ReCivitas project at Oxford 1 Feb 2016
by George Bangham The ReCivitas project has paid an unconditional basic income to members of a small community in Quatinga Velho, in the state of São Paulo in southern Brazil,…
This article is a (possible? viable?) response to one of the few criticisms against UBI that actually holds water. My training is not as an economist and so this intended as a starting point for a larger discussion.
If everybody received a UBI, so the argument goes, the price of goods will increase: If I know you have £2 where you used to have £1, what – other than altruism – would provide me with reason enough to keep the price of my goods the same? Since no mechanism exists to keep these prices down (competition will keep prices down provided supply can be met), critics of UBI suggest, what we will have is inflation. The introduction of UBI accomplishes nothing except a rise in the prices of consumer goods and we arrive, full circle and after a great deal of expense, in exactly the same place as before.
However, before rushing to that conclusion, it is important to have a little more faith in the performance of markets in a situation where UBI has been introduced.
First, the argument is that giving money to people who are currently without the means to purchase goods will increase inflation. There are some people whose patterns of consumption will not change after the advent of a UBI: There is only so much food a person can buy, only so many washing machines, cars, TVs.
What UBI does is secure the means by which the essentials of life can be had: Rent/mortgage paid, food bought, leisure permitted, travel covered, standard of living maintained. This is the reference point for UBI, not the indefinite expansion of consumption. To think otherwise seems to put a peculiar vision of the person front and centre of the economic picture. With security, so this vision has it, comes only the desire to consume, to spend and acquire, spend and acquire ad infintium.
This is not even homo economicus. This is pure homo avaricus, an all-consuming, utility maximiser with nothing on his mind but the goods that can be owned, exhausted and replaced for the next round. In contrast to this vision there is reason to believe that something more complex happens to people’s consumption choices. Rather than an increase in disposable income leading to an increase in the quantity of goods consumed, people simply improve on the quality of what is consumed. People will eat healthier precisely because they can now afford to do so.
So the issue of inflation and how the market operates under a situation of UBI must focus at this level: Will the price of that basket of goods needed to secure a basic standard of living inflate to such an extent as to cancel out the gains of UBI?
First, we need to bracket the issue of housing. In so bracketing, the nature of the other kinds of goods that are necessary for a secure standard of living is revealed. Currently, the housing market does not function in this country. There is far too little supply for an ever increasing – and, in London, concentrating of – demand. A UBI would, undoubtedly, be absorbed by rentier landlords upping their rent charges, recognising – and correctly so – the opportunity to extract more and more money from their tenants. To correct for this a great deal more supply is required. This supply issue is going to require concerted state action to get going. The motive is not there for private landlords – or current homeowners – to engage or push for such a policy, precisely because they stand to lose from it. However UBI will be neither saint nor sinner in this area: This is a problem rooted in the fact that housing has become a commodity to be trade as opposed to grounding and securing of a space in the world.
The same project and push necessary to get the housing market functioning is not, however, of the same scale as the kinds that would provide enough food and the other goods that would guarantee a minimum standard to living to all.
Assuming the cost of bread remains the same, my now having £2 where I used to have £1 only acts as an incentive to increase the price of bread, not an irresistible imperative. Where more demand has entered the market, i.e. where people can now afford to feed themselves properly and consume to a level fitting for a reasonable standard of living, the ability to produce more to cope with that demand exists when the good in question is something like food.
Where shopkeeper A raises his prices to soak up the additional demand, Shopkeeper B can take advantage, maintaining lower prices to retain a competitive edge. The market should thus function to keep prices relatively low in respect of those goods that do not generate the kinds of problem symptomatic of the current housing ‘market’ – that is, where production is simply not on so huge a scale.
There is reason to believe then that UBI will not produce the kinds of inflationary effects for which it stands accused – bearing in mind the need to tackle the carcinogen of the current housing crisis which serves only to make landlords richer, more sadistic in their treatment of tenants, and all at the cost of the security and prosperity of the people.
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Main Photo courtesy of K H Rawlings
First photo courtesy of Jesus Solana
Second photo courtesy of David Jenkins
The political temptation for inflation by currency expansion (monetary easing) to assist funding for a liquidity complement (basic Income) is not addressed. A GDP::Debt Indexing (adjustment) is needed as a popular voter incentive to encourage politicians to balance the budget and move the deficit into negative territory to reduce (and someday retire) national debt.
Without specifically addressing this type of inflation, a liquidity complement (for the necessaries of life) may as well just be funded by the central bank and help ensure QE to infinity or subject the economy to faster cycling failures. The nation then defaults when government bonds are dumped on the market by disgruntled international creditors and national debt is unable to be rolled over by the Treasury.
Of course, the country can repudiate the debt (default), print money (inflate) or raise taxes and cut government expenses (austerity). I prefer a GDP::Debt Indexed Liquidity Complement to solve the clear and present danger to the nation’s economy.
A persistent incentive is required to reign in the debt, as well as provide a liquidity complement (first-order minimum income) for all taxpaying citizens (at all levels of society subject to all individual income streams) to consume from businesses during the entire business cycle. Address the economic argument and you create the side-effect of also addressing poverty.
You may need to specify a (smooth curve) claw-back rate, also,… probably between the poverty level and individual median income to avoid the poverty trap of the welfare state. The eligibility age probably needs to be dropped down to when you leave or finish mandatory school attendance (16-18). You don’t want to provide a financial incentive for Malthusian over-population, but rather encourage the individual to grow to be a responsible and financially stable adult before considering a family.
Conceived in this manner, the argument becomes an economic necessity, not a cash redistribution, not insurance or another government program to heap on the existing welfare and subsidies piled high and deep, endorsed by funded intellectuals. It’s just good fiscal policy with unaccountable intangible good will implications.
It is a way of reforming government without threat of starving the population or forcing the country into bankruptcy. It is a fight between productive voting citizens and unproductive government bureaucrats and officials living off taxpayer dollars to increasingly micro-manage your life and prosecute foreign policy objectives (as well as their own self-interests), egged on by corporate or union self-interests at the expense of taxpayers.
Why didn’t you look at the evidence? In India, people save more when given a BI grant, so inflation won’t be as bad as if they spent it all. They also don’t spend it all on basic necessities, they spend it on improving their houses and education situation. What they do spend on food tends to be better nutritionally than before, suggesting an increased market for nutritionally better foods, which will create spaces for entrepreneurs to fill leading to a more dynamic economy.
With housing, I think there will also be an increased market for low-end housing. Part of the reason for London’s high demand for housing is the huge amount of jobs there compared to elsewhere. If there is less of a need to travel to London for a job, there will be an ease on housing (of course, immigration might increase, perhaps offsetting this ease). But there would likely be an increase of people happy to live in frugal accomodation in their city of birth.
Basically, we need further evidence to study the effect specifically on inflation and housing, though a BI should still be introduced if there were some negative effects on these, though I don’t think there would be.
I take these as supporting comments. Totally agree re: housing and education. Also, on London – When you take into account costs assumed by residents of rural areas to get to the Jobcentre Plus the inequalities between cities GENERALLY and rural areas is clear. UBI could help with that as well.
I am not sure the ‘entrepeneur’ argument for nutritional foods is even necessary – the food is out there and available just not being bought by the poorer because of cost. It’s not a matter of innovation just access.
finally, your last pt is also totally right – if inflation does increase, it has to be an all-things considered judgement. Increased inflation determines nothing in and of itself.
I take these as supporting comments. Totally agree re: housing and education. Also, on London – When you take into account costs assumed by residents of rural areas to get to the Jobcentre Plus the inequalities between cities GENERALLY and rural areas is clear. UBI could help with that as well.
I am not sure the ‘entrepeneur’ argument for nutritional foods is even necessary – the food is out there and available just not being bought by the poorer because of cost. It’s not a matter of innovation just access.
finally, your last pt is also totally right – if inflation does increase, it has to be an all-things considered judgement. Increased inflation determines nothing in and of itself.
‘Where more demand has entered the market, i.e. where people can now afford to feed themselves properly and consume to a level fitting for a reasonable standard of living, the ability to produce more to cope with that demand exists when the good in question is something like food.’
What’s your justification for assuming such an elastic supply curve here? I’m not big on these sorts of supply/demand models at any rate, but it seems strange to assume that the marginal cost of producing a new unit of food shouldn’t rise at all with increased production.
Randall Wray presents a different sort of inflationary concern to the one you address here. Think of it this way. Say I do an hour’s work and get paid £5 for it. £5 is worth an hour of my time. UBI is introduced, so that from an hour’s work I get £5 plus another £1 from my UBI. Now £6 is worth an hour of my time. In other words the value of money has gone down. What I would have paid £15 for in the past I’ll now pay £18 for – after all, the £18 now was no harder for me to get than the £15 pre-UBI. That’s how UBI can be inflationary. It doesn’t just increase effective demand; it reduces the value of money by making it possible to get the same amount with less effort.
See: http://www.economonitor.com/lrwray/2013/07/09/how-big-is-big-enough-would-the-basic-income-guarantee-satisfy-the-unemployed/
Sorry, the passage I meant to quote was this one:
‘Assuming the cost of bread remains the same, my now having £2 where I used to have £1 only acts as an incentive to increase the price of bread, not an irresistible imperative.’
Cheers for this – I am a little confused as to why the UBI should be treated as being anything like a wage. When I got JSA i never saw it as paying me for my time. Especially since in this case the £1 is accrued without work and, moreover, this already exists in the case of tax credits, i.e. govt subsidies for wages. By working in a low paying job I receive top ups from the government – in what way is this different to what you describe above? Once the two are separated out (wage & UBI) the idea that UBI + wage = the value of my labour/time surely no longer holds. I get the wage for the work and the UBI for something else entirely…
The elastic supply curve comes from a certain faith (something of which I am usually weary) that the market can mop up new demand precipitated by the introduction of a UBI – so for houses and such I don’t think you’re right that elasticity is severely limited. But for other goods… Can it really not be expected that the spirit of innovation and free enterprise cannot generate new supply?
(I shall read that article in due course – thanks again for this)
‘Can it really not be expected that the spirit of innovation and free enterprise cannot generate new supply?’
Of course it can. But standard economics tells you that unless there’s some technological breakthrough each new unit costs the producer a bit more to make. So yes, price-takers will be led by competition to expand output in order to meet new effective demand. But prices will go up too.
Is that right? I really don’t know. As I said, I don’t think the supply and demand ‘scissors’ explain prices at all well.
I didn’t mean you should think of all income as a wage. What I meant was this: the government is the monopoly issuer of money and sets the price of money by requiring people to provide labour or something else in order to get it. The price it sets then determines all other prices in the economy. If it gives some money out for free, it’s just reducing the price of money. It’s as though you buy two bread rolls at £3 each, and the baker throws in an extra for free: the price per roll is then effectively £2. Likewise if the government sets the labour-price of money at 1hr/£5 and then throws in an extra £1 for free, it’s effectively made the labour-price 1hr/£6.
On the standard ‘Keynesian’ understanding, supply is highly elastic when we’re under full employment – in other words when there’s unused productive capacity. I agree with you that that’s the situation we’re currently in. I also agree that if you dropped UBI on people right now, the result would be that the unused capacity would get used (plus inventories would be sold off and debts would be paid down), rather than prices going up. That’s just standard Keynesian ‘pump priming’.
But… *that means UBI is only non-inflationary when we’re under full employment*. Now the universally-accepted neoliberal policy is to keep the economy permanently below full employment. Fiscal austerity and investment-rationing by central banks prevent people who *want* paid employment from getting it. If such policies continue to be pursued, UBI can mitigate their effects. But the Job Guarantee is a way of abandoning such an unfair and coercive policy. The Job Guarantee is the replacement for a bad policy; UBI on its own just mitigates some of its harmful effects.
UBI + JG would be ok in principle, but I personally don’t see what’s wrong with plain old means-testing, in-kind welfare benefits, socialised medicine and housing, unemployment insurance, and progressive taxation.