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UBI and Inflation

In this article, there’s a “debate” on the pros and cons of UBI, or Universal Basic Income. I don’t find either side of the argument compelling, but there’s been some spirited discussion in the comments. Here’s an exchange that I thought worth keeping:

From “MrMustard Magoo”:

Would it necessarily be inflationary if we just printed it so to speak? Wouldn’t businesses just sell more stuff? It seems to me they struggle somewhat to sell what they have now.

Another participant “Balthazars” responds (incorrectly in my opinion):

Err, yes it will be inflationary if the government just printed the money (or credited bank accounts, as the article notes some had suggested).

When you ‘create something out of nothing’ and make it available to the market, you have increased the supply of something. More supply, means the individual value of each ‘unit’ of the item decreases in value because.

Business’ won’t just sell more stuff, they’ll tend to increase their prices, either because in bidding for scarce resources, buyers will bid higher (due to having more cash), or because the seller knows the buyers have more cash and can try to squeeze more out of them.

Printing it isn’t going to be viable, especially not given the printing would have to happen every year. Creating $200-$400 billion every year and sending it directly to households would have huge inflationary impacts.

So here’s my reply:

Hang on a minute. The term ‘printing money’ should be avoided: it refers to fiscal operations that applied under a gold standard, where the size of the economy was constrained by the amount of gold the government held (or the currency your currency was pegged to). These days all money is printed.

The laws of supply and demand suggest that prices increase if demand is greater than supply, and vice versa. But defining the demand for money itself is not that straightforward, is it? It’s not easy to conceive a situation where the demand for money is less than the available supply.

Furthermore, assuming businesses can adopt a monopolist position and just charge more for the same thing is not valid. Unmet demand leads to greater supply, as new businesses enter the market, and existing ones ramp up production to take advantage. If widgets are profitable, selling more widgets = more profit. Indeed, increased production can lead to lower per-unit cost of production.

Increasing the amount of money increases the aggregate spending capacity. That will increase aggregate demand, and increased production will follow. That leads to more employment, as firms need more workers to make more stuff.

It’s a virtuous cycle, until you run out of the fixed resources, be they raw materials or labour. That’s when you get inflation: when there’s no more idle labour and production to be put into service, and any further injection of cash into the economy will lead to too many dollars chasing too few goods. So whilst adding $200-$400BN to the net financial assets of the economy is not endlessly sustainable, the progressive nature of income taxes will attenuate that spending and drain a significant portion away again.

All that said, I don’t agree with the UBI concept. But for entirely different reasons, and this post is long enough already.

 

Ellis Winningham neatly encapsulates the issues with UBI in this Facebook post. I highly recommend it. Like Ellis and other proponents of Modern Monetary Theory, I believe the answer lies in a Job Guarantee Programme.

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Clawback of welfare debt is bad policy and bad economics

In Helen Hodgson’s article for The Conversation (reprinted by The Guardian), she writes:

The tax and social security systems can be seen as two sides of the same process – income support payments are a safety net funded through taxation.

Except they’re not, and so much of this “budget repair” bollocks we are forced to endure is predicated on this falsehood.

Tax dollars are not recycled. There’s no warehouse full of dollars that the government needs to keep stocked to support social security. Tax dollars go to the same place that Frequent Flyer points go when you redeem them: they simply cease to exist. Money issued into the bank accounts of welfare recipients comes from the same place that Frequent Flyers come from: they’re issued into existence, from nothing.

So why tax at all? Because unchecked, that new money creation will reach a point where it becomes inflationary, so some money has to be drained away to make room for more spending. (It’s done for other reasons as well.) And wherever possible, you take it from the top, because money naturally rises. Those with very little spend it all, and that spending is someone else’s income, and so it goes around until those dollars come to rest in the bank account of someone who doesn’t need to spend them.

Once you appreciate the fundamental truth of all that, the idea of clawing back money from people who no longer have it anyway as some form of economic repair is clearly preposterous. By all means have a targeted welfare scheme, but fining the poorest in the community as a revenue-raising gesture has the exact opposite effect of what’s required: it limits their purchasing power which hurts the economy.

Instead of worrying about balancing the budget to address non-existent inflation, the government would be far better served focusing on policies to address the causes of the need for welfare. Solve unemployment, and most of the other problems just solve themselves.