Policy makers use both fiscal and monetary policy to improve domestic welfare:
Fiscal policy: An example is increasing tax on the rich people who earn >$100k/y, and then redistribute it to the poor people who earn $10k/y as welfare payment (or earned income tax breaks). At a first approximation, the cost of this policy might be $100B, but the utility costs are less as of the diminishing returns to utility and the benefits are larger. This is crazy scalable—you can easily send every person a stimulus check and spend a lot of money that way. However, generally, the fiscal multiplier is small, because people can’t use capital as effectively as firms. Transfer payments multiplier are usually smaller than government spending multipliers. Money can also be spent on public goods like health or education with higher sROI, but less scalability and steeper diminishing returns.
Monetary policy: An example is printing $1T, then loaning it out to private banks at a below-market interest rate (say 0% though it could be negative). If the government would invest in an index, it could get a risk-adjusted return of 5% per year, which it is losing out of. Thus, the cost of the policy is $50B. The direct cost being distributed across the whole population due to inflation, which hits the poorest disproportionately, and thus having high cost in terms of utility. However, the fiscal multiplier of such a policy might be very high: banks are incentivized to recoup their investment and will loan to firms that succeed. The fiscal multiplier is generally higher, with higher social surplus, which creates jobs, and increases growth. Also, lower interest rates generally lower unemployment and increase wages. However, people who are not very rich only benefit slowly through trickle down effects.
Why would the state make concessional loans and lose money? Why not loan at market rates? For this would have no additionality, the state would just be another lender. These concessional loans pay for the service that banks provide to the state. What is the service? Banks find companies that will perform well, so that the state is not in the business of ‘picking winners’.
Analogously, policy makers use both aid and development finance to improve foreign welfare:
Aid: An example of UNICEF’s humanitarian aid (~$26B/y)like disaster relief in cash or in kind (e.g. food aid, short-term reconstruction relief). Or they can spend on public goods like social infrastructure and services ($65B/y) to develop the human resource potential and improve living conditions. Health aid like malaria nets is$12.9bn, $6.2bn was spent on perhaps higher leveragetechnical assistance. Half of all $180B/y in aid is spent like this.[1] But the fiscal multiplier is generally considered small (see General equilibrium effects of cash transfers).
Development finance: An example of development finance is giving out loans through development banks. For instance, the World Bank’s International Finance Corporation,[2] loans to foreign private firms and public private partnerships. Development finance institutions give out ~$50B/y.[3],[4]
Like central banks, development banks also give loans to poor countries’ governments, like the World Bank’s International Development Association, which offers concessional loans to poor countries.[5] These concessional loans have the benefit of feeling altruistic, creating strategic alliances, or spurring (global) growth.
The later (growth-friendly spending) is mostly through IMF and World Bank loans for countries that they need to pay back (analogous to impact investing), whereas aid is analogous to donating to nonprofits. The great thing about loans is that you need to pay them back with interest and so only if you’re certain you’ll create growth and a multiplier, you will take them, loans are the most direct way to subsidize business activity. They’re also very scalable. Sure you can subsidize the latest thing like chickens or therapy or whatever, but even Blattman admits money for entrepreneurs is best, so why not add skin in the game and make it a loan and go directly to the source of the problem (lack of growth)?
There is an allure to policy coherence and optimizing for several objectives at once, finding an intervention that has the best of both worlds, but it would be a suspicious convergence if the best poverty reduction methods happened to be the effective at creating growth and entrepreneurship as well. Giving directly to the poorest at scale AND having a high fiscal multiplier i.e. making people productive to create growth. The Tinbergen Rule is a basic principle of effective policy, which states that to achieve n independent policy targets you need at at least n independent policy instruments. And so people want microfinance to work at scale for poor people in poor countries, and think UBI will create many entrepreneurs and you get massive productivity at scale and a massive fiscal multiplier, but some European welfare states have de facto UBI and cuddly capitalism hasn’t created crazy growth. Not saying it’s bad for welfare reasons.
If you want anything outside this continuum, then I’d be more excited about subsidizing highly scalable, zero marginal cost (global) public goods. These could even be for entrepreneurship, like Moskovitz & Collison subsidizing Asana and Stripe Atlas for poor countries—that’d be really effective.
”the problems of the world actually will just not support giving at that scale in a super cost-effective way”
Policy makers use both fiscal and monetary policy to improve domestic welfare:
Fiscal policy: An example is increasing tax on the rich people who earn >$100k/y, and then redistribute it to the poor people who earn $10k/y as welfare payment (or earned income tax breaks). At a first approximation, the cost of this policy might be $100B, but the utility costs are less as of the diminishing returns to utility and the benefits are larger. This is crazy scalable—you can easily send every person a stimulus check and spend a lot of money that way. However, generally, the fiscal multiplier is small, because people can’t use capital as effectively as firms. Transfer payments multiplier are usually smaller than government spending multipliers. Money can also be spent on public goods like health or education with higher sROI, but less scalability and steeper diminishing returns.
Monetary policy: An example is printing $1T, then loaning it out to private banks at a below-market interest rate (say 0% though it could be negative). If the government would invest in an index, it could get a risk-adjusted return of 5% per year, which it is losing out of. Thus, the cost of the policy is $50B. The direct cost being distributed across the whole population due to inflation, which hits the poorest disproportionately, and thus having high cost in terms of utility. However, the fiscal multiplier of such a policy might be very high: banks are incentivized to recoup their investment and will loan to firms that succeed. The fiscal multiplier is generally higher, with higher social surplus, which creates jobs, and increases growth. Also, lower interest rates generally lower unemployment and increase wages. However, people who are not very rich only benefit slowly through trickle down effects.
Why would the state make concessional loans and lose money? Why not loan at market rates? For this would have no additionality, the state would just be another lender. These concessional loans pay for the service that banks provide to the state. What is the service? Banks find companies that will perform well, so that the state is not in the business of ‘picking winners’.
Analogously, policy makers use both aid and development finance to improve foreign welfare:
Aid: An example of UNICEF’s humanitarian aid (~$26B/y) like disaster relief in cash or in kind (e.g. food aid, short-term reconstruction relief). Or they can spend on public goods like social infrastructure and services ($65B/y) to develop the human resource potential and improve living conditions. Health aid like malaria nets is$12.9bn, $6.2bn was spent on perhaps higher leveragetechnical assistance. Half of all $180B/y in aid is spent like this.[1] But the fiscal multiplier is generally considered small (see General equilibrium effects of cash transfers).
Development finance: An example of development finance is giving out loans through development banks. For instance, the World Bank’s International Finance Corporation,[2] loans to foreign private firms and public private partnerships. Development finance institutions give out ~$50B/y.[3],[4]
Like central banks, development banks also give loans to poor countries’ governments, like the World Bank’s International Development Association, which offers concessional loans to poor countries.[5] These concessional loans have the benefit of feeling altruistic, creating strategic alliances, or spurring (global) growth.
The later (growth-friendly spending) is mostly through IMF and World Bank loans for countries that they need to pay back (analogous to impact investing), whereas aid is analogous to donating to nonprofits. The great thing about loans is that you need to pay them back with interest and so only if you’re certain you’ll create growth and a multiplier, you will take them, loans are the most direct way to subsidize business activity. They’re also very scalable. Sure you can subsidize the latest thing like chickens or therapy or whatever, but even Blattman admits money for entrepreneurs is best, so why not add skin in the game and make it a loan and go directly to the source of the problem (lack of growth)?
There is an allure to policy coherence and optimizing for several objectives at once, finding an intervention that has the best of both worlds, but it would be a suspicious convergence if the best poverty reduction methods happened to be the effective at creating growth and entrepreneurship as well. Giving directly to the poorest at scale AND having a high fiscal multiplier i.e. making people productive to create growth. The Tinbergen Rule is a basic principle of effective policy, which states that to achieve n independent policy targets you need at at least n independent policy instruments. And so people want microfinance to work at scale for poor people in poor countries, and think UBI will create many entrepreneurs and you get massive productivity at scale and a massive fiscal multiplier, but some European welfare states have de facto UBI and cuddly capitalism hasn’t created crazy growth. Not saying it’s bad for welfare reasons.
If you want anything outside this continuum, then I’d be more excited about subsidizing highly scalable, zero marginal cost (global) public goods. These could even be for entrepreneurship, like Moskovitz & Collison subsidizing Asana and Stripe Atlas for poor countries—that’d be really effective.