July 3, 2020 Guy Carson

WHAT IS UNIVERSAL BASIC INCOME?

BY GUY CARSON

What is Universal Basic Income? What does it have to do with Modern Monetary Theory and why does it matter?

The idea of a Universal Basic Income (UBI) is not new, in fact there are records of similar proposals dating back to the early 16th century. However, over the last decade the idea has started to gain traction and the recent pandemic may be the catalyst that cements its place in government policy.

So, what is a Universal Basic Income? Essentially, it’s a payment which replaces most existing government benefits. It is given to all people without discrimination, it doesn’t matter whether you are unemployed or you are Jeff Bezos. The UBI would provide enough income for the recipient to live, the theory being that if you wish to live more comfortably or enjoy nicer things you are then free to get a job or start a business in order to earn more.

One of the biggest arguments for UBI in recent times came from Martin Ford in his book “Rise of the Robots: Technology and the Threat of a Jobless Future.” Ford argues that the current technological revolution is different from previous ones thanks to the rise of automation and artificial intelligence. Previous revolutions such as the move from horses and carts to cars both destroyed and created jobs. However, the introduction of robots to manufacturing lines destroys significantly more jobs than it creates.

The long run trends in employment show this impact. The US has essentially been creating fewer jobs each decade. This means every time the country has an economic shock it takes longer for the economy to recover.

Labour force participation has fallen, wages have stagnated and corporate profits have hit record highs. There has been a shift in power from Labour to Capital.

Economists failed to keep pace with the changing environment and most economic theory is still based on the golden period of the 1950s and 60s where wages and productivity rose in lockstep.

With automation and AI likely to destroy more jobs than they create, Ford argues that the best solution in a world of scarce jobs is to provide everyone with enough income to survive.

Turning to the current situation, one of the most surprising aspects of the pandemic has been the jump in personal income despite the significant rise in unemployment.

The jump comes from government benefits. People are en masse being paid more to stay home rather than work.

This a direct result of the CARES Act which at $2.2 trillion or 10% of GDP is the largest fiscal stimulus package in history. In Australia, we can see a similar impact from their Job Keeper subsidy. Total personal income has risen as the rise in government benefits has more than offset the fall in wages.

The current challenge for governments is what to do with these programs when they expire. In an ideal world, economies would reopen, people would go back to work and the programs would end. However, with a second wave of Covid-19 on the horizon and with a lot of uncertainty globally, hiring is likely to remain subdued.

The additional $600 in weekly jobs benefit from the CARES Act is set to expire on July 25th and White House economic advisor Larry Kudlow has recently stated this will not be extended. This is despite the lowest employment to population ratio in history with close to 50% of the working age population without a job.

The debate around the extension of this policy becomes even more intriguing with the election scheduled later this year. Support is growing within the Democratic Party for a UBI. During the primaries, Andrew Yang ran a platform based on it. Tulsi Gabbard and Alexandra Ocasio-Cortez have advocated for it as a response to the pandemic and Bernie Sanders has called for $2,000 in monthly basic income.

Of course, the logical question becomes how will governments pay for this? The idea of a Universal Basic Income is tied hand in hand with something called Modern Monetary Theory (MMT).

MMT is a field of economics that holds as one of its core tenets that if a country issues its own currency then the government can’t be forced to default on its own debt. In theory, any country can just print money and pay off the existing debt. Hence, as the country never has to default, government debt and deficits don’t actually matter.

People will point to the Weimar Republic and Zimbabwe and highlight the risk of inflation. However, the counter side to that argument is Japan. MMT and mainstream economics suggest that inflation becomes a risk only at full employment when labour, capital and resources are fully utilised. Most developed economies are nowhere near that stage. MMT recommends fighting inflation, when it appears, by taxation and by government bond issuances which compete with the private sector for investment dollars. Both of these reduce the money supply and slow the economy.

Whether we like it or not, MMT is coming at us fast. Deficits are rising as is government debt, quantitative easing is in place across all major economies. The number one seller amongst Economics books on Amazon is the Stephanie Kelton’s recently release “The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy.”

Any shift in government policy towards austerity and balancing the budget would be disastrous for economic growth (see Europe around 10 years ago). Meanwhile interest rates are back at zero yet again, and fiscal stimulus has become the only option. Universal Basic Income is gaining traction and Modern Monetary Theory is becoming a reality. In these uncertain times, it is prudent to protect your assets and to revisit your investments. Southpac is here to help. Contact Us

 

Disclaimer: The above contains the opinion of the author and is for information purposes only.  It is not intended to be investment advice.  Seek a duly licensed professional for investment advice

 

Guy Carson

Guy Carson is Southpac's Investment Specialist. Guy manages Southpac’s external relationships with investment advisors and banking specialists in client relevant jurisdictions around the world. In addition he works with clients to find the most appropriate solutions for their circumstances.
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