Flat White

Bursting Di Natale’s slackernomics thought bubble

6 April 2018

11:53 AM

6 April 2018

11:53 AM

Universal Basic Income, a social welfare system where every citizen is unconditionally entitled to receive a fixed amount of money from the State, is an idea that continues to garner political and entrepreneurial support. I argue that Universal Basic Income is not scalable to ‘pilot programmes’ and will adversely affect the taxable capacity.

Beside numerous left-leaning politicians and activists, Mark Zuckerberg, Elon Musk, Bernie Sanders and Richard Branson have voiced their support for Universal Basic Income. Finland is currently running a trial programme which is already hailed a success. Several other countries (Canada, New Zealand, USA) are also considering similar programmes, assuming that if UBI works in a single village it must also work for the entire nation.

The problem with this logic is that a pilot programme conducted in one town only is not universal, it can be easily funded by the national economy without imposing a noticeable burden on the taxpayer. Pilot programmes do not take into account the effect of higher taxation necessary to fund the scheme nationally, nor the psychological factor that ‘this is just a temporary payment after which the usual economic pressure will return with a vengeance’.

Universal Basic Income has, by definition, no one left outside of the scheme to pay for it, therefore it is not economically scalable and the purported pilot programmes are simply not UBI. Commentators in The Financial Review and The Conversation have alluded to this fact and identified realistic (but practically unachievable) conditions for funding UBI.

A 2016 Commonwealth Parliamentary Library research paper concludes that the “The current debate is more about vision and values than about concrete policy.” The parliamentary report also identifies a concern obliquely related to a fundamental economic principle which is routinely ignored by proponents of UBI: “Critics worry that a UBI would significantly reduce economic output by encouraging individuals to withdraw from the labour market. This would not only reduce living standards but make a UBI more difficult to sustain over the long-term.”

The problem for Universal Basic Income is not the economic output per se, but the associated lower participation in the workforce (under UBI people don’t have to work as much to sustain their normal standard of living) which would have a direct and proportional effect on what is formally called the taxable capacity: the total economic value that can be taxed in a given period of time. In other words, UBI incentivises leisure which, in turn, is an incentive to reduce participation in the workforce. It is unlikely that most people would quit working altogether but it is near-certain that most people would work fewer hours and thus generate less taxable income.

Assuming that a UBI scheme sufficient to cover modest living expenses could be funded by savings from shutting down the existing welfare system, supplemented with tax increases across all income brackets, this would create pressure on the taxable capacity and would need to be again supplemented by means of even higher taxation, creating even more incentive not to work.

There are three common objections to this line of reasoning. The first objection hinges on the belief that workforce participation would not change, that people would want to work just as much under UBI (perhaps even more) than under the present income/welfare system. It is unclear what would compel us to stay in jobs we do not particularly like if we could get what we work for without actually working. If there is something else that would universally motivate us, and motivate us sufficiently, to stay in full employment as, for example, a janitor or a labourer (assuming that UBI will not make everyone a competent airforce pilot or a famous actor) this must be empirically demonstrated and not just asserted.

The second objection is that automated production and land-ownership could be taxed to provide the necessary funding. While land is not of itself productive in the economic sense, it is nonetheless one of the factors of production. In both cases, the objection fails for roughly the same reason: any taxes or costs incurred in the process of production are, whenever possible, passed onto consumers, so any benefit derived from UBI funded this way would be in large part offset by higher prices. And if the costs of production could not be reclaimed than the productive sector would inevitably shrink, with the capital seeking more profitable investment opportunities (if necessary, facilitated through war).

In regard to unproductive land, a high land tax would make land ownership a liability, ultimately resulting in the government ending up owning all the land, with no one left to tax. Considering the staggering amount of additional revenue necessary to fund a living wage, the above outcome (of land dispossession) would be a mathematical certainty. The capital is not a stationary target and will evade anything that diminishes it. When it cannot adapt, wealth is destroyed without benefiting anyone.

The third objection contends that money could be simply printed for the purpose of funding UBI. This ignores a fundamental economic principle: that money is just a token that represents value but is not valuable in itself, without something real backing it up. Irving Fisher’s theory of exchange neatly formalises this principle: assuming zero economic growth, any increase in the supply of money must result in proportional reduction of the purchasing power of money. Since UBI is bound to reduce the economic output by reducing the workforce participation one could expect price-inflation even if the supply of money remained constant, creating another economic hurdle for UBI proponents in the form of net inflation equal or greater to the overall benefit of UBI. Another way, wealth is not created by printing tokens, because tokens only represent whatever real value is already there.

I have discussed this specific aspect of the problem in much detail in an article “A Monetary Case for Value-Added Negative Tax”. As the title suggests, I have also proposed an alternative approach to wealth distribution, which in many ways resembles the Universal Basic Income concept but differs in two critical aspects: it is neither guaranteed nor fixed but determined according to one’s contribution to the economic output. The more value one personally generates the higher the entitlement to a kind of social dividend. This incentivises value-creation rather than leisure and is effectively self-funded.

Michael Kowalik blogs at Cultural Analysis, where this piece also appears.

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