Corona’s opportunity for basic income

Iris writes*

Advocates of Universal Basic Income (UBI) argue it will reduce financial stress, increase employment, and reduce poverty. Opponents of providing people with unconditional funds argue UBI is too expensive, unproductive and does not fit into the capitalist market economy [pdf]. Although experiments have been done and roundtables held, so far none have led to the full, long-term implementation of a UBI. With the current global crisis looming, however, now would be the perfect time to implement UBI, and reap its benefits in the future.

With many people becoming unemployed due to the crisis, as well as many at risk of becoming so, governments have invested huge amounts of money into businesses and individuals. In order to limit the effects of the corona crisis on the finances of individuals and businesses, governments have made available relief funds, used for subsidizing the move to online platforms, giving companies relief money to limit the number of employees that are fired, or even transferring money directly to individuals.

Although these investments could be manageable for governments now, they are not sustainable in the long run, and with the crisis sticking around at least until a vaccine has been made, other solutions should be considered. Even if a vaccine has been developed, in the shadow of the pandemic, the economic crisis will have large effects. However, keeping up with the expensive spending patterns currently sustaining businesses and individuals is not feasible for governments. Thus, in the long-run, a UBI could well be a solution to alleviate the wounds that will be left after corona itself is long gone. Although the specifics of a policy would have to be determined, the premise is a monthly fixed payment that would be different from a social safety net, in the sense that it is unconditional rather than depending on employment or other conditions. UBI would function more like an unconditional floor to stand on, as opposed to a social safety net to get stuck in [pdf]. UBI would have positive effects: reducing individual financial stress, allowing people to volunteer or take lower-wage jobs in needy sectors, and reducing poverty. These outcomes would reduce government spending on poverty reduction policies, monitoring of the specified conditions for regular social pensions, as well as spending aimed at the limitation of negative effects of poverty.

Furthermore, there are projections that due to the corona crisis inequality will rise even more. Due to the difference in types of jobs, with low-paid jobs usually being harder to continue from home than high-paid jobs, people working in low-paid jobs are more likely to lose their job due to the crisis, or to fall ill due to the need to physically go somewhere to continue working. In this way, inequality may be exacerbated due to the crisis, making the current situation even more fitting for the introduction of the basic income.

Bottom line: Basic income, a solution to economic problems of the past,  could reduce the harm of the crisis we face today.


* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Working shorter for the climate?

Soem writes*

As our economy grows, emissions of heat-trapping greenhouse gases also grow. Countries with larger economies are typically larger polluters than countries with smaller economies. In fact, the only time before the COVID-19 pandemic the world’s carbon pollution went down rather than up was during the 2008 financial crisis.

‘Decoupling’ economic growth from environmental deterioration is often presented as a sustainable way to have ‘green growth’. For pollution to go down, the carbon emissions per unit of GDP would need to fall faster than combined economic and population growth. In my opinion, this is very challenging if not impossible.

Enter degrowth: the movement that strives for a happier live with a smaller economy and therefore lower emissions. One of the showpieces of the degrowth movement is the four-day work week. The idea is that people working fewer hours will spend more time with family, friends, and their hobbies. While employees will take a lower pay, they will live richer lives taking value from hobbies and social interactions rather than financial transactions. And as people have a lower salary, they will buy less, less is produced, and emissions are lower.

Photo by Esther Tuttle on Unsplash

A longer weekend that helps the environment sounds attractive, but test runs show that shorter working weeks do not necessarily mean degrowth. Dutch marketing firm Loyals was able to introduce an extra day off for all personnel without reducing salaries or productivity. The New Zealand trust Perpetual Guardian cut working hours from 40 to 32 hours per week, while still paying for a full work week. According to J. Haar, a professor who studied New Zealand, “actual job performance didn’t change when doing it over four days instead of five.” A trial at Microsoft Japan even found that a four day work-week boosted productivity by 40%, measured in sales per employee.

Bottom Line: An extra day can be nice for employees as it allows them to spend more time on the household and hobbies or with friends and family. However, the productivity of the firms mentioned above did not go down and therefore employees did not get a lower pay. This means that production and consumption, and therefore GDP, did not de-grow. While a shorter work week is promising, it will not in all cases contribute to a environmentally stable degrowth economy.


* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Book 4, chapter 1: Introductory

§1. This first chapter introduces Book 4: The Agents of Production: Land, Labour, Capital and Organization.

Marshall defines “land” to include all that Nature has given freely, “labour” as human work not for pleasure, “capital” to include knowledge that might be private or public (as in the goods), and “organization” — an input not often included in production that Marshall defines as “aiding knowledge’ (p 115) but I would define as “institutions.”

Marshall then pivots to a model of production relying on two inputs: Nature and Man, given that man supplies labor, capital and organization. This definition does not ignore our present understanding of “natural capital” as Marshall just placed that value within Nature.

As if in passing, Marshall notes that “The growth of mankind in numbers, in health and strength, in knowledge, ability, and in richness of character is the end of all our studies” (p 116). This assertion still isn’t controversial today, but I look forward to Marshall’s thoughts on population, which was 1.9 billion — 25% of today’s — in 1920.

§2. Marshall defines demand as a “desire to obtain commodities… whereas supply depends on a willingness to overcome discommodities.” What are they? Consider:

The discommodity of labour may arise from bodily or mental fatigue, or from its being carried on in unhealthy surroundings, or with unwelcome associates, or from its occupying time that is wanted for recreation, or for social or intellectual pursuits. But whatever be the form of the discommodity, its intensity nearly always increases with the severity and the duration of labour. [p 117]

I find this a reasonable definition, especially for its contribution to a modern discussion of “work” being composed of unpleasant (labor) and pleasant (social or intellectual) tasks. By Marshall’s definition, I might describe my work as 50% “labor” (the part I dislike) and 50% “consumption” (the part I like).

Marshall does not follow this line. Using marginal analysis, he claims we work until our disutility rises to the level of the wage. In this setting (a supply curve), we are paid “more than necessary” for initial hours of work and “just enough” on the margin, which means we receive a producer’s surplus from those early hours.  Could this also be called “consumption”? Seems ok to me, but Marshall prefers, perhaps, to keep separate our consumer and producer roles.

Marshall ends by noting that the supply curve (and thus schedule of wages required to attract a targeted quantity of labor) is fixed in the short run but not in the long run, since people enter or switch trades.

Invisibly decoupling the economy?

Gabi writes*

We all know our polluting and resource-depleting economies are leading us to an ugly future. And while many swear by the intricate relationship between economic growth and the development of societies, how can we realistically decouple economic growth from resource use? Can we really enjoy perpetual growth, increased prosperity and the flourishing of human wellbeing globally while reducing carbon emissions and natural resource consumption? Could something like the knowledge economy, a system where consumption and production is based on intellectual capital, or so-called intangible assets, be part of the solution?

While we cannot run away from the fact that we need functioning primary and secondary sectors to maintain a functioning world, but intangible capital is increasingly and rapidly becoming the backbone of our economy. Intangible capital includes anything from research, design, development, creativity, education, science, brand equity and human capital, and this intangible economy largely relies on intellectual capabilities as opposed to natural resources or physical contributions (Brinkley 2008). In the knowledge economy, human capital is transformed into a productive asset or business product that can be sold to yield profits for an individual, an enterprise and the economy. And this is actually a universal process that operates across all sectors of the economy, manufacturing and services, high tech, low tech, domestic and international trade, public and private investments, large and small enterprises. The scale at which our economy is becoming more “invisible” is underestimated. Knowledge-based industries are coming close to accounting for half of national income, half of employment and a quarter of exports (Brinkley 2008).

Companies are investing more and more in intangible assets, and modern companies like Microsoft are generating triple the sales with half the assets of businesses dependent on tangible assets. In terms of value, for every £1 of tangible investments there are about £1.10 of intangible investments. Ever since the mid-2000s, companies have been investing more in intangible assets such as branding, design and technology than they have in machinery, hardware or property. “This is capitalism without capital.” says Haskel, a professor at Imperial College (Haskel 2017).

The portion of the world’s economy that doesn’t fit the old model of traditional capital investment keeps growing larger. This trend can imply many good things, but has major implications in tax law, economic policy and other aspects of society that are not getting sufficient attention. (Gates 2018). There is also a downside to growth in this invisible economy where the nature of investments is so significantly different to conventional ones. The scalability of intangible assets implies we would see the rise of an increasingly unequal economy with large firms serving many customers with few employees. Growing inequality would likely be one of the undesirable outcomes of an intangible economy (Haskel 2017).

Bottom Line: Growth in the invisible economy and knowledge-based capital could decouple economic growth from resource consumption and support sustainable societies driven by education and innovation.


* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Malaysian politics after 1997

Romée writes*

In 1997, the Asian financial crisis crippled most East Asian economies. The Malaysian ringgit lost about a third of its value, and GDP shrank by about 8%. The economic damage from the crisis is clear. However, poor crisis management or internal conflicts can also have severe political consequences for the ruling elite. This blogpost will delve into the Malaysian Reformasi movement in 1998, as a consequence of the Asian financial crisis.

The first question that should be answered is how the Malaysian government responded to the crisis. Prime Minister Mahathir refused “overly stringent” IMF assistance and implemented fixed exchange rates and capital controls (Lee 2004). The crisis also showed how political patronage and wealth creation among the elite would not help the middle class, especially because Barison Nasional (BN), the ruling coalition, seemed more focused on supporting the economic elite (Subramaniam 2001). Thus, the crisis exposed actual priorities and weaknesses in the ruling coalition.

The response to the crisis became particularly problematic when there were obvious internal disagreements. In the middle of creating responses to the financial crisis, Deputy Prime Minister Anwar Ibrahim wanted to limit social spending and open the economy up for market forces (Lee 2004). These goals, in line with IMF recommendations, directly conflicted with government policy. But besides questioning the specific policy responses, Anwar pushed the government where they were weakest: corruption, cronyism and nepotism (Subramaniam 2001). The response was the Reformasi movement, explicitly supported by Anwar. He was fired and charged with sexual misconduct in an attempt to destroy his character (Subramaniam 2001). The Reformasi movement did not stop, and Anwar’s imprisonment reminded citizens of entrenched corruption.

However, this movement was faced with a big challenge: BN governed with a race-based strategy, meaning that indigenous Malaysian people (Bumiputra) consistently benefitted from this New Economic Policy (NEP). The Reformasi movement and associated political parties challenged this with multiracial political discourse. However, for a majority of the people, the BN provided them with significant economic benefits, which made corruption an insufficient concern to change votes (Subramaniam 2001).

The Reformasi movement translated into other social movements and political parties. In 2018, an opposition coalition won the general election for the first time in Malaysian history. Even though this was seen as a victory and proof of the persistence of the Reformasi movement, Mahathir returned as Prime Minister. The movement has in this sense not lost its platform, but rather co-opted its initial opponent. Mahathir had split-off from his party, because he no longer wanted to be part of a corrupt party. So he joined the coalition of the People’s Justice Party, which was a product of the Reformasi movement (BBC 2018). Regardless of who was the Prime Minister, the fact that this opposition coalition was able to enter government shows the size of platform they have gathered.

Bottom line: The 1997 Asian financial crisis created an influential opposition movement in Malaysia, through poor crisis management and internal disagreements on patronage. This led to a protest movement, and subsequent political parties that oppose corruption and choose a multiracial approach.


* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Interesting stuff

Corona-related

  1. The retail landscape (especially in the US) will change radically
  2. Good podcasts on US failures: The government bails out billionaires, the rich and powerful fight Federal incompetence to find a vaccine, and a venture capitalist explains how the federal government is failing to use its normal tools to replace financial shortfalls.
  3. A really good corona charts explainer
  4. “Trump-administration officials do not yet understand the significance of the chaos they have created in place of what used to be American foreign policy.”
  5. Financial markets have been decoupled from the real economy by government intervention desperation, but that may will not prevent a depression.
  6. Compare US Federal (good and chaotic) to California to Dutch C19 communications

Non-corona!

  1. 68 pieces of good advice!
  2. A really excellent overview of what markets do
  3. A deep, insightful discussion of digital identity. Related: Five books on “information” that goes way deeper into how we make decisions

So, what’s utility?

Emma writes*

The goal of economics is to improve the living conditions of people (Mankiw 2019). Hence, economics should focus on increasing human prosperity rather than just increasing material consumption. Of course, material wealth strongly correlates with well-being, as material wealth provides a sense of security, a roof over one’s head, food, and clothing. Yet, empirical evidence shows that this is only necessarily true up to a certain income. In the US, average income almost quadrupled while average happiness decreased That material wealth is not the only factor determining a good life is somewhat common sense. In basic psychology terms, what neoclassical economics concerns with are the “basic needs” in Maslow’s Pyramid of Needs:

Mainstream, neoclassical economics defines utility-maximization – utility being the satisfaction gained from consumption of goods and services – as the ultimate goal of every human. It is true that this is a necessary simplification for economic modelling, as material goods are tangible opposed to utility gained from action fulfilling “psychological needs”. Thus, this is a perfectly fine assumption to hold in the spheres of economics that do not directly require a prior stance on normative beliefs (like, for example, the belief that economic inequality is meritocratically justified because we live in a society with equal access to opportunities), say accounting of econometrics.

The problem is not the use of this assumption ipso facto but that this definition of utility as being formative for human happiness shapes economics and thus permeates into economic policy and shapes everyday economic interaction, set of beliefs, and society. Economics influences not only our access to basic needs but our psychological needs profoundly. It is fundamentally tied to the other social sciences in understanding and providing human prosperity. This is also why – how neoclassical economics proponents may argue – the statement that “psychological needs” are not directly the responsibility of economists, is, frankly, wrong.

To equate utility with material goods worked great in times of material scarcity; as for example after the two World Wars or in developing countries. Yet, in times of material over-abundance in developed countries, an economy governed by this principle may erode the fundamentals necessary for our psychological needs whilst over-providing materials for basic needs. As a great – neoclassical! – economist pointed out, “the art in economics lies in judging when a simplifying assumption clarifies our thinking and when it misleads us.” (Mankiw 2019). The neoclassical definition of utility is a necessary simplification and not a doctrine or even the attempt to fully reflect the nature of humans – but when this assumption may erode, in the very long-run, psychological needs whilst leading to an oversupply for basic needs, this assumption is misleading.
To put it simply, especially in developed countries with a robust welfare state the fixation on material goods seems outdated. A paradigm shift in economics from the emphasis on material goods as utility towards an emphasis of material good and human well-being as utility is necessary. By starting at the root problem with changing the definition, policy change will follow – to something more adequate than GDP maximization and achieving full employment.

Bottom line: The assumption equating utility with human satisfaction and happiness whilst only counting consumption as utility oversimplifies what we mean by human happiness. A paradigm shift in economics from the emphasis on material goods towards an emphasis on human well-being is necessary.


* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

When FDI helps development

Bálint writes*

Foreign direct investment (FDI) is a form of cross-border investment in which an investor resident from one economy establishes a long-term interest in and a high degree of influence over a firm registered in another economy. However, FDI does not necessarily help development. For example, FDI can hurt development when foreign firms use it to expropriate natural resources. This post investigates some factors that prevent foreign investors from doing so.

Botswana is one of the few natural resource-rich countries that avoided the resource curse. The central idea is that having point-source, non-renewable resources often contributes to political, economic and social issues.

Botswana does well on all these dimensions. Politically, Botswana is a multiparty democracy with competitive elections. Corruption is quite low. Many social policies are progressive. The legal acceptance of LGBTQ+ representation groups illustrates the extent of human rights progress in Botswana. While the country still struggles with AIDS, they have progressed in combating the disease. Finally, Botswana has done well economically. Their high per capita incomes have not shown the sluggish growth rates characteristic of many resource-rich countries. To summarize, all components of Botswana’s HDI increased consistently since 1990, as the graph below shows.

Source

Botswana suffered from deep poverty and had virtually no infrastructure after independence from the British in 1966. How could they achieve all this growth and development progress? The surface-level answer is that they had prudent economic policies, their politicians cared about the public and they negotiated well with powerful foreign companies.

Knowing that Botswana made the right policy decisions, I invite you to explore the factors that enabled all this success. First, Botswana is ethnically largely homogeneous. Gapa (2013) argued that this homogeneity facilitated trust and peaceful cooperation between the people in positions of power. Better cooperation and more trust mean that foreign powers could not divide society so easily. Thus, foreigners could not rely so much on insiders to help them expropriate natural resources in exchange for a part of the rents.

Furthermore, the Kgotla system facilitated cooperation. Kgotla is a respected traditional institution of participatory democracy in which local leaders are invited to share their views and criticism of those in power freely and directly. The large number of local leaders representing interests across the society of Botswana means that Kgotla passed down information from many people. Thus, a relevant traditional source of accountability remains that hinders government and business officials from disregarding the interests of the population at large. Furthermore, British colonial destruction did not reach this institution. Since locals had been used to it for generations, the Kgotla can be a widely used and understood institution.

Finally, the ruling BDP political party is decentralized. It offers various localized points of entry, such as local assemblies that provide the population with a voice in decision-making. As Gapa (2013) argued, this decentralization helps enhance accountability, leading to more efficient political outcomes. The dynamic is similar to the Kgotla system outlined above, except that a wider population group can participate in the assemblies.

Bottom Line: The case of Botswana suggests that ethnic homogeneity, institutions of accountability and decentralized ruling parties all contribute to a more positive FDI-Development relationship in resource-rich countries.


* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Thailand’s coup-happy military

Andre writes*

The Royal Thai Army is notorious for regularly overthrowing governments, elected or otherwise. The most recent coup took place in May 2014, when the milItary removed the Shinawatra-led government supported by the ‘Red Shirts.’ Since a 1932 coup established the constitutional monarchy that continues to exist today, Thailand has undergone eleven successful coups and experiences an attempted coup every seven years (The Straits Times 2014The Atlantic 2019)

Why does the army continue to overthrow governments?

There are several theories on preventing coups:

  1. There must be a normative understanding that the military should stay out of politics.
  2. The existence of strong non-military organisations (civil society) is a way for society to counter-balance military power.
  3. Institutional arrangements (constitutional design) are aimed at preventing coups.

In Thailand, the frequent coups are a symptom of an underlying and long-running divide between the rural periphery and the royalist-urban middle class centred around Bangkok. They are commonly known as ‘Red Shirts’ and ‘Yellow Shirts’ respectively, which are the colors used in their demonstrations. The conflict within Thailand’s society is central to giving the military a key role in politics.

First, past coups set a clear precedent for further coups, and Thailand holds the world record. Coups are so frequent that they are nothing special. Indeed, the establishment of the constitutional monarchy through military coup gives the military a claim to being part of the internal political order. It is even expected of the military to intervene in political crises (CNBC 2019).

Second, the divide is so strong that the Yellow Shirts have supported what they term ‘pro-democracy’ military coups. This has ensured their position of political and economic privilege while the Red Shirts, on Thailand’s rural periphery, face repression by the military (The Atlantic 2019).

Third, Yellow Shirt civil societies play an important role in supporting and legitimising coups (The Atlantic 2019). Points 1 and 2 of coup-proofing theories are thus negated by a lack of normative agreement that the military should refrain from intervening in politics. The military has thus used the support for its coups to change institutional arrangements in its favour. Currently, the Thai parliament consists of an elected House of Representatives and a Senate. The 250 members of the Senate are chosen by the junta and their consent is required to choose the Prime Minister (The Atlantic 2019).

Fourth, royal support is critical to the success of coups, as the king is revered by Thais. In the past two coups (of 2006 and 2014), the junta was given public support by the king. This legitimacy was arguably key to coup success. In comparison, a coup attempt in 1981 failed as the king supported the incumbent Prime Minister (The Atlantic 2019).

Bottom Line: Thailand’s transition to democracy –despite frequent post-coup elections (which despite being unfair have resulted in anti-coup parties winning) — is ongoing. The difficulty in transitioning to full democracy could be explained by how popular democracy is not in the interest of Thailand’s elites. These consist of the military, the middle class and royalists, who are centred on Bangkok and hold significant economic power – the top 1% hold two thirds of the country’s wealth (Khaosod 2019). Unsurprisingly, these economic elites are unwilling to lose their economic rents and privileges to a government interested in redistribution to the periphery. Without creating an inclusive political system that benefits elites and non-elites, the equilibrium of military rule, or military-influenced rule is likely to continue.


* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Brain drain – the Romanian example

Daria writes*

“Brain drain” is defined as the emigration of highly skilled workers from developing economies to more developed ones. Globalisation and  membership in the European Union have had positive and negative impacts on Eastern European countries, which in the context of liberalisation have become known as human-capital-exporting countries. Unfortunately, the surge in medical personnel, engineers and entrepreneurs working abroad has caused serious damage to the countries of origin that now struggle with dormant economies.

Romania ranks first in emigration among European countries. The 1989 fall of the Communist regime was the first opportunity for Romanians to look for new prospects abroad. However, only following Romania’s EU joining, the brain drain effect started to impede development in specific sectors. The healthcare sector is one in which innovation seems impossible.  More than half of its workers have migrated to Western countries, meaning that those left behind are struggling to meet day-to-day health care demands.

Reports have shown that four out of five Romanian doctors consider working abroad and over 20,000 have left to practice in countries such as the UK or France since 2007. This problem disrupts the country’s development. There is often concern regarding the financial losses, since Romanian taxpayers pay for the education of doctors and nurses. The training of one doctor in Romania costs approximately 100,000 €. These costs deepen the economic disparities between Western and Eastern Europe, but education costs are overlooked during EU budgeting meetings. That oversight may not be accidental when destination countries gain knowledge and economic benefits from such workers.

While long-term economic consequences involve a more elaborate analysis, short-term repercussions are more visible. The brain drain has depleted the healthcare system, with a 20% personnel shortage in Northern Romania The recent outbreak of COVID-19 has exposed the workforce to risk and the weaknesses of the sector. The lack of qualified personnel and scarcity of hospital funding (Romania allocates only 5% of GDP to healthcare) led to unprecedented measures such as closing hospitals in major cities.

Brain drain is often irreversible, so Romania should soon focus on a “brain gain” approach. Various studies have shown that such a strategy might foster and encourage growth . “Brain gain” generates economic gains and knowledge capital. Policies promoting  return-migration would bring experience and skills to the healthcare sector.

Although remittances from the diaspora of 1.9 billion dollars in 2014 helped the economy, monetary gains cannot entirely offset the negative effects of brain drain. As an increasing number of highly skilled Romanians work abroad because of exacerbated income inequalities and corruption in their home country, radical institutional change to encourage “brain gain” is needed.

Bottom Line: Brain drain has little to no positive effects for Romania, especially in the healthcare sector losing trained specialists. Reversing the drain is needed to foster progress and development.


* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).