Could UBI be the answer to filtering money into the economy?

Unconditional basic income is no worse than quantitative easing

 
Author: David Orrell
September 1, 2014
David Orrell

Unconditional basic income is a hot topic at the moment. The people of Switzerland, for example, are currently preparing for a national referendum on whether they should pay themselves a yearly income of CHF 30,000 (about £20,000), even if they don’t work. Other groups, such as Basic Income UK, have made similar proposals, though most have suggested a figure around £7,000 per year, which would be easier to fund than the deluxe Swiss version.

The idea of paying citizens an unconditional basic income has been around for some time, and has been tested on a small scale in a number of countries. To many people, it sounds like a utopian scheme. Indeed, Thomas More mentioned it in his 1516 book Utopia. It would mean that people wouldn’t have to work unless they truly wanted to. The government could also avoid micromanaging tax allowances, and different benefits for housing, food and so on. Although it is often presented as socialist, its appeal is broad-based.

Even Milton Friedman thought it was a good idea (though his version was called negative taxation), since he thought it would shrink the size of government and therefore pay for itself. The pros and cons of basic income have been debated in a series of World Finance articles and videos; but here I’m comparing the scheme with another method of handing out money – quantitative easing (QE).

Basic income vs quantitative easing
In some respects, basic income and QE are the opposite of each other. The term ‘quantitative easing’ makes no sense and seems like a deliberate attempt to obfuscate what is going on. Unconditional basic income, on the other hand, does exactly what it says on the tin. It hands out money, with no conditions.

QE attempts to stimulate the economy in a top-down fashion, by using newly created money to buy government bonds from private sector banks. The theory is that this should flood banks with money, which they will then lend out to companies, and this will boost the economy. However the banks might just hoard the money, or channel it into unproductive activities such as boosting house prices and paying themselves bonuses, which is why the jury is still out on the effectiveness of QE.

A basic income, in contrast, could boost risk-taking and entrepreneurship by giving people the time and space to experiment

The basic income on the other hand, just gives everyone money. It will have the largest impact on low-income people, who tend to spend their money rather than hoard it, so will boost economic activity directly. Of course, they might spend it on things such as drink, drugs or gambling. But a nice feature of basic income compared to QE, is that it is easier to test on a small scale, and the empirical evidence from a number of such studies shows the money is usually spent quite sensibly.

One thing the techniques have in common is they are both unconventional approaches that will have uncertain effects on things such as inflation. When QE was first proposed, it generated little controversy because no one could figure out what it was, but some people did worry that it equated to ‘printing money’ and so would boost inflation. Others argued the new money was just filling a void left by the implosion of credit instruments during the financial crisis, so inflationary effects would be muted. The latter appears to have been the case in the US and UK (so far), though asset prices certainly rose, which was part of the idea.

The inflationary impact of a basic income would also be mixed and uncertain. It won’t directly affect money supply since it does not involve creation of new money, though it may boost the rate at which it is spent. Inflation is affected also by economic behaviour, which will certainly change in ways that are hard to predict. For example, workers may demand higher salaries for undesirable jobs, but lower salaries for more rewarding jobs.

Easy money
The UK’s current benefits system tends to stigmatise the poor while incentivising them to not seek paid work, because if they get a job their benefits are cut. This makes it hard to wean them off state support, like certain banks. A basic income, in contrast, could boost risk-taking and entrepreneurship by giving people the time and space to experiment – and potential customers some money to spend. As record label owner Alan McGee has pointed out, the unemployment benefit system in the UK certainly helped to incubate the music industry until it was cut back – most musicians in the 80s and 90s seemed to have honed their skills while on the ‘dole’.

Perhaps the biggest impediment to a basic income is psychological. Our monetary and economic system is based on the concept of scarcity and competition. We have to fight for our lucre, and it seems morally wrong to get something for nothing. But much of the wealth in the economy is generated from public goods such as natural resources or land values, and what the father of social credit, the British engineer CH Douglas, called the “cultural inheritance of society”, which today would include inventions such as the internet or mobile communications. So it makes sense that some of these proceeds be considered a birth right rather than something that can be captured by a small group (for example shareholders in Facebook).

Also, some of our fears about giving money away have surely dissipated after the bailouts and QE. After all, many countries devoted a major fraction of GDP to rescuing banks. Why not rescue some single parents? Basic income is often discussed as something that is theoretically interesting but politically impossible. Which is strange when you think about it – shouldn’t money for nothing be an easy sell? Instead, it seems to be something that many people are uncomfortable with – even though QE was OK. But maybe it is time to relax those worries, and make way for a new kind of quantitative easing – one which makes life easier for a large quantity of people.