The Deflationary Effects of a Basic Income
It’s increasingly accepted that the government can’t run out of the currency it issues. The true constraint on government spending is not the receipt of tax income or the need to “balance the budget”, but inflation. If the government spends too much money into existence, then the currency will lose value as too much demand (spending) chases too little supply (goods and services to spend it on).
A basic income, it is often claimed, would be an especially dangerous and inflationary kind of government spending, since it would allow people to opt out of productive work, while increasing spending and consumption. Less stuff, more spending. But it’s not so simple.
Having a job is expensive, and requires significant resources. With unearned income to fall back on, people may leave jobs or work fewer hours, and reduce spending and consumption associated with performing those jobs. For example if people commute less, the demand for petrol might fall, causing its price to deflate. Almost all goods require transport, so this cheaper petrol price would lower costs across the board.
We shouldn’t overstate this effect. It may well be that the inflationary pressures win out, and indeed I intuit that this would be the case. But that depends on the way people react — which is impossible to know in advance. Even if we assume this is the case, and the inflationary effects of a basic income would be greater, we still need to think about the extent to which the deflationary effects might dampen this, reducing the net level of inflation. It’s also important to note that not all products and services would move in the same direction. Prices for some might increase in nominal terms, while others decrease.
Let’s start with the example of a particular person: Meet Bob. Bob works in advertising. Three days a week he’s thinking of creative ways to try and make people experience positive emotions when they think about banks. The remaining two days a week he tries to help a new brand of beer break into the Australian market, because you know, we don’t have enough of those. Bob is one of the many people whose job is, by their own estimation, meaningless bullshit. He does it to keep a roof over his children’s head. Bob makes AUD $100,000 a year ($73,503 after tax). His wife stays home, taking care of the house and the children.
But then a UBI is introduced, based on the Australian Greens “Universal Wellbeing Payment”, it grants a total of $26,000 a year to every adult. If he keeps his job, then his income will go up to $126,000 ($89,363 after tax) and his wife will also end up with $24,084 after tax, bringing the total spending power of the household to $113,447. The family will now have $39,944 more in spending power. This would be inflationary.
But let’s remember, Bob doesn’t like his job. What’s more, it turns out, he doesn’t much like living in Sydney, he’s sick of the high prices, the traffic, and so on. The family decides on a seachange, and moves to a cheaper house in a beach town. Their combined spending power is now $48,168, $25,335 less than before the basic income was introduced. This would be deflationary.
But the family might not be much worse off. They may be better off. Their housing costs might be reduced by a hundred or two per week. Their transport costs might also be drastically reduced — Bob’s daily commute is entirely eliminated, and Bob’s car is available to drop the kids to school and do the shopping so the family doesn’t need a second vehicle. He has time to make his morning coffee and his lunch at home, rather than buy them at a cafe. Freed of the stress of a job he hates, he doesn’t need that second beer after work, so he drinks less, and starts to brew his own. His availability to help with child rearing and tasks around the home means more meals cooked from scratch, rather than bought take away, or semi-prepared. This might all easily save them $500 a week, or 25000 a year.
They end up with the same discretionary income they had before the basic income was introduced — but Bob gets his life back. The kids get to have their dad around.
And now there’s one more house available in the crowded Sydney market. There’s a car on the market that wasn’t before. There’s two tanks of petrol a week less going through the bowser. There’s less wear on the car they did keep and therefore less mechanical work required. The prices of all these things drop.
Bob’s car is absent from the rush hour grind. The need for an extra lane of freeway is reduced, ever so slightly, which reduces the need for concrete, which reduces the need for the steel to expand the concrete factory, which reduces the need for energy, which reduces the need for workers at the power plant, which means fewer cars are on the road, which reduces the need for an extra lane of freeway…
Bob quitting his job, reducing his transport needs and moving where housing is more available has made the economy more efficient. Greater efficiency means less stuff is needed to provide the same quality of life. Everybody wins.
Everybody, that is, except people who are trying to get advertising made. In fact it turns out Bob was a real Don Draper, and vital to the company’s success. A few other employees also retired sooner than they otherwise would have. Fewer applicants are showing up, and those that are are asking for more money. The company folds. More real estate is suddenly available. An office park that might have been built doesn’t need to be, reducing the need for construction workers and equipment. Power lines and data cables don’t have to be laid. This might lead to some lost wages, but remember, everyone’s incomes just went up $26000.
Everything has, in this simplified hypothetical, gotten cheaper — except advertising, since the surviving companies now have one less competitor and can raise their prices to reflect this (and have to, to keep their staff from buggering off to the countryside). But it’s not just one bank or beer company that faces this higher cost. It’s all of them. Since the main reason they want to advertise is to take market share off each other, the end result will be much the same. Things might have a bit less gloss but consumers won’t be significantly less well informed about the services each bank offers. A similar dynamic plays out with corporate lawyers. It’s an arms race. If the price per missile doubles, then each side can just get half as many. The outcomes of their disputes won’t be half as just.
Of course if the corporate lawyers and advertising creatives all keep their jobs, and just spend their basic income on top of their salaries, and instead it’s the construction workers, steel and car makers and power plant workers who quit, then it’s the cost of these really useful things that will increase. But even this effect will be dampened by the fact that these workers won’t be travelling, or buying meals out (they’ll be cooking them at home instead).
This offset will then be offset, as the remaining steel workers wages have to be increased to stop them from quitting, too, and output drops driving up the price of steel — and whatever the steelworkers spend their extra earnings on.
Or the vital steel and manufacturing industries might just put those who are currently unemployed to work, or pull labour away from the low value, low wage, service sector, which they already pay better than. It might, then, be the price of a cappuccino that goes up, or the number of retail staff that goes down, speeding automation and the roll out of self-checkout stores, or the transition to online shopping. These changes, in the medium and long term, might further increase efficiency, creating further deflationary effect.
My point is not, as I said at the beginning, that a basic income will necessarily be deflationary overall, but that it will have some deflationary effects. These will increase the level of basic income that can be paid before inflation becomes a concern.
The best way to test the theory would be to gradually phase the basic income in, starting with a low payment and increasing it gradually, tracking the effects as we go. If and when inflation does become a concern (currently it’s deflation keeping central bankers up at night), we needn’t immediately stop the increases, but could make adjustments to other policy settings which affect inflation. The most obvious adjustment, but not necessarily the best, would be raising interest rates. More targeted limits on lending and borrowing might be better, or increases to taxes, or decreases in government spending elsewhere. If none of these proved sufficient, or the negative effects of them proved too great, we could halt or reverse these basic income increases.
There’s no good reason for policy makers to resist such an obvious approach. Not unless their true fear is not that it won’t work, but that it might work too well, and the population may get a taste for a life centered on family, leisure, and other activities more fulfilling than toiling to make the masters of the economy ever richer.
Originally posted in Medium: https://medium.com/@austingmackell/the-deflationary-effects-of-a-basic-income-bf882c6c981