Free money for everyone isn’t a bright idea

Satyajit Das | Updated on September 20, 2019

Universal basic income is now seen as a painless solution to economic problems. But trials so far have shown limited success

The world economy is turning towards a depressingly familiar cycle of lower rates, renewed quantitative easing and more fiscal stimulus. The return to a persistent semi-slump in advanced economies is likely to increase interest in universal basic income, or UBI, an idea supported by Democratic presidential contender Andrew Yang and business figures from Facebook Inc.’s Mark Zuckerberg to Tesla Inc’s Elon Musk. If adopted, this radical prescription is unlikely to prove a magic bullet.

Advocates argue that guaranteeing every individual a flat-rate payment irrespective of circumstances will help to address the poverty traps inherent in traditional welfare systems, the declining share of income going to labour, and increasing threats to employment from automation. Yang, a tech entrepreneur and an outsider for the Democratic nomination, proposes giving $1,000 a month in cash to every American and has made the plan a key talking point in candidate debates.

Response to QE

The concept isn’t new. It was first suggested by Sir Thomas More in his 16th century work Utopia, and was championed by free-market economists such as Friedrich Hayek and Milton Friedman in the 20th century.

The case for UBI is that it can increase the efficiency of welfare systems by minimising bureaucracy, the administrative costs of delivery, and drainage of resources through political exploitation. Trials in Finland, Canada and India have been inconclusive, showing psychological improvements among recipients but limited success in achieving economic or social objectives.

Critics point to the financial constraints of funding such programmes. In the US, $1,000 per month per person would equate to a total cost of around $4 trillion per year, approximately the size of the 2018 federal budget. The Organization for Economic Co-operation and Development found that income tax would have to increase by almost 30 per cent to fund a modest UBI.

The key to the proposal’s renewed political appeal is how it could neutralise rising criticism of QE, which has disproportionately benefited the wealthy by driving up the prices of financial assets. UBI funded by new rounds of central bank purchases of government bonds branded as QE for the people may be a more palatable way to return to monetary stimulus.

UBI would allow for the introduction by stealth of helicopter money, a controversial proposal for central banks to print money and distribute it to consumers to boost growth and inflation.

Friedman outlined the concept in his 1969 parable of dropping money from a helicopter. If everyone is convinced that this is a unique, non-repeatable event, then it is assumed they will spend the money, increasing economic activity. The concept generated revived interest in recent years as a means of preventing deflation.

There’s a telling link between universal basic income and modern monetary theory, an unconventional economic approach that’s been gaining ground with politicians.

MMT, loosely, argues that a state cannot go bankrupt where it can print its currency — a version of the argument is that deficits don’t matter. Under MMT, governments should borrow and spend when demand is inadequate to move the economy to full employment.

Whether a guaranteed minimum income can produce economic recovery is questionable, though. It’s a repackaging of existing approaches that have had limited effectiveness. There’s little new in central banks financing governments via QE or fiscal stimulus, including welfare spending. It doesn’t address key structural issues such as excessive debt, imbalances, wage levels and demographics. Adoption of such an approach would also mean the economy becomes dependent on government intervention to sustain activity.

A universal basic income financed by helicopter money may perversely increase uncertainty. Ordinary people may react to unlimited money printing by shutting their wallets and hoarding. Australia’s recent cash-back programme, which provided up to A$1,080 ($740) to taxpayers earning less than A$126,000, doesn’t appear to have offset pessimism about the outlook. The reality is that existing policy is increasingly constrained. Policy-makers will be desperate to show that there are more tools to stave off loss of confidence in their powers. Bloomberg

Published on September 20, 2019

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