Technological advancement in a world of high private debt means a substitution of capital for labor without big increases in demand. It is a recipe for low or negative growth. Add in demographic challenges in many countries and you have a public policy problem that has been building and will become acute in the coming years. Below I want to say a few words about this problem, inspired by Bill Gross’ most recent investment outlook at Janus Capital.
Here’s the issue and the constraint. Issue: in many developed economies, we have reached a point where interest rates are so low that traditional monetary policy based on changes in interest rates cannot work to stimulate the economy in an economic downturn. With private debts already very high, a demographically challenged population will find growth stalling unless it can find a way to overcome the credit decelerator associated with this situation. But technology adds in a layer of complexity because it is a re-distributive mechanism in supplanting labour with machines, forcing people out of work and requiring an economy on aggregate create new jobs at equal or higher pay to prevent technological change from dampening growth.
Think of it this way: economic growth is driven by income gains by the widest swathes of an economy, the middle class whose outlays are a large percentage of their income because they are looking to upgrade their social condition. If you take away income gains from this widest segment of a growing economy and give the gains in income to capitalists who supplant labour with machines, ceteris paribus, less income will be spent and growth will automatically slow. So we have a problem, especially in a situation where there are already roadblocks to growth like an aging population and high private debt.
So, what’s the right policy response here? A lot of people are talking about fiscal policy. And I think they’re on to something because fiscal policy puts money in people’s pockets by creating new financial assets in the private sector through fiscal deficits. This is what the likes of Larry Summers and Christine Lagarde are saying. Now even Bill Gross is saying it as well. In his latest investment outlook, he writes:
“What should the policy response be? Retraining and education sound practical and are at the head of every politician’s promised ticket for the yellow brick road, but to be honest folks, I doubt that much of it will be worth the expense. Four years of college for everyone might better prepare them to be a contestant on Jeopardy, but I doubt it’ll create more growth; for the Universities perhaps, but not many good jobs for the students. Instead we should spend money where it’s needed most – our collapsing infrastructure for instance, health care for an aging generation and perhaps on a revolutionary new idea called UBI – Universal Basic Income. If more and more workers are going to be displaced by robots, then they will need money to live on, will they not? And if that strikes you as a form of socialism, I would suggest we get used to it.”
He even gives support to helicopter money – which for all intents and purposes is fiscal policy since it’s about deficit spending to put money in people’s pockets.
Higher taxes are one way to pay for it, but let me suggest another – something that a Rand Paul or father Ron would have been good at. Drop the money from helicopters. Now, even though this idea sounds more fictional than Trump’s 15 foot wall, it really isn’t. Milton Friedman, then Ben Bernanke and now a host of respected economists including the conservative Economist magazine itself are introducing the idea. These advocates do not really intend to throw money out of choppers. In broader terms, they are advocating fiscal stimulus but stimulus that isn’t paid for with private borrowing or taxes. That last sentence is critical – “not with private borrowing or taxes”. Democrats and Republicans alike can endorse that.
I’m not going to comment one way or the other on Bill Gross’ idea. I do want to flag his ideas as innovative and worthy of debate. And I will say though that the fact that so – many – people are talking about helicopter money and a universal basic income tells you that the present policy mix across the developed world has basically failed. It is a sign that there is a deep, deep concern everywhere that we cannot deal with the present economic environment without a radical departure from the existing policy framework. Think of it as a signpost for economic Depression – despite the apparent growth we have had since the Great Financial Crisis. And I would argue that the nationalism we are seeing everywhere is another sign post of Depression – with Donald Trump’s rise to presumptive Republican nominee last night as the latest warning that nationalism is THE political force to be reckoned with.
Now, of course, in the real world, you can’t deficit spend forever. Eventually, political constraints – at a minimum – will force your hand – as they have done time and time again in Japan. And that has left Japan in a hole with 230% government debt to GDP with no discernible relief in their basic anti-growth trajectory. And this is where the problem lies. The constraint here is that we need a recurrent source of middle class income to drive growth forward. Right now, you have an aging population, high private debt, and zero or negative rates. None of this speaks to even a one-off uplift in middle class incomes, let alone a durable one. Moreover, political aversion to deficit spending means that these Universal Basic Income and helicopter money schemes will not be seriously considered except in extremis; and by that time the nationalists will have taken many seats of power in the developed world.
This is all an alarming longer-term trajectory. And I would posit that helicopter money alone isn’t going to get the job done. Bill Gross’ vision of technological displacement – with truck drivers and cabbies losing their jobs – is real. Add financial brokers, doctors, and accountants to the mix and you should expect an all-out assault on middle class white collar jobs to begin due to the technological revolution that a broadband, always-on, mobile, cloud-centric globalized economy has brought.
Again, what kind of policy response changes this? Bill Gross adds Universal Basic Income to the mix because he understands that you need recurring sources of income. I believe the real constraint hidden here is psychology. The reason we work and are compensated for doing so is because there is a deep-seated psychological impetus to compensating fellow citizens only for work done. On the other hand, there is an equally deep-seated rejection of unjust rewards as unfair. This is true even among primates like chimpanzees (see here and here). And what this means is that instituting a system of Universal Basic Income will require big amendments to how we deal with work, salaries, and taxes in order to maintain a sense of fairness. Universal Basic Income will require a re-thinking of whether taxation and government spending is re-distributive – and in what manner.
Right now, the prevailing assumption most people have is the money I have earned is mine to keep. I ‘earned’ it. And the only defensible reason to tax it and take it away from me is to distribute it in legitimate ways for the destitute and for general public purpose – from which we all benefit. Under no circumstances would we accede to [re-]distributing our hard-earned money to others, unless those others are in need or working to ‘earn’ that [re-]distribution.
In short, there is no way that you are going to get people to accept a Universal Basic Income unless there is a Universal (Public) Work(s) Requirement that goes along with it. And even getting to a basic income is going to be difficult because of “in extremis” economic pre-conditions – ones that hopefully have not caused military conflict. I expect this policy challenge of dealing with a lack of growth to be one of the biggest economic challenges we have ever faced. And it is just beginning.