the smallest cruise liner Norwegian Cruise Line spent $1.3 billion on share buybacks.
For years, the cruise lines have triumphally proclaimed massive dividends and buybacks. For example, Carnival proudly announced in 2018. “In just three years, we have doubled our quarterly dividend and invested $3.5 billion in Carnival stock.”
Cruise lines have no real claim to any bailout. They pay no taxes due to a legal loophole, and all their vessels fly the flags of Liberia, Panama and the Marshall Islands. Furthermore, their owners tend to be billionaires with more than enough financial wherewithal to recapitalise their own businesses. Their shareholders are not among the 1%. They’re among the 0.01% of richest people in the world. In the worst-case scenario, the US has a highly efficient bankruptcy process. Bondholders of today become shareholders of tomorrow, and the companies can have a fresh start. Bondholders would only be more than happy to own the equity of these companies.
Banks, too, will inevitably be asking for bailouts before this is over. Banks have among the most aggressive stock buyback programs of any industry, with some repurchasing a staggering 10% of their outstanding shares annually. The eight biggest banks have announced they will suspend their share buybacks for the next two quarters due to the COVID-19 pandemic on the global economy. In 2019, the top eight banks bought back $108 billion of their own stock.
If any good can come of the current crisis, perhaps it is exposing the irresponsibility of share buybacks and lack of prudence of most companies.
Monetary policy was one of the mechanisms employed in response to the last crisis, in the hope its effects would trickle down to the unwashed masses. Central banks bought vast amounts of treasuries and mortgage bonds to tighten financial spreads for banks and borrowers, but none of it went directly to households. It was all intermediated by the financial system and those who had access to capital.
The absurdity of the policy was perfectly illustrated recently in Europe. The European Central Bank has been busy buying bonds, and recently it bought bonds from LVMH, the luxury conglomerate owned by the world’s richest man Bernard Jean Étienne Arnault. The bonds had a negative yield, meaning that the ECB was paying LVMH to borrow. LVMH used the ECBs money to buy Tiffany.
If rates are now so low that billionaires are being paid to borrow, monetary policy has reached the limits of its usefulness.
Investors own stocks because their bond portfolios have acted like a hedge. Whenever stocks have fallen, bonds have gone up. In every downturn since the 1980s, central banks have cut rates, but most government bonds now have close to zero yields.
Extremely low interest rates and high valuations mean that any small change in interest rates will make portfolios much more volatile. If interest rates were to rise even slightly, they would vaporise many bond and stock portfolios. The margin of safety in bonds and stocks has diminished rapidly as rates have approached zero.
The world is now upside down. Many investors now buy stocks for current income and buy bonds to trade given how volatile they have become. Things cannot hold.
What do high frequency market making, share buybacks and high corporate debt have in common? They are supposedly tools to make trading, growth and returns on capital more efficient and cheaper, yet they have made the system more fragile and less resilient. Perhaps returns on capital and cheapness of market orders and ETFs are less important than stability and anti-fragility, i.e. designing systems that are robust in the face of stress.
We have seen the fragility in supply chains in the recent crisis.When the coronavirus struck in China, suddenly companies everywhere found out that outsourcing all their manufacturing and even medicines and face masks to China might be a problem.
Manufacturing has become less robust, more fragile, even if the returns on capital are better for those companies that outsource everything to China in pursuit of share buybacks.
The lessons of history are instructive. Although planting a single, genetically uniform crop might be more efficient and increase yields in the short run, low genetic diversity increases the risk of losing it all if a new pest is introduced or rainfall levels drop.
Have we been played by China?
The Irish Potato Famine is one such cautionary tale of the danger of monocultures, or only growing one crop. The potato first arrived in Ireland in 1588, and by the 1800s, the Irish had used it to solve the problem of feeding a growing population. They planted the “lumper” potato variety. All of these potatoes were genetically identical to one another, and it was vulnerable to the pathogen Phytophthora infestans. Because Ireland was so dependent on the potato, one in eight Irish people died of starvation in three years during the Irish potato famine of the 1840s.
The lessons from nature are dire. In the 1920s, the Gros Michel banana was almost wiped out by a fungus known as Fusarium cubense, and banana shortages became a growing problem. The widespread planting of a single corn variety contributed to the loss of over a billion dollars worth of corn in 1970, when a fungus hit the US crop. In the 1980s, dependence upon a single type of grapevine root forced California grape growers to replant approximately two million acres of vines when the pest phylloxera attacked.
Today, China is manufacturing’s monoculture.
Against this dangerous backdrop of volatility and uncertainty, the coronavirus will now achieve the impossible. For the past few years, two ideas have floated around on the political fringes of the Left, but they have been dead on arrival. No one has seriously thought they might become government policy. Today, the Left and Right in the United States and Europe are embracing them.
Andrew Yang, a former tech executive from New York, ran a quixotic, obscure presidential campaign in the United States based on the idea that every citizen should receive a Universal Basic Income (UBI). He advocated a “Freedom Dividend”. This would be a form of universal basic income that would provide a monthly stipend of $1,000 for all Americans between the ages of 18 and 64.
Today, Trump, Pelosi, Romney and others are fully backing Yang’s idea. Respected think tanks such Brookings and Chatham House have advocated UBI. But once it is implemented, there will be no going back. Handouts will start small and grow.
The other big idea has come from Stephanie Kelton, who advised Bernie Sanders and advocates for Modern Monetary Theory (MMT). Kelton argues that in any country with its own currency, budget deficits don’t matter unless they cause inflation. The government can pay for what it needs by simply printing more money — no reason to borrow by issuing bonds. Helicopter money.
Could free cash fix the economy?
Her ideas were widely criticised across the Left and Right, ranging from Paul Krugman to Warren Buffett to Federal Reserve Chairman Jay Powell.
Yet today, the two ideas have come together. There are no atheists in foxholes. Even libertarians on Twitter are now calling for government intervention. Investors and politicians of all stripes are calling for UBI financed by MMT money issuing.
This is an epochal turning point, a great reset. The coronavirus is the grain of sand that will cause the avalanche.
For once the taboo of printing money to pay citizens is broken, we can never go back. Governments will spend money with few constraints, aided by central banks. It’s a strategy that has not worked well in emerging markets, and it did not work well in the 1970s — which has conveniently been forgotten.
Undoubtedly, the government must compensate citizens from mandatory curfews and quarantines. The short-term impacts of the lockdowns must be mitigated, but temporary policies must not become permanent political expedients.
That’s why the danger is not today or even a year from now, it’s five to ten years away, when the crisis has past, along with the reason for UBI and monetary easing. What politican will be disciplined enough to stop spending? What central banker will raise rates when it is unpopular to do so?
Today we are reaping the whirlwind of the last financial crisis. Rather than pursue lower leverage, less debt and more robust institutions and more responsible corporate behaviour, investors and companies instead learned that they would be bailed out in a crisis.
Central banks became enamored of their own success as fire fighters, and they have busily been trying to put out fires by
- encouraging reckless behaviour,
- prizing low volatility above a robust financial system,
- viewing “risk management” as preferring no financial corrections ever.
They should accept that sometimes putting out every single fire creates greater conflagrations. They should be humbler about the extent and limits of their power.
It looks like they’re about to learn the hard way.
There are better solutions than wealth taxes, ‘Medicare for all’ or universal basic income.
American capitalism is at a serious inflection point. Many Americans, including the two of us, are alarmed by enormous levels of inequality and by declining economic mobility. We are concerned that in many cases American markets are no longer the most competitive in the world. And, we worry that our country’s long-term economic strength will slowly deteriorate because of an unsustainable fiscal trajectory that leaves future generations worse off.
The solution is not to upend the system. A market-based economy, for all its flaws, is still the best way to achieve broad economic prosperity and to ensure that living standards continue to rise over time. But the answer is not to maintain the status quo, either.
Radical change or complete inaction seem to be the only types of solutions that are being debated in today’s marketplace of ideas. Americans can’t afford to restrict our thinking based on political ideology and the false equivalency of having to pick one extreme or the other. That’s a recipe for stalemate.
Since founding the bipartisan Aspen Economic Strategy Group more than two years ago, our focus has been on bringing together leaders with different perspectives to highlight the importance of evidence-based policymaking. Earlier this week, 38 of our members signed on to a statement of principles that should guide the development of a new economic policy agenda. We also believe we must rigorously analyze some of the proposals that are being put forward in today’s policy debates, including universal basic income, “Medicare for all” and direct taxes on wealth.
Based on research from the newest book from the Aspen Economic Strategy Group, the two of us are more convinced than ever that those policies are fundamentally misguided and would result in economically harmful outcomes that could put our economy on an unstable and precarious path, harming the very people they are intended to help.
The collective work to identify specific policy solutions, however, also suggests to us that there are still many ways to ensure more that many more people can participate in America’s successes. And while there are no silver bullets, nor will there ever be complete agreement about every policy detail, we see many excellent ideas that are ripe for bipartisan collaboration and that can begin the process of adapting our economic policies so that they work for far more people.
First, we must aggressively invest in our human capital. That starts with addressing the supply side of the education market, including investments in community colleges to provide more students the option to obtain a high-quality education and complete their degree. This ensures that more American workers have the skills they need to compete in a global economy. Just as important, investing in education will increase economic productivity, which will help drive the wage growth needed to reduce income inequality.
There are other steps we can take to further address the distribution of economic opportunity and wage growth. But as Melissa Kearney and Magne Mogstad have argued, universal basic income is not a viable solution. It directs resources away from the neediest individuals and fails to address the underlying factors that contribute to inequality. Instead, we should look at more targeted and efficient approaches to encouraging work by supplementing the wages of low- and middle-income Americans, such as expanding the earned -income tax credit or enacting a wage -subsidy program.
Finally, we have to confront the uncomfortable truth that our country is on an unsustainable fiscal trajectory. Spending priorities such as education, infrastructure, and high-value research and development are underfunded, while our commitments to entitlements continue to rise indefinitely. Restoring the sanity of our fiscal position will require raising more revenue, slowing the rate of growth in health care spending, and making Social Security sustainably solvent.
Returning to fiscal responsibility through spending reform alone is neither just nor possible. The United States needs to reform its tax code in a manner that is more progressive and produces more revenue. But there are better approaches than a wealth tax, which would be highly distortionary and is unlikely to capture nearly as much revenue as its proponents claim. Making the income tax code more progressive and reforming estate and gift taxes to eliminate the loopholes that allow wealthy Americans to pass on wealth to their children at very low tax rates would be a better first step.
Whatever path policymakers choose, it is clear that we need to move away from theoretical arguments and wishful thinking and into the arena of pragmatic policy solutions that can actually be enacted. There is a plethora of policies that already enjoy broad bipartisan support, and these policies can be enacted only through effective government, which will require leaders to engage in principled compromise and make decisions grounded in facts and analyses.
The cost of inaction is severe and grows each day, as inequality undermines our economic strength and more Americans become disillusioned with the capitalist system that has made upward mobility a pillar of the country’s identity since its founding.
Universal Basic Income–For or Against? A Debate: Karl Widerquist (Georgetown University-Qatar) and Oren Cass (Manhattan Institute) Wed., Oct. 30, 4:30 pm in Filene Auditorium
Wednesday, October 30, 2019
4:30am – 6:00pm
Filene Auditorium, Moore Building
Sponsored by: Political Economy Project
The idea of a government-guaranteed income for everyone has made a meteoric rise to prominence in just the last few years, in the United States and around the world. Karl Widerquist (Georgetown University-Qatar) and Oren Cass (Manhattan Institute) will debate the merits of this, one of the hottest policy proposals of our time.