Izabella Kaminska on Blockchain Technology and the Economics of Star Trek

Opening the door to universal banking by central banks could undermine incentives and intensify liquidity risks.

Izabella Kaminska is a writer for the Financial Times and its blog, Alphaville; and formerly worked as a producer at CNBC, a natural gas reporter at Platts and was an associate editor of BP's internal magazine. Izabella has written extensively on monetary policy, fiscal policy, financial technology, and a number of other areas. Izabella joins David on the podcast to discuss her work on blockchain technology as well as current proposals on monetary and fiscal policy. Finally, Izabella and David, who are both big sci-fi fans, talk about economics in the Star Trek and Star Wars sagas.

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Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

David Beckworth: Izzy, welcome to the show.

Izabella Kaminska: It's very nice to be here. Thanks for having me.

Beckworth: Oh, glad to have you on. We follow your work and it's a real treat to have you in for our conversation.

Beckworth: I want to begin and ask how did you get into financial journalism? What was the path that led you to this destination?

Kaminska: That's an interesting question. I am generally just very curious. I was always very very curious about a lot of things. I wanted a big book to land somewhere in front of me with all the answers, so I knew I had to do something for a career that has information retrieval within it. For a while I thought maybe I would be a police officer or some sort of agent, sort of follow that route.

Beckworth: Really?

Kaminska: But I also discovered that I have another personality trait that doesn't really support that line of career, that professional line, insomuch as I'm not very discreet. I tend to broadcast everything I ever encounter, so that made me perfectly suited for journalism. I also, in terms of financial journalism, I really wanted to just be a general news reporter. I styled myself on Kate Adie or someone like that. She was my hero when I was young.

Beckworth: Okay.

Kaminska: But those jobs were really scarce when I was coming out of university, and there were a lot of finance jobs for some reason. So I figured ... First of all I was just curious about it anyway, and I just figured a finance journalist can always become a general news journalist, but it's not so easy the other way around. So I ended up, just through that sort of job market issue, researching more and more about finance. I was always interested in economies and how stuff works. It kind of ended up suiting me very well.

Beckworth: What is it like working at the Financial Times? You're with the blog there, the FT Alphaville, a premier blog. I mean, it's read by many people around the world. Does your office, and do you and your colleagues interact with the rest of the FT ville? Are you guys kind of isolated in your own little world? How does it work there?

Kaminska: We're speaking on the phone now in the office, and I'm sitting on the Alphaville desk hub area. We speak to ourselves on our own internal chat, and a lot of the ideas that we have for posts are cultivated through this internal chat, through knowledge sharing, et cetera. We are slightly segregated from the rest of the newsroom, but we are right within it, so insomuch as I'm sitting right next to the commodities desk, the markets desk. But we interact on a more casual basis with them and they operate to their own financial sch- ... Their own editorial schedule and we do our own thing, so that's how it works. But we interact…

Beckworth: Okay.

Kaminska: ... By the water cooler, et cetera.

Beckworth: I was going to ask that very question. You're walking to the water cooler, do you see Martin Wolf there and say, "Hey Martin, what's happening?" Is that what happens?

Kaminska: Oh yeah, yes. That happens all the time. People come in and out of the office all the time. Just today John David was here. We had a long chat talking about Elon Musk and Tesla and all sorts of stuff like that. I think that's what makes it such a great place to work, is that you never know who you might bump into and who you can press for ideas. I think there's a real collegiate atmosphere here, which is nice. It's in the name of getting the good ideas out there, so I think it's a great place to work. I love it.

Beckworth: That sounds amazing. That's a really rich, fertile environment for intellectual curiosity to be developed.

Kaminska: Yes. For sure.

Beckworth: That's a rewarding work environment to be in, no doubt.

Beckworth: Let's move on to some topics that you've covered, and you've done a lot of coverage with your work at the FT. I want to begin with one that I think you've been on a lot lately and over several years, and that is blockchain technology and what does it mean for the future of banking, the payment system. Let's begin by going over what exactly is blockchain technology, and then we'll work our way through the issues.

What is Blockchain Technology?

Kaminska: What is blockchain technology? That is a really good question because I think nobody really knows the answer. You've got to understand, I'm not a technologist per se and my job as journalist is really just to scrutinize things, and I feel that in some areas people just don't acquire any of that critical thinking anymore. A lot of the story concepts I come up with are just based on being logical and on trying to scrutinize the sort of things that other people are not scrutinizing. And I'm very interested in wordplay and linguistics and really my academic background stems from historical analysis, and I did a journalism master's so I'm very interested in how media and communication work in general in terms of creating popular movements or ideas. So I look at it from a ... Not to go all Marshall McLuhan-y, but I see it from that perspective.

Kaminska: A lot of the blockchain stuff I think is based on media management and the need for innovation at banks, and banks desperately needing to look like they are being progressive and innovative. Blockchain has come along at the right time, at the right place, and now it's been hijacked by the banking community and in that sense taken out of all context because it's no more what it really ... I mean, how it started off was obviously as the technology that powered Bitcoin. But in terms of how the banks have approached it, they've stripped off all the real innovation in it and they've changed it and morphed it very much into a system that fits their agenda and in so doing I would argue stripped out all the innovation out of it.

Kaminska: I think that's the interesting thing about blockchain. And so then, what is blockchain? It's ... I can't answer that because it's either a distributive ledger, it's a permissions-

Beckworth: Yeah.

Kaminska: ... database, it's ... I mean, there's so many different-

Beckworth: Well, let's-

Kaminska: ... incarnations of it. It's hard to know.

Beckworth: Let's go maybe real simple, basic understanding for our listeners. You correct me. My understanding is blockchain was originally used with Bitcoin, and maybe at a very basic level is, there's this ledger. You really don't need an intermediary like a bank anymore. There's this public ledger that's checked by other individuals electronically through their computers, and so transactions can happen in real time through this public ledger which kind of removes a middle man of sorts, and it's done automatically. Is that the idea behind the blockchain, the basic idea?

Kaminska: What you're describing is very much the Bitcoin blockchain.

Beckworth: Okay.

Kaminska: And it's very important to distance that from the blockchain as it's being deployed by the commercial banks. The original concept was the blockchain that powered Bitcoin, and this was a combination I would say of three technologies which had been around for many years. It was just how they came together.

Kaminska: One of those was PGP ... Or not PGP, but encryption generally speaking. Then there was this idea of proof of work and hash functions being used in cryptographic puzzles, et cetera, to manage how resources are shared in that area. And then the last one is the sort of Merkle tree concept. Now I'm not a technologist by any stretch of the imagination, but that's how it's been explained to me.

Kaminska: Now, Merkle trees are sort of just the layering of one thing into the other and how it's distributed to ensure that you can have version control sometimes. And then there's other ... I mean, that's probably a terrible miscasting of what it really is, but there's all these different technologies. And then how it came together was really what was interesting about it, but when you take it to ... Well, before I go on to the banks, another key component was how the information was shared. Obviously anyone can move into the Bitcoin mining world because it's an open protocol. You download the protocol and you can contribute what they call Hashing powers to the network, and that was what was quite innovative about it because really it's a kind of escrow system. If you commit energy, and the work, you get to be part of the club. But it's the committed energy that also is the critical thing that keeps it honest, and by definition that has to be expensive because if it wasn't expensive it would be corruptible.

Kaminska: The banks don't like that because they don't want something that's capital-intensive. They want to strip that out. But by doing so they kind of completely collapsed the whole raison d'être of the blockchain. That's why I'm a bit cynical about it.

Beckworth: So it has a lot of potential but you're worried the big banks are shaping it in a direction where it loses some of the initial beauty and appeal and efficiencies that it had.

Kaminska: Well, it was never efficient. It was designed to not be efficient.

Beckworth: Okay.

Kaminska: That's the whole thing about the Bitcoin blockchain-

Beckworth: Intensive, right. Okay.

Kaminska: ... is that it doubles up on all this work, so rather than having a central ledger or someone you trust doing all this verification stuff, you've got an entire community crunching the same data across the network and on top of that committing power to solving a puzzle just to show that they have skin in the game and that they're not going to corrupt the network. So it's hugely inefficient. I would actually say it's a luxury product, in the Bitcoin sense of the word. That's why it has such a problem with scaling and why they're really encountering problems here, because once you account for all the hidden subsidies it is not a cheap system at all. To the contrary, it needs continuous capital influx to keep it propped up.

Kaminska: Now the banks obviously come along and they're like, "Well, we like this idea that it solves the trust issue but we don't want to commit capital. God forbid we add more capital constraints to our own business models." They want to have their cake and eat it, and this is where the interesting stuff is happening now because as they realize that the critical part of the blockchain is this commitment of capital, the whole thing is spiraling back to a kind of ... They're doing a 360. We're basically calling OTC markets distributed blockchains.

Beckworth: Interesting. I went to a conference recently where they discussed this. Maybe it was more Bitcoin that they were talking about, but they stressed the distribution of use. In developing parts of the world, Africa, it's extensively used as a medium of exchange, as money, whereas in the west, in the US, maybe in Europe, it's used more for speculative purposes. I'd wonder if you had any thoughts on that. Is it actually being used in different regions for different purposes?

Uses of Bitcoin in Practice

Kaminska: I think it's being used predominantly in a speculative mode.

Beckworth: Okay.

Kaminska: It's predominantly for the facilitation of illegal dark market exchange. So drugs et cetera, whatever. Where it is being used in the Third World, or the developing countries, I'm not convinced it's really doing all that much good as yet because A) it's not cheap, there's no liquidity. The cost rates are the issue. It's all very well once you're in the system, it's cheap, but even then it's not really cheap because it's being subsidized by someone else. But the issue is, say you're using it in Nigeria. Well the Nigeria Bitcoin exchange is not very liquid. It's got one-way flow. There's more people wanting to draw dollars out of the Bitcoin system than there are people wanting to put Nigerian naira value into it. Or rather the other way around. There's natural asymmetries in the flows and that doesn't go away just because it's Bitcoin.

Kaminska: So until you get an environment where every single retailer is using Bitcoin I don't think it necessarily helps anyone in the developing countries because you still have to exchange out of it for real currency if you want to use it anywhere in the real world. I think that ... There have been studies there, and the entry/exit costs of going in and out of the system are really really high. Much higher than swapping FX. Say you swapped the naira for dollar because you want the improved liquidity of the dollar, it gives you better purchasing power abroad. That's much more beneficial to you than having Bitcoin.

Beckworth: Okay. Well, that's a very sobering message on blockchain.

Beckworth: Let's move to another potentially sobering topic. You've written on it, and that's the question of universal banking, the central banks, and the idea being that the central banks balance sheet is becoming more and more open to different firms and potentially even individuals. I want to begin by reading an excerpt from a blog post by JP Koning who's over there on your side of the Atlantic. A really fascinating post about the Bank of England. It's a quick paragraph here.

Beckworth: This is dated August 10, 2016, the post. And the title of the post is, "Central Bank Deposits for You and Me." And this is how it reads: "The Bank of England recently announced that it will end a 300-year tradition of allowing employees to keep checking accounts at the Bank."

Beckworth: And he goes and he gives an example. Jump down to the next line. "The Bank of England's termination of this seemingly archaic practice is especially interesting in the context of growing efforts to crack open central bank balance sheets to those who have traditionally been hived off from them. A concrete step in this direction is the Federal Reserve's overnight reverse repurchase facility, which allows money market mutual funds to hold overnight balances at the Fed. More ambitious is the Bank of England's Ben Broadbent, who discusses some of the ideas."

Beckworth: Ben goes on to talk about maybe one day everyone will have access to it. Recently your newspaper published an article that noted that the Federal Reserve Bank of Chicago has authorized three of the US's largest clearing houses to open account at the central bank. So it's not just the reverse repo arrangement, it's also some of these derivative houses who can now have their own accounts at the Fed. So there is this kind of movement in that direction, and you've written about this. What are your thoughts on the matter?

Opening Access to the Fed’s Balance Sheet

Kaminska: I think this is a really big story and I think it's actually integral to what's going on at the moment. I've changed my opinion about all of this. Whereas I was originally quite an advocate of the idea and I thought, "Oh yes, this mechanism can definitely solve a lot of the problems we have like the scarcity of safe assets, or it would help everyone have par value protection." You wouldn't necessarily ... It could facilitate insured deposit schemes that are more viable and centrally supervised. That was my thinking before, but now I've ... Because I like to continuously contradict myself. I now come to worry about the repercussions of that, and I worry about whether or not we are overlooking the capacity of such a system to go down what I call the Gosbank road.

Kaminska: Obviously we have a very good historical example of a very centralized banking universe in the Soviet Union. Even in China there was ... China could arguably also be used as an example here, but I'm more interested in the Russian one. It didn't end well because it turns out that there's a reason why we diversify this stuff and why we want private institutions involved in the intermediation game.

Kaminska: My biggest concern on that front is how the central bank would manage what we refer to as the flow problem, because that's not going to go away. That will get larger if you expand the balance sheet to everybody. I also worry whether or not it would self-sabotage the entire bank reserve system because ... And you see this already happening, I would argue. Are bank reserves really the most special unit of final settlement in the economy? I'm not convinced they are. I am actually of the opinion that it looks like increasingly that it's scarce assets, or those T-Bills or whatever, that are really accepted by the economy for final settlement.

Kaminska: If that's the case ... I mean, we see all these sort of reverse repos, et cetera et cetera. You've got to question is the central bank lending bank reserve or is it actually lending scarce assets? And if it's lending scarce assets and it can't control the supply of those, well then the bound has nothing to do with the Zero Low Bound or anything to do with the central bank's capacity to make more or less money available. The bound is fiscal and the central bank is kind of a, I would say, a redundant agent in that model.

Beckworth: Some of the reas-

Kaminska: Does that make sense?

Beckworth: Yeah, it is. I want to go back to s- ... Maybe until that and work our way through that. You mentioned a few minutes ago in that discussion that one of the reasons people have ... Maybe the key reason people have been advocating for this is it's one way to prevent bank runs, right?

Kaminska: Mm-hmm (affirmative).

Beckworth: You mentioned the par value. What that means is, right now if there's a run on a bank ... Now there were no runs on commercial banks, retail-level banking, during the 2008-2009 crisis, but there was a run on the shadow banking system. The argument is look, one way to provide the same kind of protection that retail banks have in the institutional levels, just open up the Fed's balance sheet. That's fiat money. They produce the fiat money no problem. That's kind of the argument, I guess, that has been made in favor of that.

Beckworth: And then there's been actual concrete steps in that direction. Money market funds can now have access to the balance sheet. The derivative house, as I mentioned earlier. But one of the concerns I've had moving that direction, even though I see in some ways it's ... I don't say it's inevitable but I do see it's inching closer toward that, but one of the concerns I have is the whole process of financial intermediation. It's not clear to me if every bank became a branch office of the Federal Reserve of the United States, what would be the incentives for the local branches to provide intermediation at a reasonable level without ... You mentioned the Soviet Union. I don't want to go to that extreme, but I can definitely see some incentive problems if we had branch Federal Reserve banks and if they crowded out regular private banks. Now you're-

Kaminska: Completely.

Beckworth: Yeah.

Kaminska: I agree, and that's my big concern.

Beckworth: Yeah. You also mentioned you think the ultimate settlement of account isn't the actual dollar itself, it's going to be some other asset.

Kaminska: I think that if you move to this model, the markets will adjust their expectations because if bank reserves were available on tap and if there is sort of ... Which is exactly what would happen in a, weirdly enough, in a blockchain world, in a real pound query settlement world. You have to have ample liquidity available all the time or else the system has a systemic collapse if there's any kind of gridlock in it anywhere. You have to have continuous flow. But then none of that actually guarantees that the assets underpinning all that liquidity are productive assets or being allocated correctly, which is where I see the Gosbank's parallels.

Beckworth: Okay.

Kaminska: I think from my position ... I mean, I'm just speculating here, but my concern is that ultimately if you open the door to universal banking by central banks, not only does it skew the incentives, it kind of creates liquidity issues of a new order which were unseen until it becomes clear. For example, long term patient capital is very scarce, yet we have a capital glut. Those two situations, I would say the flip sides of the same coin, and it's a result of the fact that just because you're guaranteeing liquidity today doesn't solve your capital allocation problems for the long term. So it's a bit ... I don't know if that makes any sense, where I'm going with that, but it's very different to have ample short term liquidity access and long term capital access. The two are not the same.

Beckworth: I think you see that even in China, right? So many state-owned enterprises, they can get access to credit but they're not being very efficient. There's a lot of bad loans, capital allocation is poor, and there's mis- ... An Austrian would say there's kind of a misapplication or malinvestment of resources that emerge. I think that's the concern you're alluding to here.

Kaminska: Precisely.

Beckworth: Yeah.

Kaminska: And also because banks would then only be ... They would have to operate on a matched book basis, because I'm presuming in that world there's just no capacity for money creation on their side of the business model. What would they be left to do other than take deposits that have to be properly matched and which, if you want to cash out of whatever you're lending to, you would have to find a secondary market liquidity for that that to happen. You end up in the kind of P2P world, and we see that the P2P world is not very scalable because, well -

Beckworth: Just for our listeners, P2P, what is P2P mean?

Kaminska: This is this whole new idea that you can have perfectly self-intermediated markets-

Beckworth: So people to people-

Kaminska: ... through digital platforms. So peer to peer-

Beckworth: Oh, peer to peer, okay-

Kaminska: ... lending. The idea being that I don't need to go to a bank or whatever, I just go to one of these platforms. I can do the due diligence. All the information is there and I allocate my capital where I think it can make a good return. Caveat emptor, all the risk is on my shoulders, the platform doesn't take any risk. It's asset-light. And this was supposed to revolutionize finance but actually what's been happening is the opposite. They realized there's a cap in terms of how much liquidity they can generate because there's only so much time people can spend doing due diligence. If your primary job is doing something else you're not going to be continuously monitoring your assets, and so they can't scale very well. And so to scale, they end up taking credit decisions or trying to smooth or encourage tiering of capital. Like they'll say, "Oh no, put your money in here, we've already done this much due diligence on these loans."

Kaminska: But then you introduce trusted intermediaries again and then there's provision funds that are put in in case the loans go wrong, and who's helping to bail them out, the banks themselves, and so you see this kind of reemergence of fractional lending again because they're all self-investing. And so you're back to square one.

Beckworth: Yeah. So peer to peer does seem to have some huge, just basic problems to overcome. The reason we have banks, because we have this adverse selection problem.

Kaminska: Exactly.

Beckworth: Maybe ... I don't know enough about peer to peer, maybe peer to peer has access to credit reports or something, but it is seeming they have adverse selection problems, economies of scale problems, all those issues you bring up. It's an interesting, maybe experiment, maybe in the end it will be interesting to see where it goes.

Beckworth: Well great, that's two topics with kind of a pessimistic outlook. Let's move on to-

Kaminska: Sorry.

Beckworth: No, that's fine. That's fine. We want honest perspectives here. Our listeners want nothing less.

Beckworth: Let's move on to our third one which I think I know will be also fairly pessimistic in its outlook, and that is central banking right now. In particular let's look at negative interest rates that the ECB, the Bank of Japan and a few other banks in Europe are doing.

Beckworth: Your blog, your colleagues and you have kind of taken a decided view against negative rates. Can you speak to that and what do you see happening with them?

The Problem with Negative Interest Rates

Kaminska: I think negative rates are mostly a waste of time. I think ... We've been predicting negative rates for a very long time on Alphaville. I believe Lisa Pollack was one of the first journalists to ask Mario Draghi about the potential of them instituting them, so we were talking about this when people were like, "This is never going to happen." Not to blow my own trumpet or anything but we saw it coming.

Kaminska: The logic kind of breaks down at the zero ... We're talking about zero low bound constraints and the arbitrage potential. You've got people like Ken Rogoff coming out with his new digital e-money solution. We can get free of the zero low bound if we just digitize all cash and that way we can stimulate the economy with negative rates, blah blah blah. My concern with that is that A) markets have funny ways of engineering new alternatives, so I think if you ban cash, markets will probably find new and innovative alternatives anyway and substitute that. And secondly I think the zero low bound thing is a constraint based on what liquid ... For me this is very personal feeling, so it's probably economically wrong, but I feel like money represents a clearings tool for services in the economy that are perfectly matched, and so if you are creating negative interest rates you are playing around with inventory forces. You encourage surpluses to be built up because people will hoard value.

Kaminska: We see this in Europe already, the negative interest rate regime is seeing big corporates increasingly provide financing to smaller corporates who will just be able to load up on inventory and store the value in inventory instead of at the bank because it's a substitution. But whether that inventory is worthwhile or not is kind of irrelevant, so it's all about how we store that value. I think the market will continuously engineer alternative stores of value to circumvent those negative rates, and that's a product of clearing of supply and demand services in the economy naturally.

Kaminska: My other concern is how it ... The incentives it creates for banks, I think it creates really bad incentives for banks. It creates ... Banks are suddenly encouraged to lend money to the sorts of companies that are focused on cornering specific markets or creating artificial scarcities. Generally speaking, the incentives are against lending to productive ventures and I don't think people really appreciate those bad consequences.

Beckworth: Well you ... Interesting. On your first point there you mentioned, basically if I can restate your words, there will always be some shadow money somewhere that will emerge. You create this ... If you make currency basically no longer par value or fixed nominal value, if it fluctuates, there's always going to be some kind of demand for a short term liability of a financial form that is fixed in nominal value, creates this certainty. I think historically that's been the case. I had David Andolfatto on here. We were discussing another alternative, and that's equity-based money.

Beckworth: John Cochrane has come out, banks should be completely funded ... Not just higher capital ratios, but they're 100% equity financed, and the challenges that creates ... I mean it's an interesting idea but one of the challenges it creates is that your ATM machine becomes like a Las Vegas casino slot machine. You can take your debit card out and you can pay bills with technology. Cochrane makes I think a fair point, you could actually tap into your S&P 500 fund with your debit card, but you never know from one day to the next how much is in there. It's just like going to Las Vegas and pulling the slot machine and I think people and firms as well, they want some kind of certainty. They like that ... Historically humans have desired fixed value money, and I think what you're speaking to is if you go to the e-money and they can arbitrarily change the value of it, there will be a demand for some substitute to emerge on the margin that does preserve value. I think that's a fair point.

Kaminska: See, I think the key thing is that there ... The justification is that it will stimulate consumption and spending because people won't want to hold money that is depreciating, right?

Beckworth: Yeah.

Kaminska: Whereas my point is that it might just stimulate hoarding in the real world instead because if the depreciation rate of whatever durable goods is lower than the depreciation rate of money in the bank, you will hoard that value in durable goods or whatever. Commodities, whatever. You can't get rid of that. In the process of ... Once you encourage the hoarding to happen in physical form instead of in monetary form you are messing with economic forces that are reallocating resources to creating more gold or creating more, I don't know, refrigerators or whatever it happens to be that you're going to be hoarding, and that's not necessarily a better allocation of capital.

Beckworth: So you would have a government deal with the deep recession or depression in a different way. You wouldn't have them try to find that negative natural rate somewhere down below zero. You would have them do helicopter ... Something else that would stimulate the economy.

Kaminska: Yeah.

Beckworth: Okay. And I know you've had exchanges with Miles Kimball before, right, on this issue?

Kaminska: Mm-hmm (affirmative).

Beckworth: Yeah. We had him on the show before and he's a big advocate. I think his approach, in my view, is a little more appealing than Ken Rogoff, because Ken wants to actually get rid of physical cash. At least like the hundred dollar bill. Miles wants to keep it, actually keep currency, but in any event let's-

Kaminska: Penalize it.

Beckworth: Yeah, exactly. Penalize. To be fair to him, only at times when there are these recessions. Most of the time it would be at par value with ... Electronic money and physical cash maintain fixed exchange rate but only in times of recession would they fluctuate.

Kaminska: Even that becomes, for me, it ends up in a dead-end street because where is this going to take us? To the point where if you're penalizing the ability to hoard cash, if people transform that into gold, well what are you going to do? Start taxing their gold, or ... I mean you could do, but then you get into all sorts of issues in terms of my free right to hold gold if I want, whether or not…

Beckworth: You're absolutely right.

Kaminska: - like it or not.

Beckworth: Now I think Ken Rogoff's proposal to remove physical cash, even if there's an economic efficiency argument to be made, I think there are some liberty issues involved that, you know, it's just no one's business what I do with my money or what I do with my private life and I think there are some concerns there as well.

Beckworth: Let's move to a topic we're just on, what I just mentioned, that is deep recessions. Let's have Izzy play the nice dictator of an economy in a deep recession. What would you do to get the economy out of a depression?

Policy Responses to Counteract a Depression

Kaminska: This is kind of ... If I knew the answer I'd be like a Nobel winner, right? I don't know is the answer, but my hunch is that it has to be focused on some sort of better equality of wealth distribution. I just ... I think you need to ... My gut feeling is that these problems emerge because of concentration of capital in very specific hands and the inability for it to circulate through the economy.

Kaminska: My hunch would be actually, these crazy things like raise wages or jubilees maybe, or some other form of ... I mean, I was a fan of basic income for a while. I think I still am. I'm now more cognizant of some of the issues of basic income, so maybe I am. It needs more exploring, I think, but stuff like that seems to me a more viable route, and that ultimately the solution lies in creating jobs that provide people with independence and the ability to make their own judgments.

Kaminska: Whereas I think in the digital economy all these systems are sort of inevitably leading to rentier systems, because we're going to be renting all our devices. Our homes are going to be full of service contracts effectively, because they'll all be attached to the internet. Once you change the model of how people live, if people are living on a rentier structure increasingly, I think that feeds through into the tiering of how society's hierarchies are sort of organized.

Beckworth: So you're advocating something along the lines of a basic income. Is that right, or am I ...

Kaminska: I mean, I was for a long time.

Beckworth: Okay.

Kaminska: I thought that was the solution, but I mean I'm-

Beckworth: You're not sure.

Kaminska: ... recently ... I've had some deeper thinking about it has led to some other ... It's raised a few concerns so I'm not sure. I think there are unintended consequences with basic income that might have possibly bad side effects. For example, basic income has to be universal on a global level. As soon as you have it in just one country there are migration issues. How do you distribute that basic income? Who is eligible for it and who isn't? Is it someone who lives in the country 20 years, or is it someone who's just migrated there? This is the problem.

Beckworth: Yeah. That's interesting. I'm a little surprised. I guess I was under the impression you were a big fiscal policy advocate.

Kaminska: Oh yes, I mean-

Beckworth: Helicopter drops. More spending, tax breaks, along those lines.

Kaminska: I am, I am, for sure. I was kind of looking beyond that, but I think-

Beckworth: Okay.

Kaminska: I think fiscal also has its limits eventually.

Beckworth: Okay.

Kaminska: Yeah, no. I mean fiscal, obviously, I think is the obvious option. But then-

Beckworth: Let me-

Kaminska: ... there are limits.

Beckworth: Let me just ... You mentioned raising wages, and I would urge some caution on that front. During the Great Depression in 1933 ... We had Jason Taylor on here, and actually Scott Sumner makes this argument in his book as well, but Jason Taylor has done a lot of research on that period. There was this incredibly robust recovery in 1933 right after FDR becomes president because he takes the U.S. off a gold standard. Massive increase in the monetary ... I mean just massive shocked expectations. There's a recovery and he shows ... In fact if you go online and look at industrial production, that FRED growth rate, there's one spike that stands out and it's early 1933. And he noticed, had that recovery continued, they would have been out of the Great Depression, to a positive output gap even, by the end of the year.

Beckworth: What happened though is it was stalled at the end of the year by these exogenous ... Well they were exogenous in the sense that they were mandated by the president and congress, these increases in nominal wages. He argues they pushed wages too fast, too high, and it slowed the recovery down.

Beckworth: But in any event, let's move on. I want to get to, in the time we have left, something I've really been looking forward to talking to you about, and that is Trekonomics. We'll touch on some Star Wars for all our Star Wars fans out there too, but for those who like Star Trek and who have thought about some of the implications of it, there's a book out called Trekonomics and it is by Manu Saadia. Did I say his name right?

Kaminska: I wouldn't dare.

Beckworth: Okay.

Kaminska: I guess it is either way. I don't know.

Beckworth: Okay, all right, well it's a book called “Trekonomics,” and I got it and I read through it, and I understand you were on a panel discussing this book. Is that right?

Kaminska: I wasn't on the panel, I was watching the panel-

Beckworth: Oh, you were there, okay-

Kaminska: ... and tweeting it very actively.

Beckworth: Okay, okay. Maybe that's the impression I got. But it was very thought-provoking and it was a fun read for someone who's followed Star Trek all his life. Now, are you a Trek- ... Would you call yourself a Trekkie? I get the impression you are. I mean, double-check though first.

Kaminska: Yeah, no no, I am, I am.

Beckworth: Okay, okay.

Kaminska: I was recently on an AI panel with a guy who I met ... It was Chatham House so I can't tell you too much, but a guy who was a robot maker. He was 22 and he'd never ever watched Star Trek and I used some references to Data and it went over his head entirely and it kind of really deeply concerned and worried me.

Beckworth: Oh, these millennials. These millennials, I tell you.

Kaminska: We test-drove a lot of the philosophies and economics in these-

Beckworth: Interesting.

Kaminska: ... in these episodes and it was all for nothing.

Beckworth: Yeah. Actually I've thought about ... I have some young children and maybe a son who's coming of age, where I thought it would be good for us to sit down and Netflix and work our way through The Next Generation, Star Trek show just to make sure he gets a taste of it too.

Beckworth: I've enjoyed the show and I read through the book. It brings up a lot of interesting questions. What would it be like in a world you live, like we do in the Next Generation era? Just to be clear, there's the original Star Trek, and that was the 23rd century. Then the Next Generation, which comes out in the late 1980s and beyond, that's a 24th century timeline for the show. That second part of Star Trek, there's actually advances in technology and really where you get to this kind of utopian world where things are very different than they are now.

Beckworth: I want to just ask you some questions and maybe work through some of the ideas in the book. One of the things that the author Manu brings up is this idea that there's an end to scarcity. I wrestled with that. I completely agree there's an end to poverty, there's ... It's a period of material abundance. Later in the book he kind of called my concern when he talked about strategic goods like starships, dilithium crystals, and people which still could be scarce. How do you view the world? Is it the end of scarcity or just a period of material abundance, or are they really even different in your view?

Economics of Star Trek and Star Wars

Kaminska: I think because of my penchant for sci fi I was really enamored with this idea of end of scarcity, future that could come upon us, and I really fell for it. I was super ... I did a whole series of posts about it and I was convinced that this was obtainable. And then, the more I wrote about it the more ... Obviously, what kind of person writes stuff and doesn't listen to their critics? I was listening to the critics. I was listening more and more to the critics -

Beckworth: You've got to -

Kaminska: ... and they made so many good points and I couldn't ignore them, and so I have completely kind of flipped my viewpoint on this.

Beckworth: Interesting. Interesting.

Kaminska: Now I am somewhat embarrassed. I feel like a reformed Scientologist or something.

Beckworth: That's interesting, Izzy. See, I'm glad you brought that up because ... So here's how I ... I want to answer the question I posed to you.

Beckworth: I think it is a very different world with a whole set of issues, good ones, but I do think it's wrong to say that's the end of scarcity. For example today, Bill Gates, I'll give him as an example. He still faces scarcity, right? He still has only 24 hours in a day. He still has to decide where to use his resources. In the world of Star Trek, and I actually ... This hit me first. I'm going to have to look at my notes, but in the movie Star Trek: First Contact, which I believe is 1996, there's a scene in there where there's a woman from Earth ... They go back in time to when the warp drive is first created and there's a woman who comes onboard the Starship Enterprise with Captain Picard and she sees all the titanium in the ship. She goes, "Oh, this must cost a lot of money." And Picard says, "Oh, economics is different in the 24th century."

Beckworth: I about flipped out in the theater. I wanted to say, "Really, you're telling me scarcity is over?" I completely agree things are much more abundant, but let's just think about building a starship, right? You build a starship, that takes raw material, that takes energy, takes resources that could have been used building a space station somewhere else. Or it could have been used in the development of research and science. The author of the book stresses replicators, how replicators completely changed how we live. But even a replicator takes energy, it takes resources. There's always some implicit cost.

Beckworth: Maybe I'm just being nitpicky here because at the end of the day it's still true there's material abundance. People won't be wanting for a lack of food or shelter, and we can talk about in a minute what we do with all our time and what does work mean in that environment, but I do think it's easy in this book and in others to get caught up with saying there's no scarcity when there will always be scarcity. As long as we live in a universe with three dimensions in our existence, we're going to be bound by trade offs and I guess that is the only point I wanted to bring up. There is always trade offs. Even if we're super affluent, super rich.

Kaminska: Yeah, I totally agree and I think Brad DeLong actually stressed a lot of these points on the panel. He was referencing, say, sort of feudal structures where these kings and barons had everything they wanted, literally nothing to want for, and they would create new scarcities. People would obsess over increasingly trivial things. There's always a feeling of one-upmanship because humanity's preoccupation is really elevating their status against one another, so that's never going to go away unless you create a Borg scenario.

Beckworth: Right.

Kaminska: Even then there's still one queen bee, right? There's always a scarcity. There's only one Captain Picard. There's always a scarcity of captains. There's only one job.

Kaminska: I think the other really interesting point ... So the two really interesting points made on the panel by the economists on it. One was this sort of extreme meritocracy that this environment has to cultivate in Star Trek generally, and how that's quite a dystopia in some ways. We look at the sort of ... We romanticize the Captain Picards or whatever, and we celebrate them, but we don't really think about the people left behind, and so there's this sort of nat- ... And it's quite a grueling idea to be in a system that's continuously evaluating you on meritocratic grounds. It's quite interesting that the future they envision is highly hierarchical and very military in its formations. So that's interesting on one front, and I would argue most people don't want to live in that world.

Kaminska: Secondly, the other point that Paul Krugman brought up was about AIs and this idea that we can solve the scarcity issue by outsourcing to AI slaves. He raised the point that if we are in a position to outsource labor, that we would usually employ very human touch stuff, whether it's being a therapist, a masseur, or being waited on ... If we are in a position to outsource that to a robot then that robot has to really be almost indistinguishable from a human. But once you get that sort of level of indistinct ... Like literally you can't tell the difference sort of thing, you are likely to fall in love with your robot because you just have to watch Short Circuit. We all cry at the end, right?

Beckworth: Yeah, right.

Kaminska: So whether it's conscious or not is an irrelevance because we will by def- ... Just generally, if it has emotions and it can talk to us, we will love it and we will be inclined to give it some liberty. There's that famous Star Trek episode where Data fights for his rights and I think that's critical here, because as soon as we give robots rights and allow them to indulge in their own creative pursuits, we kind of end up at square one because we can't continuously outsource the work to them as if they were slaves. And then that creates new scarcities because by definition we no longer have a slave workforce.

Beckworth: Right. Interesting. Now-

Kaminska: Does that make sense?

Beckworth: Yeah, that's an interesting angle. So once these creative beings get sentience and we give them freedom, that's one less laborer for us and we've got to go find another one and they create their own little world to live in. That's a fascinating point.

Beckworth: But yeah, so I ... I think at one level I'm being nitpicky. Scarcity still exists. But I think Manu raises a good point, and just we can briefly touch on this. What does-

Kaminska: But also I would argue that all of Star Trek is full of confrontations and wars. So much stuff is focused around-

Beckworth: Good point, yes.

Kaminska: ... these little petty leftover scarcities, right?

Beckworth: Right.

Kaminska: Even if they're teeny-tiny in terms of the overall universe, they seem to increasingly influence the politics and the actions of the key-

Beckworth: Yeah.

Kaminska: ... people.

Beckworth: Yeah, so it's not such a utopia after all. Another way of saying it.

Beckworth: But still, it's a fascinating book and it was fun to read through it and just ... The idea of work, what does it mean to work in a world where there are replicators? And again, scarcity still exists, but there's ... Whenever we have material abundance, what does it mean to work? I think we have that problem to some extent today, right? In the West there are people who have high incomes. I mean, are there ... I'm thinking of people who live in Manhattan who are very affluent. What is it ... What meaning do they find in life if you have everything given to you on a silver platter? People still want to find something to do, so ... What are your thoughts on that? In a world where all material abundance is provided, what happens to our notions of work and leisure?

Kaminska: I think very much ... I guess ... Sorry, I'm stalling, but again it reminds me of Brad DeLong's point that we will always create new trivial things to obsess about, whether it's Beanie Babies or artificial scarcities that we create just for the sake of our own sanity. I think there will be continuous rivalry because we can't ... I think humans are, and this is my own perspective, but I think rivalry is inherent in the system. Which is why we have sport, right? So we create sports and stuff like that, and sport is just a kind of benign way of staging a war very often. Rather than fighting for resources you're fighting for a cup or whatever.

Kaminska: I think we would increasingly have this sort of Thorstein Veblen leisure society where we have to be elite, obsessing over really ridiculous games. It's kind of like a Hunger Games-

Beckworth: Very petty, petty concerns.

Kaminska: ... scenario.

Beckworth: You know, so I was thinking of Manhattan. There's an article I read about the wives of Manhattan. So you've seen all these reality shows, The Wives of Atlanta-

Kaminska: Oh, yeah yeah yeah.

Beckworth: And so the wives ... And this one was talking about how awful it is, really, to be a wife of a Wall Street banker, kind of a stay at home wife, and the incredible pettiness that goes on between these wives when they get together. The competition, the rivalry, whose kid's getting into the best school, whose husband's making the most money, who has the best penthouse. And you look at that and you're like, "That is in some ways a miserable existence." I'd rather step back and have my more modest existence where I'm not ... I shouldn't say me, but people are less petty.

Beckworth: You're right. I think that's a good example of how even in a world of affluence we're still going to have these rivalries and new forms of competition.

Kaminska: Yeah, because we'll be fighting over Twitter followers or something like that, you know?

Beckworth: Yes.

Kaminska: This continuous ... I mean it's ... We don't live in a world that doesn't have a natural kind of bind to it. Space and time are limited, therefore sort of ... You could argue that human souls are limited as well, so there's ... And there's always going to be value from being top of the social pyramid. I think there's never going to be a way to solve these problems because we just create new problems, right?

Beckworth: That's right. That's absolutely right.

Beckworth: One interesting thing I took out of the book that I hadn't recognized and I mentioned earlier is that there are ongoing technical, logical advances in Star Trek universe. The replicators, the holodecks, there is a transition from the early Star Trek to the later Star Trek. There's no secular stagnation, I guess, in the latter Star Trek universe. Whereas in Star Wars I think one can make an argument there isn't quite the same amount of technological growth. Throughout the stories, basically the same technology and there hasn't been as much progress. Now they do make great things like big Death Stars, and there was a fascinating paper I'm sure you saw by Zachary Feinstein, I believe he's at Cornell, but he's an economist who estimated the cost of destroying the second Death Star at the end of Return of the Jedi, what would it do to the economy ... In fact he has a great term he comes up with, he calls it Gross Galactic Product. So instead of GDP, it's GGP, and he talks about how it would create this massive financial crisis because probably the Empire is highly leveraged in order to finance the second Death Star.

Beckworth: He estimates ... It's just fascinating. Based on how much it costs to build a U.S. warship or battleship he estimated the first Death Star would have cost 193 quintillion dollars and the second one that was blown up would have cost 419 quintillion dollars, and what was ... And he goes on to estimate the total Gross Galactic Product, but a fascinating thought experiment.

Beckworth: But I guess, stepping back and kind of focusing my point here, Star Wars seems to be, and I'm sure I'll get replies from Star Wars listeners who disagree, but Star Wars doesn't seem to have the technological dynamisms that you see in Star Trek in terms of new ideas and new products. And that raises a question, is there a limit to growth? Is there a limit to new innovations? So Star Wars, they have incredible advances far beyond us but they don't seem to be going beyond that, and that takes me to the last thing I want to talk with you about. That's Robert Gordon's idea that we have basically picked all the low hanging fruit of innovations, ideas. There's some things on the margin that are better today but we're never going to have quite the big advances that we had in the last century. Do you share that outlook, or are you more optimistic?

Kaminska: I feel terrible because I'm to come across as such a pessimist, and-

Beckworth: Oh no.

Kaminska: ... I was originally very skeptical of the thesis, but then when I actually spent some time reading ... I'm reading his book right now and, speaking to Martin Wolf et cetera, I think he's right. I do think we've probably picked the low hanging fruit and the costs of just getting to that next stage in terms of the relative benefits that come from it, it just makes it non-economic. Not viable.

Kaminska: I think until a massive crisis stirs us to ... By that I mean like the old sort of idea that we're about to be invaded by aliens or something and then we have to make that death ray or whatever. Unless we have the economic impulse to do it, the costs are so huge and the potential benefits so low it doesn't make economic sense for us to do a lot of these things. I don't know. Maybe I will be proved wrong, but I suspect that that's one of the reasons we have this Great Filter problem. You know the Drake equation stuff where we haven't encountered any intelligent life beyond our solar system probably because there's a sort of natural filter beyond which we can't economically go without killing ourselves or creating some sort of terrible resource crisis for the planet.

Beckworth: What you would say is we need an intense incentive to really make that next big innovation and ... Well, I'll take the other side of that. I'll take the Ryan Avent side in his new book. He's more optimistic and he makes the case that it's hard to know in real time what's happening.

Beckworth: But let's put that to the side. I was trying to step back and think, "Okay, what would it take to convince a Robert Gordon that we will have these rapid gains?" What would true rapid technological progress be like if we saw it today? What kind of technology ... Can you think of any technology that you think that would actually be reflected by a sharp increase in GDP? Anything ... What would we need? Someone ... Was it Peter Thiel who said we've only got 140 characters, that's the best in innovation we've had, and we were promised flying cars?

Beckworth: What would we need, in your view, to see evidence that we've actually reached that next level?

Kaminska: Oh God, that's a really hard question. My general feeling is that innovation is best ... What's the saying, it's the mother of necessity creates innovation. I'm misquoting it but you know what I mean.

Beckworth: Yes.

Kaminska: It's like, necessity breeds innovation, and at the moment I think all the technological tools we have to solve modern day problems are available. It's just that they're not very well allocated. The technology is here, it's just not very well distributed, and so the impulse isn't really on more innovation. It's more about creating more of the stuff that we do have and distributing it to the areas that we need, and that in itself is paradoxical because if everyone was on the same living standard as the U.S. then chances are we would have other different resource crises.

Kaminska: I think everything points to the fact that we need to have innovation that is more energy-efficient and more resource-efficient, but whether or not you can achieve that without overly relying on human labor again I don't know, because one of my biggest concerns is that so much of the technology that is being funded today is actually based on the reestablishment of fairly crappy labor systems which take advantage of poor people. Some create new elites as a result. I think ... A lot of my criticism are now focused on these platform monopolies that are in the business of providing services, but those services are not being provided for by robots. To the contrary, they're being provided for by people but on really crappy subsistence wages, and I don't think that's really progress. I think that's actually the opposite of progress.

Kaminska: In some ways bringing the robots, but make sure they don't get too smart because if they do get too smart or conscious-like we'll become ... We already encountered that other paradox we discuss. So you need a sort of dumb robot that is just about competent enough to do some of the service jobs, but not so smart that it takes away ... It becomes a kind of compatriot of us.

Beckworth: Okay.

Kaminska: Maybe. I'm just like going, you know, I'm totally-

Beckworth: No, no, it's-

Kaminska: ... freestyling there.

Beckworth: No, very, very well. It's hard to imagine what would be the next technology that would fundamentally change the trend growth of, say, the GDP. And I know GDP's a poor measure of things that we value, of the utility of welfare, but ... Robert Gordon, I think the criteria to make him happy would be to show the actual number, changes in the numbers, and it's hard ... You know, just top of my head I would-

Kaminska: But there's the measurement issue as well. There's a lot of people saying, "Oh, we're not measuring it right." Or like, it takes a lot -

Beckworth: No, that ... Exactly.

Kaminska: ... to make us happy these days. Most people would be happy with a tiny little two bedroom flat as long as they can escape to this virtual reality or just spend time on the internet. So there are kind of variables that are changing in terms of how we assess happiness and whether or not-

Beckworth: Absolutely. Yes. No, I ... That's kind of what I meant was that GDP may not be very well in inflecting what we value and maybe getting poor at it at an increasing rate.

Beckworth: In any event, it's been a very fascinating conversation. Izzy, thanks for joining us.

Kaminska: Thanks for having me.

About Macro Musings

Hosted by Senior Research Fellow David Beckworth, the Macro Musings podcast pulls back the curtain on the important macroeconomic issues of the past, present, and future.