Free money for everyone?

Everyone should be rich

“No whining, everyone should be rich, vote Opposition Party, together for ourselves.” The Opposition Party was a fictional political party in the Netherlands run by two dubious characters. The creators of the fiction, Van Kooten and De Bie, intended to mock populist politicians. If the Opposition Party had been for real, the party would have fetched a few seats in parliament in 1981. The problem isn’t that there are rich people but that there are poor people. Why isn’t everyone rich? Maybe poor people haven’t enough money.

So perhaps everyone should get some money for free. This is commonly known as a universal basic income. Only normally you don’t get rich by doing nothing. People make money by working. Without work there are no products and services to buy. This has been true for as long as humans exist. Giving people money for free is undermining one of the pillars of human civilisation, which is that you have to work for a living. It therefore seems a bad idea. But there are reasons to believe that we may need a guaranteed income in the future.

A game of Monopoly

One can think of the capitalist economy as a game of Monopoly. If you have played the game, you may have observed that at first players build capital in the form of houses and hotels. You can get rich by making the right investments. There is also an element of luck involved. The game ends when most players are bankrupt. It is possible to extend the game by letting the others borrow money from the winners. In this way the winners can enjoy being rich while the others can stay in the game. Of course the others can never repay their debts. The players could stop pretending and let the winners give some money to the others so that the game can continue.

monopoly1935

The alternative would be to start from square one, or more precisely, removing all the houses and the hotels, and start a new game. That might be fun for a game but in the real economy this would be a horrendous disaster. Imagine all the houses, roads, and factories gone. There would be nothing to buy and everyone would be poor. Economists figured this out long ago. The famous economist John Maynard Keynes thought that the state should borrow money from the winners and spend it so that the others would be employed and have some money to spend so that the game could continue.1

Keynes’ plan did get a lot of attention and that’s why he is so famous. Other economists weren’t so pleased. Governments could now justify lavish spending by borrowing money from the rich to spend it on public works or lower taxes, leaving a debt to be paid by future generations. Keynes also advised governments to reduce spending when the economy is doing well,1 but this rarely happened. And if there is no starting from square one, the rich are getting richer, while the rest isn’t getting ahead. Furthermore, the state borrowing money from the winners makes things worse as interest must be paid. In this way the others end up paying taxes to pay interest to the rich. This could become a huge problem in the long run. But Keynes wasn’t interested in the long run. “In the long run we’re all dead,” Keynes said. Now the long run has arrived and Keynes is dead.

The game of Monopoly has a bank too. The bank is a magical source of money. Every time you finish a round, a fixed sum of is given to you. That is great for a game. If it wasn’t for this everlasting fountain of money, the game would have ended after a few rounds. Giving free money to everyone is often called a universal basic income. It can help to keep the economy going. Adding money to the real economy can make money worth less. If people have more money, prices often go up, as there is more money to buy the same stuff. For example, if everyone craves for that latest model mobile phone, producers can raise prices, unless people run out of money and can’t buy them. In a game of Monopoly the prices of rents are fixed, but the prices of streets rise. If you want to buy a street from another player when there is a lot of money in the game, you often pay more. The rich are bidding up prices of streets. In the real economy something similar happens. Inflation is low but prices of assets like stocks and real estate are rising.

There are reasons to fear a universal basic income. Proponents tell us that it will all be fine and dandy and that we will be free to realise our dreams. If you always wanted to become a blogger or a vlogger, you can become one when there is a universal basic income because you don’t have to work for a living. The opponents of a universal basic income paint a dismal picture of people sinking into an abyss of idleness filled with writing blogs nobody wants to read and making videos nobody wants to see. A job can make you feel useful. And there must be a compelling reason to do unattractive jobs, otherwise they won’t be done. Many countries already have benefits for people without a job. In these countries the unattractive low paying jobs are often done by immigrants who don’t have access to those benefits.

Machines taking over?

In the future machines may become better than humans at most jobs. Until very recently only simple tasks have been taken over by machines. This already put a lot of people out of work. The surplus of workers could be employed in the government and the service sector. Computers in the future can do much more. Self driving cars will replace human drivers and cause fewer accidents. Robots can care for the elderly, and this could be an improvement as robots don’t have moods. Computers will be better at diagnosing diseases and operating them.

Few professions appear safe from the coming onslaught. Economists tell us that robots will create many new jobs for humans, for example programming and maintaining them, but that may be wishful thinking. There is however one big problem blocking progress, or our descend into the abyss of idleness if you like. If people lose their jobs they also lose their incomes so that they don’t have the money to spend on the products and services the machines produce.

Perhaps the market will be able to deal with the issue so that there will still be jobs, but we can’t know for sure. It is also possible that the economy will collapse because there are fewer jobs. Progress may halt if the economy can’t operate with fewer jobs. Without jobs people have no money so that humans may need to keep on doing jobs machines can do better. If there is an income guaranteed that is sufficient to live off, the economy may not need these jobs. In that case there will also be less need for minimum wages because of the income guarantee. In this way people could do a job cheaper than machines if they really like to do it. And so humans can still care for the elderly in the future while robots do the heavy lifting. And that may be good because when humans do their jobs because they like to do them, and not because they need the money, they can have better moods too.

That sounds great. Perhaps it will work out this way. A universal basic income can improve the bargaining position of workers. It might lead to the following situation:

  • unattractive jobs that machines can do will be done by machines;
  • unattractive jobs that machines can’t do will be paid well;
  • attractive jobs that machines can do will be paid poorly as there will be volunteers;
  • attractive jobs that machines can’t do will be done by humans, but it is hard to predict how these jobs will be paid.

Obstacles on the way

Implementing a guaranteed income may not be easy. There will be obstacles on the way. Some of them may be hard to predict as they will emerge once the income guarantee has been introduced. A few questions can be raised already. For instance, does an income guarantee make people fill their time with idleness or does it give them the possibility to realise their potential? It is plausible that both will happen.

Many people believe that the income guarantee should come in the form of a universal basic income that replaces existing welfare schemes. It would reduce the amount of bureaucracy as the administration would be relatively simple compared to existing schemes. Existing social security schemes redistribute money to those who lack sufficient means of existence. A universal basic income is given to everyone, including the people who don’t need it.

A universal basic income could easily become expensive and would require higher taxes. This would not please tax payers and it could lead to tax evasion. And why should the rich receive a universal basic income too? An alternative is a guaranteed income that is to be settled with the income tax. People with low incomes would receive income tax instead of paying it. If the income guarantee is € 1,000 and the income tax is 50%, the scheme works as follows:

gross income
income tax
net income
€ 0
– € 1,000
€ 1,000
€ 1,000
– € 500
€ 1,500
€ 2,000
€ 0
€ 2,000
€ 3,000
€ 500
€ 2,500
€ 4,000
€ 1,000
€ 3,000
€ 5,000
€ 1,500
€ 3,500

If machines are to replace human labour, other sources of taxing may have to replace the income tax to fund the income guarantee, but it is still uncertain to what extent that will happen and how long that will take. How a guaranteed income can be paid for remains a puzzle and the answer to that question may emerge over time. It will not work if the wealthy don’t pay for it. Like in the game of Monopoly the winners need to hand over money to the others to stay in the game. This can happen via taxes on wealth or in the markets for money and capital via negative interest rates.

Negative interest rates can make the wealthy hand over money to the middle class via mortgages and loans as well as to governments via government debt. This is because debtors don’t pay interest but receive it. In this way the middle class has more money to spend while governments have more money to give to the poor. Negative interest rates might happen because the wealthy have trouble finding profitable investments and making these investments profitable might require them handing over money to the rest so that the rest has money to spend on the products and services made by the corporations owned by the wealthy. How a financial system with negative interest rates might work out is explained in the section about Natural Money.

Featured image: De Tegenpartij poster. Van Kooten and De Bie (1981). [copyright info]

Other image: Monopoly game.

1. Keynes, John Maynard (1936). General Theory of Employment, Money and Interest. Palgrave Macmillan.

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