New Economy Journal

Higher Incomes, Lower Costs & Guaranteed Safety Net

Volume 2, Issue 3

June 9, 2020

By - Michael Haines

Piece length: 1,890 words

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Around 50% of the population cannot contribute to the production of our goods and services: the young, old, incapacitated and their unpaid carers, as well as a small percentage ‘between jobs’.

This is not a fixed group. The people in it constantly change: the young grow up and babies are born. The old and disabled die and their carers get new jobs; others age or become incapacitated, requiring new carers. The unemployed find new paid work, as other people lose their jobs.

The group is ‘us’ over time.

It goes without saying that the people in this unpaid group are not simply ‘takers’. Many undertake valuable work: learning, caring for home and family, creating, volunteering, and maintaining social bonds. Even people looking for work are doing work.

However, if you cannot work in the paid economy, you have no direct access to income. Without income, you cannot buy the goods and services you need.

People in this ever-changing unpaid group access financial means through savings, borrowing, family, welfare, charity, and crime.

Quite evidently, these systems fall short. 12% of the population remains in poverty within Australia. This percentage has changed little over time, though the people in the group constantly change.

Economic growth cannot solve this problem, as no matter how big the economy gets, the percentage of people in the ‘unpaid’ group remains about the same. Quite simply, the reasons why people are ‘unpaid’ (age and incapacity and the need for care, as well as the constant flux in employment) are independent of ‘economic growth’.

A Universal Basic Income (UBI) provides a SYSTEM solution to this problem, without anyone having to justify entitlement.

It can enable us to achieve higher income, lower wage costs and a guaranteed ‘safety net’ by splitting income into two parts:

  1. A UBI that meets everyone’s Basic Needs*, and
  2. Earned/Investment Income on Top.

(*Basic Needs’ are relative. In a modern economy, these include water, food, clothing, shelter, energy, transport, sanitation, and healthcare, as well as education, and other essentials, including basic smartphones, computers and communications).

The UBI would be a weekly payment to all adults, paid until death or emigration. It would be treated as normal income for tax and welfare purposes.

It would not have to be ‘funded’ by taxes or debt.

This piece, and subsequent planned papers will discuss how a $500/week UBI can be paid to every Australian adult using ‘newly created money’ without triggering inflation or creating labour shortages.

The money can come from the same place all money comes from: ‘out of thin air’, as banks make loans. This is not an opinion, but an empirical reality, explained in an excellent paper produced by the Bank of England.

In simple terms, your bank never asks if it can lend out your deposit. Instead, when a new borrower is approved, the bank simply makes two entries in its books. On one side they show the amount of money borrowed that must be repaid; matched on the other side by a new deposit, that the borrower can drawdown.

The double entries create ‘money out of thin air’ while keeping the bank’s books in balance.

This new money is spent by borrowers into the economy, increasing demand.

The UBI would simply replace some prospective new borrowing, reducing the overall debt burden, while maintaining demand without triggering inflation.

A new tax could also be applied to spending, to further mitigate inflationary pressures.  By taxing spending, the tax captured in one cycle can be re-injected as UBI on the next cycle, keeping the money circulating without increasing the money supply.

The secret to implementing a UBI is ‘gradual implementation’.  We can start with a small weekly payment, say $10/week/person.  This allows us to test the system with minimal risk. The amount can be gradually increased (perhaps over ten years) to reach the equivalent of the current target of $500/week.  A gradual increase in the amount of the UBI gives businesses the time to adapt to new levels and mix of demand without causing shortages.

Introduction of the UBI also requires incomes to be adjusted, to create the two-tier income structure.  This can be done by reducing wages of employees via their employer, and via the tax system for self-employed and passive income earners, phased as follows:

  1. If you earn less than 25% of the median income, say $300/wk, you keep all your income, on top of the UBI.
  2. Above $300 earned income, you keep the whole UBI, but your earnings would be reduced by 40 cents in every dollar earned above $300 up to $1,576 (which is about 125% of the median wage)
  3. Above $1576, your earnings would be reduced by the full amount of the UBI. At this level, there would be little incentive to give up your earned income to live on the UBI… though you would have that choice!

The capacity to pay the UBI is derived from our collective real wealth: our natural and human resources; as well as our physical infrastructure, together with the technological, organizational and knowledge resources of humanity. Basically, this ever-growing wealth allows us to make more with fewer people (and, potentially, even less harm to the environment using ‘circular’ processes).

Under the current paradigm, the people put out of work lose income.  Without money coming in, they cannot signal their needs in the market.

How crazy! Needs that were being met, suddenly go unmet, even though our capacity to produce is enhanced through automation.[1]

The UBI simply provides the money to enable everyone to signal their basic needs, whether they are employed in the ‘paid economy’ or not.

With a UBI, it is likely most employers could lower their average wage bill as they would no longer have to pay each person enough to meet all their living costs. They would only have to pay the marginal cost to attract someone to do the work.

Each person would need to balance the ‘value of their time on the basic income’ vs the ‘extra money that would allow them to better enjoy their remaining free time’, after taking up any work on offer.

It is indisputable that most people want more than the basics, incentivizing them to take the work on offer.

It may mean the wages for some low-paid jobs increase; as employers may have to pay more to people who are having their basic needs met, to attract them to do the work.  Some employers may not have to pay any more than now.  Many may pay less.  The market can be left to set rates, with the support of unions to equalize bargaining power.

Despite lower average wage costs, based on the proposed phasing, most people should earn more in total from the combined UBI and wages than they do now. The rest should be no worse off.

In the event of unemployment, the basic income would allow people to continue to meet their basic needs until they find new employment. No need to apply. No falling into the poverty trap of existing welfare. When new employment is secured, the money earned would be in addition to your UBI. No need to tell anyone you’ve got a job, or how much you are earning. No more second-class citizens.

A UBI would also provide direct income to those staying at home to care for children or elderly parents, or disabled dependents. It would be a token recognition of the enormous value they contribute to community well-being.

As a result, we can expect to see less despair, suicide, domestic abuse, and crime; as well as better health and education outcomes, which would provide a degree of relief on government budgets (and therefore taxpayers).

As well, the extra spending generated by the UBI would benefit business and investors by boosting business turnover and profits.

Government would also benefit from the income growth, reducing the need to borrow or raise taxes, or enabling it to provide additional public goods and services.

Everyone would benefit from a stable thriving society.

The UBI can be increased over time to reflect not only inflation but also a lift in overall living standards.

It is important to stress that UBI is not a panacea.[2] It solves one system problem only: the lack of money in the hands of people in the ‘unpaid group’ to express their basic needs.

A version of this article was published on Medium on 8 May 2020.

[1] Automation and virtualization will radically alter the labour market, eliminating jobs on production lines, and in warehouses, shops and offices; as well as driving a taxi, truck or bus. As Daniel Susskind demonstrates, ‘this time is different’. While machines will create work, much of that new work will also be done by machines, not people. There will, of course, be new technical jobs, required to install and maintain highly-automated manufacturing plant but they will entail relatively few workers with good manual skills using AI and AR to guide them through processes they have little understanding of.

Yet, there does not seem to be an impending end to work overall. Automation will not do away with social interactions, entertainment, sports and hobbies, as well as care for children, elderly and disabled; with people willing to pay for personal service. It will be a long time too before it eliminates the need for people in the maintenance, repair, re-building and beautification of our cities and gardens.  UBI can help the transition to the new economy.

[2] A UBI would not replace government ‘job guarantees’. These should not be ‘make-work’. Any job provided by the government should have as its first aim, the delivery of a needed good or service. If it seems there is a lack of private-sector jobs, the government would remain free to offer public jobs that are truly useful. Regardless of whether the job is offered in the private sector or the public sector, the income it provides would sit on top of the UBI.

The cost and availability of healthcare (including dental), education, and housing also remain major issues. Fortunately, new technologies are emerging that will drive down their price and increase availability. Cheaper and better remote health and education services, as well as remote working will take the pressure off city housing by allowing people to live in places where prices are lower, without loss of work or essential services. Other policy changes may also be required to increase supply and lower prices.

Additional support would also be required for people who are incapacitated due to their greater needs.

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