Free Money for Everyone Won’t Solve Our Problems
(Bloomberg Opinion) -- The world economy is turning toward 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 labor, 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.
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. In a national referendum in 2016, Switzerland rejected a proposal to establish a universal basic income.
The case for UBI is that it can increase the efficiency of welfare systems by minimizing bureaucracy, the administrative costs of delivery, and drainage of resources through political exploitation or benefit fraud. 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 programs. In the U.S., $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% to fund a modest UBI.
The key to the proposal’s renewed political appeal is how it could neutralize 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. The idea covers a wide range of policies including the permanent monetization of budget deficits and direct transfers to households financed with base money.
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 that deficits don’t matter. Under MMT, governments should borrow and spend when demand is inadequate to move the economy to full employment. It provides theoretical cover for governments to issue debt to central banks in greater amounts than hitherto contemplated. This can then finance spending programs – such as a universal basic income – to maintain economic activity.
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” program, 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.
That’s unlikely to deter more countries from embracing such solutions. The reality is that existing policy is increasingly constrained. Significant debt restructuring and writedowns as well as acceptance of lower growth and stagnant or diminishing living standards is unacceptable. Policymakers will be desperate to show that there are more tools to stave off loss of confidence in their powers.
Friedman believed that policies should be judged by results, not intentions. Unfortunately, the continued lure of a painless and easy solution to economic problems dictates that universal basic income will remain on the political agenda.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Satyajit Das is a former banker and the author, most recently, of "A Banquet of Consequences."
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