THE concept of a universal basic income (UBI), an unconditional cash payment to all citizens, has in recent years captured the imagination of a wide spectrum of people, from leftist activists to libertarian Silicon Valley techies. Proponents see a neat solution to poverty and the challenges of automation; detractors argue it would remove the incentive to work. Trials of UBI have been launched, or are about to be, in several countries. Most are publicly funded, although Y Combinator, a Silicon Valley startup accelerator, is starting a privately funded experiment in America.
Finland was one of the first movers. In January 2017 it began a trial for 2,000 people, each receiving €560 ($680) a month. That drew legions of foreign journalists and camera crews. This week, however, international media attention abruptly centred on the ending of the experiment in December 2018. Headlines suggested that it had been “scrapped” or had “failed”. The truth is more nuanced.
The trial was always due to finish after two years, although Kela, Finland’s national welfare body, which was responsible for the experiment, had hoped to expand it (it was denied funding in January). The scheme was also more limited than the hype suggested; it was not a truly universal benefit, because all the recipients were chosen from among the unemployed. And the trial is not ending because of failure. Indeed, Kela has refused to publish any results until it is finished, for privacy reasons and to avoid biasing outcomes. The government simply has other priorities. In particular, it has decided to adopt Danish-style active labour-market policies.
More important, the UBI trial was always as much about the principle of policy experimentation as it was about the outcome. As Heikki Hiilamo of Helsinki University points out, Finland has tested policies before, such as a “full employment” trial which sought to provide a salaried job for every unemployed person in the small town of Paltamo. And the country is still keen on novelty. After the UBI trial, the government is planning to test a universal credit system.
In its desire to try new policies on a small scale, Finland is no different from many other countries. A study in five Dutch municipalities, billed by some as a basic-income trial, is in fact mainly focused on testing various options for unemployment benefits, dividing participants into three groups. (To be fair, one of these was supposed to receive something much more like a UBI before changes imposed by the national government.)
For all the hype around UBI, surprisingly few are using the most rigorous research approach—a randomised control trial. Y Combinator’s plan in America, as well as an experiment in Kenya run by GiveDirectly, a non-profit organisation, are exceptions. In the Kenyan project, 300 villages were assigned to four groups. In one, villagers get a UBI for 12 years; in the second, for two; in the third, they get a lump sum; the fourth is a control group. But all these trials are just getting started, and none has released results yet.
Meanwhile, other basic-income trials are going ahead. On April 24th the provincial government of Ontario said that it had successfully finished the enrolment phase of its UBI study, which has more than 4,000 participants in four towns. And in Scotland, four local authorities, including Glasgow and Edinburgh, are busy hashing out pilot projects to implement a basic income. Whatever the results of Finland’s trial, a definitive answer on how UBI actually affects citizens’ long-term behaviour is still many years away.
Japan still has great influence on global financial markets
IT IS the summer of 1979 and Harry “Rabbit” Angstrom, the everyman-hero of John Updike’s series of novels, is running a car showroom in Brewer, Pennsylvania. There is a pervasive mood of decline. Local textile mills have closed. Gas prices are soaring. No one wants the traded-in, Detroit-made cars clogging the lot. Yet Rabbit is serene. His is a Toyota franchise. So his cars have the best mileage and lowest servicing costs. When you buy one, he tells his customers, you are turning your dollars into yen.
“Rabbit is Rich” evokes the time when America was first unnerved by the rise of a rival economic power. Japan had taken leadership from America in a succession of industries, including textiles, consumer electronics and steel. It was threatening to topple the car industry, too. Today Japan’s economic position is much reduced. It has lost its place as the world’s second-largest economy (and primary target of American trade hawks) to China. Yet in one regard, its sway still holds.
This week the board of the Bank of Japan (BoJ) voted to leave its monetary policy broadly unchanged. But leading up to its policy meeting, rumours that it might make a substantial change caused a few jitters in global bond markets. The anxiety was justified. A sudden change of tack by the BoJ would be felt far beyond Japan’s shores.
One reason is that Japan’s influence on global asset markets has kept growing as decades of the country’s surplus savings have piled up. Japan’s net foreign assets—what its residents own abroad minus what they owe to foreigners—have risen to around $3trn, or 60% of the country’s annual GDP (see top chart).
But it is also a consequence of very loose monetary policy. The BoJ has deployed an arsenal of special measures to battle Japan’s persistently low inflation. Its benchmark interest rate is negative (-0.1%). It is committed to purchasing ¥80trn ($715bn) of government bonds each year with the aim of keeping Japan’s ten-year bond yield around zero. And it is buying baskets of Japan’s leading stocks to the tune of ¥6trn a year.
Tokyo storm warning
These measures, once unorthodox but now familiar, have pushed Japan’s banks, insurance firms and ordinary savers into buying foreign stocks and bonds that offer better returns than they can get at home. Indeed, Japanese investors have loaded up on short-term foreign debt to enable them to buy even more. Holdings of foreign assets in Japan rose from 111% of GDP in 2010 to 185% in 2017 (see bottom chart). The impact of capital outflows is evident in currency markets. The yen is cheap. On The Economist’s Big Mac index, a gauge based on burger prices, it is the most undervalued of any major currency.
Investors from Japan have also kept a lid on bond yields in the rich world. They own almost a tenth of the sovereign bonds issued by France, for instance, and more than 15% of those issued by Australia and Sweden, according to analysts at J.P. Morgan. Japanese insurance companies own lots of corporate bonds in America, although this year the rising cost of hedging dollars has caused a switch into European corporate bonds. The value of Japan’s holdings of foreign equities has tripled since 2012. They now make up almost a fifth of its overseas assets.
What happens in Japan thus matters a great deal to an array of global asset prices. A meaningful shift in monetary policy would probably have a dramatic effect. It is not natural for Japan to be the cheapest place to buy a Big Mac, a latté or an iPad, says Kit Juckes of Société Générale. The yen would surge. A retreat from special measures by the BoJ would be a signal that the era of quantitative easing was truly ending. Broader market turbulence would be likely. Yet a corollary is that as long as the BoJ maintains its current policies—and it seems minded to do so for a while—it will continue to be a prop to global asset prices.
Rabbit’s sales patter seemed to have a similar foundation. Anyone sceptical of his mileage figures would be referred to the April issue of Consumer Reports. Yet one part of his spiel proved suspect. The dollar, which he thought was decaying in 1979, was actually about to revive. This recovery owed a lot to a big increase in interest rates by the Federal Reserve. It was also, in part, made in Japan. In 1980 Japan liberalised its capital account. Its investors began selling yen to buy dollars. The shopping spree for foreign assets that started then has yet to cease.
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