Wednesday, 9 October 2013

Unconditional Cash Transfer

From Caracas Chronicles:

extorres says:
Nicolaas Smith,
Juan’s post’s “free cash” is very different to UCT. Start with a country that has no oil, nor other natural resource. Its government must fulfill its duties, limited by income from taxation. The government’s incentive is to maximize its people’s success because that is what maximizes its own income from taxation, which, in turn, maximizes what it can do to maximize its people’s success, which is what keeps people voting for its stay in power. Now let’s compare the two scenarios: A) The free cash to which Juan is referring, and B) UCT to which I refer.
A) The government now gets two incomes, oil money and taxation money. Suddenly the government’s incentive is no longer to maximize taxation money because it is so much easier and more than sufficient to maximize oil income. Whether its people fare well or badly becomes more irrelevant the more money it gets from oil. The government uses the oil money to reward submission and loyalty while punishing dissent.
B) The government only gets a single income, taxation money, so the incentives remain as in a healthy, non oil country. The difference is that now the people have a bonus income which makes it even easier on the government since it has to worry that much less on poverty alleviation programs and can focus on maximizing its people’s success. The government does not have use of the money to reward loyalty and punish dissent.
You see, NS, the key is in the *unconditionality*. That requirement in the UCT proposal is what does not allow the cash to be used in the faulty way to which Juan is pointing in his post.
You were criticizing some time ago about people not considering your DI proposal as much as you think they should. The arguments you used apply to your not considering UCT as much as you should. Remember, whichever proposal is endorsed, right now we need one that not only works, but that it wins votes and that it cannot be countered. UCT is the one to best fit the bill.
By the way, you really need to drill it in: There is no such thing as a free lunch; it comes from somewhere, and it’s paid for.
  • Extorres, I read the 2007 post “Torres in Bethlehem”: it does not explain UCT in detail. Where can I find a detailed explanation of UCT?
    (My capitalist mindset prejudice me towards the idea of UCT: l automatically think it would be fundamentally flawed because of the “crazy” cash transfer idea. Cash transfer just sounds very silly to me.) [This is just confidential between you and me, of course. :-) ]
    “Torres in Bethlehem” showed me that Venezuela is a freak country and you are a freak society.You are not a normal economy and not a normal society. Oil is certainly the devil´s excrement to you. I have a feeling that UCT is obviously your attempt to normalise Venezuelan society and its economy. Cash transfer just sounds fundamentally wrong. Something for nothing never works.
    Venezuela is ultimately lucky: oil resources have to come to an end some or other time in the future. Then you will spontaneously become a normal society and a normal economy. The change-over will obviously be very traumatic if you do not prepare for it. Current signs are that you are not preparing for it. The end of oil is still far away for you. The sooner the end of oil revenue the better for Venezuela. In the mean time you have the misfortune that clowns can run your country because … (I can not state the obvious).
    • Andersen says:
      You won’t find a lot of people agreeing with you, but quite simply you stated the truth. Venezuela is a freak country with a freak society. Everybody knows that, except Venezuelans, the people who against all odds succeeded in turning gold into crap.
    • extorres says:
      Nicolaas Smith,
      The proposal you hear me describe is part of a multipart proposal with which I came up for Venezuela. I presented it publicly in Caracas for the first time back in 1996. I’ve tweaked some aspects since then, mostly as a result of the many discussions throughout which the details are sprinkled. I have yet to write a single, all encompassing version. Caracas Chronicles took several years to finally give the idea any traction with the milestone post that you already read, .
      By the way, I think you misattribute the source of your rejection to this idea. It can’t be your capitalistic mindset for it is mainly capitalists, myself included, that support it. In fact, how capitalistic can you get when the game of Monopoly gives free cash every time you pass Go? Since the difference with that game and life is that we cannot accept people being left out of play in life, then the tweak to make Monopoly like this proposal is to give cash on each turn, not just when passing Go. This way, every player would have enough to continue playing indefinitely. Nothing going against capitalism there.
      You are correct that the freakiness is what got me to come up it the idea, but after open-mindedly analyzing it as a system, it turns out that the idea is fundamentally sound for any country. Note how the TED talk McAfee video talks about guaranteed income. That’s the growing global thinking.
      Your thinking that this proposal is about “something for nothing” is incorrect. Again, there are no free lunches. There is never a something for nothing. But even simpler than that, you have to look at the alternative. If a little money for nothing to someone is such a repulsive idea to you, what makes you think giving a boatload of money for nothing to someone is any better? All the ills that you envision from giving shares of money to all citizens are centralized when you give the total of the money to the government. But looking at the nothing, what exactly is it that we can expect from government when we give it oil money and how does that compare with what we could expect from the citizens? Well, what I would expect from the citizens is that each citizen spend the money in a way that is most beneficial to himself, at least beneficial in how each citizen perceives it. This spending would help the consumer market considerably, while retaining the incentives of a healthy, non oil nation, rather than the petrostate disaster that giving the oil money to the government achieves. Besides, next time you try to convince anyone that giving money for nothing in exchange never works, remember all the positive results cash distribution is having worldwide.
      I disagree that the sooner the oil ends the better for Venezuela. If UCT is implemented, all Venezuelans will be better off, and the longer that lasts, the better for Venezuela. Did I forget to mention UCT wins votes?
      • Extorres,
        Thank you for all the links. This is an important subject, the detail of which I am not familiar with. So, I will read them carefully.
        Smith´s division of labour immediately springs to mind when I think about how this all fits together because I have a gut feeling that in the end you and I will agree on fundamentals.
        I look forward to continuing our very enjoyable conversation.
      • Extorres,
        I have read all the articles and I have listened to all the videos you listed above. I now have a basic idea of what Unconditional Cash Transfer is. That does not make me an expert on the subject. You are the expert on UCT. I am an expert in Daily Indexing. Division of labour between you and I – as Adam Smith stated – is a basic building block of creating wealth.
        I support your idea of UCT for Venezuela. You know the details.
        Daily Indexing does not purport to deal with any political or social or socio-economic aspect of the petro-state or the state-citizen relationship or direct resource allocation or anything like that.
        Daily Indexing is simply a measurement basis during inflation and deflation for
        daily inflation-indexing [1] monetary items – monetary loans, bonds, etc. in terms of the Daily Index – and
        measuring [2] constant real value non-monetary items – e.g., salaries, wages, rents, interest, capital, reserves, trade debtors, trade creditors, taxes, taxes payable, taxes receivable, etc. in units of constant purchasing power in terms of the Daily Index and
        updating the third fundamental economic item, [3] variable real value non-monetary items (e.g. property, plant, equipment, finished goods, raw material, etc.) in terms of the Daily Index.
        It so happens that when you measure the above items as stated in a double entry accounting model, namely Capital Maintenance in Units of Constant Purchasing Power (for every debit there is a corresponding credit), you stabilise the non-monetary economy. This ONLY happens when you apply a DAILY Index, actually an index that follows ALL changes in the general price level. From about 3000% inflation per annum, you would have some days on which the price level would change more than once a day. The Index you use has to follow ALL changes in the general price level – at least daily.
        When you inflation-index ALL monetary items at least DAILY you remove the EFFECT of inflation or deflation – not actual inflation or deflation. It will be AS IF there is no inflation or deflation while you actually still have inflation or deflation. This is easy to see in capital inflation-indexed government bonds. I believe they do exist in Venezuela. These Venezuelan capital inflation-adjusted sovereign bonds are tightly held by major banks in Venezuela according to Miguel Octavio.
        Daily Indexing can be used by any political model. It would have the same stabilising effect when it is properly implemented. The sound characteristics of Daily Indexing is inextricably built into the model. Daily Indexing does nothing directly to stop inflation or deflation. It only removes the actual real EFFECT of inflation or deflation.
        Dagoberto Salazar stated in CC:
        The former paragraph takes me to one of the drawbacks of TP: inflation. An undervalued currency and a surplus in money supply will certainly spur inflation. But let’s face it: we already have one of the worst inflation rates in the world, so TP won’t make things worse.
        Daily Indexing would remove the EFFECT inflation. See above. It would be AS IF there is no inflation.

        Over the medium term the stabilising effect of DAILY INDEXING would lead to low inflation. Copying Brazil´s Real Plan would mean that Daily Indexing would kill hyperinflation OVERNIGHT at no cost. But, you have to copy the Real Plan exactly. It was implemented over 3o days from 1 June 1994 to 30 June 1994 in Brazil. Easy to copy.

        It needs ONE other essential item without which it would not be possible to implement it in Venezuela: GOOD GOVERNANCE.

        Dagoberto Salazar stated:

        Then, at the end of each quarter (let’s say we are in the second quarter, or 2Q) the government will compute the total gross oil income from the previous quarter (1Q), and will divide it by the number of Venezuelans that were alive for the full quarter, and the number of days in that quarter. People that died or were born (or naturalized) during 1Q will not get their quarter share. Simple enough. Transparent enough.

        Then, the government will deposit the corresponding quarter share, in Bolivars, into each active account. The one-quarter delay will allow for updates in the database of living Venezuelans, and will keep the work manageable for a relatively small bureaucracy.

        Currently you have something like 3% inflation per month in Venezuela. A one quarter delay with nominal Historical Cost values (not measured in units of constant purchasing power in terms of a Daily Index) would mean that everyone would lose real value in their UCT receipts at an annualised rate of something like 45% per annum -your rate of hyperinflation. Under Daily Indexing the UCT values would change daily in nominal values but stay the same in real values. You need Daily Indexing.
        This applies to everything else Dagoberto stated in /day values. Under HCA they will stay nominal and lose real value at a rate of 45% per annum. Under DI they would change daily in nominal value and stay the same in real value.
        So, Extorres, I agree with UCT, but, you need to do it under Daily Indexation.

        If you would help me to get the International Accounting Standards Board to change IAS 29 Financial Reporting in Hyperinflationary Economies which Venezuelan companies have been implementing in terms of the IASB´s mistaken requirement of the monthly CPI since 2009, to REQUIRE Daily Indexing, then only the Venezuelan non-monetary economy would strongly move towards stabilisation as a result of an International Financial Reporting Standard without your government being involved. It would do nothing to hyperinflation in Venezuela over the short term.

        I described above what you have to do to stop hyperinflation overnight in Venezuela at no cost, but, with the requirement of GOOD GOVERNANCE.
        • One very, very scary aspect of the current IAS 29 – which requires the use of the MONTHLY CPI – is the fact that it had absolutely NO POSITIVE EFFECT during the eight years it was implemented at the end of Zimbabwe´s hyperinflation. The same will happen in Venezuela with a severe increase in hyperinflation. Daily Indexing has to be REQUIRED in IAS 29 to fix it. The IASB does not yet understand this. They and the people they consult have no experience of hyperinflation. It may take them another 10 to 20 years to understand it. Actual direct pressure from Venezuelan accountants or anyone in Venezuela would make a big difference.