Arguments for a UBI – The Economist

This post is part of the sequence Arguments for a Universal Basic Income.

Effective Stimulus

One of the problems with the economy as it stands is the positive feedback loop of recessions.  When times are good, things work well: people spend money, which allows businesses to pay their staff, who can then spend their money and so on.  Every pound or dollar spent flows around the economy several times, facilitating growth and prosperity.  When the economy slows however, people see hard times ahead, and will try to save money, reducing their expenditure, which in turn reduces businesses’ income.  These businesses feel the squeeze and may lay off staff, who then have even less money to spare, exacerbating the problem, reducing the flow of money and making a recession more likely.  The concept of a stimulus is an idea originally thought up by the economist John Maynard Keynes: the government can inject money into the system, often by funding large infrastructure programmes, or more recently by giving it to banks to lend out.  This has the effect of increasing the flow of money again, with the hope that this will kick-start the economy, improve employment, and get things back to normal.

The issue with this idea, is in the implementation – when should the stimulus be made, and who should receive it?  Recent stimuli have been a windfall for the banking sector, raising questions around corruption and impropriety, while previous stimuli aimed at investing in infrastructure have raised questions about efficiency and government waste.  There is also the risk that the stimulus may be implemented too late, allowing the recession to bite before any action is taken, or may be implemented for too long, resulting in too much money flowing around the economy, causing higher inflation.  In principle, stimuli should be counter-cyclical – that is, when the flow of money around the economy falls, they should be used to increase it, and when the flow of money around the economy rises again, they should stop.  Unfortunately, stimuli inevitably become political, which hampers the objectivity with which they can be applied.

It is a well understood and intuitive phenomenon that poor people spend a higher proportion of their income than the rich.  People with high incomes can afford to save, whereas people living on the bread-line spend everything they receive, just to make it through the day.  The beauty of a Universal Basic Income is that this phenomenon makes it a self-adjusting pseudo-stimulus (it is not technically a stimulus in the strictest sense as it is moving existing money, not adding additional money to the system).  As the economy contracts, and people become poorer, the Universal Basic Income becomes a more significant part of their income, and they will spend a higher proportion of it.  Equally, as the economy improves, fewer people will be dependent on the Universal Basic Income, so it will be more likely to be saved rather than spent, avoiding the economy becoming overheated.  This means that if an economic slow-down occurs, resulting in many job losses, there is still a large amount of cash flowing into the economy from the people spending this Universal Basic Income, which should keep many businesses afloat, and reduce the cascade effect of further job losses.

Due to the fact that both demand and investment fall during a recession, there is a choice to be made between propping up demand and propping up investment when considering ways to mitigate the economic damage.  Propping up investment is obviously intended to encourage higher employment, which will in time give people more money, and therefore increased demand.  As was seen in the recent recession in the UK however, despite improved access to investment through cheap rates of borrowing, companies can take a long time to translate the increased availability of investment into higher employment.  This is something of a self-fulfilling prophecy – they don’t want to increase their employment until demand improves, and demand won’t improve until employment increases.  This situation does not persist indefinitely, but does act as a kind of “friction”, slowing down the impact of the policy.  

Propping up demand on the other hand removes the disincentive for companies to utilise any investment they have access to – there may well be less investment available, but what there is, is more likely to be used for increasing employment.  Low investment is not ideal, but here the “friction” is on our side – a short period of low investment means that new machinery will not be purchased, and old machinery will not be replaced, however this will simply result in people sweating their assets.  It is only if this low investment persists, that significant permanent reductions in capital stock will emerge.  As such, a Universal Basic Income props up demand without needing an actual stimulus – investment will reduce, but a vicious self-reinforcing cycle of collapsing demand is avoided, and due to the “friction” around investment, if the economy recovers relatively quickly, there shouldn’t be too much lasting damage.

If an actual stimulus is still required, the Universal Basic Income provides a highly efficient vector for the stimulus money – rather than government spending on infrastructure or lending to banks, the Universal Basic Income can simply be temporarily increased, providing a wealth transfer to every citizen in the country.  This avoids any questions of inefficient government spending or impropriety, by avoiding the government picking favourites.  Instead, as wealth is distributed in such a way that there are usually many people at the lower end of the wealth spectrum for every person at the higher end, the vast majority of the stimulus goes directly to people that will spend most of it, providing an immediate and effective injection of cash into all of the most critical businesses.

A common perception around a Universal Basic Income is that it would cause higher inflation, similar to what occurs when a stimulus is applied when one is not required, however this is unlikely to be the case.  Unlike cheap bank loans, which increase the supply of money for businesses, or the government printing money to spend on infrastructure, a Universal Basic Income does not require creating money, as demonstrated in the Accountant section.  It is the act of creating more money either through printing or through debt that is inflationary.

When looking at housing specifically, rather than the economy as a whole, it can be argued that a Universal Basic Income could drive an increase in housing costs, however this is also the case with any effective system of benefits: if there is an inelastic supply of a good, the price will necessarily rise to keep consumption the same level as before.  If there are not enough houses for the number of people in the country, there is no way to house everyone.  Eventually one might expect that higher prices would lure more competitors into the market, increasing supply, but this is dependent on the availability of land and the planning regulations.  Ultimately this is a problem of housing policy, with no “silver bullet”.  That being said, a Universal Basic Income does have one advantage in this area that other benefit systems lack – unlike programs such as housing benefit or social housing, Universal Basic Income does not tie you to a location.  If you have no job, you can move to an area where housing is cheap, rather than relying on the government getting around to building council housing in London.  This does depend on the Universal Basic Income being both implemented nationally and administered nationally, as having to re-register for benefits after moving to a different area often causes a discontinuity in payments, which can be hugely problematic for people.  This is a reasonable condition to expect though, if it is being administered through the tax code.

One of the most widely used arguments for a Universal Basic Income since the advent of computers and robotics is that of automation.  As more and more jobs become automated, reducing the need for human employees, more people will become unemployed, and possibly unemployable.  It remains to be seen whether this will be the case, as previous technological advancements have simply led to higher production volumes, lower costs and higher demand.  Needless to say, these disruptive technologies caused a temporary dip in employment while the market rearranged itself, and people trained for new roles.  Even if large scale automation does not result in fewer jobs to go around, it will cause temporary unemployment on a large scale, which will have inevitable negative consequences without a system in place to ease the impact of this loss of income.  Current state benefit systems, by virtue of their piecemeal approach, leave too many gaps to fall through, and do not adequately encourage retraining, demanding that people constantly apply for jobs that may be dwindling in number, rather than allowing them the time to train in another field where more jobs are becoming available.

If large scale automation does result in a permanent reduction in the number of jobs required by human workers, it is highly likely that existing systems of administration for state benefits would become overloaded.  Providing everyone with the means to survive by implementing a Universal Basic Income is likely to be far more straightforward than scaling up the existing system by an order of magnitude.  Because people would no longer need a full-time job in order to have enough money to survive, this could also result in the remaining jobs being divided up and spread across more people, so that everyone could still augment their Universal Basic Income, but could work fewer hours per week.