The Universal Basic Income: It’s time

henry George

The most widely read book on economics in history (with the possible exception of “Wealth of Nations” by Adam Smith) was a book by a self-taught political economist named Henry George. His formal education ended at age 14. He made his living as a journalist and later became a politician. Yet, his magnum opus, entitled “Progress and Poverty” was taken very seriously by economists, and justifiably so.  The book sold 3 million copies in English, in the first years after publication, 6 million copies in thirteen languages, by 1936, and many more since then. It is justifiably included as one of the ten all-time economics classics {George, 1879 [1946] #2004}. See Figure  1.

In 1879 Henry George advocated a single tax on land values. At the time he wrote, land values were a reasonable proxy for total societal wealth. Today that is less true, and I will focus on the alternatives later. Very briefly, it argued that people should own the products of their work, but that the gifts of nature, including the fertility of the land and the mineral wealth beneath, should be shared equally among all the inhabitants of the earth or the territory..

Henry George also proposed a universal basic income, or UBI, to be financed by his tax on land.  His proposal was not the first.

Early explorers

That honor may belong to Thomas More in his book “Utopia” where the residents of an imaginary idyllic island shared all goods in common (much like life in a monastery). Later the Marquis Nicolas de Condorcet wrote a small book while in a French prison awaiting execution, “Esquisse d’un tableau historique des progrès de l’esprit humain” (Sketch for a Historical Picture of the Progress of the Human Spirit) was published posthumously in 1795. In it he envisioned a utopian future including social insurance. It is considered one of the major texts of the Enlightenment and of historical thought.

Condorcet’s ideas were simultaneously taken up and elaborated by Thomas Paine, in the last chapter of his book “The Rights of Man” {Paine, 1791 #8489}. Paine’s book strongly supported the French Revolution, which is what it was mainly remembered for. But in the last chapter Paine said that welfare for the poor is not charity, but a natural and irrevocable right. That view was radical at the time of the French Revolution (and still is in some quarters).

Charles Fourier (1772-1836) was a critic of the violence of the French Revolution, and the concept of “revolution” in practice. He became known as the founder of “L’Ecole societaire” or utopian socialism. He is remembered for the last of the “four apples” that conveyed wisdom and changed social history.  (The first three were Eve’s gift of an apple to Adam, Paris’ gift of an apple to Aphrodite, and the apple that fell on Isaac Newton while he was sleeping, giving him the idea of gravity.) Fourier’s apple revealed the fundamental flaws of commerce, as exemplified by dumping sacks of rice into the river to create shortage and raise the market price. He borrowed some of the ideas of Robert Owen in England.

Fourier’s most influential follower was Jen-Baptiste Godin, a manufacturer of cast iron stoves located in the town of Guise, in northern France.  Godin is remembered today for the concept of “Familistere”, a factory that incorporated living quarters for all the workers, and was governed by democratic votes of the worker-members. Godin lived in one of the apartments in his complex. By 1884 his manufacturing enterprise in Guise had 2000 worker- inhabitants. Godin’s ideas were very influential In “reform” circles in subsequent years. However, his enterprise failed (it is now a museum) because cast-iron stoves went out of fashion.

Modern Times

Since 2016 the idea of a universal basic income has “gone viral” and for good reason. The debate about UBI has revealed two distinct groups of backers of the idea. One new group consists of extremely wealthy people — like Richard Branson, Nick Hanauer, Elon Musk and Mark Zuckerberg , to name four – who have an economic stake in the continued development o fautomation, robotics and artificial intelligence. They are well aware that the likely consequence of further technological progress in AI will be the disappearance of large numbers of traditional jobs. The socio-economic consequences of massive job losses are scary, and not least to those who will be blamed for it when the time comes.

[1] To be fair, I do not include Elon Musk or Steve Bezos in the group of undeserving rich. They are truly wealth creators, although they, too, are standing on shoulders of others.

The other group of backers consists of people who acknowledge the unemployment issue but think the problem is much deeper. Mabel and Dennis Milner, a Quaker couple active in the anti-war movement in 1914, wrote a pamphlet entitled  ”A scheme for a state bonus”, echoing Tom Paine’s view {Milner, 1919 #8490}. It later became an academic paper. They argued for a weekly income, not subject to any conditions, based on the citizen’s “moral right” to the means of subsistence, irrespective of deserving.

Since the Milners, the idea has been proposed in various forms by quite a few others, including Bertrand Russell, Milton Friedman (the “negative income tax”), John Kenneth Galbraith and – surprise! — Richard Nixon. Apparently in the late 1960s it was widely agreed that a UBI system would soon be adopted in the US and Canada. In fact, Nixon (a Quaker himself) supported it in the 1970s and twice got it through the House of Representatives. It was blocked on the floor of the Senate by Democrats who wanted a more generous version than Nixon was offering. It seems they thought that opposing the plan from the House of Representatives would force another debate in the Senate and another vote.  That was an historic strategic error.

The most popular of the recent authors on the subject include {Stern, 2016 #8486}{van Parijs, 2917 #8485}{Bregman, 2017 #8484} {Standing, 2017 #8487} and {Lowrey, 2018 #8488}. I should also mention Jason Hickel, whose book “The Divide” is the latest exposé on the causes of global poverty. Guy Standing, who has been researching in this field for 30 years, says that there are three reasons for embarking on a UBI program.

Reason #1 is what he calls “social justice”, meaning recognition that everyone living now, no matter their degree of economic success in the world, owes most of his or her wealth to those who came before.  From that perspective, the poor deserve to be provided with a minimum means of living, as a dividend from that accumulation of wealth from the past.

Reason #2, according to Standing, is that people – regardless of income — deserve to make their own decisions, free of arbitrary conditionality and coercion from hierarchical “superiors” or administrative officials.

Reason $3 is the need to provide basic security, as a human right, harking back to Thomas Paine and the Milners. I agree with Standing’s reasoning on all counts.

The current debate is also exposing how deeply rooted, yet rotten, is the still-dominant Protestant Ethic, which attaches moral virtue to work, and to wealth, while dismissing poverty as a “character defect” (in the words of Margaret Thatcher).  That view of the world is rapidly and justifiably losing credibility. Nowadays everybody works hard to survive from day to day, whether they get paid money or not. Single mothers with young children probably work harder with little or no reward, than any hedge fund manager or banker ever worked. Even begging in the street is hard work. The alleged connection between hard work and financial success is now invisible. In fact, there is clearly no such connection.

         A different kind of work

One of the major historical objections to a guaranteed basic income, voiced in a variety of different, but roughly equivalent ways, is that the recipients will stop working and become lazy couch potatoes watching game shows in their pajamas. Or they will become “druggies” or worse. I recently watched an anti-UBI presentation on U-tube. It started with an unqualified assertion that the main effect of “free money” would be that lots of people would choose to quit doing the jobs they do now, that need to be done – like garbage collection, I suppose — but that “nobody wants to do”. All the evidence we have suggests that this fear is unjustified. Nonetheless, this fear has been expressed many times.

Economists call such people “free riders” and constantly devise incentive schemes to punish or exclude them. Yet when people are polled on what they would do if they did not have to work in order to eat, they overwhelmingly answer that they themselves would not quit working, but that, if free to do so, they might want a different kind of work. In fact, as Bregman has pointed out in his book “Utopia for Realists”, there have been many experimental tests of the question in a number of countries {Bregman, 2017 #8484}. And the responses almost all agree that, when given the opportunity to live without working, very few choose to do so. But many would change jobs.

Some examples are worthy of explicit mention. For one example, there is the case of an airline clerk in New York in the 1950s who wanted to be a writer. She wrote a few things, not very successful, but an agent took her on. After some more disappointments, some friends banded together to give her a gift of a year’s wages with a note: “You have one year off from your job to write whatever you please. Merry Christmas”. The book she wrote (after that year, and another, js called “To Kill a Mockingbird” and her pen-name is Harper Lee (actually Nelle Harper Lee). That book won a Pulitzer Prize, among other honors and has sold more than 30 million copies. It is a classic.

There are other success stories.  For instance, Bregman tells a story about a group of 13 homeless men in London who were each given a one-time stipend of £3000 with no conditions (ibid). A year later 7 of the 13 were living under a roof, and 2 more had applied for public housing. The whole experiment cost just  £50,000, much cheaper than the usual government rent subsidy program would have cost. But the experiments show almost no evidence of the lazy, slothful, “free rider” behavior expected by conservatives. What we do know from the evidence of many experiments in a number of countries is that crime goes down among the group being studied, while health improves and school performance of children also improves.

Social justice

So much for the “free rider” issue. Social justice is another. The billionaires in Silicon Valley (and elsewhere) are all essentially lottery winners. They were smart enough to recognize and lucky enough to have the means to invest in a good opportunity when it came along. But they all stand on the shoulders of (literally) thousands of others. Bill Gates invented nothing. MS-DOS was a program he bought. Steve Jobs invented nothing. He was just smart enough to exploit the inventions by  people at Xerox‘s Palo Alto Research Center (PARC). Warren Buffet didn’t invent anything at all. The hedge fund guys don’t invent.  I could go on and on.[ 1]

The fact is that the true inventors and innovators (mostly) don’t get rich. Many of them have died poor. The wealth they created is acquired by others with very different skills and resources. The owners of major wealth today – the winners of the capitalist “game” — are the (mostly) aggressive men who have mastered the means of making money from money, by manipulation, management and maximization. (I personally enjoy maximizing M’s). But they didn’t “earn” anywhere near noticeable fraction of the world’s wealth, which is what they own. In justice, they shouldn’t have it. Their claims to do social good by setting up philanthropic foundations to promote various high-sounding purposes in far places, such as medical research on rare diseases, are nothing more than cop-outs for “original sin”. By original sin, I mean, the enjoyment of grossly undeserved benefits acquired by doubtful means from the contributions of many other people.

There are several other good reasons for taxing the very rich, if it can be done effectively (another question).. Next on the list (after social justice) may be the fact that they – the 1% and the 0.1%– simply have too much of the wealth that exists now, leaving too little for the rest. It is not only deeply unfair; much worse than that, it is very dangerous. As venture capitalist Nick Hanauer has been saying to his fellow plutocrats on U-tube – “the pitchforks are coming” and when they do come, the destruction will be terrible. The French and Russian Revolutions and the Communist takeover in China  illustrate what can happen. Sadly, the avalanche rarely hurts the people who trigger it.

Wealth is largely – except for collectibles and works of art — the same as capital stock. It is closely correlated to the means of production. It is important to recognize that the total wealth of the world is limited at any one time. Whatever capital the top 1% owns and controls is – by definition — not available to the rest of us. There is no question of a “rising tide” of wealth that benefits everybody. It is binary situation: the resources owned by the plutocracy are simply unavailable to the rest of society (us). That is why the poor people at the bottom of the pyramid have no savings and nothing to invest, which is why they – and their children — have virtually no chance of escaping from poverty or near-poverty, no matter how smart they are or how hard they work.

Income inequality is probably a little less dangerous than wealth inequality, in terms of the coming of the pitchforks. But there is quite a lot of overlap. Top executives being paid large amounts of money – I won’t say “earning it, because I don’t believe they do earn it – soon become plutocrats themselves.  Moreover, when the top executives of a firm take an outsize share of gross profits for themselves, there is less for the rest of the employees. That is undeniable.

The argument in favor of large pay packages for CEOs and top execs rests largely on the fact that corporate profits are less and less based on product quality and productive efficiency and more and more based on “financial engineering”. It is why top executives are increasingly being recruited from “private equity” groups or from other companies, not from within. This is not the place for an extended discussion of what “financial engineering” means, except that it has nothing to do with real engineering. Most readers who have got this far know what it means, and I shall leave it there.

The last, and not least, reason for taxing the very rich is to fund the government, which means paying for the welfare programs and the so called “entitlements” – like Social Security and Medicare/Medicaid that conservatives want to get rid of. It also means paying for public services like roads, public health, education, police, the courts and the military forces. The usual privatization argument is that the private sector is more efficient at allocating resources than the government. This is possibly true for manufacturing and some personal services. It is emphatically NOT true for public services, such as education or health. The evidence from France, and other countries in the EU, is overwhelming.

The scandalous inefficiency (and unfairness) of the US insurance-based health system as compared to virtually every other “single payer” health system in the world, makes the point. The US pays nearly twice as much for health care as a percentage of GDP  as the average of all other advanced countries, and 50% more than the next highest cost country. Yet the performance of the US system, in terms of life expectancy or infant mortality or a number of other measures, is poor to abysmal compared to the other rich countries. (I say this as a happy resident of France, which has one of the very best health care systems in the world.)

The government budget at every level in every country also includes interest payments on existing debt. As the TV pundits tell us every night, US government debt has been rising for quite a long time – roughly since 1970 – thanks to persistent budget and trade deficits, thanks (in turn) to tax cuts for the rich. International trade is up. Corporate profits are up. Yet middle class wages and standard of living have not been rising during the last 40 years. The lowest income group has lost ground and become poorer than it was 40 years ago. This is probably the major single cause of voter dissatisfaction with neo-liberalism and globalization.

Up to now, government debt has been rising while debt service at the Federal level (interest payments) has been simultaneously declining. This is because interest rates have been reduced after every crisis by the Federal Reserve to stimulate the economy. That pattern changed in 2017. Since then, interest rates on government debt (bonds) have started rising. This is because returns on long term (10-year) bonds have finally started to rise. That means debt service will get more and more expensive in coming years unless government spending is cut drastically.

How to finance the UBI

Now it is time to come to the big problem: how to finance the UBI. Most people, starting with Henry George and the current generation of “Georgists”, advocate progressive taxes on the rich. It is true that a wealth tax serves as “negative reinforcement”, in the sense that it motivates the productive use of assets. According to University of Pennsylvania Law School Professors David Shakow and Reed Shuldiner {Shakow, 1999 #8493}, speaking at a symposium on tax law (summer 2000), “A wealth tax also taxes capital that is not productively employed. Thus, a wealth tax can be viewed as a tax on potential income from capital.” A net wealth tax – even if it is quite small– can be treated as an income tax on potential (imputed) income. (Hence the capital gains, estate and gift taxes could be eliminated if the financial part of the wealth were taxed).

On Nov 9, 1999, in that same year of the “Dot Com” stock market boom, Donald Trump – now President Trump– proposed (on CNN) a one-time wealth tax of 14.25%. The idea was to raise $5.7 trillion and wipe out the US national debt. Presumably much of that 14.25% tax would have been covered by the stock market gains up to that point. (Don’t bother doing the arithmetic. Donald Trump doesn’t). Unfortunately the market peaked a few months later and the gains disappeared without being captured for productive use.

As regards the notion that high taxes reduce economic growth, the evidence also contradicts that idea. It is certainly true that income tax rates in the US and the UK during and long after WW II were far above current rates. The top rates for US income taxes were still high (70%) until the Reagan administration cut them drastically. But while, in the past, income taxes were higher, so was US economic growth. The alternative implication, that wages and working conditions for dirty and unpopular jobs would increase, was not even considered. .

In 2014, French economist Thomas Piketty published a hard-to-read book entitled “Capital in the 21st Century”. That book got a rave review in the New York Times by Paul Krugman. Piketty documents at length the obvious fact that economic inequality is getting worse and has been getting worse for a long time. His explanation is that when the rate of return on capital (r) is greater than the rate of economic growth (g) over the long term, the result is concentration of wealth in favor of the well-to-do (the 1%). He also argues – as many have starting with Tom Paine – that this increasingly unequal distribution of wealth causes social and economic instability. Piketty proposed a global system of progressive wealth taxes. He argues – and I emphatically agree — that unless capitalism is reformed, the democratic order will be threatened. Where I disagree is on the feasibility of such a global tax.

Not surprisingly, Piketty’s work has been harshly criticized by Barrons, Forbes, The Wall Street Journal and Financial Times as well as comparable publications in Europe and plenty of academic economists with ties to the status quo.  Critics have challenged various aspects of Piketty’s analysis, stating that it is inconsistent and/or flawed. Probably it is, but then, one could say the same about them (as I do). The main difficulty is that a non-trivial wealth tax on financial wealth cannot work unless it is internationally agreed and enforced. And optimist though I am, I cannot imagine that happening in my lifetime.

Wealth taxes are currently being collected in a number of countries, usually at quite low rates, meant to be less than the rate of inflation. France had one of the highest rates until 2017; now it is lower and applicable only on real estate.  If not prevented, the owners of financial, non RE wealth will simply move it to other countries. Money is easy to move as the French, in particular, discovered recently and the Chinese are still learning.

Guy Standing, a Prof at the University of London,  has advocated a sovereign wealth fund, financed from levies on all kinds of rentier income, not only from undeveloped land but from all kinds of assets, both physical and financial {Standing, 2017 #8487}). I agree that that would be a good way to finance the UBI. However, he doesn’t explain how to sell those levies to the public or to the legislators, most of whom have links to the existing system. Same problem.

Ayres  gets to the point

You readers have been waiting for me to get to the point. So here is my – hopefully feasible –proposal. Assume the US GDP of $20 trillion, slightly more than the current level. Government expenditures in the US  at all levels amount to about 40% or $8 trillion, of which $4 trillion is Federal. This includes something like $500 million for debt service on Federal government debt.

My proposal consists of three linked components that must be presented as a package, all or nothing: 

First, the Federal Reserve could sell bonds to pay for a UBI supplement to the existing Social Security retirement fund (“helicopter money”).  In particular anyone receiving less than $1000 per month would receive a monthly check of that amount, deposited in a bank. Retired people already receiving  that much would get a bonus, but not quite the full amount of the new money. It would be enough to compensate for rising prices due to the energy tax below (Details to be worked out). It also needs to cover the higher income taxes for the middle class so that nobody pays more tax unless his/her income is above some cutoff ($150 K p.a., roughly where payroll taxes stop now. Medicare and Medicaid would need to be extended to cover all ages and incomes. Roughly, speaking these changes taken together would cost around $3 trillion p.a. The program could be administered (in the US) by the existing Social Security Administration (SSA).

The second component of the package must be a carbon tax, to be paid directly by primary producers (and importers) of fossil fuels and certain rare metals. The rate must be set to provide annual government revenue of at least $1 trillion – one third of the UBI — while also cutting carbon dioxide  emissions by at least 10%.  The negative reinforcement would encourage the search for non-carbon alternatives and the search for more efficient means of recovery and recycling those rare metals. Prices of many carbon-intensive consumer products, especially plastics and synthetics, would increase somewhat, of course. The negative reinforcement effect would be helpful to producers of natural materials, especially wood products.  Poor people living in cities and not owning cars would pay very little of the higher prices for energy-intensive products. The effect would be progressive, not regressive.

The third component of the package is an electromagnetic frequency tax, set to bring in annual revenues of the order of $1 trillion (some of it to local government). The Internet is a public resource, and use of it needs to be allocated fairly by charging realistic prices for its use. It is obvious that, while free use of the EM spectrum has been helpful to innovators, the IT industry is now mature and it needs to pay its way. This tax would be collected partly as TV access fees – already common in Europe — and fees on Internet usage paid by message senders (like postage on first class letters). Frivolous use of the Internet, such as “junk mail” would be strongly discouraged by these charges, but information transfers to and from the “cloud”. For instance, by large-scale business data users, would not be excessively costly. In fact, this tax could have a by-product effect in discouraging excessive use of personal information by social media.

Government revenues (all levels) would necessarily continue to include some other taxes, on personal income, value added or land use. In fact, for all the reasons I mentioned earlier in this chapter about the desirability of taxing the very rich, I would like to see personal income tax rates and capital gains tax rates returned to pre-2016 levels, or even a pre-2008 level. That “tax reversion” could help pay for a small part – possibly a quarter or less — of the overall UBI cost.

Impacts

The financial impact of this package of changes would be roughly as follows. First, bank deposits would increase significantly, perhaps by the whole $3 trillion. Beneficiaries would spend most of their new money, after paying off high cost credit card loans and student loans. That would cut bank profits, but those repayments would also be available to the banks for lending. Some, perhaps most, of that new lending would probably go to housing, but some would also go to infrastructure upgrades,  electrification and de-carbonization projects. The rest would be spent on food, health care and other products. All of this extra spending would create new jobs. GDP would grow faster. Higher personal incomes spent on goods and services would also generate more taxes for the government, at all levels. It is unclear how big that tax bonus, collected by the government, would be. MY guess, off hand, would be around 25% of the 3 trillion UBI.

Most of the UBI money would be used to repay existing private debt, especially credit card debt and education debt, but overall the government debt would increase somewhat, each year, perhaps by $500 billion, perhaps even less. That would be 2.5% of the GDP, within the current EU deficit guidelines, enough to cover inflation. Of course there is a chance that the stimulus effect of the UBI would increase economic growth even more than the rate of inflation. That is what I think would happen if the UBI program is intelligently planned along the above lines.

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About the author:

robert-ayres

Robert U. Ayres is a physicist and economist, currently Novartis professor emeritus of economics, political science and technology management at INSEAD.. He is also Institute Scholar at the International Institute for Applied Systems Analysis (IIASA) in Austria, and a King’s Professor in Sweden.   He previously taught at Carnegie-Mellon University, and as a visiting Professor at Chalmers Institute of Technology. He is noted for his work on technological forecasting, life cycle assessment, mass-balance accounting, energy efficiency and the role of thermodynamics in economic growth. He originated the concept of “industrial metabolism”, known today as “industrial ecology” with its own journal. He has conducted pioneering studies of materials/energy flows in the global economy. Ayres is author or co-author of 21 books and more than 200 journal articles and book chapters.  The most recent books are Energy, Complexity and Wealth Maximization(Springer, 2016), The Bubble Economy (MIT Press, 2014)  “Crossing the Energy Divide” with Edward Ayres (Wharton Press, 2010) and The Economic Growth Engine with Benjamin Warr (Edward Elgar, 2009).

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2 thoughts on “The Universal Basic Income: It’s time

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