Universal basic income and macro models: What can we learn?

By: Geoff Crocker

The macroeconomics of universal basic income (UBI) is insufficiently addressed, both in proposing and in evaluating UBI. The UBI/macroeconomy interface is bidirectional. Macroeconomic analysis generates a strong case for basic income, whilst basic income proposals have significant macroeconomic impact, and need to show macroeconomic sustainability. The redistribution of income proposed in microeconomic simulation models of UBI feeds into the aggregate consumption function of the macroeconomy, further driving production and investment functions with their onward effect on government expenditure, trade balances etc until a new dynamic macroeconomic equilibrium is reached.

Only a comprehensive macroeconomic model can address these questions.

The affordability of basic income proposals is the usual macroeconomic concern. Will higher existing taxes, and/or the introduction of new wealth, land, or ecological taxes be necessary to ‘pay for basic income’? Will basic income inevitably drive inflation or devaluation?

A specific macroeconomic interpretation generates a case for basic income to fund consumer demand. The argument distinguishes between high-tech developed economies and low-income developing economies.

In high-tech economies, technology implemented as automation reduces labour income in proportion to output. This is likely a priori, and also results from a thought experiment of a totally automated economy with neither labour nor wage, where goods and services could only be allocated by vouchers, equivalent to basic income. In this case, UBI would amount to 100% of GDP.

A more nuanced argument is therefore that degrees of automation cause degrees of relative reduction in labour income, requiring degrees of basic income as a component of disposable consumer income. Research at the University of Bath Institute for Policy Research (IPR) confirms that technology empirically reduces the labour share in the economy. It is a valid alternative structural explanation of the 2007/8 economic crisis that inadequate consumer income led to the huge increase in unsustainable household debt.

In developing economies, a similar but different Keynesian argument for basic income arises. Such economies are widely restricted to low debt/GDP ratios of 50-60%, in contrast to developed economies running debt/GDP ratios in excess of 100%, in Japan’s case reaching 265%. Traditional Keynesian fiscal stimulus operated through government capital expenditure working through the consumer income multiplier effect.

A more direct Keynesian proposal would provide basic income to consumers to stimulate demand, and hence production and investment, to create sustainable non-inflationary growth. The application of this policy would need macroeconomic modelling in each country economy to test the response of the supply side, to ensure against inflation from excess demand, or devaluation from increased imports. Supply side production and investment policies could then integrate with the basic income policy.

The challenge of macroeconomic affordability is ever present in basic income debates. Basic income proposals are costed, taxes are raised, and welfare benefits reduced to pay for the net UBI scheme cost. This assumes that government financial balances are the measure of affordability. But an alternative measure of affordability was advanced by Keynes in a 1942 BBC address in which he said, “Anything we can actually do, we can afford”. Ultimately, we can consume what we can produce.

This shift from financial balances to real resource constraints requires a radical redefinition of the ontology of money in the economy. Orthodox thinking insists that money has inherent value, derived historically from gold reserves, or currently from the sale of government bonds and the assumption of government debt. It is clear that this is an artefact, and not necessarily the case.

Governments can simply create money, as commercial banks currently do when making personal and business loans. Such money creation does not need to count as debt but must observe the constraint of output GDP to avoid inflation. Not only is this conceptually true, but it has been proved empirically by the widespread current practice of central banks holding a very large proportion of government debt, which, since the central bank is owned by the government, is not net debt at all. Currently, the UK Bank of England holds £875bn of UK government debt in this way. Academic papers by leading central bank economists such as Michael Kumhof also challenge the definition of money as debt.

The question then arises of whether a substantial aggregate basic income can be funded by debt-free sovereign money. Research by Cambridge Econometrics assumed an injection of aggregate basic income funded by debt-free sovereign money into a multisectoral model of the UK economy. The result was a stable equilibrium, collapsing into neither inflation nor devaluation. The demand stimulus of basic income initially took up spare supply side capacity, and then fed into the investment function to yield non-inflationary growth.

A further simulation of the model showed that basic income funded by debt-free sovereign money restored labour income lost by extensive future automation. A current outstanding proposal is to conduct similar modelling with a stock-flow-consistent model of the UK economy with a specific financial module to simulate money flows and balances.

Basic income is therefore a sustainable, affordable, macroeconomic necessity.

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