Recessions and Temporary UBIs

Introduction
When it comes to wealth and income distribution, many emotions are evoked. On the left, redistribution is seen as a moral imperative. On the right, it seems equally immoral.

Here, I will provide an overview of monetary policy and various monetary theories, particularly during recessions. Then, I will define under what conditions a temporary UBI should be used.

I will argue that a temporary UBI redistributes wealth, not simply from the rich to the poor, but from the financial sector to other sectors of the economy, something both sides of the political isle can support. (And ultimately, everyone but bankers supports.)

Finally, I argue that a UBI more broadly promotes capitalism and decentralized systems.

In particular, I argue that temporary universal basic incomes as an alternative form of monetary policy during recessions 1. redistributes wealth from the financial sector to other sectors, 2. encourages consumer spending without disincentivizing work, and 3. promotes capitalism and decentralized processes.

Left, Right, Center on Inequality
On the left, many view extreme wealth inequities as intrinsically evil. “Billionaires shouldn’t even exist!” On the right, “taxation is theft.”

How can we define inequality? Economic inequality is a difference between wealth levels of individuals and groups of individuals. What level is economically optimal is an open question. What I mean by this is some economists argue that inequality incentivizes innovation, but others argue that too much inequality can hurt growth (not to mention democracy).

Nevertheless, most people agree that some level of inequality is preferable to perfect equality, if only because such a world is impossible to obtain without extreme loss of freedom and inequality incentivizes innovation to a certain extent.

Many view there to be some form of tradeoff between freedom and equality. But that also depends on how one defines freedom. If freedom is absence from government interference, then in a capitalist system there is indeed a tradeoff between freedom and equality. Conversely, it is possible that a capitalist system will result in more “positive” freedom as well as inequality.

To the left, is there something intrinsically evil about Lebron James being better at basketball than me? If not, what is evil about Elon Musk being better at capitalism than me (so far)?

Numerically, does it really make a difference if he makes 1000x what I make, instead of 10000x? What should matter more to the left is that we provide enough for the poor through a strong social safety net, healthcare for all, higher wages, etc. Not that some people make a lot of money in absolute terms.

That’s of course not to argue against higher taxes in some cases.

To the right, it depends on who I am talking to. The libertarians would claim taxation is theft. I would respond by asking what level of government do you support? Unless one argues for anarchocapitalism, one must accept at the minimum an minarchist state, in which case the government will have to engage in some level of “theft”.

If I am speaking to the right leaning economists who would argue that redistribution of income disincentivizes work and innovation, I would ask if they have even considered possible alternatives that 1. redistribute wealth, and 2. don’t disincentivize work.

Here, I would like to attempt to find some common ground by focusing in on monetary policy in particular. Enlightened centrism for the win!

Why focus on monetary policy? Because it is literally how money is made and distributed.

Theories of Monetary Policy
There are many theories of monetary policy. Back in the old classical days dating back to David Hume, money was viewed an “illusion”. What does this mean? Well, essentially, the idea was that if you double the money supply, you will double the price of all goods, so nothing effectively happens in the long run.

Under the money illusion theory, real economic transactions are effectively barter transactions, and money is simply the medium of exchange upon which said transactions occur. This is oversimplified, as even David Hume recognized that in the short term inflation can result in a sugar high.

Nevertheless, Keynes undermined the remaining money illusion theories with his Theory of Employment, Interest, and Money. Without getting overly complex, Keynes developed what he called The Paradox of Thrift. He argued that money can be stored instead of spent, so in the short term there is the possibility that everyone individually becomes thrifty (storing money), lowering the overall demand in the economy to the point where everyone is worse off (recession).

Keynes came up with several additional theories, and his policy prescriptions were highly influential until the 1970s. His theories explained The Great Depression as a lack of aggregate demand, although later monetarists would argue that The Great Depression was largely due to the central bank tightening monetary conditions when it should have been expansionary. This is the view largely held by economic historians today, although lack of aggregate demand is also recognized as impactful.

In the 1970s, the US economy experienced stagflation, or high unemployment and high inflation. This contradicted the Keynesian notion of a Philips Curve, where there was a tradeoff between inflation and unemployment.

The monetarists, led by Milton Friedman, argued that this was due to the fact that in the long run, increases in the money supply lead to increases in inflation:

Monetarist theory is governed by a simple formula: MV = PQ, where M is the money supply, V is the velocity (number of times per year the average dollar is spent), P is the price of goods and services and Q is the quantity of goods and services. Assuming constant V, when M is increased, either P, Q, or both P and Q rise.

— Investopedia

I would like to focus in on the monetarist theory formula for 3 reasons. First, it is true by definition: prices times quantities equals the amount of money times the number of times it changes hands. Second, it is extremely simple and does not require any math that can’t be understood by a high schooler. Finally, third, this formula applies to virtually all monetary theories, since it is a truism; whether MMT, Keynesianism, Classical, Neoclassical, etc.

PQ = MV
This formula might seem controversial, because it was popularized by Milton Friedman and the monetarists. Nevertheless, there is nothing to fear, for it is simply an accounting identity. The average price level in an economy, times the quantity of goods exchanged, is equal to the amount of money in an economy times the velocity at which the money changes hands.

If the money supply doubles, but velocity is constant, then either the price level or the quantity of goods exchanged must increase. During a recession, the velocity of money collapses, whereas during a boom, the velocity of money is increasing.

The controversy comes from the monetarists assumption that Velocity is constant in the long run, so changes to the money supply end up only changing the price level. It is clear that even by the monetarist formula, if the velocity of money is collapsing (which happens in a recession), then increasing the money supply isn’t going to necessarily increase inflation.

Inflation as a Vector Field
Inflation is typically taken as a scalar or singular value. “Inflation was 5% last year”, says a news report. Of course, that is usually broken down further, such as “Energy prices increased 20% last year, while corn prices soared 40%.”

Nevertheless, in reality, inflation is not a scalar, or basket of scalars; instead, inflation is a vector field. This simply means that we can imagine/model inflation (using Gauge Theory) as a flow across the entire economy, as opposed to one giant number.

Since inflation is a vector field, the…