Funding Supercommunities won't raise prices

I'm starting to make a series of 1 minute explainer videos for Supercommunities (you can watch the first ones here). The first video, "In a nutshell", emphasises how governments and corporations are key enablers of the Supercommunities model. So, I read with interest the recent Ashoka report, New Allies: How governments can unlock the potential of social entrepreneurs for the common good, which identifies "five action areas for government players interested in supporting and unlocking the potential of systems social entrepreneurs as transformation guides" (summarised below in an image from page 21 of the report).

In the section on funding models, the Ashoka report suggests that government bodies "Review existing funding mechanisms for their suitability for systems social entrepreneurs. Keeping the challenges of the traditional funding models outlined above in mind, government players could map all funding options available to systems social entrepreneurs in different development stages along the full spectrum, from grants to fully repayable financing. This could help identify and close existing gaps, for example, by adapting existing programmes to systems social entrepreneurs’ needs or establishing new funds, possibly in collaboration with philanthropists or impact investors."

The Supercommunities model proposes a new funding option for social entrepreneurs - stakeitback, a lightweight approach that removes administration burden and barriers to entry. Project owners issue stakes, which buyers can redeem for the purchase cost plus a fixed amount when the project reaches a target. In the meantime, they can use see project progress towards this target, as well as towards social outcomes aligned to the UN Sustainable Development Goals. The stakeitback model is a new candidate for support by government players, who could (for example) host the community-based data stores underpinning the enabling open source technology and guide social entrepreneurs through the process of issuing stakes.

Government players can also buy stakes themselves, as a simple, low cost way to help kick start post-covid economic recovery - and it would be a shame if they were deterred from doing this by current pessimism among macroeconomists about rising inflation. For example, Kenneth Rogoff warned last week that "longer-term inflation risks are skewed much more to the upside than markets or policymakers seem to realize." Macroeconomists possess unearthly skill in assembling arguments so arcane and labyrinthine that they are impossible to challenge. Nevertheless, this one deserves a common sense double take.

Rogoff's main argument is that we may be heading for a reversal of globalization, and thus higher prices for goods and higher incomes for workers. Well, wouldn't that be great - and if so, inflation might be a price worth paying. But let's get some perspective on the likely pace of change. With inequality back at the level of the Belle Epoque, there will be limits on what most people can afford for some time yet, so it is likely to be quite a while before we see much rise in prices.

Every macroeconomic paper I can find on inflation and inequality (here's a typical example, from the UK Office of National Statistics) argues that (a) they are positively correlated (b) the former drives the latter. Both of these arguments reflect a typical macroeconomic outlook, in which analysis spans years rather than decades (the ONS data considers only the period since 2005) and fiscal measures by government are viewed as having disproportionate influence on economic outcomes for citizens (advice on fiscal measures being a key source of income for macroeconomists, it's understandable that they present them as critical).

However, stand back from these assumptions and you see a different picture. Taking the UK as an example, and looking back a hundred years, inequality decreases and inflation rises until the mid 1970s, with the pattern reversing thereafter - see the chart below, which combines data on inequality and historical inflation rates for the UK since 1918. All you need do to understand this as common sense is to reverse the usual causality, and think of inequality as driving inflation. As wealth becomes more concentrated, rich people invest rather than spend most of their income, often in assets such as land that aren't reflected in price indices. This reduces upward pressure on prices, and inflation goes down.

From this perspective, what are the implications? In the short term, inequality has fallen a little, but covid-19 will surely reverse that trend. If history is any guide, the unfortunate but likely rise in inequality over the next decade will lead to a corresponding fall in inflation - or more realistically, since inflation has already fallen about as far as it can go, to little or no increase.

The graph above shows that the inverse correlation between inequality and inflation isn't exact over short time periods. Nevertheless, it suggests that government spending for recovery is unlikely to cause inflation until there is a major reversal in inequality, which even with policy stimulation has got to be several years away. Governments considering Green (and other) New Deals shouldn't let fear of inflation hold them back.

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