Welcome to Boston Basic Income, I'm Alex Howlett.
This week we are talking about whether it makes sense to think of the economy as having a natural rate of basic income.
that's optimal for the economy.
And my contention is that there is a natural rate of basic income.
So some of us read my recent article titled "Introduction to Consumer Monetary Theory."
In that article I talk about the economic framework that I use to understand basic income.
So when we're thinking about the economy let's imagine that there's a giant machine that produces a bunch of stuff.
and we don't have to do anything except put tokens into this machine
and it spits out goods and services for us.
So you can imagine that this machine can produce a certain amount of stuff, that's what we're calling Q¯
The amount of stuff that it's actually producing is Q.
Now, at any given moment, the amount of stuff that it produces is going to exactly correspond to the number of tokens that people put into it.
Obviously, you can't put more tokens into it than the machine can produce, because the machine can only produce so much.
But if people put in fewer tokens, then the output that you're gonna get is going to be lower than the maximum level.
Obviously, the real economy doesn't work that way.
In the real world we actually need some people to do some work to make the machine go.
We need people to contribute their labor.
So, in this model, if we just assume that the machine will spit out everything all on its own, nothing is going to come out of it.
Because nobody's doing any work.
So what we can do is: to get people to do some of the necessary work to contribute to the machine's output.
We can withhold some of the tokens from the public.
We can say: OK, everybody gets fewer tokens now,
But if you contribute your labor you'll get some of the tokens back.
That's reflected here.
Instead of giving everyone the maximum amount of tokens,
in order to get this amount of spending power, you'd have to earn it through wages.
And then the rest, of course, you can still give everybody the tokens.
So that's the basic income here.
So the question is: how many tokens do you have to withhold from people
in order to get them to do the necessary labor in the economy?
And the answer to that question, we don't know the exact number,
but the answer to that question is what determines the natural level of basic income.
So instead of saying: how many tokens, how much money should we withhold from people, how much income should we withhold from people?
We can ask it from the other direction, we can say:
How much income can we give to people while still having enough incentive for the economy to produce everything it's capable of producing?
So I've drawn this handy little diagram over here.
So on this axis, you've got the quantity of output, Q¯ is the productive capacity of the economy
And then on this axis we've got a continuum between 100% labor-- so everyone's working 100% of their time--
and then 100% leisure
So this is like working in the labor market. So 100% leisure is you're not contributing anything to the labor market.
So as you can see, this is the line of economic output,
If you're at 100% leisure, you've got this problem here where nobody is contributing any labor and the economy's not producing anything.
If you've got 100% labor then you've got a similar problem, because now nobody has any time to sleep or eat or anything like that
so the economy doesn't produce anything
in either case, everybody dies in the end.
So what you want to do is, you want to find this optimal balance between labor & leisure.
and if you saw our free ridership discussion, the free rider problem,
the 100% labor end of the spectrum is a free rider opportunity.
There's opportunity for more free riding. Opportunity for more leisure.
If we're at the 100% leisure end of the spectrum, that is the free rider problem. We need people to be doing more work.
So there is kind of an optimal balance there, and my hunch, and I'm pretty confident about this,
is that the optimal level of basic income for the economy is not $0.
So the goal, or what we would like to do, is ideally find what this amount is.
What the optimal level of basic income is, what the natural level of basic income is.
And what I tend to advocate is starting small and gradually increasing the basic income
until you get to the point where the economic machine is pretty much producing everything it can for people.
The remaining thing is that I want to point out
What I'm assuming here is that the price level stays the same.
The same amount of money that you spend into the machine gets the same amount of stuff out.
And that is what we see with these equations here.
So this is R = P¯Q
So P¯ is the price level, so that's the average price of things you can get out of the economic machine.
So R is the consumer spending level.
And Q is, again, economic output.
So we want to bring the consumer spending level, which is this here, we want to bring it to the maximum.
which corresponds to the maximum level of economic output.
All of that is pretty straightforward.
So these diagrams here, these are typical market diagrams.
- Does that say aggregate demand?
AD is aggregate demand.
So here's the price level on this axis and this is the quantity of economic output on this axis.
We've drawn in Q¯ here.
Which is the maximum level of economic  output.
And then the question is: where is Q going to settle?
So we talked about the price level being stable.
But in order for prices to be stable it has to be the case that on average
producers are producing their products at the most profitable combination of price and quantities.
So that means, this area under here needs to be maximized.
- Can you tell us what I is?
- So I¯ is the input price level.
So P¯ this is the consumer price level or the general price level that we normally think about.
It has to be higher than the prices of the inputs to production, otherwise the producers are not going to make any profit.
So this, they have to pay this, so that's not part of their profit. They're trying to maximize the rectangle that appears here.
So that means that the aggregate demand curve has to intersect the price level
at the place where it would maximize the profit under the price level.
Q* is the actual level of economic output, and you can see that it's less than Q¯ which is the maximum level of economic output.
And that's because if the demand curve is shaped like this. Then this is the only level of economic output that corresponds with the maximum profit for the producers.
So here we've got another situation.
So this is the profit here.
And the reason we're able to bring output all the way up to Q¯ over here is because the aggregate demand curve is shallower.
So that means more people are willing to buy more stuff at lower prices.
It's profitable for producers to keep their prices lower at higher quantities rather than keeping their prices higher at lower quantities.
And then is the opposite of that. Now you've got
Now you've got a situation where
If producers raise their price a little bit they're not gonna lose that many customers. They're not gonna lose that much demand, they're not gonna lose that many sales.
So they really have an incentive there to maximize their profit by keeping their quantities very low and their prices relatively high compared to what they could be.
The thing to keep in mind is that in all of these diagrams
the price and quantity, the price level and the level of economic output are at the most profitable levels for producers.
The difference is the demand.
So if more people want to buy things at current prices, then that makes it more profitable for producers to produce more things at current prices.
Just keep this in mind that this kind of always has to be true if the price level is stable.
and we can refer back to this when we talk about how the central bank keeps the price level stable
which is by influencing the slope of this aggregate demand curve.
- Can you clarify what in here is canonical and accepted by all economists and what in here is new?
This is probably canonical here.
Usually they write MV = PQ (or PT)
and that's money stock (M) x velocity (V) = price (P) x output (T)
The reason I don't divide consumer spending into money stock and velocity
is because it's really hard to tease apart these two things
and depending on what you even count as money, something could be a higher money stock or it could be a higher velocity
depending on where you draw the line
If you have $1 and people are borrowing $1,000,000 against that $1
Do you count that debt, that credit that's also being spent as part of the money suppy?
Or do you just roll it all into the velocity of that single dollar?
So I don't think it's super useful to divide into money stock and money velocity.
Thinking of the economy without labor is not very canonical
- as a starting point.
As a starting point, yeah, that's not very canonical.
and then going from that down to: OK, how much labor do we really need? And the rest is still basic income
Most economists are not thinking about basic income.
This is probably not canonical. But I think it would make sense to most people
That you can't just overwork people and people can't just sit around.
This stuff here
A lot of times for macro, what people draw is an aggregate demand curve and an aggregate supply curve.
Whereas I'm just assuming that the input price level is stable just like the output price level is.
Even the central banks when they manage the aggregate demand they are not thinking in this way.
They're not thinking of changing the slope of the aggregate demand curve, they're actually thinking that they're
that when they bring the price level up, when they prop it up, they think they're doing something like
bringing the economy to full output. But they're not.
They do think they're affecting the level of consumer spending in the economy
and they generally talk about it as: if there's inflation, that means the economy is going beyond full output.
because it can't handle the level of consumer spending.
But it's not just the level of consumer spending, it's the distribution of consumer spending
and the distribution of demand that matters.
- I wonder if one way to present this would be starting with the canonical model and then showing the ways in which you deviate from it.
I mean, that's going to be tough. I think the canonical model gets so much stuff wrong that I don't even start there.
But why isn't your goal just to attack those assumptions, as opposed to create models?
I can attack those assumptions now. I think it's friendlier to just describe this
and then, you know, it's more straightforward.
But I can attack the assumptions, so let me attack the assumptions now.
One of the assumptions is that full employment or some notion of full employment
corresponds with full economic output.
So they're really thinking in terms of
They think that keeping prices stable is the same thing as bringing employment to a Non-Accelerating Inflation Rate.
They call it the "Non-Accelerating Inflation Rate of Unemployment"(NAIRU) actually.
And then everybody argues about what that rate actually is.
But they're thinking in terms of: everybody gets their income distributed through wages.
and that's also what most of the academics think and they kind of get that from there.
So let me write some down.
1. Income from wages.
Another one which I actually get into in my article is that
2. Money supply is a stock.
There's an *amount* of money out there that's kind of determining the price level.
- What does that mean: money supply is a stock?
- Stock rather than a flow.
So everywhere in economics, supply & demand are flows
How much stuff is produced or sold in a certain amount of time.
-You're claiming you believe it is a flow or you believe it is a stock?
These are the things that are wrong.
Bad assumptions.
- Alex has a very diplomatic style.
- Can you explain a little bit on why money is a flow and not a stock?
The price is what you pay for the thing you buy.
So the aggregate of that is the spending that occurs on all of the economic output.
So that's a flow: how much money is flowing through the economy at any given time.
So that's what determines the price level.
But there's this assumption that there's kind of a certain amount of money in the economy and it just keeps circulating.
So when you make that assumption, then the amount of money can be a proxy for the level of spending.
So that's what I was talking about here where they bring the spending
- Don't they talk also talk about the velocity of money?
- Right.
The reason they talk about the velocity of money, the reason they even broke spending into velocity and the money stock
is because they wanted to say things like
well, the velocity generally stays steady, or sometimes it changes a little bit but for reasons unrelated to the things we care about.
- But money supply is also the thing the Federal Reserve controls?
They can print more money or burn some money?
Well, sort of. They can influence the level of spending in the economy.
So if we're thinking of the money supply as a flow rather than a stock, then I would say: yes, that's accurate.
If you're thinking about the economy... if you've got an economy the size of the United States
and you've got institutions that basically issue the currency
Then the only sense in which the United States government borrows is by issuing Treasury securities
and then the Fed comes in and decides how many of those Treasury securities are going to be out on the open market
buys up the excess in order to control interest rates.
I would argue that the government borrowing money is equivalent to printing money.
I would say there's not really a connection between what happens now and what happens later.
If the economy has productive capacity to produce things for people to buy with the money that's out there
that's all that matters. It doesn't matter that the government borrowed a bunch of money.
Here's one.   3. Taxes fund government spending.
If you are a very small government like the government of a city or something like that
you're not a currency issuer.
So in order to spend, you either have to get your money from somewhere, or you have to borrow
and your capacity to borrow is limited by your credit.
And it's also true that the United States government's capacity to borrow is limited by their credit.
But they have a lot more credit, and a lot of their debt is monetized as money.
As the money that is spent in our economy.
So the constraint on the United States government spending is more: how much stuff is there to go towards?
What's the capacity of the economy to produce?
So that's what I drew over here: you have Q¯
and then you want to get spending up to the level that activates the full productive capacity of the economy.
- So if I want to build a new battleship, how do I do that other than raising taxes?
So what needs to happen in order to build the new battleship, is you've got to get a bunch of steel, a bunch of labor, all this stuff.
So the question is: is that stuff out there in the economy?
If it's idle, then you can pay for it, activate it at current prices. You can print money.
-But Mitch McConnel can't print money.
- Like all he can do is write a budget.
So if you're talking about legal constraints...
- Yeah, the way our government is currently structured.
So the way our government is currently structured, what they'd have to do is, they'd have to borrow the money
By issuing Treasury securities, and then the private financial sector,
buys up those Treasury securities
And then the Fed says: oh, is there the right amount of Treasury securities for the level of interest rates they want,
and they buy up any excess or not, depending on what their monetary policy is.
So those actions all taken together are exactly equivalent to printing money.
So if the Fed printed $4 quadrillion and spent it into a hole in the ground,
that does not affect the economy.
If the Fed borrows $4 quadrillion, and spends it into a hole in the ground,
it also does not affect the economy except in the sense--
--  so your claim is on average
if I want to build a new battleship
the more battleships I build, the higher taxes have to be, you think that claim on average is not true?
That claim on average is not true.
Where taxes could come into play is if your economy starts running out of steel to build the battleships
Then you can start taxing steel.
To free up some of that resource so you can build the battleships.
What matters is the real resources that are available to the economy.
