It is the answer when the shortage is an abrupt, acute disruption in the money supply. A massive number of people were made unemployed by the pandemic. We had lines at food pantries stretching miles long.
If you recall, at the beginning of the pandemic we we had farms ploughing under crops for lack of demand. Potatoes stacking up to high heavens, farmers offering them free to anyone who'd arrive with a bag to transport them.
The author actually mentions the traditional knobs of monetary policy don't impact the distribution of money at the bottom of the economy where it is needed. That's why the direct stimulus and now family UBI is so different, and should be looked at as imperfect but necessary for addressing the need at hand.
Or face a total financial system meltdown if the fix is poorly implemented.
I think the simplest solution is for the fed/government to simply give everybody cash, since the root of the problem is that a lot of people have temporarily lost their incomes due to their jobs being essentially banned in response to the pandemic (eg a lot of people in retail outside of supermarkets/food). Anything that involves nonpayment is extremely risky
what the pandemic is making more obvious is that money is getting stuck in idle and infirm hands. further, money is being injected into the wrong hands in the economy. we need money being injected closer to productive hands (like essential workers) rather than the current centralized system giving it to far-removed capital holders, those who prefer rent-seeking and other non-productive ways of stalling the velocity of the economy for their own benefit.
The number of people who are homeless, in medical debt, and unable to work or make any money due to limited skillsets and COVID is astounding. These people need some type of immediate help, and if they don't receive it, the effects will be far more detrimental than the effects of fiscal stimulus.
And I think you're confusing monetary stimulus with fiscal stimulus.
> It doesn't matter how the money is distributed, it tends to inflate asset prices
For the US, that's not true. The US Dollar is the world's reserve currency, and the Fed isn't worried about inflation, but a lack of money supply. The pandemic has led to a huge demand for safe assets, including Treasury bonds, which has led to incredibly low interest rates on Treasury bonds, and a stronger dollar. See, for example, this article: https://www.washingtonpost.com/business/2020/04/05/what-2-tr....
This is a quick sum of the study's basic intuition:
> When workers lose their income, due to the shock, they reduce their spending, causing a contraction in demand. The question is whether this mechanism is strong enough to cause an overall shortfall in demand.
Answer:
> Positive, demand may indeed overreact to the supply shock and lead to a demand-deficient recession.
Suggested solution:
> The optimal policy to face a pandemic in our model combines a loosening of monetary policy as well as abundant social insurance.
The current situation is not normal. People are forced into unemployment to control the outbreak. I completely agree that governments need to step in and provide support during this artificially induced economic coma. But I’m not sure any observations would apply to UBI in a normal mode of economy.
The pandemic will deflate most economies. So much so that that attempts to correct for this by injecting cash, controlled intentional inflation, only lightly softens the blow. The US economy is expected to see a contraction of 35% to the GDP this year, which is huge. I believe the great depression only contracted the US economy by around 22%. This great deflation is even after several rounds of economic stimulus, which are largely comprised of giving people money from the government in similar spirit to a UBI.
In this case the goal of stimulus is inflation and it isn't enough to repair the economic disruption.
Despite the sharp and historic deflation this is not unusual though. Pandemics are historically known for economic deflation. Europe experienced a devastating pandemic about once a century for more than 10 centuries in a row yielding plenty of economic evidence to this.
The most important thing to learn from this is that a sudden economic deflation hurts poor people and corrections insufficiently help poor people. Wealthy people are not directly impacted, at all. Attempting to correct for that difference with an economic stimulus, such as giving poor people cash, does not at all balance that disparity.
If anything this current pandemic illustrates that a UBI is an insufficient control for balance. Instead of focusing on what to do about poor people if the goal is to balance the disparities of wealthy people against poor people then wonder what to do about wealthy people. Tax the shit out of wealthy people and use that increased government revenue to grow the economy directly in ways only business can: increased infrastructure (there is more to that than just roads and telephone poles).
As for taxing wealth I am a huge fan of a complete estate tax and not a huge fan of income taxes. Take everything greater than $10 million of estate value when a wealthy patron dies.
This is a massive question: how do we nearly shut down an economy and still meet people's basic needs?
Today's crisis is not 2008's crisis.
The economic changes seem more akin to WWII when there was rationing and production shifted to war efforts. Now we are shifting efforts to healthcare, and the logistics of maintaining basic consumer goods to the populace.
Both in WWII and today we want the ability to spin things back up once (fingers crossed) the virus abates without having made the situation worse by displacing or further indebting huge amounts of people.
When surveys show somewhere between 70-80% of Americans live paycheck to paycheck the potential consequences of the economy grinding to a halt would be devastating.
Talk of $1,000 payments to people help move the Overton Window, but don't solve the problem.
>The stimulus was only necessary because of the lockdowns
The question of whether lockdowns were justified aside, pandemics aren't the only form of economic calamity that might occur. Financial crisis occur. Other supply shocks (eg. war in ukranie) exist as well.
This was due to the pandemic disrupting the global supply chain, not because of the inadequate yet desperately needed stimulus, unemployment supplement and child UBI.
So a huge pandemic has been raging through the world for almost 2 years now, massively reconfiguring the world in so many ways. lockdowns, deaths, fear, government subsidies, cheap money, GME and unions, several global mindshift changes e.g of how crucial low wage jobs are or how short life is. But the bean counters are confused about why “labor supply” is low. hmmmm
Or maybe they aren’t confused, they're worried.
> More broadly, the participation rate has generally underperformed in economies with large increases in household liquidity. The most notable case in point is Chile, where the participation rate declined by 5pp as fiscal support and pension withdrawals flooded households with liquidity.
“if people have money they might not work at jobs”. jobs that have systematically trained them over decades to expect a paycheck but nothing else, not loyalty or satisfaction or upward mobility or any semblance of agency. wow. fucking clueless.
> Governments are supposed to take care of the society during times of need, especially catastrophes, wars, pandemics.
The free money made sense for that reason during, e.g., April 2020, when almost every business was closed and jobs weren't available. But once the jobs became available again, not so much.
The government prints money and sends out those $1000 monthly checks so as to continue using money to organize transactions, and the people working essential jobs continue to get paychecks.
Make the distinction between financial capital and money. Money as medium of exchange continues to be used. Money as financial capital assets is paused for the duration of the crisis.
What’s the function of capital? To allocate labor to the highest-value uses. We can’t be bothered with that during a pandemic.
Capital allocation is important, and it is long-term. The pandemic is about short-term physical survival. Providing food water medicine electricity is straightforward enough that it can be done through command, and through the sheer momentum of our existing systems.
We need to drop back to a simpler version of our physical economy for awhile, where people sit in their houses and only use basic necessities. Once it’s all clear we can come out and resume the previous activities; but how exactly do we effectively pause the non-essential activities?
This article is pointing out, rightly, that landlords and rents are non-essential. So pause them along with the rest of the non-essential activities.
We are experiencing both. During the pandemic governments inflated the money supply to fund vaccines, cash payouts to citizens, and huge programs to keep payrolls flowing. The pandemic also increased demand on consumer goods because people were spending their stimulus checks on goods since you couldn't go out or travel. Add on the fact that there are shortages of goods because many producers were slowed down significantly by lockdowns and staff shortages.
So we have both fewer goods available for purchase and less valuable money to buy them with.
On the other hand it's a straightforward economic slowdown, there's no hidden or surprising cause and effect, we understand what's going on. Before the pandemic there was no shortage of capital. We should be able to recover from it well.
Unless we fail to contain this virus, or find a treatment for those severe cases and the situation lasts for months on end. In which case we're screwed :)
> I agree we need more cash payments to humans. But we have to be careful not to confuse money with stuff (the goods and services produced by the economy). Giving money does not produce any more stuff, it only increases the competition for and price of the stuff that is being produced.
> We are producing less stuff because of the pandemic, which means there is less to go around (however it gets allocated), and no amount of money will change that.
A large fraction of that stuff is not strictly necessary for anyone's survival, especially in the short term. It's various degrees of "nice to have." Too see this, look at the kinds of rationing they did in WWII.
A successful COVID containment strategy would have identified the truly essential vs nice-to-have parts of the economy, and temporarily shut the latter parts down while supporting all affected workers in those sectors with payments sufficient to provide all needed access to essential goods and services for the duration (including housing). That wouldn't work as a permanent economic policy, but it would work as a temporary coordinated response to time-limited crisis.
> Meanwhile, shoppers have been spending at record levels, unleashing all the money saved by not traveling or going out — and their cooped-up pandemic anxiety — onto buying things
I don't think its all money saved from not traveling and going out. I think a large percent of the savings had to do w/ the generous unemployment benefits and stimulus payments. If you look at the person savings rate in the US, you'll see two huge spikes around the time of the transfer payments and then level near pre-pandemic levels in the last few months.
Strange it wasn't mentioned as a possible cause.
[EDIT] The reason that its important is that a lot of articles talk about "supply" or "worker" shortages as though its some naturally occurring innocuous condition, and not a result of policy. If you think its just money people saved up from last year, then everything will even out. Instead of buying a car last year, you'll buy it this year. But it ignores the introduction of 12 trillion dollars into the system (or around 30% of the current money supply). Its unprecedented and it's the reason you've seen financial assets rally to well past pre-pandemic levels. And for some reason, we think financial asset appreciation not based on fundamentals is positive. But this is beginning to creep into other assets and people are beginning to notice.
> The economic contraction was due to governments instructing people to shut their businesses down and simply lifting those was all that was necessary to revive the economy.
Governments told people they couldn't go to work. Two thirds of the country live paycheck to paycheck. In order to keep food on the table and a roof over their heads many had to go deep into debt and/or eat into their savings which weren't always so great to start with since around 25% of Americans have no savings at all.
Forcing a great number of people into huge amounts of debt and desperation was bound to slow spending long after the bars reopened, and to add to that you had many households where breadwinners were suddenly dead or unable to go back to work either due to illness or unexpected childcare expenses since schools weren't able to perform their role as babysitter while parents worked all day.
Some financial support was (and still is) needed for families who suffered heavy economic losses because of the pandemic and the restrictions it necessitated. Consumer spending was doomed to suffer for a whole lot of Americans. Even after the restrictions were lifted it's pretty hard to stimulate consumer spending when people are trying to dig themselves out of a hole and avoid eviction. All of that was at least somewhat offset by the desperation of the wealthy to get back to spending on the goods and services they were denied while the nation was locked down though. People who were able to stay employed and had large sums of money in the bank throughout the pandemic were very quick to get back to spending. Unfortunately, most Americans didn't come out of the situation in such great shape. After all of the emotional trauma they were every bit as desperate for some familiar comforts and a return to normalcy but they were forced further into debt to get them.
If you recall, at the beginning of the pandemic we we had farms ploughing under crops for lack of demand. Potatoes stacking up to high heavens, farmers offering them free to anyone who'd arrive with a bag to transport them.
The author actually mentions the traditional knobs of monetary policy don't impact the distribution of money at the bottom of the economy where it is needed. That's why the direct stimulus and now family UBI is so different, and should be looked at as imperfect but necessary for addressing the need at hand.
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