Tag Archives: universal basic income

A case for universal basic income

Within modern libertarian-leaning circles, there has been increasingly vocal support for introducing a Universal Basic Income (UBI) — an unconditional state-financed income guarantee for all citizens. This is often met with surprise from those more social-democratic leaning, who, interestingly, are increasingly supportive of the idea too, albeit approaching it from the social rather than the economic angle. I believe the arguments from both sides are valid, and regardless of which way you vote or whether you lean left or right, we should support the introduction of a UBI as a replacement for our existing welfare systems.

Government efficiency

Perhaps the biggest gripe with current social welfare spending is how inefficient governments are at handling it, which is hardly surprising, given that governments simply aren’t very strongly incentivised to be efficient. A UBI is the most simple and efficient social spending program that can be envisioned and owing to its inherent universality and uniformity it disempowers politicians from manipulating it for political purposes.

We can effectively eliminate all forms of existing welfare (including unemployment benefits, aged and disability pensions, maternity and paternity leave, carers allowances, and student income support) and their associated bureaucratic infrastructure, replacing it with a script that makes automated periodic bank transfers to everyone. The entire existing infrastructure can be completely dismantled and put to rest, along with all its operating costs and overheads, and the associated labour put to better use than paper-pushing.

This isn’t only more efficient for the government, but also for recipients, who are no longer burdened with battling against bureaucracy and can instead turn their attention to more productive things.

Benefits for the unemployed

A common and completely correct criticism of conventional unemployment benefits is their creation of ‘poverty traps’, induced by the extremely high effective marginal tax rate (EMTR) imposed upon the unemployed when they gain employment, whose income upon gaining employment is discounted by their loss of benefits. Their effective pay increase is the difference between these (not very much for a low-income worker), yet their respective increase in workload is from zero to full-time. This is equivalent to paying a very high rate of income tax, typically far higher than the highest marginal tax rates in even highly progressive systems. This creates an enormous disincentive to seek employment since people aren’t likely to switch from unemployment to full-time work if it only earns them an extra cup of coffee. With an unconditional UBI in place, any new income earned is not discounted by benefit reductions, and the person’s marginal income remains their actual income.

Eliminating this poverty trap barrier would foreseeably result in far greater incentive amongst the unemployed to seek and hold onto employment. Additionally, by not being stuck in a situation where people have the “I have to take any job I can get otherwise I’ll be homeless” mindset, people are more likely to find themselves in jobs that suit them and provide a positive future outlook.

With social security conditional upon being unemployed and a minimum award wage in place, those with labour productivity below the minimum award threshold are forced onto social security. Marginal income is discounted by the social security baseline, which is a very low differential for low-skilled workers, creating a ‘poverty trap’ that disincentivises employment.
By removing the minimum wage and replacing social security with a UBI the poverty trap is eliminated.

Additionally, in eliminating the minimum award wage we prevent low-skilled workers from being priced out of the labour market altogether given the inevitability that some workers will be unable to readily find employment in which their skillset empowers them with productivity above this imposed threshold, thereby condemning them to unemployment.

Benefits for workers

Amongst low-skilled workers in particular, there is significant bargaining asymmetry against employers — to the employee, everything might depend on keeping their job, whereas to the employer the cost of replacing them is relatively low. A UBI to a significant extent offsets the former issue, placing workers into a stronger workplace bargaining position without the need for regulatory mechanisms of highly questionable efficacy to attempt to enforce it. This increases the labour market competitiveness of workers.

The same argument extends to self-employment. A low-skilled worker might self-employ by undertaking odd jobs, or contract- or app-based work, which don’t provide long-term job security but ought to be encouraged.

Labour market mobility

Throughout much of the developed world, savings rates are very low, providing a significant hindrance to labour market mobility — the ability for people to switch between jobs. Since it can be very challenging to line up a new job timed exactly right to match the exit from an existing one, transitioning between jobs is effectively disincentivized by this savings barrier. This creates an employment trap that inhibits people from placing themselves into jobs to which they are best suited and most likely to be successful and productive at.

Increased mobility in the labour market is enormously beneficial not only to workers, but also to employers, and reducing inefficiencies that undermine mobility have huge economic benefits. This doesn’t only apply to upward mobility, whereby people shift into jobs with higher income, but especially to sideways mobility, where people change jobs to better suits their conditions or gain new skills. A UBI improves overall labour market mobility by ensuring that employees aren’t economically trapped into jobs that aren’t right, or where they could find something better, which isn’t a good outcome for any of us, either individually or collectively.

How to introduce a UBI

Given that introducing a UBI represents a major structural reform, it is important to be mindful of minimising disruption during implementation. If poorly executed it could shock the system and cause destabilisation. A suggestion for how to smoothly go about implementing this is as follows.

Take all existing employment contracts and automatically overwrite them to subtract the introduced UBI amount from the specified income, with no other contractual changes — the legislation effectively negotiates down all salaries by an amount equivalent to the newly introduced UBI, which everyone now receives. The UBI amount is effectively contractually refunded back to the employer via reduced liability, with no perceived change in income by employees.

We could similarly eliminate mandatory superannuation — a hugely inefficient and inequitable system — instead converting whatever fraction is necessary into income taxation to finance the component of the UBI stream that replaces the pension and allowing workers to retain the rest.

Effect of legislative renegotiation of employment contracts to discount incomes by the newly-introduced UBI. For illustration here I let the UBI be equal to the minimum award wage, at which point those previously earning the minimum wage now earn nothing. This necessitates the right for employees to choose to cancel current contracts and renegotiate them if they choose.

There is one obvious pitfall in the above figure, being that at the bottom end of the labour productivity spectrum legislatively renegotiated incomes become extremely small or indeed vanish in the limit where the UBI equals the previous minimum award wage. Clearly it isn’t viable for those employees to accept that. But that isn’t to say that their labour is actually worth nothing. The purpose of the legislative override is only to balance the various money flows, but it simultaneously skews incentives.

Two ways to navigate this issue are:

  1. Complement the legislation with the right for employees (but not employers) to exit their contracts and choose to either reapply with newly negotiated salary. Employees can realistically negotiate their salaries upward at this point given that their labour still has value, however they would now be doing so in competition against a bigger pool of competitors given that the minimum wage has now been abolished. The new market value is expected to be less than before (due to increased labour market competition).
  2. Introduce the UBI gradually over time, discounting the pre-existing benefits stream by an equal amount until over time it evaporates entirely and can be abolished. This has the advantage of mitigating sudden labour market shocks that a spontaneous introduction would induce and allow the market to find new pricing for labour on its own without top-down intervention.

Given that employers have all now been granted an employment cost reduction equivalent to the UBI paid to their employees, the cost of the UBI can now be compensated for by tax liabilities to the employer via company tax. For this to remain budget neutral the new tax liabilities would in total be greater than before since they now also must cover those who are unemployed but now received the UBI, which corresponds to the unemployment rate, offset by whatever the costs of the previous, far less efficient unemployment benefits schemes were. All things combined, in countries with low unemployment and/or highly inefficient public sectors, this is unlikely to be a major burden.

Money flow between employers, employees and government.
Upon transitioning to the UBI the flows change, with no perceived change in incomes. If the UBI takes the same value as conventional benefits, which it needn’t necessarily, there is no perceived change in benefits or net taxation either (tax rates would however have to increase).
If we opt to introduce the UBI gradually to minimise labour market shock, the money flow would instead look like this. We discount the benefits flow by the UBI, and the UBI is gradually ramped up until the difference is zero at which point the previous benefits scheme is abolished. Although this approach is a longterm one, it is likely more politically viable to pursue given the aversion politicians have to making major structural reforms that cause short-term shocks (after all, the next election is always in sight). Politicians aside, major shocks to the labour market are generally unwelcome anyway, and slowly swapping in a UBI using this approach (which I’m going to name political annealing) allows us to smoothly interpolate from one to the other, thereby allowing new market prices for different forms of labour to be properly established.

To maintain parity from the income tax side, existing income tax rates should be renormalised such that income and UBI combined are taxed equivalently to previous incomes without the UBI. This implies workers’ marginal tax rates to be pushed upwards to remain tax revenue neutral since they are effectively promoted to higher tax brackets.

Now everything is roughly financially equivalent from the perspective of both employees and employers, the primary difference being that the unemployed have now been absorbed into this new system, with the previous one being dismantled.

Benefits for employers

From the employer’s perspective, especially small businesses employing low-skilled workers, this is a massive boon, since the cost of employment is reduced to the differential between what it previously was and what the new UBI provides. However, they’re receiving the same labour in exchange, so the ratio between the reduced labour cost (indirectly subsidised via the UBI) and the original labour cost (the worker’s full income) provides a multiplier on the productivity of their employees. This ratio is largest for low-income workers, thereby stimulating demand for their employment. Businesses are now better off to the effect of a UBI per employee, which can be recovered via company tax adjustments to finance the UBI.

Social benefits

It’s easy to see the attractiveness of this from a social-democratic perspective. But not just in the trivial sense that it directly undermines poverty. More generally, it places every member of society in a position of greater independence. People in abusive relationships are better able to leave. People have a greater genuine choice in making life decisions, both personally and professionally, and are less easily coerced. People who need lifestyle or career flexibility for health reasons are in a far stronger position. And perhaps most importantly, the impact on general mental health within society is likely to be significant, by removing enormous insecurities, particularly during periods of labour market volatility.

A more powerful monetary tool

During the course of the current COVID-induced economic crisis, it has become clear that central banks have exhausted their fiscal tools in stimulating consumption, and have entered a cycle of concocting ever more elaborate and extreme new ones out of desperation. This has arisen because their tools are largely limited to manipulating the money supply via interaction with financial markets. But that isn’t where consumption takes place, it’s where investments are made and assets held. Consumption is driven down here, not up there.

With well-considered legislation in place, a UBI provides a monetary tool for stimulating consumer spending via the injection of additional funds — in addition to the regular UBI flow under the umbrella of fiscal policy, central banks have the option of supplementing it with monetary stimulus. This provides the most direct possible mechanism for stimulating consumer price inflation (CPI) as opposed to conventional monetary stimulus via open market operations (OMOs) which largely affect asset price inflation. Unlike manipulating income tax rates, this is not conditional on people being employed (and less likely to spend than those who are not), and the latency between pulling monetary levers and their impact on CPI is minimised.

This is not to advocate for more monetary intervention by governments, who have consistently demonstrated themselves not especially competent in doing so, but rather provides tools that are more effective in achieving what they’re ostensibly intending to do. It doesn’t take a genius to see that when interest rates are near zero, pumping more cash off the press into financial markets isn’t going to be hugely effective at stimulating consumption. This represents a trickle-up rather than trickle-down approach to economic stimulus, the latter being oft criticised as being ineffective, which it is.

Economic & social robustness

During COVID, various governments scrambled to introduce mechanisms to protect businesses from the catastrophic impact of having neither workers nor clients. One approach, which seems to have worked reasonably well here in Australia (the so-called JobKeeper scheme) was for the government to temporarily pay the incomes of companies’ employees, thereby allowing businesses to go into hibernation and be insulated from payroll liabilities, ensuring that existing employees’ employment is retained. A UBI would have made this kind of response far less chaotic.

A UBI provides significant robustness against future pandemic scenarios and other temporary but catastrophic labour market shocks. There is no need to rush to put new legislation into place to absorb such shocks, the infrastructure is already in place. Companies, especially small businesses with limited financial buffers, needn’t wait for governments to decide if and when they will consider programs like JobKeeper, which has seemingly been very effective at protecting businesses from their employees being prevented from working.

Small government

While a UBI is a ‘big government’ initiative and therefore might be unpalatable to many on the political right, it needs to be seen on a comparative basis relative to what we currently have, a social welfare system that ostensibly aims to achieve the things a UBI will but does so with massive bureaucratic overhead and inefficiencies that in many ways create more problems than they solve.

Dismantling a hugely complicated set of systems focussing on different aspects of social welfare and reducing them to a single streamlined one that requires very little overhead to maintain is very much aligned with small government philosophy and massively reduces the number of levers the government has to play with and therefore play politics with.

The redundancy of human labour

It seems likely a UBI will become inevitable at some point in time based on the expectation that as automation and AI continue to advance, increasing numbers of workers will simply not be able to compete with the productivity of machines. There’s only so much retraining we can do before trying to do something that machines can’t do better becomes futile. And this isn’t an expectation that applies only to low-skilled or manual labour, but inevitably will over time impact the competitiveness of even the most highly skilled jobs. With this kind of inevitable future outlook, the conventional libertarian philosophy of “leave the market to itself” will simply not be capable of addressing society’s needs.

We are in an era where automation dominates productivity, a trend that will inevitably continue escalating exponentially. It simply isn’t plausible that in the long term we will be able to compete against the machines we invented, and the need for state intervention to subsidise income will be necessary to ever-increasing extents. A UBI is the most practical and efficient way to achieve this, with the most positive outcomes both economically and socially. It would be complete intellectual capitulation for libertarians and conservatives not to allow free-market philosophy to evolve and accommodate for the hard reality that our labour is becoming worthless and that a UBI is the best way to accommodate for this in a manner entirely congruent with the remainder of free-market philosophy. As we outsource our productivity to machines, we mustn’t outsource all the return also.

The incentive tradeoff

The fact that a UBI implies higher marginal tax rates, even if net tax revenue remains the same inevitably raises the perfectly legitimate criticism that this skews incentives and may undermine competitiveness. There is truth in that, however while higher marginal rates act as a disincentive these are counteracted by newly created incentives, specifically more competitive workers, more streamlined government, a more efficient and less regulated labour market with greatly increased mobility, and most importantly all those who were previously priced or regulated out of the labour market altogether no longer face those roadblocks and are able to compete.

From the perspective of businesses, who now pay higher tax rates to effectively reimburse the UBI, they have the new incentive that labour costs have been reduced, providing a multiplier on return on investment into labour, and face fewer regulatory barriers when negotiating employment contracts since we can now safely dismantle many existing employment regulations.

Vote Script for President

Ladies & Gentlemen — Allow me to introduce our new Minister for Social Services.