WHY WE NEED A UNIVERSAL BASIC INCOME (UBI)… AND HOW WE CAN AFFORD IT.
This paper proposes the seemingly impossible: how to pay a Universal Basic Income (UBI) to every Australian adult, at or above the poverty line, without raising taxes, or debt, or taking money from other programs, or causing excessive inflation.
But first, the most important question: Why?
Rationale for UBI:
Once, it was the birthright of every person to live off the land.
Since the advent of property rights, money, and the system of paid work, this is no longer possible. As a result…
Humans are now the only species that need money to survive (Scott Santens).
While the system has delivered huge benefits for the majority, it has left a substantial minority destitute: those who cannot do paid work, that also have no savings or family support (12–14% of the population, around 3.2 million people in Australia, mostly single women with kids, the aged and disabled, and those between jobs).
This report in The Guardian illustrates what thousands face every day:
“Poverty can happen to anyone at any time — it’s in my every waking and sleeping thought”
Most Poverty is a System Problem:
Without money, people are invisible to the market, so the market can never respond. This is bad for them, bad for business, and ultimately, bad for society.
Yet, we have unlimited money: we create the stuff.
In Australia at least, we also have the resources and organizational capability to meet everyone’s basic needs (and much more).
Welfare does not suffice as it is deliberately set below the poverty line to encourage people who can work to take the available jobs.
Raising welfare is not the answer. As, the higher the rate, the more rational (not laziness) it is for people to take the benefit in lieu of a low-paid job (the Welfare Trap).
A UBI Offers a System Solution:
A Universal Basic Income restores each person’s birthright, by providing the money required to access the resources they need to survive.
It avoids the welfare trap because people do not lose their UBI if they take on paid work.
It provides a floor to stand on, not a ceiling to achievement.
Pilots from around the world show that with enough to live on, people focus on making their lives and the lives of their dependents better, with little adverse impact on the labour market. In general, women spend more time looking after their children, while others take on more education and training — hardly the worst situation.
Objective:
To introduce a Universal Basic Income (UBI):
- Paid to all adult Australian residents every week.
- At or above the Henderson Poverty Line.
- The current target is AUD500/week/adult by 2030 (adjusted for inflation in the price of basic goods and services over time).
- Starting with a low initial payment in 2025 (allowing time to implement the scheme).
Making an Informed Decision about Changes to our Economic System:
Plainly, new money drives new activity as it is spent into the economy.
If we are to make informed decisions about changes to our economic system, it is therefore vital to understand how new money gets created, allocated and spent into the economy.
Unfortunately, most people (even some economists) don’t understand that:
- “…the majority of money in the modern economy is created by commercial banks making loans”, as explained in this Bank of England article: Money Creation in the Modern Economy
- Borrowers then spend the money into the economy to drive new economic activity that meets their needs.
However, there is no natural law that says bank borrowings are the only way new money must be created and allocated.
Given this is the reality…
Funding the UBI:
It is proposed to leave the tax system unchanged. Nor would the UBI be funded by debt, or by taking money from other government programs. These methods could be used, but by leaving our current systems untouched, no one can complain that they are disadvantaged.
Instead, the UBI would be funded through the issue of new Sovereign Money.
The UBI would become the ‘base’ method for injecting new money into the economy.
By increasing interest rates, we can suppress some bank borrowing. (Ideally, bank borrowing aimed at increasing capacity to meet basic needs should be exempt from any rate rises, so we don’t dampen supply. This could be done by giving banks leeway to declare certain loans exempt, with the Reserve Bank subsidizing the rate).
This will give us the ‘monetary space’ to inject some new money into the economy via the UBI, without causing excessive inflation.
In doing this, overall economic activity should remain at full capacity, but more would be directed to meeting basic needs, and less on other spending.
Obviously, this would prejudice people who would have liked to borrow more on non-essentials. But no different to any time interest rates are increased to dampen demand.
Like Bank Lending, a UBI is Not Government Spending:
Bank lending occurs under government auspices, but we don’t regard the money created, and spent into the economy by borrowers, as ‘government spending’.
In the same way, the money created by the Reserve Bank, and allocated to all citizens as UBI, should not be regarded as ‘government spending’. It is truly spending by the people, for the people — individually.
Three Ways to Inject New Money into the Economy:
We would then be left with a system that injects new money into the economy in three ways:
- Universal Basic Income (with the money spent into the economy via individual citizens to meet their basic needs, as their ‘birthright’).
- Government Deficit Spending (with the money spent into the economy to provide additional public goods and services, to the extent agreed — which is the thrust of Modern Monetary Theory)
- Bank Borrowing (with the money spent into the economy to meet borrowers’ needs)
Given we have created a system that requires people to have money to survive, equity would seem to demand that the system ensures basic needs are met above all else.
Under the current system, inflation is managed through interest rates and taxes and spending.
Interest and taxes would remain the primary tools for inflation control, with the preference being a flat % tax on all spending to dampen demand in general. Together with a UBI, this would have the effect of shifting production to meeting more basic needs (as the UBI is spent), and less on other spending. The aim being to keep the economy operating at full capacity, without generating excessive inflation.
Four Income Sources:
It would also result in each person have four potential sources of income:
- A Basic Income paid to everyone to meet their basic needs
- Earned Income for the 50% of people who, at any time, can do paid work — to better themselves and their family, and to provide our goods and services
- Welfare (paid from tax) to support the extra needs of children, the aged, and disabled. This would only be the marginal amount above the UBI required to fund the extra needs.
- Passive Income, for those fortunate enough to have their own savings and/or family support (which for many is currently their ‘basic income’, or in some cases not so ‘basic’.)
Targeting the Universal Basic Income:
This sounds like an oxymoron… but it’s not.
Despite being paid to every Adult, the payment would be targeted to those who need it most by:
- Offsetting welfare payments against the UBI (any amount in excess of the UBI would continue to be paid to ensure no one was worse off).
- Recovering the UBI on a sliding scale from earned income. Above AUD80,600 of income, the whole UBI would be recovered.
In effect, everyone would get two payslips.
1. One from your employers showing your normal income, with normal tax deducted
2. Another from a new UBI Authority. It would show the amount of UBI paid into your bank account each week — less a recovery based on your earned income.
These recoveries and offsets against welfare and other savings on health expenditure and crime would result in the net UBI going into the economy at around 2.5% of GDP. This would simply reflect the growth in production required to fund the extra goods and services that people could demand as a result of having the UBI to spend.
Just as we now rely on people’s honesty (backed up by audits and heavy penalties for fraud), under the proposed UBI, we would rely on businesses to correctly report wages each pay cycle, and on business and people generally to record their total income annually in their respective annual tax return. For people who operate their own business, reporting could be done through their accountant, or a special app that casual workers could also use to report their earnings for both Tax and UBI.
Rationale for Paying it Universally but Targeting the Net Benefit:
- Targeting significantly reduces the amount of money required to fund the UBI, while making sure it goes to those who need it most.
- By paying welfare in excess of the UBI, as well as ensuring no person can be worse off, it means that welfare will ‘naturally’ phase down (and out in the case of unemployment benefits) as the UBI rate is raised. See about ‘phased introduction’ below.
- Paying it and recovering it may seem inefficient. However, it has the major psychological benefit of making the payment universal (so no stigma).
- It also acts like ‘basic income insurance’, as explained below.
Just because you have an income today, does not mean you can’t lose it tomorrow. People lose their income for all sorts of reasons every day: divorce, sickness, a fall in business, natural disasters, disagreements with the boss, their car breaks down and they can’t afford to get it fixed so they can’t get to work, the algorithm denies them shifts, etc.
The UBI provides assurance that if you ever lose all or part of your income, the UBI continues to be paid — no need to apply, no delay. No one looking over your shoulder to see if you ‘qualify’, relieving people of the burden of ‘meeting mutual obligations’, so they are free to do what they know is needed to find themselves a job again (as soon as they can), while caring for themselves and their family, as circumstances require. And, no need to tell anyone when you get a job, or how much you are earning (except the tax man, of course). Again removing ‘stigmatization’.
Then once income is again earned, the following week (or whenever), the recoveries would recommence.
Phased Introduction:
- Start at just $10/week (enough for food for a day for someone in poverty).
- Increase the amount quarterly by $25/week until the target is reached.
Rationale for Phasing:
None of us know what the impact will really be on inflation, the labour market, and behaviour.
Inflation may skyrocket, no one may want to work, and all 18 year old’s might retire to their bedrooms to play computer games, or take a share house and party-away their UBI! Though the evidence from the hundreds of pilots say that this will not happen.
Regardless, the initial amounts are not going to break the economy, or turn everyone into indolent sloths.
Phasing the UBI:
- Gives the supply chain time to adapt to the new pattern of demand, without creating shortages that drive inflation.
- Allows us to establish and test the administration systems, to ensure everyone who is entitled is receiving it, without ‘double dipping’, before the amounts become significant.
- Allows us to monitor inflation, labour market impacts, and behavioural changes with relatively low risk.
At any time, the increase can be halted if it appears that adverse impacts are outweighing the good… or speed it up if, as expected, we see improved health, lower crime, and increased incentive to work and/or take on education.
The countermeasure may be as simple as leaving the rate where it is until the job market sorts itself out, perhaps with an interest rate rise to help things along.
In fact, in today’s environment of rising inflation, a gradual increase in the UBI could be a circuit breaker, providing an effective wage rise for workers, without cost to employers (thus avoiding ‘cost push’ inflation), as well as benefiting those without a job, who are also suffering from rising prices.
Using UBI to Balance the Labour Market:
Once the UBI reaches the Poverty Line, it can become a new more powerful tool to help keep the labour market in dynamic balance.
This can be achieved because each person has a different propensity to take on paid work, depending on their age, commitments, needs, and other income, etc.
As automation, virtualization and AI change the job market, resulting in job losses, the UBI can be increased.
As it is raised, individuals will make their own choice to stop looking for work, or to drop out of paid work, or to cut back their hours, to live on the UBI and any other passive income they may have. Once the rate at which jobs are being filled begins to push out beyond ‘standard’ recruitment times, this would signal the need to hold the UBI rate until the market is re-balanced. At some point, most people wanting paid work would have a job and most jobs would be filled, with everyone else doing other things with their life… by choice. People would then move in and out of the labour market as their circumstances change, while the economy should continue to operate at full capacity.
It would never be perfect, but it should facilitate the transition to a ‘new normal’ over time. It should certainly be better than trying to manage unemployment through interest rates on bank lending. Of course…
UBI Authority
To provide some separation from the Government, it is proposed that a new Authority be set up to manage the UBI, with its own charter and goals: 1. to ensure the UBI did not fall below the poverty line
2. to ensure that everyone entitled to get it each week received it, and
3. to help keep the labour market in balance (in consultation with the Central Bank)
UBI is not a Silver Bullet:
It only addresses the demand side, by giving people the money they require to express their needs in the market.
We still need to ensure supply of adequate housing, health, and education, along with other public goods and services.
We also need unions and employers’ organizations to negotiate in good faith across each sector to facilitate a shift to local production (including increased automation) to improve resilience in our supply chain; where the gains are fairly shared in the form of reduced hours, increased flexibility, job share, work from home, improved conditions, and higher pay, as well as increased profits, and lower prices.
Even so…
UBI could be Transformative:
A UBI has the potential to eliminate systemic poverty, along with the fear of falling into poverty (for those now living pay cheque to pay cheque).
It can do this by providing the money that people need to survive. Effectively restoring their birthright to access resources, as when all people lived directly off the land.
By funding it through new money, phasing its introduction, and targeting the net benefit to those who need it most, we can also introduce it without raising taxes or debt, or taking money from other programs.
And, by using interest rates to dampen some bank borrowing, we can minimise the risk of inflation, ensuring the economy continues to operate at full capacity but with more activity going to satisfy basic needs, and less on other spending.
There are 59 identifiable benefits for individuals, business, the economy, the government and the people in general, as listed in the links below.
Overall, it should result in much less anger and fear in the community, and much more productive effort, less crime, and better health.
Though, the only way to prove this is to do it… starting small. No amount of theorising can demonstrate the reality.
