Holden, thanks for responding. I apologize again if I’m missing something obvious or straying too far outside my field.
I think the two things I would have to understand in order to accept your reply is that (a) my entire objection does indeed consist of “positing an offsetting harm in the form of inflation”—which isn’t how it feels to me—and that (b) we should expect the “series of trades” visualization to mean that no inflation occurs in goods of the form that are being purchased by the low-income Kenyans.
Let me think about this.
Okay, I agree there’s a sense in which (a) has to be true. If you could magically print shillings and have them purchase goods with no other prices changing and hence no change in other velocities of trade, this would have to be a good thing. The goods purchased would have to come from somewhere, but you can’t possibly have something go wrong with the GD model without inflation somewhere else in Kenya. It’s not how I think in my native model—I think about ‘Who has money?’ as a distribution-of-goods question, not a nominal pricing question—but point (a) has to be correct from the relevant point of view.
Let me think about point (b). Hm. So far it’s not clear to me yet that point (b) is necessarily true when I try to translate my original model into those terms. Suppose—you’ll probably think this sounds very perverse, but bear with me—suppose that GD’s operation causes inflation in the price of basic foods and deflation in the price of fancy speedboats. Even if inflation at point A is offset by deflation at point B, this net-no-inflation repricing can be harmfully redistributive.
My visualization of you replies, “Why on Earth should I believe that?” But before answering that, why would I believe that? Either my original worry was incoherent, or I must have already believed this somehow. By argument (a), if inflation in Kenyan goods purchased primarily by low-income Kenyans is offset by a similar amount of deflation in similar goods, then net benefit is fine and there’s no problem.
On further reflection I think that my original concern does translate into those terms. I don’t know if the following is true, but it is my major concern: First suppose Kenya does not currently have an aggregate demand deficit and cannot directly benefit from printing money. Then suppose goods purchased by low-income Kenyans are denominated primarily in shillings, and goods purchased from the U.S. using U.S. dollars are going primarily to high-income Kenyans (fancy speedboats). Then it seems to me that the series of trades should end up creating inflation in the price of basic goods produced in Kenya, and offsetting deflation within Kenya at the point where U.S. dollars are finally spent on a larger market.
Note that even if this worry is structurally possible, one could very quickly answer it by showing that most foreign goods imported in Kenya are in fact consumed by the same class of Kenyans who are the targets of aid, in which case GD is mostly equivalent to giving low-income Kenyans USD and letting them make foreign purchases directly. (In which case, it correspondingly seems plausible to me that you might do most of the same good by buying shillings and burning them. Though this would lose positive redistributive effects and possibly slow down Kenyan trades by destroying money if they’re not in a state of excess aggregate demand—delete the term for the good accomplished by printing money.)
It may also be that my concern is incorrect and that even if most Kenyan goods purchased in USD are not consumed by, or inputs to goods consumed by, the targeted recipients, you still don’t get inflation in bread and offsetting deflation in speedboats. For example, I think you said something at the EA summit which I had forgotten up until this point about a series of trades being mutually beneficial. I.e., maybe you could show that the state of the world resulting in Kenya can be reached by starting with giving the target Kenyans USD and letting them buy foreign goods, which I agree is good, and then a series of trades occurring which benefit both sides of each trade and don’t disadvantage any other low-income Kenyans or cause trade gains to be redistributed toward wealthier Kenyans. Though it seems to me that this line of argument would also have to show that my concern about inflation in bread offset by deflation in speedboats was misguided to begin with.
I don’t suppose there’s any relevant economic literature on direct aid which addresses this? Someone said something similar in the Givewell comments thread on your GD post, so it may not be such a non-obvious concern.
Sorry for forcing you to choose between spending time on this and leaving an unanswered question, I will understand if you choose to do the latter. I hope that the many argumentative people who are deluded into believing that they understand money, possibly including myself, do not put you off direct aid charities.
Eliezer, I think inflation caused via cash transfers results (under some fairly basic assumptions) in unchanged—not negative—total real wealth for the aggregate set of people experiencing the inflation, because this aggregate set of people includes the same set of people that causes the inflation as a result of having more currency. There may be situations in which “N people receive X units of currency, but the supply of goods they purchase remains fixed, so they experience inflation and do not end up with more real wealth”, but not situations in which “N people receive X units of currency and as a result have less real wealth, or cause inflation for others that lowers the others’ real wealth more than their own has risen.”
If you believe that GiveDirectly’s transfers cause negligible inflation for the people receiving them (as implied by the studies we’ve reviewed), this implies that those people become materially wealthier by (almost) the amount of the transfer. There may be other people along the chain who experience inflation, but these people at worst have unchanged real wealth in aggregate (according to the previous paragraph). (BTW, I’ve focused in on the implications of your scenario for inflation because we have data regarding inflation.)
It’s theoretically possible that the distributive effects within this group are regressive (e.g., perhaps the people who sell to the GiveDirectly recipients then purchase goods that are needed by other lower-income people in another location, raising the price of those goods), but in order to believe this one has to make a seemingly large number of unjustified assumptions (including the assumption of an inelastic supply of the goods demanded by low-income Kenyans, which seems particularly unrealistic), and those distributive effects could just as easily be progressive.
It also seems worth noting that your concern would seem to apply equally to any case in which a donor purchases foreign currency and uses it to fund local services (e.g., from nonprofits), which would seem to include ~all cases of direct aid overseas.
If I’m still not fully addressing your point, it might be worth your trying a “toy economy” construction to elucidate your concern—something along the lines of “Imagine that there are a total of 10 people in Kenya; that 8 are poor, have wealth equal to X, and consume goods A and B at prices Pa and Pb; that 2 are wealthy, have wealthy equal to Y, and consume goods C and D at prices Pc and Pd. When the transfer is made, dollars are traded for T shillings, which are then distributed as follows, which has the following impact on prices and real consumption …” I often find these constructions useful in these sorts of discussions to elucidate exactly the potential scenario one has in mind.
Holden, thanks for responding. I apologize again if I’m missing something obvious or straying too far outside my field.
I think the two things I would have to understand in order to accept your reply is that (a) my entire objection does indeed consist of “positing an offsetting harm in the form of inflation”—which isn’t how it feels to me—and that (b) we should expect the “series of trades” visualization to mean that no inflation occurs in goods of the form that are being purchased by the low-income Kenyans.
Let me think about this.
Okay, I agree there’s a sense in which (a) has to be true. If you could magically print shillings and have them purchase goods with no other prices changing and hence no change in other velocities of trade, this would have to be a good thing. The goods purchased would have to come from somewhere, but you can’t possibly have something go wrong with the GD model without inflation somewhere else in Kenya. It’s not how I think in my native model—I think about ‘Who has money?’ as a distribution-of-goods question, not a nominal pricing question—but point (a) has to be correct from the relevant point of view.
Let me think about point (b). Hm. So far it’s not clear to me yet that point (b) is necessarily true when I try to translate my original model into those terms. Suppose—you’ll probably think this sounds very perverse, but bear with me—suppose that GD’s operation causes inflation in the price of basic foods and deflation in the price of fancy speedboats. Even if inflation at point A is offset by deflation at point B, this net-no-inflation repricing can be harmfully redistributive.
My visualization of you replies, “Why on Earth should I believe that?” But before answering that, why would I believe that? Either my original worry was incoherent, or I must have already believed this somehow. By argument (a), if inflation in Kenyan goods purchased primarily by low-income Kenyans is offset by a similar amount of deflation in similar goods, then net benefit is fine and there’s no problem.
On further reflection I think that my original concern does translate into those terms. I don’t know if the following is true, but it is my major concern: First suppose Kenya does not currently have an aggregate demand deficit and cannot directly benefit from printing money. Then suppose goods purchased by low-income Kenyans are denominated primarily in shillings, and goods purchased from the U.S. using U.S. dollars are going primarily to high-income Kenyans (fancy speedboats). Then it seems to me that the series of trades should end up creating inflation in the price of basic goods produced in Kenya, and offsetting deflation within Kenya at the point where U.S. dollars are finally spent on a larger market.
Note that even if this worry is structurally possible, one could very quickly answer it by showing that most foreign goods imported in Kenya are in fact consumed by the same class of Kenyans who are the targets of aid, in which case GD is mostly equivalent to giving low-income Kenyans USD and letting them make foreign purchases directly. (In which case, it correspondingly seems plausible to me that you might do most of the same good by buying shillings and burning them. Though this would lose positive redistributive effects and possibly slow down Kenyan trades by destroying money if they’re not in a state of excess aggregate demand—delete the term for the good accomplished by printing money.)
It may also be that my concern is incorrect and that even if most Kenyan goods purchased in USD are not consumed by, or inputs to goods consumed by, the targeted recipients, you still don’t get inflation in bread and offsetting deflation in speedboats. For example, I think you said something at the EA summit which I had forgotten up until this point about a series of trades being mutually beneficial. I.e., maybe you could show that the state of the world resulting in Kenya can be reached by starting with giving the target Kenyans USD and letting them buy foreign goods, which I agree is good, and then a series of trades occurring which benefit both sides of each trade and don’t disadvantage any other low-income Kenyans or cause trade gains to be redistributed toward wealthier Kenyans. Though it seems to me that this line of argument would also have to show that my concern about inflation in bread offset by deflation in speedboats was misguided to begin with.
I don’t suppose there’s any relevant economic literature on direct aid which addresses this? Someone said something similar in the Givewell comments thread on your GD post, so it may not be such a non-obvious concern.
Sorry for forcing you to choose between spending time on this and leaving an unanswered question, I will understand if you choose to do the latter. I hope that the many argumentative people who are deluded into believing that they understand money, possibly including myself, do not put you off direct aid charities.
Eliezer, I think inflation caused via cash transfers results (under some fairly basic assumptions) in unchanged—not negative—total real wealth for the aggregate set of people experiencing the inflation, because this aggregate set of people includes the same set of people that causes the inflation as a result of having more currency. There may be situations in which “N people receive X units of currency, but the supply of goods they purchase remains fixed, so they experience inflation and do not end up with more real wealth”, but not situations in which “N people receive X units of currency and as a result have less real wealth, or cause inflation for others that lowers the others’ real wealth more than their own has risen.”
If you believe that GiveDirectly’s transfers cause negligible inflation for the people receiving them (as implied by the studies we’ve reviewed), this implies that those people become materially wealthier by (almost) the amount of the transfer. There may be other people along the chain who experience inflation, but these people at worst have unchanged real wealth in aggregate (according to the previous paragraph). (BTW, I’ve focused in on the implications of your scenario for inflation because we have data regarding inflation.)
It’s theoretically possible that the distributive effects within this group are regressive (e.g., perhaps the people who sell to the GiveDirectly recipients then purchase goods that are needed by other lower-income people in another location, raising the price of those goods), but in order to believe this one has to make a seemingly large number of unjustified assumptions (including the assumption of an inelastic supply of the goods demanded by low-income Kenyans, which seems particularly unrealistic), and those distributive effects could just as easily be progressive.
It also seems worth noting that your concern would seem to apply equally to any case in which a donor purchases foreign currency and uses it to fund local services (e.g., from nonprofits), which would seem to include ~all cases of direct aid overseas.
If I’m still not fully addressing your point, it might be worth your trying a “toy economy” construction to elucidate your concern—something along the lines of “Imagine that there are a total of 10 people in Kenya; that 8 are poor, have wealth equal to X, and consume goods A and B at prices Pa and Pb; that 2 are wealthy, have wealthy equal to Y, and consume goods C and D at prices Pc and Pd. When the transfer is made, dollars are traded for T shillings, which are then distributed as follows, which has the following impact on prices and real consumption …” I often find these constructions useful in these sorts of discussions to elucidate exactly the potential scenario one has in mind.