UBI – A highly relevant macroeconomic policy tool that most policymakers misunderstand

By:  Swapnil Pawar

Universal basic income has been discussed at length in recent debates in economics. The mistaken and yet generally widely agreed premise is that it is a dole of sorts. It seems like a welfare scheme of an overly ambitious nature. I propose that, far from being a dole, universal basic income is actually a lifeline to save modern mature economies from meeting the sorry fate implied due to the fundamental flaw in the capitalist organization. The likely medium term future of capitalist economies is of gradually falling real output as wealth concentration reaches extreme levels. This may lead to violent revolutions in the extreme or at least widespread misery and hardship in the average case. There is not much that can alter this course of economic evolution in post-industrial economies – save a lucky break on some breakthrough technology.

Why the fatal flaw?

Universal basic income strikes at the root of this fatal flaw. The reason the flaw becomes fatal is that the demand for financial profits and savings is structural and relatively constant while the supply of financial dissaving is uncertain. Universal basic income can generate a constant source of financial dissaving that does not require real investments and government deficits to bear the entire burden of funding the profits and savings demand. UBI can act as the balancing figure that makes up the gap between the demand for financial profits and savings and the supply of financial dissaving from real investments and fiscal deficits.

What about inflation?

The obvious concern with UBI is that it may be inflationary. However, this concern misses the point. If an economy is struggling with inflation, it is likely that it is operating at close to its capacity. UBI as suggested here is an antidote to underutilized capacity co-existing with unfulfilled consumption demand. If there is no spare capacity, the ‘recommended’ value of UBI will be zero, as is the case in this specific year and might remain so for the next couple of years.

The amount of UBI can be adjusted to ensure that the total dissaving across real investments, government deficit and UBI is not a runaway number that can threaten to cause hyperinflation. Such targeting can be self-correcting during boom periods when real investments are strong – thus reducing the need for relying on UBI. During the slowdown, UBI can be increased to take care of falling incomes and consumption. Besides being good for the average person in the population, this also ensures that the vicious cycle of falling incomes leading to falling consumption leading to yet more reduction in income is avoided.

Where do we fund it from?

The second question often asked about UBI is – who is going to fund it? I propose that UBI need not come from the government’s regular finances. Hence, it need not add to the fiscal deficit. Given our claim above that UBI is a public good, in the sense that it avoids recessions and the corresponding hardship for the common public, UBI can be funded through fresh issuance of currency by the central bank. The amount of UBI can be credited into the bank accounts of the entire population by the central bank. This does amount to the issuance of new high-powered money (HPM) by the central bank. Conventional theorists of money multiplier may worry that a jump in HPM may cause a cascading jump in total ‘money supply’.

What will happen to this newly issued HPM? Since it is going to the average folks, most of it will get spent and will find its way ultimately in the profits of firms. Hence, everyone is better off!

Always on UBI?

Will this lead to excessive investments? Once again, our very basis of suggesting UBI is to avoid the problems caused by a mismatch in sustained demand in financial profits/savings and low real investments. If indeed UBI-driven fall in yields leads to an increase in real investments, that is for the better. The proposed control on the amount of UBI as making up a relatively stable nominal GDP means the recommended UBI amount will start to drop as real investments pick up. Secondly, on a more pragmatic basis, the question facing many central banks through much of the last decade is not whether low interest rates will lead to excessive real investments but why there are not many real investments despite the rates being near zero for so long. Another way to think of UBI then is to see it as a tool in the policy arsenal to kickstart real investments if they don’t pick up even with near-zero interest rates. After all, UBI is likely to spur consumption, owing to its wide distribution – thus pushing up the attractiveness of investing in capacity expansion by firms.

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