The GP 'Macro Bowl O' Economy !

The GP ‘Macro Bowl O’ Economy !

Ganga Prasad G. Rao

gprasadrao@hotmail.com

The world over, it is the same humdrum, the same reaction to the economic crisis that has afflicted nations across the globe. Every economic contraction, no matter of what origin must be responded to by stimulating the economy with low interest rates and ‘stimulus funds’. Pump prime an economy with ‘policies’ that have no credibility, shore up the very banks that caused the financial crash with their ultra-short trading, even indulge in a privately enriching market crash despite an obvious conflict of interest …..and when the economy fails, put your hands up, point your finger at the ‘other guy’, and walk away with your booty in the melee of a regime change. Macro-politics, my friend, is an art to master! So, in a world of no alternatives, let’s, for a change, break all taboos – I mean, academic - and imagine the unimaginable. Let us motivate a macro-economy with an entirely different rationale. An economy that does not hide its loot behind austerity programs, an economy that does not encash policies and regulations even before they are enacted, in fact an economy that cares, I mean a ….. ‘welfare state’, yes you heard it right, a ‘freebie economy’. A freebie welfare state when we aren’t able to even half-way support a subsidy economy? Sure sounds implausible. But ‘miracle’ is a word in the dictionary, right? So, let’s dare the odds and dream…I mean, read on!

Consider a society comprised of a set of households maximizing whose aggregate utility is the objective of the Government. Let HC represent a vector comprising of the entire set of households, and let i denominate the income-ranked ‘percentile elements’ within. HCi|i=k represents households in percentile i with income equal an arbitrary percentile, k. P denotes population, T represents the state of Technology, and Pc, the price of carbon, is a proxy for the (scarcity value of) the environmental commons. As the frontier of technology expands and the resource base expands, productivity increases in the economy, resulting in higher income, savings, wealth and investment (and a lowering of discount rates) among households. Due the existing inequity in household income, the expansion of the economy benefits the higher ranked household, HCi|i>>50 more than it does households HCj|j<<50. Such economic growth may be expressed as (GDP^f| Y^HCi|i>>50 > Y^HCj|j<<50), where GDP^f represent GDP-Efficiency phase, and Y^ represents the change in household income. In other words, income/wealth growth in the higher percentiles of households far outpaces income growth in the lower percentiles. Conversely, GDP growth could be ‘equitable’ (denoted by GDP^e) and reduce the disparity in income, ie, (GDP^e| Y^_HCi>>50 << Y^_HCi<<50). These two phases are not unlike an elastic rubber band that expands proportionately from a point of origin (a peg/stake) in the poorest household (GDP^f), and one that rebounds in favour of the poor (GDP^e) with the income of richest held constant. In times of recessions, similar logic holds. In a shrinking economy too, two phases are possible – an inequitable recession with the poor suffering larger losses than the rich, and an ‘equitable’ recession with the rich paying the price. In the latter case, the band, pegged to the poor, shrinks from the rich end, and in the former, the poor end of the band slides back while the ‘hedged’ rich hold their place at the far corner. Over time and across the expansionary and contractionary phases, the rubber band economy moves forward in fits and starts, much like a worm, occasionally backtracking some, perhaps to ‘straighten’ its path. If that were all to this 2-phase rubber-band economic paradigm, one would label it a ‘worm hole economy’ and move on to the next jingle on the idiot box.

But, what if we embellished this economy not with a ‘subsidy’, but a ‘freebidy’ that offered free a subset of consumption goods and services to a subset of households up to a certain monetary amount per period? The freebie consumption subset would comprise of both essential goods and upscale ‘luxury’ and high-tech goods. Eligibility would be determined by a cut-off household percentile, HCi|i = z, z being the percentile cut-off determined by a host of economic, demographic and environmental variables. Predictably, the percentile cut-off would rise with income and resource base, RB – a variable that half-proxies for technology as well. Anticipating the impact of the freebidy scheme on prices and labor supply, as well as a ‘freebie-exploiting society’, and to accommodate the environment, the percentile cut-offs is designed to roll back with wage rate, w, the inflation rate, r, the price of carbon permits, Pc, and with PLsw, the marginal bid for the issue of landfill permits to private landfill operators in an auction (a proxy for solid waste fee), and Pop, the Population:

Freebidy Percentile Cut-off, z = g(PCGDP^, RB^, w^, r, Pc^, PLsw^, Pop^),

where ‘^’ represents percent changes.

The cut-off plays an important role in separating the haves from have-nots. The latter group are supported economically with freebies - essentials are doled out up from the bottom percentiles of the household ladder, and luxuries handed free from the cut-off downwards. As income and the resource base expands from technology, knowledge enhancements, and reductions in cost of production, the standard of living and lifestyle expectations undergo revision, and more goods and services fall either in to the essential or ‘commodity’ category. Concomitantly, the percentile cut-off increases, consequent to which the ‘freebie subset’ enlarges. In recession, the logic reverses, and the cut-off percentiles fall, or equivalently, less of the freebie is available to eligible households. The intention, indeed the hope of this radical proposal, is that by offering essential or luxury goods and services free to the deserving and future consumers, the government could keep the economic juggernaut moving across recessions and depressions without resorting to patently self-deceiving macro-gimmicks. Thus distributed, economic growth is equity- enhancing; simultaneously, it enhances/preserves scale economies and permits a rationale for price discrimination while stimulating demand for luxuries and high tech products in those who likely to move out of the freebie net and turn future customers.

It doesn’t take an economist to question the financial sustainability of the proposal, or an environmentalist to question its environmental sustainability. That a ‘freebidy’ in isolation is unsustainable unless there is near limitless resource or near zero-cost, environmentally benign, production technology is well known. But this proposal does not assume either; it is designed within the confines of ‘closed finance’ so that the freebidy economy automatically limits itself to what is sustainable. In essence, the proposal is initiated, dependent and bounded by ‘macro, strategic/hedge money pots’ that nonetheless serve to allocate and bound expenditures and investments in the real world. These money pots are in the nature of funds tied to ‘economic drivers’ - Inflation, Potential GDP (Gap), Solid waste (remediation), and Product quality – that impact on the nation’s health, and which are anticipated, staked and hedged by the industry and the government. To this, one could potentially add random and non-random, natural and anthropogenic ‘phenomena’ such as wars and communal strife, or earthquakes and monsoons, which too are anticipated and hedged at the start of a new term.

Toward such a closed, sustainable financial allocation, let us first recognize the stakes and claims of the Government and the Industry. Following a win at the hustings with its plank, the Government, cognizant of its obligations to serve its citizens, aligns its monetary policies along a targeted Potential GDP which implies a certain M2 Growth and anticipated inflation rate. In a complementary move, the Industry counts on a certain amount of environmental obligation (the price (of carbon) of polluting the commons, Pc), and some permitted environmental damage (Solid Waste, implicitly translating to a prospective pot of money, SW 2key). The Industry joins the Government in accepting a ‘Service’ obligation which they split in to boom-cycle and bust-cycle 2keys. The Government, aware that the potential GDP will likely not be achieved or adhered to, and that its trend will be interrupted with booms and busts, stakes a boom-time ‘Inflation 2key Potential GDP 2key’ ‘self-interest’ card, while the Industry pursues a ‘Product Quality (PQ) Bakey Solid Waste 2key Share’ strategy. The two sides exchange their respective bakeys, ie, the Government offers to the Industry an Inflation 2key Bakey, while the Industry does not mind the Government sharing in its SW 2key Bakey. In Bust, the Industry falls back to ‘Product quality 2key SW 2key Bakey’ and the Government to its Inflation Bakey Potential GDP Gap 2key. The Government seeks the PQ 2key bakey from the Industry in return for the Potential GDP Gap 2key Bakey. These funds are then applied by the two sides toward their freebidy obligations/offers as explained below.

In the context of the reality of macro-cycle involving growth periods and recessionary phases, due which prices, inventories, and interest rates cycle up and down, it’d be appropriate, even opportune, to bifurcate the ‘freebidy’ set of goods two ways: in to Essentials and Luxury, and in to Durables and Consumables. Such categorization is consistent equity goals of the government, with the impact of the interest rate cycle on the demand for durables, the impact of interest rates on durable inventories, and of those inventories upon prices. The categorization also helps focus funds specifically to targeted families for targeted outcomes.

		BOOM				BUST
		ESSENTIAL		LUXURY		ESSENTIAL		LUXURY
		Durable	Consumable	Durable	Consumable	Durable	Consumable	Durable	Consumable
BOOM	SW 2key Bakey		Ind	Ind
	SW Bakey Share	Govt			Ind
	Inflation 2key		Govt
	Inflation Bakey				Ind
BUST	Pot GDP Gap 2key						Govt
	Pot GDP Gap Bakey							Ind
	PQ 2key								Ind
	PQ Bakey					Govt

In Boom, the Government chooses to discharge the service obligation; it applies the Service 2key to serve the indigent households down from the percentile cut-off, while the Industry is too busy minting money to care about the bakey. In this phase of the economic cycle, the Government and the Industry share their ill-gotten Inflation and SW 2key bakey with the indigent. The Government, inherently more caring for the poor than the Industry, sponsors the free issue of essential-consumables to Household below the cut-off in a bottom-up fashion until the Inflation 2key pot runs out. The Industry, always seeking to expand its business and profit from it, offers ‘luxury consumables’ as freebies to those near the ‘income-knee’ (the percentile cut-off). Between the Government and the Industry, the Inflation pot and the SW 2key bakey pot obtain some equity gains to the indigent and prospective lifestyle gains to those at the threshold of crossing the ‘poor-rich threshold’.

In Bust, the Industry takes over the obligation, and sponsors voluntary organization with the Service 2key to serve the poorest in society. The Government is too busy with its economic policy-making seeking an end of the recession, to worry about the bakey. Beyond their service obligation, the Government and the Industry switch to two other pots: the Potential GDP Gap and the Product Quality. The industry shares its PQ 2key as durable-consumable freebies with prospective consumers just below the percentile cut-off. In addition, it supports those IPOs that support the cause of product quality, energy efficiency and resource/material conservation. The Government chooses to ‘invest’ the PQ Bakey in essential durables among the poor households at the bottom of the percentile ladder. It also offers its PGDP Gap 2key to freebidize essential consumables. In all cases, the allocations by the Government/Industry between essentials and luxuries and between consumables and durables follow the proportions in which the 2key and bakey were taken by the two opposing parties.

The function ‘g’, which determines z, the critical freebidy percentile cut-off variable, and which weights the various socio-economic and demographic variables, is further calibrated in an accounting sense with the size of the various money pots involved. As technology advances, more resources are discovered, and as production turns more efficient – both cost-wise and environmentally, both Potential GDP and Product Quality money pots expand, the percentile cut-offs advance higher in to the household income distribution, and the society turns incrementally a welfare state. Conversely, if inflation rears its head, if population expands unsustainably, if there is palpable resource scarcity, or if the environment deteriorates due inefficiency in production, the percentile cut-off shrinks back, reducing the size of the freebidy pie to what is sustainable given the money pots on line.

To ensure efficiency in the allocation of freebies, the administrator of this system issues ‘Durable-‘ and ‘Consumable-Freebie points’ to the target group that, in aggregate, sum up to the available funds. These points are bankable across time, but are neither exchangeable across type of good or across recipients. The recipients of the freebie points exchange them for the various durables and consumables offered in the freebie basket, each priced in points equal the prevailing market price. This strategy, tantamount to gifting extra, albeit conditional income, preserves consumer choice, maximizes aggregate utility gain among the indigent and minimizes the efficiency and investment distortions so characteristic of subsidies. Thus designed, the freebidy proposal is efficient, closed, sustainable, and self-perpetuating.

Despite the break from traditional economic wisdom, and the overtly unsustainable incentives that it induces, the freebie economy has its advantages. First, it provides essentials for the really poor. Since a PDS is in place, it’d be straightforward to replace subsidized goods with rationed freebies. The strategy, though, is more advantageous with income-elastic luxury goods than essentials, since it permits ‘judicious’ price discrimination in the cover of cross-subsidizing of the poor by the rich, and simultaneously serves to pull the poor up through the lifestyle ladder. For good measure, the freebie economy is advantageous to ‘Bharat’ as well, for the increase in consumption among the masses would help expand margins due cost economies of scale. The ‘freebie policy’ is a rational one to adopt when technological advances turn scarcity to abundance (such as resource discoveries) without a concomitant increase in demand, or when technological advances increase the rate of obsolescence in the market. The strategy serves implicitly as a labor supply control instrument too. If blue collar wages rise unsustainably, as they do during economic booms, the freebie cut-off percentile falls, forcing those marginal households to compensate for the loss in freebies by supplying labor, thus forcing blue collar wages back down. Such strategy is particularly opportune when unemployment rises, or when wage pressures threaten to stymie economic growth. And, despite the strategic plays around solid waste, the freebie strategy serves as a conservation policy too. By offering a limited amount free, the strategy induces households to constrain their consumption to the rationed freebie. Such strategy is applicable to environmentally injurious, albeit essential consumables. In an economic downturn, the strategy keeps the industrial engine going by offering ‘luxury’ durables to households just below the percentile cut-off. The opportunity cost of freebidizing such households is mitigated, on one hand, by interest rates that are at the bottom of the economic rate cycle, and on the other by lower inventory costs (and by the fall in the price of durables with the fall in consumer demand during recessions). Implementing the ‘closed’ freebidy scheme smoothens out the demand for durables and in turn the inventory of consumer durables. The built-in incentives and dis-incentives in this proposal drive the economy to find a sweet spot that is a pareto compromise between, on one hand, equity and efficiency, and on the other between efficiency and the environment. It even obtains an implicit and endogenous rate of societal technological advance, as well as product-specific innovation and obsolescence rates. Over time, the society moves incrementally toward an environmentally, financially and even a technologically sustainable welfare state.

Now, for that word in the dictionary…

Dial M for Miracle, Right?