18 Oct 2014

An open letter to my colleague Jean Tirole - the new nobel prize winner in Economics

Mon Cher Jean,

First, can I congratulate you on your Nobel prize in Economics. We are all very proud in France, and particularly in Toulouse, that you have received this most prestigious of honours.

As a colleague, and the director of another lab in Toulouse (the Brain and Cognition Research Centre, or CerCo) we have already met on a number of occasions, and I would be very happy to met up again in the near future. I know that you are a very pleasant person, very affable, and clearly one of France's most brilliant minds.

I've just listened to you on the Saturday morning Economics program on  France Inter "On n'arrête pas l'eco". You were asked what would be your four highest priorities to help the French government overcome the current debt crisis and to get the French economy back on track. Your recommendations were (i) reforming the "marché du travail" - the regulations controlling employment (presumably making it easier to hire and fire workers), (ii) reforming the pensions systems (by increasing the duration that people are forced to work in order to cover the costs of the system),  and (iii) reforming government to simplify and reduce the role of the state.  (You apparently didn't have a fourth proposition - it would seem that those three should be enough).

Sorry Jean. Much as I respect your contributions to Economic Theory, there is not much that is new there. It's the same neoliberal story that we all hear day in, day out. Remove restrictions on employment, force people to work longer, and reduce the role of the public sector, and everything will turn out fine. If I was to believe you, it will be possible to solve the debt crisis by a combination of austerity and liberalisation. Sorry, I'm afraid I don't believe you. Is that really the best that one of the most brilliant minds in economics can come up with? Isn't that just pure 100% orthodoxy??

So, how about trying something truly innovative? Can you be sure that we have exhausted all the options?

I would be very happy if you could tell me what is wrong with the following proposal.

For some time I've been pushing the idea that Central Banks such as the European Central Bank could introduce a small flat rate transaction tax on all electronic financial transactions in their currency, wherever they occur in the world. Anyone, anywhere in the world, who wanted to make transactions using Euros, would be legally obliged to pay the transaction tax. I would pay it when my salary from the CNRS arrives on my account. You would pay it when you receive your Nobel prize (if it was paid in Euros). I would pay it when I pay my electricity bill, when I use a credit card - indeed, whenever I or anyone else uses the Euro money system.

If I choose to use Sterling, I would make a payment to the Bank of England at the rate specified by the Bank of England. If I use Swiss Francs, I would pay a small fee to the Swiss Central Bank, and so forth.

Critically, everyone would pay. Citizens like you and me. But also businesses. And, of course, the transaction fee would also be paid by the financial markets who are using our money for literally millions (billions?) of transactions every day. 

The sort of fee that I'm talking about could be absolutely tiny - literally  a fraction of a percent. Perhaps one hundreth of the transaction fees currently charged by Credit Card companies such as Visa, MasterCard and American Express every time you and I use their services. Remember that while you may think that it costs you the same to pay with your credit card as when you pay cash, the merchant will often have been forced to pay between 2 and 4%. And obviously, we all end up paying more because of those charges, whether you use your credit card or cash.

And don't forget that, in addition to a 4% merchant fee, the vast majority of credit cards will also slap on an additional 2.5% or even 2.99% "International charge" when you use your credit card abroad. That fee is simply for multiplying the amount in the local currency by the current exchange rate. So, we all currently pay up to 7% in "Financial Transaction Taxes" to the banking system - everytime you or I go to London and buy a meal in a restaurant. I'm proposing something that could well be less than 0.1% - an amount that is almost insignficant when compared with the sorts of fees that the banking system currently imposes on every one of us.

The only difference is that instead of the transaction tax going to pay the bonuses for those in the financial sector, the transaction tax could be used to finance other more useful projects.

With a minimum of $10 quadrillion in global transactions every year, a tax of just 0.1% could logically generate as much as $10 trillion in revenue. As I pointed out a couple of weeks ago, the correct value for transactions is certainly a lot higher than $10 quadrillion, because major players like the Options Clearing Corportation ($12-16 quadrillion?), the Chicago Mercantile Exchange (also doing roughly a quadrillion per year), and LCH ClearNet Ltd are not even mentioned in the current "official" BIS figures.

So, let's conservatively assume that the tax  could raise at least $10 trillion globally. What could you do with that?

Well, my favorite  proposition is that the money should be directly handed out to citizens in the form of a basic unconditional income. Each Central Bank could simply create an account for all the citizens living in their region, and simply add some amount to that account every month, depending on the amount that has been raised. There would be no conditions attached. You would be paid whether you are working or not, employed or retired.

Note that I'm not proposing the that Central Bank would provide any real banking services, because the only thing that a citizen could do with the money on their account would be to transfer it to a normal high street account. Indeed, they would have to transfer the money to be able to use it. The Central Bank would also not be in the business of making loans - and you could never be negative on your Central Bank account - it would simply be impossible.  In passing, let's note that this would be an absolutely guaranteed place to leave your money - thus removing any need for government guarantees on bank deposits.  It would not earn any interest (you would need to move it to a commercial bank) - providing a useful risk free place for people to keep their savings if they wanted. By definition, a Central Bank could never go bust. People who decide to move their savings to an interest bearing commercial bank account would be forced to acknowledge that they were taking a risk.

Let's assume that the Euros contribution to world trading is 20% (this is guess work, since the actual numbers are unknown, although transactions in just five of the Eurozone countries in 2013 exceeded €2 quadrillion  (that's a 2 with fifteen zeros after it). I would guess that the ECB could reasonably raise close to €2 trillion a year by imposing an extremely modest 0.1% fee on Euro denominated transactions. With a total population within the Eurozone of 330 million, this would mean direct payments of around €6000 per person for every man, woman and child within the Eurozone. That's €24,000 for a family of four. Not bad...

What! I hear you say. You can't give people money for doing nothing! That would be unfair. Why would they bother going out to work?

Well, there are lots of reasons. There are large numbers of people in our current societies that receive millions for doing nothing in the form of inherited wealth. That doesn't seem to upset the neoliberals who claim that only people who work hard should get any money.

Furthermore, the €24000 that a family of four could be given per year might be just enough to get by on, for families living modestly, and in a part of the eurozone that was not too expensive. It would provide a decent minimum lifestyle - no frills. And would eliminate poverty at a stroke.

It would also remove the need for endless means tested state aids for housing, transport and so forth. Currently, those benefits are often only paid to people who are unemployed, making them less interested in going out to work. And it literally costs a fortune to employ an army of civil servants to check that the people on benefits are actively seeking work. All that waste of resources could be ended overnight.

These are all arguments that have been well documented by those people who have been lobbying for a Basic Income for years.

But there are a couple of arguments for such a scheme that I have not heard, and which ought to convince even the most ardant admirers of the free markets (like yourself?)

First of all, consider what would happen if a family of four really did have an guaranteed income of €24,000  a year. How much would an employer have to pay the head of the family for him (or her) to want to go out and work? Well, it would certainly have to be worth their while. They would have no obligation to work just to put food on the table. But they might well be highly motivated to work a bit to increase that €24,000 to (say) €30,000. In other words, even €6000 might be enough to make a difference. And yet €6000 is a mere €500 a month - a pittence compared with the full cost of housing and feeding a family of four.

It seems obvious that providing an unconditional basic income would mean that businesses could actually reduce wages considerably. It would even act as an indirect subsidy for businesses, because they could provide an attractive salary for far less than is currently needed. Today, businesses are effectively obliged to pay salaries that would be attractive for a breadwinner trying to cater for a family of four. They cannot decide to pay people more because they have a family than they would to a single 21-year old living at home with their parents. The result is that governments are required to make endless top-up payments and tax breaks to bias the system in favour of families.

Recently, the French government decided to give something like €40 billion in tax breaks and subsidies to industry - "la pacte de responsablité". Businesses are supposed to reciprocate by taking on more workers. But there is no requirement for them to do anything. And many people in France are thoroughly depressed by the current governments desire to "aimer l'entreprise" with no strings attached.

Likewise, the French government hands out billions in "Credit Impot Recherche" annually - again with virtually no controls whatsover. Why not provide the same boost to industry, but do it by simply making it cheaper to employ people - i.e. via an unconditional basic income?

Under the current system, our governments pump billions into the social security and benefits system. But that expenditure does absolutely nothing to help productivity of French industry. It merely prevents unemployed people from starving to death. Provide the same money in the form of an unconditional basic income and Renault would be able to produce cars cheaper in France than they could elsewhere. Surely, that has to be good news?

Providing a basic unconditional income would thus make it far cheaper to employ people - thus reducing costs, and making industry more competitive. The same thing would happen if the state provided free public transport - it would mean that workers could get to work more cheaply, again meaning that wage costs could be reduced without making workers lives miserable. But the use of an unconditional basic income financed by a microscopic financial transaction tax would be so much simpler.

But there is a second massive advantage. And it's one that would probably appeal to even the most extreme right wing groups, obsessed with the need to kerb illegal immigration. In the UK, the numbers of jobs in the economy has been increasing, and yet the actual earnings of workers has been declining with respect to inflation. What's going on? Well, one explanation is that with large scale illegal immigration in the UK, workers can easily be undercut by some illegal immigrant who would be prepared to work for next to nothing and with little or no job security. And the increasing numbers of people who are prepared to vote UKIP (in the UK) or Front National (in France) is clear evidence that this is becoming a serious problem.

Consider what would happen if a legitimate family of four really did get €24,000 a year of unconditional basic income directly from the ECB (or the Bank of England in the case of hte UK) - it would simply be their fair share of the money raised by the FTT imposed by the Bank on Euro-denominated transactions across the globe. The bread-winner of such a family might indeed be prepared to work to earn an extra €500 a month in order to increase the family's income to €30,000 a year. But an illegal immigrant, with no unconditional income, would have to work for less than €500 a month to undercut the local worker. It simply would not be doable, because whereas the illegal immigrant on €500 could not afford to live - whereas the family of four on €24,000 plus €6000 could live decently.

Hopefully you can see that the idea of giving all bonafida citizens an unconditional income would not only give a major boost to industry, but it would, at a stroke, also make it virtually impossible for local workers to be forced out of employment by being undercut by illegal clandistine immigrants.  Of course, the country would still have the option of giving real refugees citizen status, thus allowing them to also obtain the unconditional basic income.  But the hundreds of illegal immigrants trying to hide on lorries crossing the channel to the UK in the hope of being able to earn a living wage would be a thing of the past. Without the official status of a citizen, it would no longer be possible to survive reasonably - thus eliminating much of the pressure from illegal immigrants.

Exactly the same thing would apply to the thousands of Africans that risk their lives to cross over to the European mainland in the home of being able to scratch a better living than they could at home.

Of course, theres a even better way of convincing all those desperate migrant workers to stay at home. And that would be to give them a (very modest) unconditional basic income in their home countries. A few dollars a month would allow many Africans to live far better in their home countries than they could by joining the ranks of illegal clandestine workers in some other country where they would  not only lose their unconditional income, but  be forced to compete with locals who were being paid their local basic income and could survive on far less.

Now, don't get me wrong. I'm far from sharing the anti-immigrant positions proned by extreme right wing parties across Europe. But my solution would indeed take the wind out their sails.

So, Jean. Sorry, it's been a rather long message. But I just wanted to sketch one of a large number of alternatives that simply never gets discussed - either in the media, or among professional economists like yourself (and there are plenty more non conventional ideas on the 770 plus pages of my blog if you ever find yourself with time on your hands!). Don't you think that there would be a good case for having a look at some of the more interesting alternatives to the sort of neoliberal austerity based economics that you currentlu seem to favour?

If you have a few spare hours in the coming months, I would be very happy to come and talk with you about some of these ideas. I'm convinced that we might well be able to come up with something that could literally change the world.

With very best wishes

Simon Thorpe
Directeur de Recherches CNRS
Director of the Brain and Cognition Research Center
Amateur Economist


  1. Please, could you elaborate on the sentence "They cannot decide to pay people more because they have a family than they would to a single 21-year old living at home with their parents. " I don't understand it.

  2. Manuel, imagine that you are an employer with two employees. One is a 21-year old living at home with his parents. The other is 45 years old, has a wife and two children to support. Are you allowed to say that I will pay the older person more than the 21 year old?

    If you are living in a similar place to me, the answer is no. It would be illegal to pay people different amounts for doing the same work. In the same way, it would be illegal for you to pay a man more than a woman for doing the same work (quite right too!)

    But suppose that, in addition to the money that you pay them for doing the work, the 45 year old with a family of four got 4 x €500 = €2000 a month as an unconditional basic income, whereas the 21 year old only got €500, wouldn't that solve your problem. You could pay both of them a modest amount (say €1000 a month) and everyone would be happy. You would be paying €2000 a month, the 45 year old would be getting €3000 a month, and the 21 year old would be getting €1500 a month.

    Under the current system, if you want the 45 year old to be able to support his family, you have to pay him €3000 a month, and you have to pay the 21 year old €3000 too. That's €6000 a month. You would be unable to compete with labour costs in China (for example), where wage costs could be only €2000.

    The alternative is that you pay both your workers €1500 a month (€3000 in total for you), and that the taxpayer has to find an additional €1500 a month to top up the income of the family breadwinner so that they can afford to live. That's effectively the system that we have in many western countries. And of course, it gets a lot of people very angry - why should my taxes go to pay for their houseing costs, etc. etc.

    For me, having a Unconditional Basic Income of €500 per personne is infinitely more intelligent.

  3. Simon, the sentence puzzled me because I did not realize that you had elided the word "pay" in "... than they would (pay) to a single 21-year old ..." In any case, your long and detailed answer is beautiful. ¡Gracias!

  4. Simon, here you have both versions, English and Spanish:

    Good work!

  5. Wow - thanks Manuel. It looks very impressive in Spanish. I wonder if Jean Tirole reads Spanish?

  6. Ah, I see the problem. But actually I was very happy to be able to spell things out clearly. It really does seem to make sense, doesn't it!

  7. Hello Simon

    If you want to explain the basic income to a follower of economic liberalism theorist you must serve him with Milton Friedman and possibly offer him to watch this video which presents the principle of negative income tax



  8. In theories on
    economic liberalism, there is the school of Chicago on the one hand
    and another Austrian school defended by libertarians. Here is an
    article which argues for the setting up of a basic incomes http://www.libertarianism.org/columns/libertarian-case-basic-income#LSJHAW:Sg2

  9. Voda - thanks! Fascinating video.

    For me, Friedman's Negative Income tax (which is not a bad idea at all), is functionally exactly the same as giving everyone an Unconditional Basic Income, and taxing it. Get rid of the $3000 threshold for taxation used in the Video, and treat all income in the same way.

    I could note in addition that, if you follow other bits of my blog, you will know that I am in favour of scrapping income tax altogether and replacing the whole taxation system by a flat rate financial transaction tax. In other words, you get (say) €500 per month per person, and any additional income you can make you keep!! You can't get much more liberal than that!

    Cheers, Simon