Implementing a Market-based UBI to Eliminate ‘Systemic’ Poverty

This article is the fifth in a series of eleven short papers that address how we can use ‘market mechanisms’ to better share the world’s resources, without destroying the biosphere upon which all life depends; now and into the future.

It shows how a Market-based Universal Basic Income can be used to alleviate the root cause of systemic poverty.

Overview
Each of the articles is written to be ‘self-contained’. If you want an overview of the series, it is provided here.

Recap
The previous articles discussed how a Universal Basic Income (UBI) can solve the problem of ‘systemic’ poverty caused by a lack of money in the hands of people who are ‘outside’ the production process: young, old, incapacitated, their unpaid carers and those between jobs (over 50% of the population).

It was suggested that:

  1. The Government, perhaps with the support of an independent Commisssion, be responsible for setting the target UBI, and
  2. The Central Bank (as part of ‘monetary policy’) be given responsibility to pay the UBI and levy a new Goods and Services Tax (UBI-GST) to help it achieve its twin aims of low inflation and low unemployment.

This next in the series looks at how this may work in practice

Funding the UBI to Start
Starting small (say $10/week/adult resident) has two majors advantages:

  1. We can test the system to make sure it is getting money to everyone entitled without putting too much at risk, and
  2. The money to pay the UBI would not need to be funded from tax.

We could simply have the Central Bank credit your UBI bank account with dollars, literally at the press of a button; just as Central Banks around the world have done to support ‘Quantitative Easing’, and are now doing to pay wages and to keep businesses afloat in the current COVID-19 crisis.

This would represent a permanent increase in the money supply every year.

The Australian economy is around $2 trillion, with around 20 million eligible adults. At $10/week/person this would amount to $10.4 billion per annum, or about 0.5% of the GDP over a full year.

It could be regarded a very mild stimulus if it was all spent, which in many cases it would not be.

First, tax would be paid on it as income, and welfare benefits would be marginally reduced, based on existing rules for earned income.

Secondly, for many people it would just be a number sitting in their bank account unspent. Though, for people on low or zero incomes, even $10/week (or $20 for a couple) could make a material difference, perhaps petrol in the car to get to work.

Using the Market to Increase UBI While Limiting Adverse Impacts
Once we have set up the system, we can assess its impacts.

If we find that $10/week is not creating any dis-benefits, or the benefits far outweigh and negatives, we can begin to gradually increase the amount, watching for any signs of inflation or tightening in the labour market.

Taking this approach ensures the target level of the UBI and the rate of its implementation are based on ‘market measures’ to achieve overall social and economic well-being, not on ‘individual entitlement’.

Managing Inflation
The Central Bank can then gradually increase the UBI.

Every few months, the rate could be increased by (say) $20/week, with the extra money continuing to be created by the Central Bank until inflation appears.

As explained in the previous article, the onset of inflation would be mitigated by a range of measures:

  1. Welfare Savings
  2. Income Tax payable on UBI
  3. Adjusting Wages and Incomes to account for UBI
  4. Increasing Supply using Spare Capacity and Automation/Virtualisation
  5. Additional Taxes payable as a result of Economic Growth driven by UBI
  6. Reduced Borrowing (as explained below)

Replacing Some Borrowings with UBI
Borrowings could be reduced the way they are always reduced.

As we pump money in via UBI, at the first sign of ‘excessive’ inflation (say above 3% pa), we can begin to increase interest rates. Potentially, we could go to 4–5% pa without any trouble, while keeping the real economy from diving through the on-going injection of the UBI.

As always, it would be a ‘balancing act’, never perfect, but ‘good enough’. The increase in interest rates would help return monetary policy to ‘normal’, and also help investors, particularly superannuation funds, to achieve more stable long term returns.

The replacement of some borrowings with a non-repayable UBI would, itself, provide a huge stabilising influence on the economy, while helping to alleviate financial stress for many on low incomes.

The Risk of Labour Market Imbalance
Everyone has a different propensity to take on paid work depending on their age, life circumstances and other sources of income. We can use this fact to set the UBI at a rate that keeps the labour market ‘roughly’ in balance.

By starting small and gradually increasing the UBI, we can also monitor its impact on the labour market. As the market tightens we can hold the increase.

If subsequently, people do want more work, and it’s not available (say due to automation), we can increase the UBI until people stop looking for work again, bringing the market back into balance. This would be evident when people in work began to drop out of the ‘paid economy’ to live on the UBI, faster than people re-entered the market to take on the vacated positions.

At that point, those choosing to live on the UBI could not find paid work even if they wanted it (because, by definition, the market would be in balance). In these circumstances, they would not be a ‘drain’ on the economy. Nor could any of us complain that they are not doing ‘paid work’, as everyone of us would be getting the same UBI and have the same choice.

Imposing an Additional Goods and Services Tax (GST) to Partly Fund UBI
If the labour market is balanced and inflation is in control, the UBI may still not be sufficient to meet ‘basic needs’.

A moral judgement will then have to be made to increase BOTH the UBI and the UBI-GST to provide more money for those in the ‘unpaid group’ to get the UBI to its target level

This decision is ultimately a decision of the the Federal Government, acting on our behalf, perhaps based on the recommendation of an independent Commission.

In making their recommendations, the Commission could be required to take into account any increase or decrease in drug or alcohol abuse or gambling, or mental and physical health issues, or educational outcomes, or crime flowing from the payment of the UBI; given the clear link between these behaviours and poverty. The Commission should also have to take into account the overall lift in living standards over time, so that the target UBI can be altered to account for them.

As the UBI is not going to the government to spend, but to all of us equally, and as we all would pay the same % GST on our spending, the government could even poll the population to gauge the level of support for an increase in the UBI — based on the data provided by the Commission. This too can be seen as a ‘market-driven’ process as we all have skin in the game.

The costings in the previous paper suggested a 7% UBI-GST, together with the other offsets described, could fund a $500/week UBI for everyone over 18.

Of course, the judgement on the level of UBI and UBI-GST would never be perfect (just like interest rates!), but if we err on the generous side, we can be sure that all people have the money they need to live and, worst case, we put up with periods of mild inflation, and/or a tight labour market in some areas at different times.

Over time, it ought to be possible to increase both the UBI and the UBI-GST to give more and more people a higher net benefit as the capacity of the economy grows to make more with less: as long as the changes are done gradually so as to keep both inflation and real unemployment low.

Phased Implementation
We could give ourselves (say) ten years to fully implement it, by which time the UBI could be $1,000/week, depending on the level of automation and other factors at play.

By that time, our welfare could be much more targeted to those with special needs including disabled people, the aged and their carers, as well as more support for people with mental health problems and addictions.

At the same time, automation and virtualization ought to have increased the supply of healthcare and education at lower cost, as well as allowing remote working in outer suburbs without loss of essential services. Combined with renewable energy and local sewage and water re-processing and highly automated local manufacturing, we could create livable satellite centres that provide a good quality of life without harm to the biosphere!

The next in the series looks at how a Market-based UBI combined with a new UBI-GST managed by the Central Bank can address all of the concerns that many people have about a UBI.

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