Yesterday, we heard about how the world has moved forward in the last generation or so. Almost everyone is profiting from an extraordinary period of global growth. Everyone, that is, except for two key groups. These are the global poor and the working class in developed countries.
The economic prospects of blue-collar voters in the West have been hit hard. Their income growth has been cut off – eroded by accelerating trends of globalisation, immigration and automation. Many have become alienated and angry. Relatively speaking, they’ve lost their wealth – and with it, their status in society. Large numbers have been taking this anger out at the ballot box. That’s why we’ve seen the adoption of extreme, ruinous policies – and the ascent of populist politicians. Previously, these demagogues would have been dismissed as jesters. But nobody’s laughing now.
But today, it’s time for one possible solution.
You may already have heard of this idea. It’s a revolution to the tax and benefit system – one that’s being trialled at a small scale in many countries of the world. It’s being tested by private US firms, like Y Combinator. In Europe, it’s the subject of small state trials.
Its name is universal basic income (UBI), and it may be as revolutionary as the welfare state. It’s a simple idea: free money – for everyone. It’s a benefits system that does for your pay cheque what the NHS does for your healthcare. You get an allowance of what you’re deemed to need to live. If you want to earn more on top, then so be it.
I’ve been a businessman all my adult life, but there’s always been something that struck me about the socialist philosophy “from each according to his ability, to each according to his need”. Something about this chimes with many people. Personally, I’ve never been persuaded that destitution was a necessary part of capitalism. There’s good sense to this approach, too. Rising inequality in societies often precedes revolution or collapse.
Our modern welfare state was conceived for noble reasons, but it is broken. It has created a divided society, portrayed as strivers and skivers. The skivers may be freeloading, but they are often very poor. Not only that, but they are trapped. Welfare is a good idea – to a point. It stops people starving (usually). But our current system tends to ensnare them in relative poverty and idleness.
There’s significant risk of what economists call “perverse incentives”, if you’re a welfare claimant.
Firstly, you might want a job – but be unable to take one. Often, it simply doesn’t pay to work. I have single friends with children who work for zero or negative marginal pay. A life on benefits is often easier and better paid. It’s a temptation many eventually succumb to – leaving the labour force for long periods. After a gap of years, skills fade and bad habits form. This can make a return to work very difficult. Many children grow up in households without a culture of work – entrenching poverty, down the generations.
I usually explain it like this: in the West, there are few genuinely unemployed people – but there are many people paid by the government to sit around all day, doing nothing. Benefits, restrictive housing policies, and minimum wages see to that.
There’s a second perverse incentive. You might want a good job – but be pressured into taking a bad one, because you “need” to be pushed off welfare. One famous case is a prime example: a graduate was forced to give up an internship as a museum curator, to stack shelves in a discount store.
To add a personal perspective: a young friend of mine had to quit A-levels to take a menial job, as her family couldn’t make ends meet. That makes no long-term economic sense to anyone – not the country, and certainly not to her. That’s poverty used as a weapon against the poor – a vindictive enforcement of the status quo, at the expense of economic growth.
Tragically, when I met the girl a few years later, she’d become homeless. She was relying on crime and sex work to survive. All that stems from a lack of a few quid a week, to help her through college. It’s economic madness, and it’s utterly cruel.
In both cases above, these perverse incentives are a dumb solution. It means labour is deployed badly in the economy, either underused or not used at all. People don’t earn as much as they could, nor are they as productive as they should be. UBI aims to overcome this. Those who want to work can do so – without fear of losing benefits.
But what about those who don’t want to work?
UBI means they can quit – without starving. You might think that this is an obvious disaster, and you might be right. But early evidence suggests that people who drop out of the labour market tend to do so because they have a very specific need. That’s typically limited to care or continuing education, as we saw in the example above. There’s not a lot of evidence to suggest that people sit around playing PlayStation all day – because it always pays to get a job. This is a key reason why UBI beats “ordinary” welfare. (However, I’d argue an exception may need to be made for substance abusers – who could be endangered by being given cash.)
The Swiss voted a UBI proposal down in a referendum last year, but it’s far from a dead project. The Swiss version actually saw a very high income proposed – tens of thousands of Swiss francs per annum. By contrast, other trials have focused on subsistence level incomes, equivalent to just a few hundred pounds a month.
In the UK today, you can rent a room for around £300 per month (outside London). You can buy basic, healthy food for less than £200 per month and then get by with perhaps another £100 for clothes, phone credit, toiletries, etc. So perhaps £600 a month for a single adult would ensure that everyone could live without worry.
It may surprise you to know that this proposal (or something fiscally similar) could be run for only a shade more than the current welfare bill costs.
There may be major economic benefits, too. UBI tends to remove the poverty trap, but there are less obvious benefits. We could see an explosion in innovation, entrepreneurship and music – all activities that have provided a huge boost to UK PLC in the past. Many famous musicians credit their success to being able to survive on the dole, while perfecting their art. In recognition of this, a specific “rock ‘n’ dole” scheme was implemented in the 1990s. If you think that’s a gratuitous waste, think how much a degree in art history or classical Greek costs the government – and these disciplines have fewer direct economic benefits.
UBI is a fascinating subject, and it’s one we’ll likely return to in Exponential Investor. Meanwhile, the debates and trials will continue all around the world. UBI may be seen in years to come as a fundamental human right – akin to the vote or primary education. It’s fascinating to watch history being written on this core economic subject.
Would you like some free money? Or are you scared of paying it to someone else through your taxes? Let us know, at email@example.com.
Category: Artificial Intelligence