Basic income is a hot topic these days.
Recognized advantages include: removing the bureaucracy; the forms; the interrogations; the mandatory courses, job applications, job interviews, penalties for non-compliance, and the accompanying fear of getting cut off. A Reliable provision of income to everyone eliminates the decision-making process over who to pay and the accompanying risk, from the point of view of recipients, that the decision-maker will cut them off.
Basic income’s main disadvantage is that it is not targeted at those in need. A given tax revenue paid evenly to everyone will give the needy less than one paid solely to them. The UK’s welfare budget can afford to pay everyone about £4,000 per year without tax hikes. That’s not much.
Here, a case in favour of basic income is built from three points:
- Basic income has a higher credit value than means-tested benefits
- Basic Income should not be compared to a living wage. Paid work depletes time. Basic income does not. This leaves recipients time for cash-saving activities.
- Job-seekers allowance and working tax credits push people into the labour market. Increasing the supply of labour reduces its price (i.e. wages). The provision of basic income does not push people into the labour market, and so supports wage levels.
Credit Value of Basic Income
When bank managers decide whether to lend someone money, they look at their assets, their income and, finally, the reliability of that income. Applicants with unreliable incomes are either charged more interest or turned down.
Two defining features of our age are record low interest rates, set by central banks, and an increasingly precarious job market. Together, these two factors are driving wealth inequality to levels not seen since World War 2. Record low interest rates enable asset owners to access cheap credit with which to buy yet more assets. Many asset owners all using cheap loans to buy assets inflate asset prices which can then be used as collateral for yet more loans. Meanwhile those with insecure jobs must pay interest rates that are 5 to 10 times higher on any money they borrow. This interest rate apartheid between asset owners and precarious workers is the root driver of inequality today.
The provision of income through means-tested benefits is precarious. It starts and stops, it gets revised up and down based on increased hours, changes in savings, missed appointments, changes in government policy and a myriad of other factors. This means someone on means-tested benefits, applying for a loan, will either be charged very high interest or refused.
Even a relatively small uncertainty in an income source drastically affects the interest rate (especially when central banks set rates low), and correspondingly the principal which that income can service.
For example, if there is a 10% chance per year that a benefit recipient will get cut off, the bank must charge 10% interest to compensate for the default risk. A fiscally responsible person receiving a fully secure basic income, on the other hand, would probably get charged a mortgage-like interest rate of 3%.
Thus, £4,000 of precarious income could at most service a £40,000 loan at 10% interest.
While the fully secure £4,000 basic income could service a £133,000 loan at 3% interest.
Basic income provides far more credit bang per benefit buck than means-tested benefits. Pilot studies in India confirm that even a low basic income significantly helps poor people to access to credit at lower interest rates.
This point is crucial: the cheaper credit, that basic income facilitates, lets people purchase capital today to save expenses tomorrow. The front-ended purchase of cost-saving capital produces a higher quality life from less money. Basic income provides more benefit from less payment. It’s a much more efficient way to pay out benefits.
Basic Income and Self-Provision
Due to its high credit value, a relatively modest basic income (of perhaps, £4,000 a year) in a low interest rate environment could enable its recipient to raise a significant amount of capital (perhaps £100,000+).
This creates many opportunities for buying capital today to save expenses tomorrow.
A key point to remember, when comparing basic income to a living wage, is those who work 40 hours a week to earn a living wage have depleted their time. Those with an unconditional basic income, however, still have those 40 hours to add value with their labour to any capital they have purchased with their income. This surplus time enables someone on an unconditional basic income to live a far better life than someone who earns a similar wage.
For example, it is much cheaper to buy raw materials to construct a house as opposed to buying the finished house. Indeed Open Source Ecology is working on a turnkey design, combined with instruction videos that will enable anyone to build a house and a hydroponic greenhouse from starting materials costing just £25,000. This way, you can produce the same final house by expending far less money but far more time and effort – yet if you’ve got nothing better to do with your time, applying it to build a house is no loss and a big gain. Consider cooking (or otherwise preparing) a meal verses buying one in a restaurant, consider purchasing fertilizer, gardening tools and a greenhouse as opposed to buying food in a supermarket. Supermarket food may seem cheap, but, remember, land costs less in the countryside than in the city, so growing food in your back garden, not only saves the cost of buying the food, but also the cost of living near, or travelling to, a supermarket. Bicycling as opposed to driving is another example of trading time and effort for money to achieve the same result.
Many means-tested benefits are calculated on the basis of personal expenses, especially rent in the case of housing benefit. This perversely incentivizes benefit recipients to increase their expenses. A fixed income, on the other hand, encourages people to seek creative ways to reduce expenses and cash in the surplus. The most obvious way to save money is to move to a cheap area. This option is unavailable to those who work in an expensive location and indeed, as this graph shows, average after-rent wages are identical up and down the country. This implies that landlords collect most of the surplus produced in wealthy cities. Thus, by freeing people from expensive locations and freeing up time for self-provision (as oppose to filling out endless job applications, as Job Seekers Allowance requires), surprisingly little money could facilitate a decent standard of living.
Uniquely as an economic activity, self-provision doesn’t require anyone’s permission. Those who work for themselves with tools and raw materials purchased with basic income do not need employers to hire them or customers to purchase their goods, they can just get on with it – no permission, or CV, required. This means the economic activity of self-provision on a modest basic income can automatically fully absorb an arbitrarily large unemployed population. Many critics of basic income would prefer to supply everyone with guaranteed work. However, a basic income set at an affordable level is, to all intents and purposes, a guaranteed job. The provision of basic income is an indirect provision of employment. No one on £4,000 a year would sit around doing nothing – they couldn’t afford to, or at least wouldn’t want to – as their quality of life would be very low. Instead, anyone on £4,000 a year would spend their time working industriously to extract the maximum value from every penny they got.
Furthermore, unlike make-work guaranteed job schemes, those employing themselves in the activity of self-provision requires no supervision at all. Since people providing for themselves reap the benefit of their own industry, there is no way to skive off and game the system. This simultaneously raises productivity and eliminates the need for supervisors that peer over the backs of guaranteed workers to make sure they perform their make-work jobs.
Higher Wages, Wealth Creation and The Benefits of Full Employment
If we quit our jobs, we lose money and gain time. The extra available time can be devoted to working at a job that pays more, and people often quit their jobs when offered a higher paying job elsewhere. One could also use the extra time acquired from quitting a job to run a business. This would make sense if the hourly profit generated by that business exceeds your old salary.
Other than working at your own business, or a higher paying job, you could work to provide value for yourself (such as building a house, growing food, brewing beer, etc.). This is a key point: Unlike other activities, which may not be available, self-provision is always an available option for healthy people. If the benefit from a given amount of time spent providing for your own needs exceeds the benefit of your salary at work, then it makes sense to quit your job and provide for yourself instead. And because self-provision is available to everyone, then if there are enough rational people to set the price of labour…
…the benefit that someone providing for themselves can extract from a given period of time and industry will set the wage floor everywhere.
In 1879, Henry George eloquently expressed this principle in his landmark book Progress and Poverty in the chapter, Wages And The Law of Wages
“…what, in conditions of freedom, will be the terms at which one man can hire others to work for him? Evidently, they will be fixed by what the men could make if labouring for themselves. The principle which will prevent him from having to give anything above this, except what is necessary to induce the change, will also prevent them from taking anything less. Did they demand more, the competition of others would prevent them from getting employment. Did he offer less, none would accept the terms, as they could obtain greater results by working for themselves.”
However, the wealth that someone can produce working for themselves depends on available tools and raw materials. Without an initial supply of tools or raw materials, the value of our time is low indeed – and tools and raw materials cost money.
Wealth is created by applying labour to capital. If someone wishes to mow the lawn, they will be far more productive with a lawn mower than a pair of scissors, conversely a regularly used lawn mower will be more productive compared to one left idle in a garden shed. Hence:
Capital amplifies the productivity of each hour of labour, while labour amplifies the productivity of each unit of capital.
This means a basic income that enable recipients to access more capital will raise the value of the time they spend providing for themselves and hence baseline wages across the board. Since labour and capital have a multiplicative effect on each other, basic income will raise wages to many times the value of the income itself. If labour amplifies the value of capital (tools and raw materials) by a factor of 5, then a basic income of just £4,000 a year could raise wages everywhere to £16,000!!!
Henry George’s Law of Wages can also be used to infer that a basic income will create new wealth. According to this law, the aggregate benefit produced by basic income recipients applying their labour to capital exactly equals the salary forgone by not spending that time working for someone else. If a £4,000 basic income raised the wage floor to £16,000 then someone who chose to provide for themselves as opposed to getting a job for £12,000 actually produces an additional £4,000 of wealth compared to a situation without basic income where they were forced to labour for less. By more efficiently capitalizing the poorest members of society, even a modest basic income would increase the productivity of their labour.
And if we agree that labouring industriously to provide for yourself is a productive, wealth-producing use of time, then universal basic income will give rise to full employment along with all its corresponding benefits!
Basic income can buffer a flexible, non-exploitative labour market. Today we shudder at the term “flexible labour market” due to the implication that one moment you have an income, the next moment you’re left high and dry. But once people can use basic income to set up a homestead with the tools they need to provide for themselves, flexible labour markets become less ominous. For those working from a foundation of self-provision, flexible labour markets will merely be a source of pocket money.
An Integrated Strategy
For universal basic income to truly benefit society, two other things must accompany it:
- A program to provide cheap credit to poorer people who wish to become self-sufficient
- A government funded information resource, that informs people how to provide the best possible livelihood with their income. Including the best skills to develop and the best tools to work with.
Bank managers will effectively serve as gatekeepers to prevent wasteful people without a plan from front-loading their income as a capital loan. Conversely, it is also vital that responsible people who are poor can access cheap credit to front-load their income. Means-tested default subsidies are a possible solution. If the government refunded, say, 50% of the money that banks lost as debt defaults from low interest self-sufficiency loans issued to those on low incomes, then banks would not lend out to really dodgy customers, as they would still lose 50% of the defaulted sum, but if only low interest loans to those with low incomes qualified for the subsidy, then interest rates could be held down.
Phasing It In
In my book, The Countryside Living Allowance, I discuss how to phase in a basic income so as to minimize the costs (along with costing estimates) and maximize the positive impact. Basic income will have the biggest impact where the cost of living is lowest. Therefore, initially limiting basic income to regions with a low cost of living would reduce its budget while still raising wages everywhere, as those on lower incomes would move to where they could collect the allowance. Furthermore, the allowance could be linked to a Land value covenant, so that the government could raise more revenue as more people moved into regions that qualified for the benefit.
If this article is of interest, and you want to learn more, read The Countryside Living Allowance to get the details.
John
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Do you remember AGFA? They used to make film for cameras, blank cassette tapes, blank video tapes etc. As you can imagine, there’s not as much demand for these products as there used to be. My current apartment is built on the site of a former AGFA factory, and lots of the people living nearby used to work there. The new luxury apartments built on the site of the factory have made the area in general more desirable and are therefore also driving up rent in nearby properties, so those former factory workers who haven’t managed to find a new job can only afford to keep living here thanks to housing benefit. (We weren’t aware of this situation or the history of the area when we moved in.)
Under your proposal, these people would presumably move away to the countryside and either start growing their own food or get a loan to build a house, which they could then sell. Their lives would undoubtedly be more productive, but would they be happier? They would lose their community. I’d never lived anywhere with such a strong sense of community before, and living in one of the new luxury apartments, we’re now part of a separate white-collar island community rather than the wider blue-collar community. If I had to move away, I’d miss the apartment itself, I’d miss the location not too far from the city centre but also not far from the river and a forest, I’d miss the parks with the children’s playgrounds for our daughter, and I’d miss my pretty, green jogging routes; but I wouldn’t miss the strong, blue-collar community that developed around the factory as we don’t really belong to it, and I think it’s very difficult for someone like me, who’s never belonged to such a community, to imagine how much of a sacrifice it would be to move away from one.
Until last year, the local football club were playing in the second Bundesliga and sharing the Allianz Arena, which is around 10 miles away, with Bayern Munich. They were relegated, but when it turned out that this meant they would be leaving the Allianz Arena and returning to the local stadium, they celebrated their relegation! They’d rather have the football club stay in the community than be successful. On matchdays, the streets and bars are full of fans all dressed in blue football shirts. Before, when they were playing in the Allianz Arena, matchdays were just the same as any other day. If the locals moved away to the countryside, that would all be lost again. (House prices are very high everywhere within commuting distance of Munich, so they’d have to move quite far away for it to make financial sense.)
I don’t think this community is unique. I’m sure there are strong, blue-collar communities like this in industrial and post-industrial areas eveywhere. I’m sure there are also traditional farming villages with similarly strong communities, though quite different in character. Since these strong, blue-collar communities tend to be in areas with lower wages and higher unemployment, it would be precisely people from these communities who would move away to the countryside under your proposal. Even if they moved to a similarly strong rural community, it still wouldn’t be *their* community. People who go to university and then move from place to place over the course of their career, and who have friends and family members who do the same, end up with a social support network of friends and family that covers a wide area. On the other hand, many people from blue-collar communities don’t go to university, and if they work, it’s often work in a factory, bar, restaurant, shop etc. that you can do nearly anywhere, so many of them don’t move from one place to another in order to further their career. As a result, most of their social support network of friends and family may live within their own community. Leaving the community, even if it brings material benefits, may also bring emotional and psychological costs that outweigh them.
Just to make myself clear, if people aspire to move out of their community in search of a better life, then I think they should be given the opportunity to do so, but if you take away their housing benefit, then they could be *forced* to leave the community, which is another thing entirely.
This is a transitional problem. Every change in policy, necessarily creates a change in incentives including disrupting the status quo along with communities and arrangements that have developed and are viable because of it.
There’s no way around it. If you make a significant change…any change at all… you will inevitably temporarily inconvenience some people and change some communities. The only way to completely avoid disrupting some people’s live is never to change anything.
In the long run, a basic income would create a new equilibrium and new viable communities. As time went by, the new basic income-based communities would develop a sense of identity and a cultural richness of their own.
So the question is: How do you slowly phase in this change without causing excessive psychological trauma and give people time to adapt?
The answer is: The Countryside Living Allowance, which I only just touched on in this post. In the actual booklet (which the post links to) I mention that a key advantage of starting off with a Countryside Living Allowance as opposed to a universal basic income is that the budget required to fund it will be much lower (since only a small fraction of people currently live in the countryside) this will enable all the other government benefit programs (including housing benefits) to continue and remain adequately funded.
So if we phased basic income in slowly and carefully (such as by starting out with a Countryside living Allowance and only gradually expanding applicability) then no communities would have to suddenly be disrupted or traumatized.
So long as the transition to basic income is slow enough, communities and people will adapt, as they usually do, to changing circumstances. Especially if the phasing in of UBI takes longer than a generation.
Your proposal would see lots of people growing their own food or building their own houses. Have you taken into consideration the fact that they might do so much less efficiently than professional farmers or builders? I know you mention a “government-funded information resource that informs people how to provide the best possible livelihood with their income, including the best skills to develop and the best tools to work with.” Do you envisage this taking the form of farming and building textbooks, or practical, hands-on courses in farming and building? The former would surely not be enough for people to become as efficient as professional farmers or builders are, while the latter would have to last at least a year or two for the courses to be meaningful (particularly with farming, where certain activities can only be done at a certain time of the year) and would cost the government a lot of money if large numbers of people take the courses.
Even if the people themselves become as efficient as professional farmers or builders are, the fact that they’re working independently means that they miss out on economies of scale, particularly with farming. Farming with large machinery like tractors and combine harvesters is much more efficient, but the average self-sufficient jobseeker-turned-farmer wouldn’t have enough land to make such machinery viable (which in any case would have to be rented as they also wouldn’t have the means to buy such machinery or the space to store it). Crop rotation is also very important for high yields, but I don’t know how effective it is on allotment-sized plots of land.
The are significant differences to growing your own food and farming. Commercial farmers typically specialize in producing a few crops in large quantities while purchasing other food stuffs in the super market. If you intended to live primarily off what you grow, then you would need to grow a wide variety of crops to avoid getting bored! This is very different from most commercial farming models.
Commercial farmers grow to sell crops at wholesale cost. Self-sufficient individuals grow to displace the retail cost of buying food.
The wholesale cost of food is between 10% and 50% of it’s retail price. You are of course right that self-sufficient growers would produce food less efficiently than commercial farmers. But I’m not sure they would produce food 3 to 10 times less efficiently, and if, say, a self-sufficient grower produced food at 35% of the efficiency of a commercial farmer, the cost savings of not buying groceries per hour working in the garden, could still be greater than the commercial farmer’s wage.
Furthermore, the self-sufficient individual doesn’t have to drive to town to sell his food at the market or buy the groceries he doesn’t grow. Because customer demand is unpredictable, a lot of fresh produce goes off. People who grow their own produce can match their demand to what is ready for harvest. This is an efficiency gain.
While someone building their own house would take longer than a qualified builder, since qualified builders often earn above normal salaries, a normal person might be better off spending 2 hours at DIY than paying a trades man to do the job in 1 hour (assuming he has to work for more than 2 hours to cover the tradesman’s salary). By building your own house you could also personalize it, which is a kind of premium value as well. Also if you live next to or in the house you are working on you save commuting time to the building site along with the cost of commuting.