I have been reading articles and books as well as taking courses on economics, and it never stops to amaze me how macroeconomics seems to be full of pure luck, open interpretations, and wild guesses. Especially when compared to microeconomics, where you can run experiments, analyze precise data, perform advanced modeling — all sorts of activities to actually prove your point.
I see macroeconomic monetary and fiscal policies like a long row of huge levers, that some very smart people try to pull in the exact right position — just to see afterward how incredibly large amount of different consequences ripple through the global economy because of the tiniest differences of lever positioning. Like flap of butterfly wings affecting something on the other side of the planet, only with the effect that can really be felt. And just like with butterfly wings, there is no way to actually be sure about the result. There can be only incredibly complex and ultimately ineffective models.
Of course, monetary policy is needed, money is the blood that is running in the veins of our civilization. It keeps all the cells supplied and ready to produce as much as they are capable. And there must be a powerful and central heart that pumps it and of course many complicated mechanisms that would regulate pressure, guard the valves to ensure the best performance possible from every involved element.
If we continue with the analogy — currently central banks and governments of all the countries are the nerve knots that regulate how the veins are pumping the money, in what speed, in what quantity, in what pressure. They need to ensure that some places do not get under-supplied and die, while other places do not get overly eager to grow, so the growth wouldn’t turn cancerous. And also ensure that cells are reasonably similar in size, so they can live happily next to each other. And that there are not too many unemployed cells, and that there are no unnecessary red tape blocks in monetary flow, yet that there is still sufficient legislation to keep all the bad behavior under check.
And as trade is global, all of those central banks and governments are both trying to help each other to keep things stable, at the same time competing with each other as the interests of their nation have to come first.
It is incredibly surprising that it all keeps working, but it is not a very big surprise that there is no agreement of what exactly is good policy and what to do to reduce unemployment, increase economic activity and make people happier and safer.
There is a need to replace the row of big levers with a hundred times bigger set of smaller, more precise levers, that would be then governed by advanced algorithms to keep the impact the highest, and side effects lowest.
Instead of just turning on big monetary fire-hose in financial markets when monetary supply needs to be increased and hoping that banks will, in turn, credit more and businesses will grow and people will consume more, thus reducing unemployment. I suggest a lot of smaller financial injections directly at the source, to promote growth exactly where it is needed the most, without a large cut and unpredictability that banks bring into the process as the middle man.
Of course, I am not the first to think about how to improve upon Quantitative Easing and similar programs. This is a good article on what are the problems and possible alternatives. People have been thinking about just giving money to people, to support traditional fiscal and monetary policy. This concept has been called ‘helicopter drops’ by Friedman. It has been happening as a form of various tax rebates and other handouts, but its impact is still hard to understand, as it affects large indiscriminate masses of people and is rather ‘macro’ still.
I would like to propose a system, where policymakers would work differently — first define macro targets that need to be reached in the country. Then define more specific industries and/or geographical areas, where improvements are needed the most, and then, via competitive bidding, moderation, and evaluation process, select private enterprises who set out to deliver the results, by using tools of the central bank and government.
For example, we can imagine that there is a goal of reducing unemployment in Latvia. And there is a Latvian region of Latgale that is struggling economically as well. Drilling down into the issue, we can identify more specific targets. One obvious choice is one of the biggest towns of the region — Rēzekne, with a very high unemployment rate of 15.2%. In absolute numbers, it is not a too large amount — 2386 people. Each with a sad story, quite tough living conditions, and with little hope for improvements. In Rēzekne, there are also 839 commercial companies. Both of those numbers need to be improved and they obviously go hand in hand.
The central bank could theoretically just print new money and give each of those people 10000 and that would cost only two and a half million. That is not a significant amount of money and it most likely would not solve any structural problems in Rēzekne, would not increase employment, and give only a small boost in the number of enterprises, while pushing up inflation in the city.
But if instead of just doling the money out, it would be given as a tool to a smart small company who would go and explore opportunities for very local growth in the city, and invest the bank’s money where it would give the most unemployment reduction, most new enterprises, and least inflation, while keeping the changes sustainable in long term — then everybody would win.
Money, after all, is just means to an end. It can be created out of thin air, if necessary, and we need to do that where it makes sense for growth and where all adverse effects are accounted for. We don’t want to skew the competitive landscape, we don’t want to give people money for not working, we don’t want to increase inflation by generating a sudden increase in demand. We do not want to reduce average productivity. There are a lot of bad things that can happen, and we want to do good instead.
Government and central banks are unable to work efficiently on a micro level, but small companies with clear targets can do that very well.
So, what could be the new jobs that our theoretical small company (Smart Policy Ltd) could create, without all the above-mentioned accompanying problems? Let me propose a couple of imaginary scenarios:
- a small local factory is operating on rather thin margins, producing a rather generic product that has little or no competitive advantages. Smart Policy Ltd could offer them a targeted grant of 4000 euros per month for 2 years, for hiring 3 research and product development employees. If with extra 1000 per month and a one-year long period, they would hire local residents and provide them more advanced education. The program would require sustainability checks every 6 months, with a possible extension for extra two to three years, if clear results can be shown.
- local startup incubator has several small companies with global ambitions. They have already some investment and grants to grow. Smart Policy Ltd can offer them extra financial help to hire local people to boost growth, with smart commitments that ensure that those jobs remain in the city for a number of years, even if the startup grows very big and moves its headquarters to one of the big capitals of the world.
- previous research has indicated that there is a number of issues that need to be solved with local infrastructure, for outside investment to come to the city and for locals to invest locally. Smart Policy Ltd identifies areas where most of the improvement can be achieved by using employment, instead of just buying extra goods and services from outside. It then sets up the plan for local government and agencies to hire people for specific tasks, that would fix many problems noted in the research, thus improving longer-term growth.
And in each case, all the negative effects are measured and planned for. And after implementation constantly monitored. And only newly created money is created for those activities, and any competition with existing government grants and programs is avoided as much as possible. The only thing that matters are results — less unemployment, more enterprises, and no adverse effects in the process.
Of course, one of the more complicated problems of this setup is the right set of incentives for companies that would identify and create those precision instruments. The risk for corruption and waste is enormous.
For this, I propose several mechanisms. And I am sure there could be a lot more checks and balances built:
- Payment based only on results. Both on overall improvement and on deliveries of specific projects. And not for the execution of projects, but for projects themselves achieving the desired level of self-sustainability. Of course, such measurements could often be done only post factum, so some money would need to be paid to the company as it goes. Longer-term money could be defined similarly to stock options, based on initial targets for specific projects.
- It would, however, not be very effective if ‘as you go’ payments would be given out based on assessment from some bureaucrat. It would end up ineffective and with an unhealthy injection of politics and micromanagement. Instead, there should be a peer-review process between competing companies in this field. Peer review and moderation, and based on that monthly fee would be paid to the companies and their employees would get salaries.
- Of course, reviews from peers would immediately invite the problem of collusion. That could be avoided if all the peers would also be interested in Smart Policy Ltd projects achieving their long-term goals. To ensure that, there could be added element of randomness — some of the future project options could be exchanged for other project options. Basically, the future success of one of five to ten projects delivered by Smart Policy Ltd would be swapped with the future success of the project, delivered by its peer company. With such an incentive, every reviewer would be very motivated to evaluate work as precisely as possible and also to offer advice and to help if any problems are noticed.
And, of course, all the companies would still need to compete as well, there would be a bidding process to get contracts to deliver targets in particular locations and specific amounts. And each company would be limited to have only part of the work, never fully achieving a monopoly. It would be a rather interesting setup — competitive, yet collaborative, landscape. Monetary politics as a service.