It’s a topic that won’t go away, the question of universal basic income is cropping up all over the place, but despite the extent of the debate a key point gets overlooked.
It is quite simple: universal basic income is an income that is paid to everybody within an economy, regardless of the work they do. Drill down and opinions vary as to whether it should be paid to every man women and child, or just people over the working age. Opinions also vary regarding the level of universal basic income – money that will help out a little, or enough to keep someone out of poverty.
One myth that needs to be corrected straight away is the idea that this is a left-wing concept, in fact politicians and economists considered to be on the right wing of the political spectrum have advocated the idea in the past, including President Nixon, and two of the most celebrated economists of the 20th Century: Milton Friedman and Friedrich Hayak – two men, whose work inspired Margaret Thatcher.
Universal basic income has come to the fore of late, with both Facebook’s Mark Zuckerberg and Elon Musk coming out in favour of the idea.
Universal basic income is popular with some people on the right who like its simplicity – it is easier to manage than the welfare system. It is popular with many on the left, who see it as the most effective way of creating more equality.
It is especially popular with people who fret over the danger of automation taking jobs – which is why the likes of Musk and Zuckerberg have supported it. But the case for automation killing jobs is not proven, many still argue that actually, although automation will destroy some jobs, it will create new ones too. The jury is out on this particular debate.
The two big downsides
There are two obvious downsides to the concept.
The first relates to the cost. Let’s say you were to pay every man, women and child an income equal to 25 per cent of mean wages. If we then assume that roughly half the population works – which is approximately correct – this would mean that if you were to fund universal basic income through income tax, the average income tax rate just to pay for this would be 50 per cent.
Other taxes, to pay for the things we are already getting, such as education, defence, and public services would require further taxation.
The other point is that many fear that if you pay people for doing nothing, then they will do nothing.
Some argue that universal basic income may create a more entrepreneurial society, as the safety net provided by this income would free people up to experiment with business ideas. Against this, others say that if you make it too easy to set-up a business, you will see too many bad ideas. This may be right, that may boil down to your view on the role of randomness in innovation. In nature, innovation occurs via random mutation – and the result is the most innovative force we know of – evolution. If we suddenly see a glut of new entrepreneurs, given confidence to try something new by the provision of a basic income, the end result is not easy to predict. We may see the creation of zombie businesses, propped up by free money – or we may find that society becomes more creative.
The idea has been tested. It was subjected to an experiment in the town of Dauphin, Canada, in 1974. I will hand over the explanation of what happened to Rutger Bregman, who described the experiment in his Ted talk. “Everybody in this small town was guaranteed a basic income, ensuring that no one fell below the poverty line. At the start of the experiment, an army of researchers descended on the town. For four years, all went well. But then a new government was voted into power, and the new Canadian cabinet saw little point to the expensive experiment. So, when it became clear there was no money left to analyse the results, the researchers decided to pack their files away in some 2,000 boxes. Twenty-five years went by, and then Evelyn Forget, a Canadian professor, found the records. For three years, she subjected the data to all manner of statistical analysis, and no matter what she tried, the results were the same every time: the experiment had been a resounding success.
“Evelyn Forget discovered that the people in Dauphin had not only become richer but also smarter and healthier. The school performance of kids improved substantially. The hospitalisation rate decreased by as much as 8.5 per cent. Domestic violence incidents were down, as were mental health complaints. And people didn't quit their jobs. The only ones who worked a little less were new mothers and students.”
A form of basic income also exists in Alaska, and it has been thriving for 40 years. In 1976 tax receipts from oil revenues were invested into a fund – the Alaska Permanent Fund, with dividends from the fund paid to every registered citizen. Annual income ranges from $878 to $2,072. According to John Thornhill, writing in the FT, "The scheme, which has commanded bipartisan support, has also proved increasingly popular and been described as the ‘third rail’ of state politics because it electrocutes any politician who touches it. In a recent telephone survey, Alaskans described the fund’s top three advantages as being its equality of treatment, its fairness of distribution and its assistance to struggling families. Some 58 per cent of respondents said they would even be prepared to pay more state taxes to preserve the fund, although Alaska has been knocked by lower oil prices.”
And then there is Finland, where 2,000 people are receiving 560 euros a month as part of a trial. Average pay in Finland is 3,500 euros a month, so the basic income is quite modest, but the idea is that the money is paid to people who are unemployed but if they find work, they continue to receive it.
There is one snag with all of these schemes, because of the way they are structured one of the key reasons for applying universal basic income is not allowed to occur – namely that it could be a powerful macroeconomic tool, but only if applied across the economy. This idea will be returned to in a moment.
Actually, the UK sees a form of universal basic income but one in which the state determines how the income is spent. It is called the NHS – free healthcare for all.
I Daniel Blake
One of the advantages of universal basic income it that it could theoretically overcome the ‘I Daniel Blake' experience – as described in the excellent movie of that name, following the experiences of the fictitious Daniel Blake after he had to stop working following a heart attack, but was refused disability benefit.
Automation and jobs and rising inequality
While the question of whether robots and AI will destroy more jobs than are created is unanswered, there is another point. It does appear that technology has been linked to rising inequality.
And that takes us to the crux of the issue
A point that is slowly being appreciated, but has not fully sunk in yet, is that too much inequality is bad for the economy. As a rule of thumb, the richer you are the more you save. The poorer you are, the more you spend as a proportion of income. And right now, across the developed world, there is what the former chair of the Fed, Ben Bernanke, calls a global savings glut. This is why, despite interest rates hovering close to zero for the best part of ten years, growth across the developed world is anaemic and inflation appears to show no intention of becoming a problem.
And this brings us back to Milton Friedman who once said that in times when interest rates cannot feasibly be cut any further, but the economy is weak, the government should print money and hand it out to citizens – he referred to it as a helicopter drop.
Of course, if you hand money out to citizens, you are effectively engaging in a form of basic income – but not applied to reduce inequality, but applied as a form of macroeconomic policy – designed to stimulate the economy.
And maybe the biggest mistake that was made by policy makers post-2008 was, instead of doing this, they engaged in quantitative easing, buying government bonds, while the government applied austerity.
From a macroeconomic point of view, now is not the ideal time for printed money being dished out across the economy, because central banks are currently moving towards somewhat tighter monetary policy.
But in the event of another 2008 type crash, or if further automation does create an economy in which rising inequality leads to chronic lack of demand, then some form of basic income – or maybe a basic one off payment – funded by central banks creating money, might be exactly what the economy needs.