World After Capital: UBI is Affordable

NOTE: I have been posting excerpts from my book World After Capital. Today’s section provides some back of the envelope calculations to show we can afford UBI to provide economic freedom for all. 

UBI is Affordable

So with all of this as background, your might wonder what a Universal Basic Income should pay. My working proposal for the United States is $1,000/month for everyone over age 18, $400/month for everyone over 12 years old, $200/month for every child. These numbers might seem extremely low, but keep in mind, the goal here isn’t to make people well off; it’s simply to let them take care of their basic needs. We have mistakenly come to embrace unlimited wants, and we can free ourselves from this by re-establishing a clear distinction between wants and needs. We should also remember that our basic needs will get cheaper over time, and we won’t get UBI overnight. So my numbers are meant to work over time as other government programs are phased out and a UBI is phased in. Other policies I will discuss will also serve to help bring down the cost of education and healthcare.

Let’s dig further into these numbers. While everyone will spend their UBI in different ways, a possible allocation for a typical adult would roughly break down as follows: $300/month for housing, $300/month for food, $100/month for transportation, $50/month for internet access and associated equipment.

You might wonder why I am proposing a lower payment for children and teenagers. First, we can meet many of their basic needs even more cheaply than we can for adults (for instance, several kids in a family might share a room). Second, I propose a lower payment in recognition of historic evidence that the number of children people have is partially determined by economics. UBI should not give an incentive to adults to have more children so as to “skim” their income. That’s especially important with regard to slowing down and eventually stopping population growth: We want the birth rate to decline globally, as it has started to do in most industrialized nations in conjunction with economic progress and the decline in infant mortality. This will allow us to achieve peak population and put to rest the Malthusian fears of overpopulation and scarcity.

When you calculate how much money is required to provide a UBI for everyone in the United States based on the 2015 population size, you wind up with about $3 trillion annually [76] [77]. While that’s a huge number, it only represents about 17% of the size of the economy as measured by 2015 GDP, and only about 10% considered as a percentage of 2015 Gross Output (the latter measures not just final output but also intermediate steps) [78] [79] [80] .

Where will this money come from? There are two sources: government budgets (at the local, state and federal level) and money creation. I will examine each of these in turn.

In the U.S., in 2015 total government revenues from taxation and fees were about $6 trillion or about twice the UBI amount [81]. So in theory the money for a UBI could come entirely from redirecting existing budgets. There would then be another $3 trillion of money for critical government activities, such as local law enforcement and national defense (the latter was $0.6 trillion in 2015 [82]). There is a long debate to be had about the political process by which such a reallocation can be accomplished but there is no fundamental impossibility, such as perpetually increasing government debt.

Having a UBI can also substantially increase government revenues. How so? At the moment there are many people who work but fall below the level for paying federal income tax. In fact this is true for nearly half of all earners (Mitt Romney’s infamous 47 percent remark). Once people have a UBI, then every additional dollar earned should be taxed. For instance, if you are single and make $10,000 at present you do not even need to file a federal income tax return at all. With a UBI that could be taxed at a rate of say 25% generating $2,500 in new tax revenues. This effect could provide as much as $0.3 trillion or about a 5% increase in total government revenues. Of course people who are already paying taxes today would also effectively be paying back some of their UBI in the form or higher taxes. Applying a 25% tax rate for that group which would receive roughly half of all payouts, i.e. roughly $1.5 trillion, results in an additional $0.4 trillion. Another way of saying this is that the net burden of a UBI with a 25% federal tax rate applied to the first dollar earned is about $2.3 trillion.

Moreover, government revenues can be expanded in ways that accomplish other goals at the same time. For instance, we could and should be taxing pollution more than we are, in particular the emission of greenhouse gases into the atmosphere. Taxes are a well established way of dealing with negative externalities and we have made good use of that, for instance by aggressively taxing cigarette smoking, which has resulted in dramatically diminished consumption. Estimates of the revenue potential for a carbon tax are somewhere in the $0.3 trillion dollar range annually and potentially even higher. So between offsets via income tax (which will occur automatically) and a greenhouse gas tax (which we need in any case) we are down to about $2 trillion. Now that’s still a massive number. On the other hand, for comparison, Social Security and Medicare/Medicaid are about $1 trillioneach. So in the extreme UBI could be financed through a massive reallocation of existing programs.

There is another way though to provide much or all of UBI by changing how money is created in the economy. This involves moving away from fractional reserve banking and issuing money directly to people instead. In today’s fractional reserve banking system, commercial banks extend more credit than they have deposits. This carries with it the potential of a bank run and the Federal Reserve Bank (Fed) acts as the so-called “lender of last resort.” For instance, in the 2008 financial crisis the Fed stepped in aggressively by buying up potentially bad bank assets to give banks liquidity. Europe has had a policy of “quantitative easing” (QE) where the central bank makes it progressively easier for commercial banks to extend loans beyond their existing deposits.

Generally the idea is that as banks extend loans this will help grow the economy as the banks will lend to businesses that need to finance capital good or working capital. While banks have done that to some degree, they have also been lending to people who are already wealthy for acquiring second and third homes or for engaging in financial speculation. Conversely, bank lending to small businesses has actually been going down as banks have consolidated and have focused on larger customers. The net result of all of this has been that quantitative easing has amplified wealth and income inequality.

An alternative system would be to remove banks from money creation by forcing them to hold all of their deposits at the Fed. This is known as “full reserve banking” and eliminates all risk from the commercial banks. Credit extension could instead happen via marketplace lending as enabled by companies such as Lending Club, for individuals, and Funding Circle, for businesses (both former USV portfolio companies). This would allow money creation to happen by simply giving new money to people as part of their UBI payments, which is sometimes referred to as “QE for the people.”

What magnitudes are we talking about here? In the United States we have unfortunately stopped tracking the larger monetary aggregates, such as M3 and are only using narrower measures, such as M2 (M0, M1, M2, and M3 are different measures of how much money has been created in the economy). Even the M2 measure though has been growing by about $1 trillion annually over the last decade. The actual amount of money created in the economy by quantitative easing is likely to be much bigger. We can consider the development of debt more directly. U.S. households have about $8 trillion in mortgage debt [83], over $1 trillion in auto loans [84], over $1 trillion in student loans [85] and nearly $1 trillion in credit card debt [86]. Total household debt can go up as much as $1 trillion in a single year. U.S. business debt is a total of $25 trillion, of which about $15 trillion is in the financial sector and $10 trillion in non-financial businesses. These too have grown by as much as $1 trillion in a year.

As a first approximation the amount of annual money creation is in the trillions of dollars and thus in the same ball park as UBI. Historically, the idea of the government “printing” money is associated with fears of runaway inflation, such as occurred in the Weimar Republic. There are several reasons why this would not be the case with a proper UBI scheme. First, the amount of new money creation would be fixed and known in advance. Second, as we saw earlier, technology is a strong deflationary force. Third, the amount of net money creation over time can be reduced by also removing money from the economy. This could be accomplished through negative interest rates on bank deposits above a certain amount where the payment is collected by the central bank (and not by the commercial bank). This is known as “demurrage” and would be easy to implement in a full reserve banking system.

I expect that the path to UBI will involve some mix of changes to government budgets, taxation and the monetary system. One exciting possibility is that the change to the monetary system can come about through newly created crypto currencies. No matter how we eventually get there, what the back of the envelope math above shows is that UBI is in fact affordable. Economic freedom for all is possible, if we want it.