Sunday, March 12, 2017

Funding a Universal Basic Income





Follow up note/Clarification:  "Aggregate demand," as described below, is perhaps overly simplistic.  Traditionally, aggregate demand equals consumption (in this instance, UBI per capita multiplied by the population) plus investment plus government expenditures plus trade balance.  Depending how generous UBI, ultimately, becomes… taxes could be drawn from UBI to cover government expenditures (beyond UBI itself), and if savings were to accrue from UBI, investments too, could be accounted for w/in UBI.  Therefore, UBI per capita multiplied by the population could conceivably equal aggregate demand.  Either way, the traditional definition of aggregate demand stands. But my primary argument still applies, as well: As long as aggregate demand, inclusive of UBI, does not outstrip aggregate supply, inflation is held in check and a UBI should be sustainable.



Funding a Universal Basic Income


Freedom is indivisible, and when one man is enslaved, all are not free.
-       John F. Kenndy

By J.M. Hamilton 3-12-2017

If you read no other editorial this year, JMH highly recommends Mr. Buchanan’s piece, The Misunderstanding at the Core of Economics, published in Bloomberg View.  In the piece, Mr. Buchanan cites recently deceased economist Kenneth Arrow for both helping to create - and taking down - the general equilibrium model, and the catechism of overly simplistic demand and supply models, often utilized to justify a great deal of economic activity.  The general theory of equilibrium (aka Adam Smith’s invisible hand) has been utilized to justify everything under the sun, from the religion of free markets with perfect knowledge, to free trade & globalization, and also, including – but not limited to – deregulation and de-unionization.

In the same piece Mr. Buchanan, by way of Mr. Arrow, notes: As with most theories, and the general equilibrium model is no exception, there follows enough caveats & conditions (exogenous & endogenous variables) to choke a cadre of Ivy League economists.  Politicians running governments, academics, economists, and think tanks are often sponsored, or beholding to someone, and that someone or something is all to often multinationals and plutocrats, who have a vested interest in perpetuating many of the myths surrounding the primacy of the free market.  Social outcomes are maximized, if government stays out of the way, and, as the U.S. Chamber of Commerce is fond of advocating, let the Robber Barons have their way.

The Godfather of capitalism, Mr. Adam Smith, recognized that the natural course of capitalism is for enterprise to seek out advantages, often afforded via the government, not the least of which is cartel and monopoly.  Monopolies are little more than socialism by private proxy. Without the checks and balances of competition, afforded by many entrants into the market place, said cartel or monopoly often charge obscene taxes upon society (albeit a privatized tax). 

Obscene taxes may foster dreams of revolution and regime change… some might recall the rallying cry of the American Revolution against a British Monarch: “Taxation without representation is Tyranny.”  Tyranny, by the way, is not the exclusive domain of governments; Tyranny may arise from the oligarchy that pulls the government’s strings, a – not so – invisible hand.

All of which leads us to the topic of my last piece, Another Reason for a Universal Basic Income, in which it was described how concentration & monopoly from M&A, free trade/globalization, and automation “were all killing jobs, and all too often opportunity, at an alarming rate.”  The same piece put forth the premise that a UBI would allow society to dispose of industries deemed irresponsible and morally repugnant. 

Further validating JMH’s premise, the NY Times ran an excellent piece last week – going into some depth – on how concentration in industry after industry has led to rising unemployment for Americans, and greater wage and wealth inequality (and arguably, the decimation of the middle class). Vanity Fair’s Hive ran a piece in late February, citing Trump’s billionaire buddy from Japan, Mr. Masa Son of SoftBank fame, who is being credited with the goal of investing $50 billion in America and creating 50,000 new jobs.  Apparently, Mr. Son does not hold out much hope for the longevity of these jobs he has yet to mint. The Hive article affords the following: 

“Within 40 years, in every aspect of every industry – doctors, lawyers, designs, etc. – I’m expecting artificial intelligence will exceed the wisdom of human beings,” Son said at an investor’s meeting.


Well, there you go.  Some may view the thought of a labor free economy (a.k.a. a fully automated economy) as darkness incarnate and a highly depressing thought; while others – myself included – look forward to an era, where future generations may have the luxury of living a life, w/out forty years of toil and an early grave.  Let’s face it: America maybe the land of the quasi-free, but w/out economic freedom, that is to say, freedom from want and fear, there truly is no freedom. (The leading Kennedy quote, above, immediately comes to mind)

So w/out belaboring the point, how do we fund future generations emancipation from the tranny of the nine to five grind, or the tyranny of no nine to five grind, and an economy driven by AI & automation?   That is, how do we fund for a UBI (universal basic income)?

Several avenues avail themselves, and as these things go, there are economic and political consequences to many UBI funding solutions (and the following is by no means expansive or conclusive):

Perhaps the key to starting up a UBI in earnest is the multilateral writing down of global public debt.  The U.S., Japan, China, and parts of Europe are all mired in unsustainable debt.  By having central banks monetize public debt, which has already been done to varying degrees, the debt- on a multilateral basis – can be written down or forgiven.  As long as this is done in a coordinated fashion, there should be no harm to purchasing power of each nation’s currency, or the balance of economic power among currencies.  Banks, insurance companies, and retirees may not like it, but many of these institutions are already used to earning close to zero returns on sovereign debt, if not in the case of Europe -- negative yields.

With debt carefully and methodically written down – or say placed w/in “bad banks” – governments around the globe would be free to spend again, particularly on a UBI.

And while we are on the topic of debt monetization, there’s no reason why central banks – as one of many means – can’t fund a UBI simply by printing money.  If the Federal Reserve can print trillions for Wall Street bank bailouts – seemingly with limited effect on the dollar’s purchasing power – then why can’t central banks support a UBI by the same means?

What’s the alternative to a multilateral public debt write down and central bank money printing?  Well, that would be taxation.  And taxing income wouldn’t quite get us there, unless rates are raised significantly and corporations & multinationals actually begin to anti-up and pay their fair share.  Presently, corporations & multinationals only make up eleven percent of the federal government’s revenue intake.  No, the bigger tax prize – if taxation is the route or one of many routes to funding a UBI – is global wealth. 

Global household wealth is estimated to be approximately $250 trillion U.S. dollars.  The richest one percent of the population owns half that wealth, and the U.S. possesses, approximately, between 45% to 50% of the high net worth and ultra high net worth individuals on the planet.  (This information comes via Zero Hedge, citing Credit Suisse’s annual global wealth report.)

So let’s do the math, half the global wealth belongs to the 1%, or $125 trillion U.S.  Of that, let’s say approximately 50%, for sake of argument, resides in the U.S., or $62.5 trillion.  Tax 30% of that wealth, and the U.S. national debt of $20 trillion is nearly wiped clean.

Now ask a plutocrat how’d they like to fund a UBI: Through a tax on wealth, or via international debt forgiveness and money printing?

If the plutocrat says neither, there is yet another means.  At some point, if the number of Americans out of work reaches a boiling point, and they recognize that the American economic and political process is rigged, specifically benefiting an elite few, there could be political upheaval.  There could be a revolution(s), not unlike those encountered in America and Europe in the 18th, 19th and early 20th centuries, whereby the lands and wealth of royalty, and the aristocracy and The Church, were confiscated and handed over to nascent democracies, or authoritarian and totalitarian regimes.

Please don’t shoot the messenger.  Far, far wealthier capitalists – than your humble blogger – have noted that the “pitchforks are coming.”

In turn, confiscated cartels, monopolies, and multinationals could be run for the benefit of the people, preferably run w/in trusts established for the public’s benefit, and outside both private and public/government control.  The proceeds and profits would accrue to the people, and help finance a UBI.

Now ask a plutocrat how’d they like to fund a UBI?  My guess is the answer would be through some combination of public debt forgiveness and money printing.  The reality is, and to varying degrees, the funding of UBI could be achieved by a combination of all the above.





Economic Considerations:

Borrowing from Keynes, the concept of UBI funding – particularly its economic sustainability – breaks down into two simple concepts: aggregate demand (population X per capita UBI) and aggregate supply (a nation’s gross domestic product). 

Regardless of how UBI is funded, it would be absolutely critical - that in order for the venture to work - that aggregate demand not outstrip aggregate supply.  If that were to happen, we’d get inflation and possibly, hyperinflation.

As long as aggregate demand is less than aggregate supply, we should be good.  A UBI is something that would be eased into, and in fact, a UBI is already enjoying some forms of experimentation in Europe, India, dozens of developing nations, and even in Oakland, California and the State of Alaska. 

If inflation were to heat up, government could look to control aggregate demand by either lowering the UBI allowance per person, or by incenting the public not to procreate (see China’s one child policy, presently, revised to a two child policy).  Untrammeled immigration is a factor that could upset UBI’s equilibrium, between aggregate demand & supply.

On the supply side, there are some that argue that the property, air, and natural resources – and earning a living from these resources - are among the rights of man.  That is, the world is owned/shared by all humans.  Moreover, just compensation from private ownership of the land, and rents accruing to lands, land use, and monopolies is a UBI tax.  These aren’t liberals, freaks, and socialist outcasts making these arguments, but rather, the following luminaries were said to be in favor of a tax upon the land (and among some, taxing rent seeking monopolies) to finance a UBI:  philosopher, John Locke; American revolutionary hero, Thomas Paine; former Treasury Secretary, Henry Paulson; Adam Smith; Winston Churchill; at least a couple of republican Secretaries of State; William F. Buckley; economist Joseph Stiglitz; and of course, Henry George.

Taxing economic rents off the land, resources, and monopolies is said to be “efficient, fair, and equitable.”  Such a tax is inherently just and progressive (which is likely why we hear so little about the Georgist tax paradigm, w/in our corporate controlled news media); and a tax upon rent seekers should spur more entrepreneurial drive and initiative, instead of rent seeking behavior, which is all too common in the crony capitalist model.

In the future, if rent-seeking monopolies continue to exist, they should be treated like the utilities that they are, and regulated and taxed accordingly.  This is exactly what our “democracy,” and elected officials, should have been doing all along - regulating business concentration - had they not been purchased and owned by the billionaire class.

Therefore, on the supply side, as a condition to allowing business to concentrate, or as a condition to the continued existence of privately held – rent seeking - multinationals & monopolies, government might insist that said industry would operate at a capacity or threshold, so as to meet aggregate demand. This would be the new paradigm, as opposed to standard monopoly operating procedure of restricting supply, so as to maximize returns (see OPEC’s recent attempts).  In other words, big business would operate in harmony with society, and not as its adversary, so as to mitigate inflation.  Another condition to allowing continued concentration might be that any profits, or private taxation, made above a certain threshold would be taken as part of a windfall profits tax regime; hence, mitigating a monopoly’s incentive to restrict supply, and drive up inflation and profits.

And the penalty for a privately held monopoly or multinational for failure to meet the production caveat stipulated to meet aggregate demand, or to dodge paying a windfall profits tax?  Answer: Public confiscation and/or the break up of said monopoly, into many competing businesses.  All of this, of course, smacks of the dreaded words, "industrial policy."  But we've had an industrial policy for the last 35 years, called neoliberalism, and it's been an abject failure for all, but an inordinate few.

Unfortunately, many of the virtues of private enterprise – the ability to provide many well paying jobs, and innovative products & services – have long ago been interred w/in crony capitalism's tomb.  Taxing (and public ownership of) rent seeking monopolies and inherited wealth, and encouraging entrepreneurial spirit, drive, and initiative w/ a considerably lower tax rate, if any, just might give capitalism the desperately needed dynamism and the shot in the arm it deserves.  

With a UBI, citizens would likely feel free, and possibly inspired, to seek additional forms of income, through private enterprise and initiative. 

Think about it… future MBA courses may teach students how to maximize production at breakeven, as opposed to how to maximize profits.  Then again, perhaps AI and robotics will eliminate the need for MBA courses all together.



Copyright JM Hamilton Publishing 2017


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