Response to Warren Mosler

This is a brief response to Warren Mosler’s contribution to a dialogue with Joe Firestone, who has put together an excellent multi-part series that can be read by following the link provided. In this post, I am addressing only the section on the Job or Income Guarantee. Mosler makes the claim that the value of the currency is determined “at the margin”, and from this takes what I consider to be a leap to the conclusion that a BIG as part of the JIG would likely cause a collapse in the currency and hyperinflation.

I don’t see any need to respond in depth, because by coincidence I have already addressed this argument in a recent post and in a few comments. My view is that the conception of the value of the currency being formed “at the margin” is incorrect:

Currency Value is Not Formed “at the Margin”

That post was written prior to the dialogue between Joe Firestone and Warren Mosler. However, I have since added a few brief comments in response to Joe in the thread that follows it.

The main comment is reproduced below:

Regarding Mosler’s response:

So if you can get a living wage from the issuer for doing nothing, there is nothing that can stop the currency from being worth nothing once it heads in that direction from an accelerating flight to BIG.

By the same logic, we would have hyperinflation already. An accelerating flight to unemployment benefits.

Most people seem to desire much more than just a basic income and/or derive satisfaction from their jobs. To receive more than the basic income or retain their source of satisfaction, they need to resist the urge to take accelerating flight to the unemployment benefit. And they do resist. They fly in droves in the other direction.

Incidentally, there are traces of marginalism in this argument as well: the “marginal disutility” of work, etc. There is a mistaken belief that what happens at the margin is somehow determinative of the aggregate. In this case, some jobs are unpleasant and at current pay few would wish to do them rather than accept a basic income. Therefore, everyone would quit their jobs if a basic income guarantee was introduced. But, of course, it doesn’t mean that at all. It just means that pay and conditions for those particular unpleasant jobs would need to rise or instead be done with more mechanized production processes.

The remainder of Mosler’s remarks reflect ideological preferences. I see little point discussing ideological differences, if any, in this post.

37 thoughts on “Response to Warren Mosler

  1. Peter, Interesting thoughts and I look forward to the comments. My question is a different subject. Obviously, the JIG presents some issues as it relates to the current economic structure, just as the JG does, but it’s easier (at least in my view) to see how you get from here to there with the JG. Have you presented any thoughts on that for the JIG? It seems there is a lot more initial disruption (for lack of a better word) with the JIG which make it more difficult to implement?

  2. I find Warren’s argument against the BiG weak too. The hyperinflation thing is the sort of scare-mongering indulged in by the opposition.

    I struggle to understand why, if you have a differential between BiG and ‘paid work’, the motivated won’t still go to work at ‘guarantee’ jobs if the private sector is having a wobble. Because when they do that they become more hireable – and also they need something to do. Free time is boring and you still have a system that allows you to get more resources by taking paid work.

    That is after all the idea of the JG. It is a transition position that prepares you for work.

    Essentially BiG creates an army of volunteers to do the ‘Big Society’ thing.

    I can see that the state might need to encourage the creation of volunteer positions and a general societial feeling of generosity and charity. But that is what school is for.

    In other words boredom and resource acquisition is surely a sufficient differential between unemployment and ‘guarantee’ jobs and you don’t need to differentiate on the amount of resources commanded by either of those states. Don’t the growing number of interns show that?

    Peter, perhaps you know the mathematics Warren is relying on and can explain what his thinking is?

  3. Thought,

    Is Warren seeing a different BiG, where an individual gets the money by rights, in paid work or not – rather than the BiG stopping when you get paid work?

    Or even vice versa.

    Which is your choice Peter? Does it matter?

  4. dave: It may depend where you want “there” to be in “from here to there”. My ideal is a society in which we can increasingly opt for free time as productivity rises and mechanization spreads. I don’t mean that there would necessarily be less productive activity. It’s just it would more and more be conducted on the basis of voluntary associations.

    From this perspective, part of the challenge in the transition is enabling people to embrace free time at their own pace. The reason I tended towards the JIG was in thinking about comments made by Neil Wilson about the difficulty many people have when consigned to involuntary joblessness, and the social and human costs that follow. For me, the JIG not only allows some people to opt for free time but just as importantly, in the transition, guarantees people paid employment if that’s what they want. It is likely that even in an ideal society, there would still be people preferring to follow orders or the leadership of others, etc. That is partly a matter of personality. It’s just that this would not be compulsory. The associations – including leader/follower associations – would be voluntarily formed, not compelled.

    The first post in which I considered the transition in this sense was in the post prior to the one initially suggesting the JIG. At that point, I was not thinking of it as a JIG. Concern over the transition is implicit in posts from that point on, though not always in the forefront.

    I had been considering the transition “from here to there” in posts leading up to that, but it was in terms of a move towards socialism or some form of emancipatory communism rather than a discussion in terms of the JG and BIG, which is only one part of the overall challenge of getting from here to there, from my standpoint.

    Of course, for others, the “there” they want to get to may be very different, and that would affect the perceived merits of the JIG in transition.

  5. Neil: I’m not sure how mathematical they have actually got with the supposed connection between a BIG and hyperinflation. The basic intuition seems clear. They think some people in bad jobs will opt for the BIG. Others with slightly less awful jobs will think, “Blow this, we’ll take the BIG, too.” And so on up the line.

    It combines with the “ratcheting” argument in which the BIG is introduced at some modest level. It causes inflation, so the BIG needs to be raised. It causes more inflation, a further upward revising of the BIG, etc. Basically, for the dynamic to play out in the way the MMTers suggest, most people would have to prefer the BIG to paid employment.

    If that were realistic, the dynamic would already have taken hold in societies providing unemployment benefits.

    Regarding the choice between a BIG as intended by proponents such as Parijs (basic income for every citizen) or just an unconditional basic income for those of working age who opt out of the labor force, I don’t have strong feelings during the transition. I think I prefer the full blown BIG, but the main thing to me, at least in the transition, is that everybody is guaranteed a job if they want one but assured a basic income if they choose not to participate in the labor force.

    Either way, the value of the currency would be determined by average, not marginal, labor time. The full-blown BIG would of course cause a much larger one-off increase in prices and/or require a much larger increase in taxes.

  6. Yes, I agree the hyperinflation argument against BiG is unconvincing, especially if it’s based on the marginalist fallacy Peter says Warren is committing.

    A somewhat different argument for the inflationary effect of BiG, though, is that prices for goods and service are a function of the amount of money in the system in conjunction with the amount of goods and services offered for sale. So if government simply spends more money into existence to provide income, without increasing the supply of goods and services for sale, that can increase the price level. That doesn’t mean instituting BiG would necessarily increase the price level though. In an economy well below capacity, the added demand will stimulate some additional private sector production. The question is only how much.

    I think the private sector is much less efficient that is frequently asserted, and that there are important kinds of goods and services that only the public sector can, will and should supply. One benefit of the JG is that it can be structured in such a way that the government commits to more production of these publicly produced goods and services. With attentive long-range planning, it can plan, provision and shelve projects during private sector booms, and then hire more people during downturns to carry out these pre-planned projects.

    If the program is well-organized, the program should be sustainable and stabilizing in the long run, because all that is going on is a shift of production back and forth between the public and private sector.

  7. On the question of incentive structures, I don’t think government has the ability to set the incentive structure for the private sector. But certainly its actions can influence that incentive structure, and so paying attention to incentive structures is one legitimate aspect of public policy.

    Personally, I wish the government were much more aggressive about enacting policies that established more incentives for firms to shift larger shares of their revenues down the pay scale, and to retain employees during downturns.

  8. Dan, I agree that the government has a role to play in delimiting the scope for competition, influencing the incentive structure, providing infrastructure, etc. But, like you, I think the government should be doing more than just setting the framework for the private sector, including producing more in the public sector. Warren Mosler would prefer a less extensive role for the public sector than I would. This is clearly an ideological difference between us. I didn’t see the point in debating that in this response, since it is not connected to the hyperinflation claims.

  9. ” So if government simply spends more money into existence to provide income, without increasing the supply of goods and services for sale, that can increase the price level.”

    But that can happen in any circumstances. It boils down to the old chestnut about how much the economy will quantity expand vs price expand.

    So you would introduce the JiG on the strict understanding that it will be ‘paid for’ by quantity expansion, and if that doesn’t happen taxes will rise (on business?) to compensate.

  10. So you would introduce the JiG on the strict understanding that it will be ‘paid for’ by quantity expansion, and if that doesn’t happen taxes will rise (on business?) to compensate.

    Hmmm… Well I think if the program is a permanent program, that might have to happen at some points in time. It is at least conceivable that there might be situations in which the economy has reached some inherent real-world limits on the pace of capital development it can sustain, but in which there is still significant involuntary unemployment. At that point, it might be difficult to hire all of the unemployed workers to do something that produces additional value of any kind that exceeds the cost of employing them, so hiring them up will generate inflation unless some purchasing power is also removed from other places in the economy.

    I would still say that in such a situation we should attempt to hire up the unemployed, and then redistribute full-time work loads and purchasing power to keep prices and incomes stable and the growth of output where it is, while moving to a lower labor requirement per capita. I put a lot of value on the role of social integration and participation.

    But I don’t think this really applies to anything like our current situation. The world I see here in the US is one in which there is a tremendous amount of easily mobilizable work to be done, and a tremendous number of unemployed people to do it, but in which we are maddeningly committed by ideology from relying on the public sector to mobilize this work, under the misguided theory that if the work was valuable enough to justify the costs of doing it, the private sector would already be doing it.

    As for the role of formal taxes to regulate prices in the current situation of underutilization , I suppose we have a choice. If we hired up 20 million people tomorrow to produce new public sector goods and services, and if those public sector goods and services are simply delivered “free” to the public, rather than sold on the market, then the addition of 20 million people worth of worker income (presumably beyond what they receive from unemployment compensation or other social insurance), without any additional goods and services being bought and sold in markets, would cause a one-time boost in the price level. But that boost in prices might be regarded as the “tax” we are paying for the additional “free” public sector goods and services along with existing level of consumer goods, and well worth the cost. If we then imposed an additional tax to keep the price level where it was initially, we might overshoot get lower prices, but also fewer consumer goods.

    But I might be getting lost here.

  11. MMT has lost sight of the goal, which is to provide income to people who have lost their source of income. They’ve thrown in a quasi-Puritanical requirement that one must work, which has nothing to do with the problem.

    The MMT JG (formerly Employer of Last Resort) program makes as much sense as telling people they must currently be employed in order to collect Social Security, Medicare, food stamps, housing subsidies, disability payments, unemployment compensation or any other federal, anti-poverty payment.

    Providing jobs and providing income are two separate problems. Monetary Sovereignty is 90% in sync with MMT, but they have lost their way on this one.

    By the by, MMT seems to have changed its focus. When the program was ELR, it meant the government would hire people. When they changed it to JG, it meant the government would pay private industry to hire people. I suspect many people are confused about which program MMT actually supports, these days.

    If the government pays private industry to hire the unemployed, when those people are hired, are they still unemployed?

    Rodger Malcolm Mitchell

  12. You should see the post in the comments at Pragcap on this. Warren says the currency value is based entirely on coercion. He uses an example of the state pointing a gun at people. That’s wrong on its face.

  13. FDO15: Welcome. Actually, I agree with the MMTers that the basis of demand for the government’s money is the tax obligation, and that the tax obligation, backed by force if necessary, is coercive. By imposing the tax obligation, the government creates a need in the non-government for some people to get hold of the currency in order to meet the obligation.

    That is not to say that the coercion is a good thing, but it is necessary if some resources are to be transferred from the private to public domain until and unless we reach a stage where we are prepared to cooperate on a purely voluntary basis.

    The value of a unit of the currency in MMT is defined as the amount of labor time required to obtain it. Looked at the other way, it is the amount of labor time the government or a capitalist employer can command with a unit of the currency. My (minor) disagreement with the MMTers is that I think it is the average, not marginal, labor time that is important. The value of a unit of currency can still be expressed in terms of simple labor (e.g. JG labor) by reducing complex labor to a multiple of simple labor, but it is not the simple labor time requirement in isolation that matters. It is the average. If it wasn’t, the value of the currency would already be infinitesimally small, because “at the margin” some people are receiving unemployment benefits and so work zero time for a unit of currency.

  14. Rodger, thanks for your thoughts, but I don’t see the connection between your comment and the point in dispute in this post, which concerns whether a BIG as part of a JIG would result in hyperinflation due to the supposed determination of the value of the currency “at the margin”.

  15. I’m pretty sure Warren’s idea that BIG causes hyperinflation stems from the large amount of research and writing he has done into the origins of money. He has done well in highlighting the fact that the text book explanations for the origin of money are very questionable. The historical reality is that in most societies, money is simply a token that the state forces citizens to work for, so that citizens can pay taxes. The value of money is then dependent on what the state supplies citizens with in return. To take an actual (and rather extreme) historical example, in some slave economies, slave owners paid slaves with tokens (money) which the slaves then used to buy food and shelter from the slave owner. So the value of the tokens (money) is dependent on how much food and shelter the slaves got per token.

    See Warren’s “mandatory reading” No 7: “What is money”, for more on this.

    However, that’s all a far cry from the economies we currently live in. Personally I think that if tax as a proportion of GDP declined to zero, there’d be no effect on the value of money. Money would more or less maintain its value through sheer INERTIA (absent some idiot “Mugabwe” type gaining power). E.g if people are used to paying $1 for a loaf of bread, a business selling bread will not be able to double its prices for the simple reason that other bread sellers probably WON’T double their prices.

    It is the above sense that Warren thinks JG is a “price anchor”. I don’t agree with that. JG (if it works well) would certainly improve the inflation / unemployment trade off – and you can call that an “anchor” if you like. But the idea that the price of JG labour DETERMINES the value of a dollar or yen or Russian Rouple is going too far.

  16. Looking at this horizontally, you can actually see the JG as a BiG with a top up.

    So the unemployment benefit is $X per hour, the JG pays $X + Y per hour and normal jobs pay $X + Z per hour minimum

    That distills the problem down to what the values of Y and Z should be and whether zero is a problem for either of them.

  17. FDO15,

    “Warren says the currency value is based entirely on coercion. He uses an example of the state pointing a gun at people. That’s wrong on its face.”

    How do you see it? Resp,

  18. In the 1980′s much of the Municipal garbage collection was done manually, with about 5 garbage collectors and one driver per truck – garbage was picked up rain or shine. The garbage collectors basically ran around, picking up the garbage bins, and dumping them in the truck – back breaking exhausting work. Today, those six collectors have been replaced by one truck driver, with a truck with an automated arm. It relieves those 5 garbage men from back breaking labor – but at the same time it relieves them of a job and income that gave them sustenance.

    Oftentimes, these workers were laid off with no compensating job or income. At the same time 5 jobs per truck disappeared. No more hiring for that ever again. So if jobs continue to vanish, with no new jobs being created, then there has to be a BIG. There is no way around it.

    This is a simple example of automation taking away a jobs, and not creating any new ones (in terms of both job numbers, and total income!)

  19. Clonal, of course new and less painful jobs were created: those who design and build the new trucks. That’s what always happens when automation replaces manual work. Maybe more jobs were lost than were created, but it’s hard to tell. Anyway it is a good thing that people are freed from labour they do not need to do.

  20. I don’t agree with the notion that “people receiving unemployment benefits work zero time for their unit of currency.” I know that in California, the government is rather picky about insisting that you look for other employment. Plus, there is continual form filing. This comes pretty close to what you do in a lot of jobs.

    I saw a documentary on what they did to the unemployed in New Zealand during the seventies and eighties. Pretty nasty. Does being punished qualify as zero work time?

  21. Ralph — I agree that the value of the currency would stay nearly the same if taxes went to zero. And one of the things maintaining it is the prices government is willing to pay for labor, goods and services.

  22. “So if government simply spends more money into existence to provide income, without increasing the supply of goods and services for sale, that can increase the price level”

    I think the point which is missed here is that BiG and produced goods and services both have a time dimension independent from the value of labor. The BiG does not collapse into a single time-point but takes time. Each second accumulates into a certain amount of BiG and only then it can be spend but each seconds of BIG is too small for anything meaningful for the economy. Production of goods also requires certain time before volume of production can positively react to the growing demand without resorting to prices rationing. If, of the two time dimensions, the first one is longer then there should be NO inflation, i.e. the flow of income per unit of time as per BIG is smaller than the potential adjustment of production. (As a by-point, modern consumers take as given “on-order” style of many goods by which I mean not all goods are immediately available for sale and significant demand for goods can be rationed by time without triggering price increases. Think a new iPhone though this is a bad example. In general furniture and cars are extent built on-order and which makes their time dimension very flexible)

    Finally, given that modern economies are very service oriented, the supply in such economies is very scalable especially for the purposes of BIG. Warren himself like the example of online mp3 files sales. It is a pretty much indefinitely scalable service which can absorb any volume of demand.

  23. “By the same logic, we would have hyperinflation already. An accelerating flight to unemployment benefits.”

    I don’t follow your comparison at all. You can’t choose to go on unemployment benefits, i.e., you don’t get them if you quit voluntarily. And if you are laid off there is a constant clock ticking away the months until you are no longer covered, so you’d better look while you can. (At least that’s my understanding of the US system).

    I think a core part of the disagreement about whether an income guarantee would be inflationary (because too many people would opt out of other work) relates to differing assumptions about how self-motivated people are to do what is good for them and/or society if they aren’t forced.

    My opinion is it is a minority who would elect for the JG part of a JIG rather than the income guarantee, and that Warren is right that it would pull people out of private sector jobs and be inflationary via reduced economic capacity (production of goods and services people demanded by their $s of spending).

    Just about everyone knows the extraordinary benefits of exercise in both mental and physical health, yet only 16% of the US population exercised on an average day in 2008. ( http://www.bls.gov/spotlight/2008/sports/ ) I don’t see why the propensity to choose formal work positions would be much different (if made voluntary) than propensity to exercise.

  24. “My opinion is it is a minority who would elect for the JG part of a JIG rather than the income guarantee”

    The evidence from the Argentina programme contradicts that opinion, as does my personal anecdotal experiences. People want something to do with their lives and at the unskilled level they really need somebody to tell them what to do.

    “Was this the case with Jefes? During our site visits, we spoke with nearly 100 individuals who were Jefes workers. When asked “would you prefer to receive the benefit of the Jefes program but stay at home,” every single one, without exception, said that they would not want to sit at home and that they preferred to go to work. ”

    http://www.cfeps.org/pubs/wp/wp50.htm

    “And if you are laid off there is a constant clock ticking away the months until you are no longer covered, so you’d better look while you can.”

    The world isn’t the US. US unemployment benefits are very poor indeed. In the UK we have a fixed amount you can claim that goes on until you get a job or the powers that be can find an excuse to throw you off. It’s a pittance, but it is permanent and attract a host of other social support payments.

    So the comparison holds. The UK does not have hyperinflation.

  25. Neil,

    Thanks for the data points. It sounds like there could be selection bias in that Jefes question — if you ask the people who are already actively working in the program, it seems to me you’d get a different answer than if you asked a random sample of the similar-skill-level population at large, many of whom might not be in the program. Plus there is the difference between words and action (same as if you asked people if they “want to” exercise regularly). Admittedly I haven’t read much of that Jefes report yet.

    However, I fundamentally agree that “people want to do something with their lives…”. I’m just unsure at how good they are at realizing that and self-motivating to make it happen if given the choice between a no-strings-attached living-wage-level income versus the same wage with other people running the show. And the real comparison I was making when pondering a potential reduction in capacity was between minimum wage jobs in the private sector versus the choice of a no-strings-attached income.

    Also just to be clear I didn’t repeat the hyperinflation claim, just a suspicion of relatively higher inflation pressure, which might or might not be true in the UK. If your experience suggests that the number of people who stay on long term income support but are capable of more is low (which you haven’t said explicitly but might be true), that’s great, and I admit I could be too pessimistic regarding this aspect of human nature, since I haven’t done enough homework to investigate real world scenarios.

  26. “. If your experience suggests that the number of people who stay on long term income support but are capable of more is low ”

    Don’t forget that boils down to on income support and doing nothing. The main economic advantage at the bottom end is caused by the multiplier, so their primary job is spending – for which they receive the majority of the output that spending induces.

    If I stop on income support while fixing faults in the Linux kernel I’m adding significantly to production. But that’s just a bonus over my consumption spending.

    Similarly for the street artist, or the care assistant, or the volunteer doing the typing at a charity.

    Those bonuses quickly add up to a better quality of life for all via indirect channels.

    The problem is assessing the value of things solely in terms of capital relationships.

  27. I agree that when the output gap is large, spending by those on income support will help support demand in the broader economy (via the multiplier). Thus it’s less likely to be inflationary in that scenario.

    As I outlined in an earlier comment, I think there is a fundamental question here as to whether individuals are better at assessing what society needs (the street performer, open source developer, etc) or whether society is best able to express its needs by voting with actual dollars (or pounds) of spending choices. Might society rather have that street performer preparing food for those without time or interest, for example, and might restaurants be left understaffed if that person self-selects their type of output without the feedback loop of having to have others pay them for output that was most highly valued?

    It’s a complex question and gets into the ways capitalism is or isn’t “broken”. I’m quite sure there are examples of volunteer functions that society underpays for relative to other things but that would make society better off. I’m just not sure how widespread those scenarios are relative to all the things people currently want but already can’t afford (but would vote with their wallets for if they could.)

  28. I realized I should clarify my reference to “capitalism” above in case it is taken out of context. I’m not arguing that the free market alone is optimal…

    As elaborated in previous comments, I’m just suggesting that the union of {formal government, private sector including non-profits, and JG via local government} may do a better job of assessing what society *most* needs ON AVERAGE than individuals can when left to their own devices. (Of course there will be exceptions).

  29. ” Might society rather have that street performer preparing food for those without time or interest, for example, and might restaurants be left understaffed if that person self-selects their type of output without the feedback loop of having to have others pay them for output that was most highly valued?”

    It can signal that value by offering a higher wage or better job conditions/prospects.

    Those activities that can’t signal a higher value cease to exist or are replaced with machines.

  30. Under certain sets of assumptions about the real world and human choices and preferences, the labor bid required to draw people into the formal government sector and private sector away from an income guarantee would generate a high enough increased general price level such that the income guarantee wage could no longer be a living wage. (i.e., after all the ripples had stabilized to a new price structure). If you increased the income guarantee amount in response you would risk an inflationary spiral.

    I can’t provide any evidence for whether such a set of assumptions is realistic. I do put quite a bit of weight on Warren’s assessments, but my mind could be changed at some point on this topic. I also believe Bill may have cited income guarantees as a cause of high inflation in South America at some point, but I didn’t get into the details.

  31. “If you increased the income guarantee amount in response you would risk an inflationary spiral.”

    I don’t believe that’s the case, because you always have redistribution down via taxation as a mechanism to enforce the change if quantity expansion in the economy is insufficient.

    The one thing that is certain at the unskilled level is that money is a motivator, which it ceases to be once the job involves any thinking.

  32. I think there are scenarios under which such an increase in taxes could be insufficient, but again, I don’t know the right real world assumptions to use.

    Fundamentally, to the extent an income guarantee drew some people out of the formal work sector, the economy’s official economic capacity (the units of output it can produce) would shrink. So you’d have an increased dependency ratio. Thus some people on aggregate would be able to consume less units of output than was possible before the income guarantee. So first off, you’ve got a political question as to whether the free time of those opting out of formal work is more valuable to society than the extra output that could have been produced if they were in the labor force. I think most societies would reject such a shift politically, but that’s just my opinion.

    Then there’s the question of how much of what we consume is “necessary” given current configuration of society’s infrastructure (which evolves very slowly) and how much society could do without. I don’t know the answer, but I think it’s interesting that the peak to trough fall in real personal consumption expenditures in the US in the 2008-2009 panic time frame only fell about 3% (or about 4% in nominal terms). That’s when everyone at just about all income levels (except possibly the top 0.1%?) seemed to be curtailing any and all “optional” spending they could think of, and that’s all they could reduce it by? I have no doubt there’s a lot more “waste” than that in GDP, but how much should you try to control people’s spending preferences (aside from special cases such as when they impose external costs on others, or when advertising “tricks” them into buying things that are bad for them)?

    Let’s be generous and say that 50% of current output is stuff society can do without given enough time to adjust, rather than 3%…

    1. Assume population of 100 people, who produce and consume avg 1 unit of output per person

    2. Assume core human needs can be met with 0.5 units of output per person (the 50% assumption above), and the rest is “gravy”

    3. Introduce income guarantee that pays “living wage” (0.5 units)

    4. Suppose 50 people choose IG, and 50 people choose formal paid work

    5. To preemptively constrain demand, you increase taxes on formal economy workers to remove all “excess” income. Thus while they could previously produce and consume one unit each, you drain that ability to consume, arriving at… see #6:

    6. Suppose that people submitting to formal paid work require on average an after-tax wage that allows them to command 50% more real resources than if they had complete freedom in how they spent their time. Remember, it is a big jump from 0 hours per week formal work to ~40 hours per week. Thus their pay must command at least on average 0.75 units of resources each (0.5 * 1.5).

    7. Total demand now is for 62.5 units of output (50 IG recipients * 0.5 units + 50 workers * 0.75 units).

    8. Total supply is 50 units (via the workers in the formal sector) Output has collapsed since before the IG, but some may say society is better off with the extra free time than the lost output.

    9. Demand for formal output (65 units) exceeds supply (50 units), so assuming the IG remains pegged to the “living wage” and formal workers continue demanding the same premium in real resource use, inflation will accelerate dramatically unless something changes.

    10. If the IG workers are content with their modest low-consumption lifestyles and won’t join the formal sector at any price premium, then this is an inflationary supply shock a bit like the oil shock in the 1970s.

    11. If the extra pay (command of units of resources) required to entice additional IG workers into the formal sector equates to more resource units than those same workers add to productive capacity, then the inflationary spiral is unresolvable via the labor market price adjustment mechanism, because each transitioned worker adds more to demand than to supply. This may sound like a ridiculous assumption to some, but I’m not sure it is — think of a trade of labor hours — “others have to work at least as much extra for me as I’m going to work for them for it to be worth it to me.” How many workers would go from 0 to 40 hours required work for, say, a $1/hour addition to their total income?

    12. However, if you CAN entice those workers to join the formal work sector for less additional units of pay than what they would be producing once they join, then after quantity and price adjustments played out, the price level would likely stabilize.

    (Let me know if I made any logical errors in the above steps, as I’m just making this up as I go along and running out of time)

    So, having worked through it in more detail, I think it comes back to assumptions about people’s preferences, price elasticities, etc. Maybe #12 (or different starting assumptions altogether) is most realistic, in which case you may be right about the feasibility of an IG with respect to price stability. (Though I can’t assess which assumptions are most reasonable one way or the other). That would just leave the [nontrivial!] political debate about the relative value of individual determination of best uses of time versus social determination of best uses of time.

  33. ” Suppose 50 people choose IG, and 50 people choose formal paid work”

    Suppose they don’t.

    ” inflation will accelerate dramatically unless something changes.”

    Yes. Innovation to increase supply without increasing labour demand. After all there is huge demand and that drives changes.

    ” I made any logical errors in the above steps”

    The logical error is assuming things are fixed and don’t change dynamically.

    You can always come up with a model that fails. Try coming up with one that works.

  34. ” Suppose 50 people choose IG, and 50 people choose formal paid work”
    Suppose they don’t.

    I stressed multiple times in the comment that I was making lots of assumptions for illustration and not suggesting they necessarily reflected the real world. If people interacted with formal work like they do exercise, my previous example shows only 16% would choose the formal work sector! But that is almost certainly wrong. Maybe 90% or more would and the risk of inflation is thus low. All I was doing was setting up a an analytic mini-framework in which certain settings would show accelerating inflation and others wouldn’t.

    I didn’t pick the “worst case scenario” for any of the settings. For example, I think MORE than 50% of activity in current GDP is necessary to current civilization, even if the number is less than the 97% implied by the recent panic-driven fall in consumer spending.

    I also suggested a pretty harsh maximized tax rate on the formal sector workers.

    The point was to show a way in which an income guarantee COULD result in an inflationary spiral. Nowhere did I claim such a result was inevitable.

    “Yes. Innovation to increase supply without increasing labour demand. After all there is huge demand and that drives changes.”

    There’s only so far you can push innovation… productivity historically increases in developed nations at 1-3% per year. I do agree that effective policy can contribute to keeping this higher than would be otherwise, but you can’t make the entire inflation scenario go away by saying “just use more machines”.

    “The logical error is assuming things are fixed and don’t change dynamically.”

    Where did I assume that? Sorry for not building a simulator into my text comment, but I had to pick some numbers to show the point I was making, and then refer to the ways the numbers could change (points 10-12) or be wrong.

    “You can always come up with a model that fails. Try coming up with one that works.”

    I already did that! As I said, “Maybe #12 (or different starting assumptions altogether) is most realistic, in which case you may be right about the feasibility of an IG with respect to price stability.”. Also, many of my assumptions were not overly aggressive on the side of trying to prove inflation.

    This had felt like a healthy friendly discussion up until now. Anyway, thanks for the opportunity to work through some of the details (even if I’ve got it all wrong, which really could be the case).

  35. “The point was to show a way in which an income guarantee COULD result in an inflationary spiral.”

    You can always prove it. The model you put forward is simply an economy that has insufficient real resources to support the level of distribution proposed. Obviously it will cause inflation.

    The same applies to pensions and anything else other than the law of the jungle. Yet we have pension systems.

    The interesting models are those that don’t spiral out of control. What are the parameters there and how close are they to the real world situation.

  36. hbl, I am enjoying the dialogue between yourself and Neil, and taking it into account in my own thinking about the topic. I am reading various materials on more general questions and haven’t had time to interact in the various threads, but I have been jotting down notes for further posts on this topic informed by the discussion. I think you are raising relevant factors and suggesting a framework for thinking about them, which contributes insight beyond the numerical values assumed in particular examples. Thanks.

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