Michael Zibulevsky, Technion, September 8, 2009
In time of a crisis consumers tend to spend less money on leisure, luxury and durable goods, which often leads to further market deterioration. In order to treat this problem, we propose a new insurance system, which provides support of industries in crisis by their customers. It creates a possibility of moving money fast from areas of excess to areas of shortage, blocking the crisis in early stage, before the waves of instability spread over the entire economy. This instrument can greatly stabilize the economy in whole and reduce its vulnerability to sharp external shocks....
Under conditions of instability (for example, on eve of crisis) consumers change their behavior dramatically, saving on durables, automobiles, tourism, etc. The whole economy goes into different "mode of operation", depressing entire industries and regions. The same can occur due to sudden changes in the external world: For example, in time of epidemic people can dramatically limit their travel.
Obviously, these changes are temporary in nature, and it would be unproductive to retrain and move workers from the crisis industries somewhere else. On the other hand, support of these industries require huge funds, and state budget may not be able to bear such costs. Existing insurances can also break down, when simultaneously presented a myriad of insurance bills for payment.
However, a close look shows, that the necessary funds exist. They are in pockets of former customers of the crisis industries, and precisely in necessary amounts. Really, the corresponding goods and services were not purchased, and the money was saved! How to transfer these funds to the "thirsty" industries and their workers? For this purpose I propose a new mechanism: Insurance of producers by their customers.
Let me explain the idea with an example. Buying a flight ticket, we encourage certain production level of the air transportation industry. I would propose, that the consumer, simultaneously with the purchase of a ticket, would sign an insurance bond for the price proportional to the ticket price. In time of crisis people fly less and do not spend as much money on tickets. Government has a right to declare a state of emergency in the aircraft industry, giving it the right to receive a certain part of value of insurance bonds in its possession, raising the money from the former consumer. In exchange, the consumer receives shares of the airline company of equal amount.
As the airline also is a consumer of goods and services of other companies, for example, in fuel or airplane construction industry, it can spend part of the money received from bonds for the payment of insurance bonds of these suppliers, receiving in exchange their shares.
This creates a new cushion mechanism of economic crisis, which allows to preserve workers income, and leads at the same time to redistribution of the property rights. A great advantage of this approach over the traditional methods of crisis management is the ability to move money fast from the area of excess to the area of shortage, blocking the crisis at early stage, before the waves of instability spread over entire economy.
One can see this system as a mass insurance of producers by their customers. Analysis of the proposed mechanism and development of its details require further research. For example, in order to accelerate payments of insurance bonds to a company, Central Bank can immediately provide the payments in exchange of the bonds, putting the debt on the consumer' name. This debt could be repaid by the consumer automatically over time, in the form of a temporary tax, or by his own insurance bonds. In order to avoid support of obsolete branches of economy, it is reasonable to limit action of a bond by some period of time (for example, 3 - 5 years).
Another interesting question is, whether the decision about the insurance payments have to be made by some person in power (for example, Head of Central Bank), or it can be performed automatically using some predefined condition: say, percent of repayment would be some predetermined function of total production decline in the given industry. What should be this function, which prevents "overcompensation" effects?
A company may not be interested in use of these funds (because it pays for them by part of its shares), preferring instead to fire some workers. This action would increase burden on society, and the company should be discouraged from such actions in time of a temporary crisis, by requirement of significant compensations to fired workers. I.e. the proposed kind of insurance should in some way substitute other insurances, including the social one.
I am looking forward to your comments...
In time of a crisis consumers tend to spend less money on leisure, luxury and durable goods, which often leads to further market deterioration. In order to treat this problem, we propose a new insurance system, which provides support of industries in crisis by their customers. It creates a possibility of moving money fast from areas of excess to areas of shortage, blocking the crisis in early stage, before the waves of instability spread over the entire economy. This instrument can greatly stabilize the economy in whole and reduce its vulnerability to sharp external shocks....
Under conditions of instability (for example, on eve of crisis) consumers change their behavior dramatically, saving on durables, automobiles, tourism, etc. The whole economy goes into different "mode of operation", depressing entire industries and regions. The same can occur due to sudden changes in the external world: For example, in time of epidemic people can dramatically limit their travel.
Obviously, these changes are temporary in nature, and it would be unproductive to retrain and move workers from the crisis industries somewhere else. On the other hand, support of these industries require huge funds, and state budget may not be able to bear such costs. Existing insurances can also break down, when simultaneously presented a myriad of insurance bills for payment.
However, a close look shows, that the necessary funds exist. They are in pockets of former customers of the crisis industries, and precisely in necessary amounts. Really, the corresponding goods and services were not purchased, and the money was saved! How to transfer these funds to the "thirsty" industries and their workers? For this purpose I propose a new mechanism: Insurance of producers by their customers.
Let me explain the idea with an example. Buying a flight ticket, we encourage certain production level of the air transportation industry. I would propose, that the consumer, simultaneously with the purchase of a ticket, would sign an insurance bond for the price proportional to the ticket price. In time of crisis people fly less and do not spend as much money on tickets. Government has a right to declare a state of emergency in the aircraft industry, giving it the right to receive a certain part of value of insurance bonds in its possession, raising the money from the former consumer. In exchange, the consumer receives shares of the airline company of equal amount.
As the airline also is a consumer of goods and services of other companies, for example, in fuel or airplane construction industry, it can spend part of the money received from bonds for the payment of insurance bonds of these suppliers, receiving in exchange their shares.
This creates a new cushion mechanism of economic crisis, which allows to preserve workers income, and leads at the same time to redistribution of the property rights. A great advantage of this approach over the traditional methods of crisis management is the ability to move money fast from the area of excess to the area of shortage, blocking the crisis at early stage, before the waves of instability spread over entire economy.
One can see this system as a mass insurance of producers by their customers. Analysis of the proposed mechanism and development of its details require further research. For example, in order to accelerate payments of insurance bonds to a company, Central Bank can immediately provide the payments in exchange of the bonds, putting the debt on the consumer' name. This debt could be repaid by the consumer automatically over time, in the form of a temporary tax, or by his own insurance bonds. In order to avoid support of obsolete branches of economy, it is reasonable to limit action of a bond by some period of time (for example, 3 - 5 years).
Another interesting question is, whether the decision about the insurance payments have to be made by some person in power (for example, Head of Central Bank), or it can be performed automatically using some predefined condition: say, percent of repayment would be some predetermined function of total production decline in the given industry. What should be this function, which prevents "overcompensation" effects?
A company may not be interested in use of these funds (because it pays for them by part of its shares), preferring instead to fire some workers. This action would increase burden on society, and the company should be discouraged from such actions in time of a temporary crisis, by requirement of significant compensations to fired workers. I.e. the proposed kind of insurance should in some way substitute other insurances, including the social one.
I am looking forward to your comments...
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