In these times of economic hardship and uncertainty, an Unconditional/Universal Basic Income (UBI) has the potential to solve countless issues that the world faces in 2021. But the big question his “how do you pay for a UBI?”
The field of economics is often explored by conducting various thought experiments. My premise is “x”. And if we accept “x” to be true, then “y” follows. The numbers behind economics are all maths and statistics and very precise, but the theory is a social science. So, before we go any further, let’s be clear, as Richard Thaler discussed in his book, Misbehaving, the perfect rational actor (homo economicus) doesn’t actually exist. It’s impossible to aggregate millions of people’s decisions into a single, all-encompassing theory
At the end of last year, I wrote a column on “How a UBI can save South Africa in the Covid-19 era”. In the article, I explain the benefits of a UBI and how investing in people can have profound, positive effects on the economy. However, I failed to cover some of the details and address the point of contention: How do you pay for a UBI?
Scott Santens from the World Economic Forum sums up the ostensive problem with a UBI succinctly and in a way that seems perfectly reasonable”
“I know what you’re thinking,” he says. “It’s the same thing most people think when they’re new to the idea. Giving money to everyone for doing nothing? That sounds both incredibly expensive and a great way to encourage people to do nothing.”
Giving people “free money”, seems far too simple a solution for tackling poverty and inequality to be viable. It’s utopian… right?
Theoretically at least, a UBI pays for itself. The mechanisms through which you fund a UBI program (which I will lay out in a moment) should be appealing to everyone, because an increase in taxes would be offset by the UBI that every citizen receives… except for the wealthy. So if you’re earning, say $2,000 per month and taxes increase from 25% to 30% to pay for it, the extra 5% ($100) will be offset by the UBI (say, for example, it’s $500).
A middle-class household would see a net increase of $400 on their income. If you’re earning less, that offset will be larger and the offset will be smaller or non-existent if you’re paying into the program. And that’s IF you decide to fund a program through income taxes, which isn’t even necessary if you set up other funding mechanisms.
A UBI is not some kind of socialist daydream or a utopian idea. It’s the next logical step in the development of the existing social welfare programs that we have long since accepted are necessary… just consolidating them all into a single, streamlined program that gives recipients better control and more choices… it grants them freedom, essentially.
How to pay for a UBI
There is a way to reform tax systems that would make the wealthy pay their fair share, which aligns with leftist/progressive values, AND policymakers can appeal to right-wing libertarians as well by proposing cuts to existing welfare programs… both creating fiscal space for a UBI.
Before we explore all of the mechanisms for payments, let’s get real about something for a moment. According to analysts at Investopedia, the value of derivatives trading is pegged at 10 times the value of global GDP. Traded Wealth is rent seeking. Making money from existing money is how you create the boom-bust cycle of capitalism that cripples everyone. So, before all the neoliberal capitalists out there get on my case about this, ask yourself if you really care about inflation… earning money for doing nothing and entitlements… ask yourself, “what are the investment bankers on Wall Street and every stock exchange on Earth actually doing?” Is that economic productivity? What does trading shares do for the material well-being of the vast majority of people? Once you morally justify that to yourself… we can move onto the benefits of a UBI.
in a Medium post, Santens discusses a number of mechanisms that can be used, such as a carbon tax, reforming both welfare and invisible welfare such as tax expenditures, a “Robin Hood tax” (FTT) for financial transactions, Seigniorage reform, Value Added Tax (VAT) and a Land value tax. Other experts, like Malcolm Henry are fans of a negative interest rate. Henry also debunks all of the myths surrounding UBIs, such as the idea that savings rates will drop and have an adverse effect on the long-term sustainability of an economy. He discusses what the role of cash and coins will play in the future UBI-augmented economy and dismisses the myth that an increase in the money supply will lead to hyperinflation.
This one, to me, is an absolute no-brainer. You kill two birds with one stone… discourage pollution and the general degradation of our environment and tax the massive fossil fuel industry for the destruction that they’ve caused for their profits. In the US, a $50/ton carbon tax and an annual increase of $15/ton would result in an immediate $150 billion in tax revenues. Obviously, this will be lower in other countries who aren’t quite as ecologically exploitative, but any incentive to discourage pollution is good for me. Using it to fund a UBI program would make a carbon tax even more appealing.
Welfare programs, such as unemployment grants, social security, childcare programs, food stamps, as well as the “welfare for the rich”, such as earned income credits, child tax credits, home expenditures, marriage filing preferential treatment, tax breaks on pensions, fossil fuel subsidies, can all either be reformed or completely abolished to make room for a UBI. This has the potential to save us hundreds of billions.
Furthermore, the administrative costs of doing means testing, of funnelling money through various pipelines and an amalgamation of countless programs can also be eliminated, because the UBI is unconditional. In other words, paying each citizen their guaranteed monthly basic income by a simple transaction, straight from state coffers into citizens’ bank accounts cuts out the middleman, the state, where too much money is lost to inefficiency and corruption.
The Robin Hood tax
This has the potential to be far less popular to the free-market sycophants, but it makes a lot of sense. This would be a tiny, but very progressive, tax on the financial transactions of mostly the wealthiest (who own the vast majority of financial investments). Even a tiny fraction (Urban-Brookings suggests 0.34%, the maximum rate before changes in behaviour result in revenue decline) would would raise an enormous sum of money (an estimated $750bn in the US) and make financial markets more stable by putting a price on destabilizing and rent-seeking high frequency trading.
Money itself is a public good. It’s no longer governments that are “printing money”, but private banks that are fuelling the creation of money through digital accounting on their commercial banking ledgers. Seigniorage is the difference between the value of money and the cost to produce and distribute it. So this is welfare for bankers. Money creation is free. Seigniorage reform, including debt-free public money creation, and simultaneously removing the ability of banks to create new money, would be able to fund a UBI all on its own, without the need for additional taxes, but let’s put the calculations on the back-burner for now.
We’re familiar with a Value Added Tax (VAT) in South Africa, of course, while most people living in developed nations are not. Nonetheless, a UBI would undoubtedly drive up the revenues we’re making from VAT simply because people are spending more. This is something that was not considered in the Financial Mail‘s horribly shortsighted editorial on how South Africa’s finances are “dangerously overstretched”. The author speaks only about the economic costs of a Basic Income Grant and not of the inevitable economic benefits that result from an increase in consumer spending.
A Value Added Tax is applied at each step along the chain of production, and therefore, the increase in economic activity that’s caused by higher levels of income, will “pay back” part of the UBI. If VAT is 10%, that means that effectively, 10% of the billions or trillions that are spent on a UBI will go straight back into state coffers.
Land Value Tax
Here’s another two-birds-one-stone solution that would be particularly useful in finding a creative solution to a contentious issue that exists outside of income inequality.
By taxing the unimproved value of a plot of land (ie. the land itself, not the man-made structures built upon it), we can provide a disincentive to idle speculation and an incentive to develop unused and underused space. An LVT shouldn’t be confused with property taxes either. It is a tax on the total value of real estate minus what’s built on it.
Morally, this makes sense. We all co-create the wealth accrued from that land, because the value of land depends entirely on everything and everyone that exists around it, not on it.
Perhaps the most appropriate story about a LVT comes in the form of George Henry’s campaign in the 1886 New York Mayoral election. The Independent candidate, campaigned on a socialist ticket, with the LVT at the heart of his policy proposals. It was called a “contest between those who aim to eradicate social injustice and those who profit or hope to profit by its perpetuation.”
Henry proposed effecting a 100% tax on land, reduced to 0% if developed for public spaces and near 0% taxes on other productive improvements.
Negative Interest Rate
This is one of the more interesting solutions and Malcolm Henry believes that a negative interest rate has the potential to eliminate the need for governments to increase tax revenues at all.
A negative interest rate (sometimes called demurrage) charged on all money wherever it’s held (with the exception of the money in your UBI account), encourages people to spend more and leave less money to sit idly in a bank account. Because of the need for money to be available and mobile, idle money should be the target of any revenue collection scheme.
“If we shave off a small percentage from every bank balance every hour of every day, not only do we refill our UBI pot in a way that’s proportionally fair, we also discourage the longterm hoarding of money,” says Henry.
Can it work in South Africa?
I recognise that the various studies I’ve been citing here, the arguments for a UBI, are geared towards a developed economy, such as the United States’ or the UK’s. This is a fair argument – South Africa’s economy is a wreck, we have a small tax base, lots of debt and high levels of unemployment. So what do the numbers say?
“. . . [W]hen the government spends more and invests in the economy, that money circulates, and recirculates again and again. So not only does it create jobs once: the investment creates jobs multiple times.
The result of that is that the economy grows by a multiple of the initial spending, and public finances turn out to be stronger: as the economy grows, fiscal revenues increase, and demands for the government to pay unemployment benefits, or fund social programmes to help the poor and needy, go down. As tax revenues go up as a result of growth, and as these expenditures decrease, the government’s fiscal position strengthens.”Nobel prize-winning economist Joseph Stiglitz, former senior vice president of the World Bank
Let’s start with the negative interest rate. According to Trading Economics, there is a surplus of of 6,460,027,000,000 (six-and-a-half TRILLION) on South Africa’s commercial banks’ balance sheets. By charging a negative interest rate, the wealthiest of South Africans will no longer be encouraged to leave vast sums of money in a bank account for years on end, unspent. That money has no productivity in the economy. But in the hands of our poorest, it gives them the necessities, such as food and shelter. It creates economic opportunities that wouldn’t be there, and the country’s billionaires won’t be missing the money… I promise. Henry suggests that a fraction of a percentage of interest is taken off daily. Let’s say that it’s 0.055% per day (19.8% p.a.) on the six trillion in idle money. That’s R1,296.845 billion. It’s also worth mentioning that interest earned on the remainder will still lead to an increase in wealth for the owners of the money.
Data from 2018 indicates that South Africans made 52.52 million financial transactions at a value of R29 billion. A 0.01% levy on equity trades and 0.3% on higher derivatives means that a Robin Hood Tax (FTT) would therefore bring in a measly R18.27 billion, but it’s still not an insignificant amount.
South Africa’s carbon dioxide emissions in 2019 added up to 478,610,000 tonnes. Let’s take Santen’s proposed $50 (R702.34) tax per ton on carbon emissions as an example of what we could charge. We would therefore bring in R336,146,947,400 in carbon taxes in a single year.
Carbon taxes should be a sovereign wealth fund, akin to the way Norway treats its oil, which has dramatically improved the standard of living there. And those taxes can also be used to invest in renewable energy and future technologies. Now, while maintaining the integrity, sovereignty and functionality of the UBI provisions, excess revenue could be applied to renewable energy adoption, catch-up education in STEM subjects, subsidising tertiary education, eliminating pit toilets, improving urban transport systems, retraining coal, oil and Eskom workers in renewable tech, funding national health services, roads upkeep, water infrastructure, and much more.
South Africa’s social welfare programs cost just less than R195 billion (R185 billion in assistance, R10 billion for admin and support), according to the National Treasury. As I stated earlier, social assistance, social welfare and other grants that are paid out to our most vulnerable citizens can either be radically reduced or eliminated altogether. And the administrative costs (at ±R10 billion) will effectively disappear because the UBI is unconditional. Rather than using means tests and making people wait in long queues at the end of the month for their welfare, we can pay them directly (although, this would also require South Africans to have bank accounts, which many don’t). However, it’s also within the realms of possibility, and would be liberating for many, for the government to create a national bank and ensure that everyone can participate in the economy.
The Land Value Tax is really hard to calculate in this post, so I’m going to exclude it from the equation.
But what would a UBI cost? The Financial Mail was discussing R500 UBI payments – a ridiculously low sum of money. The monthly cost of supporting one person’s monthly needs in South Africa, according to Oxfam’s “Reward Work, Not Wealth” program’s report would be R6,460. In 2019, South Africa’s working age population was recorded at 38,423,838. Therefore, the UBI program would cost R248,217,993,480 per month or about R3 trillion a year. It’s certainly not a number to scoff at, but the fiscal space is there…
So, let’s look at the calculations here:
We can pull in R1,296.845 billion per year with a negative interest rate, R18.27 billion with a “Robin Hood Tax”, R336 billion with a carbon tax and we can save up to another R195 billion by cutting out redundant social welfare programs (a low estimate). Beyond that, VAT on R3 trillion would generate a further R525 billion (assuming we don’t raise VAT from its current level). So, at a conservative estimate, we could bring in an additional R2.376115 trillion per year with the introduction of these taxes alone (excluding the LVT, which I haven’t been able to calculate).
This does not include the fact that we’d see an increase in the tax base (and therefore income taxes), because tax allowances would become redundant. It doesn’t take into account the inevitable economic growth that will occur when South Africans have vastly more spending power. It doesn’t factor in the reductions to what we’d have to spend on incarceration, healthcare and many other government expenditures that are a massive drain on the our budget.
What we are not able to raise through new taxes can be raised with a small increase in income tax, but as I stated earlier in the article, the taxpayer would actually be getting more out because their UBI would offset the tax increase. From this point, the shortfall can be made up through an economic stimulus package not dissimilar to the one issued by Barack Obama at the height of America’s Great Recession in 2009, with Quantatitative Easing packages worth trillions of dollars. Our stimulus package, however, would be Qualitative Easing – the same concept, but we invest in the people of South Africa, not corporations. There’s historical precedent to show that fears over hyperinflation aren’t grounded in reality.
And, for anyone concerned about debt, I would like to refer you to a new heterodox macroeconomiceconomic framework that’s gaining a lot of traction around the world –Modern Monetary Theory (MMT). Without putting you through an economics lecture, the theory, in simple terms, posits that decision makers in an economy are not operationally constrained by revenues when it comes to federal government spending. And, at the same time, our perspectives on debt itself have changed dramatically over the years.
While, in the past it was generally accepted among ecoomists that debt to GDP ratios are what mattered when it comes to managing debt. Contemporary economists, however, argue that debt is manageable as long as the interest payments on the debt are lower than economic growth. Economic growth, with the implementation of a UBI, is simply inevitable and I’ll eat my hat if our GDP doesn’t grow by at least 6% per annum.
So, yes, it’s rather difficult to calculate the exact numbers with limited data and without a tireless team of researchers, but to say that a UBI is unaffordable is dishonest. We CAN afford it – and it only becomes more and more affordable with each passing year as we watch our economy grow when all South Africans have economic freedom.
But where has a UBI actually worked?
Perhaps the greatest example of a successful UBI program exists in the US state of Alaska. Citizens of Alaska receive a monthly dividend of over $2,000 in cash. That dividend is an acknowledgement that all Alaskans are shareholders in the state’s oil industry. It represents their share of the revenue derived from their land, through the oil reserves buried under it. And Alaska implemented this program 40 years ago. And no state in the US has lower levels of inequality than Alaska and social outcomes such as level of education and violent crime are far better than their counterparts below the Canadian border.
And it seems like a lost chapter of history, but, believe it or not, the Nixon administration almost implemented a UBI program in 1968 after a successful trial program showed that receiving the money had little impact on the recipients’ working hours.
There are two reasons why Nixon’s UBI effort fell through. The first reason is that a White House aide presented the first, and flawed, findings on Englands first UBI trial in Speenhamland. This version of the study’s findings deliberately and wilfully misrepresented data and sabotaged results through fake numbers, predetermined decisions on outcomes not supported by evidence, and poor collection of data. Many years later, a revised version was released, shedding light on the support and success of the program at Speenhamland. Nixon had no idea that a rebuttal of the first version even existed.
Secondly, the Nixon trial stated that divorce rates doubled with the implementation of the program (which was also later found to have been miscalculated). Divorce rates were actually unchanged from the national mean. So, and remembering that this is more than 50 years ago when gender equality was effectively non-existent, it would seem that men at the time would lose their minds, knowing that the rise in divorces was probably a consequence of eliminating the primary reason why a women would stay in a bad marriage at the time… because a divorce would affect her livelihood. It’s rather telling that the attitude towards this (incorrect) finding was “oh shit, if our wives get their hands on some money, they’re going to leave us!”
Elsewhere, Ireland, Switzerland, Finland, India, Brazil, Canada, the Netherlands and Scotland are among the countries that have launched or plan to launch a UBI pilot program.
Dispelling the myths
Each pilot had varying degrees of success and gathered a lot of empirical data to support the assumptions made by people touting a UBI. For example, every program under the sun has shown that very few people stop working when they receive a UBI and, of those that do, they either use the money to pursue an education, migrate to part-time work or take up unpaid labour, such as that of a home caregiver.
Another myth is that a UBI would create hyperinflation, which is simply not true. There is no evidence from any of the programs to indicate that an increase to the money supply drives up the prices of goods. Fixed assets, such as properties, could be hoarded by the wealthy, but Henry proposes legislation “to prevent bubbles in the prices of essential assets like houses. Making it illegal to provide a mortgage of more than, say, 90% of the insurance value of a house (i.e. the cost of rebuilding it) would provide a restraint on house prices, for example. As for non-essential assets, let the market decide.”
Then there’s the argument about “capital flight” – the idea that the wealthiest people will simply leave the country and take all of their capital with them. This could happen… but it won’t make any fundamental difference to the state of the economy. Why? Because the wealth of a country is represented by its natural resources and its people. When someone in South Africa decides to exchange their millions of rands for US dollars they don’t remove a single atom of wealth from South Africa. They don’t even take any money away. All that happens is that a bank gives them dollars, taking the unwanted rands in exchange. At some point the bank will find a customer from the US that wants to buy millions of rands worth of gold or platinum, for example. The bank gets dollars from the US buyer and the rands get spent back into the UK economy via the mining industry.
Furthermore, capital not used in the productive economy won’t be missed. It hadn’t been invested there to begin with. Not to mention, the pending economic boom that would follow the implementation of a UBI would have investors lining up around the block for an opportunity to invest in South Africa.
A cure for Covid-19?
Obviously, I don’t mean this in the medical sense of the word, but rather in terms of the economic turmoil created by lockdowns and a collapsing global healthcare system.
The means of accessing resources are many. For example, a simple reduction of 2.5% in the legislated required cash reserves of banks, which could be ratcheted up over several years post-pandemic, would instantly free up about R15 000 for every South African 18 to 65 as a once-off stay-at-home incentive. No additional loans or taxes would be needed.
The city of Oakland launched on of the US’ largest UBI programs ever in March this year, sending out $500 UBI payments to it’s people monthly in response to the Covid-19 pandemic. Other countries, including Japan, Austria, Spain and Hong Kong, have implemented similar programs that have been incredibly popular.
In South Africa and other parts of the developing world, fully vaccinating our population seems like a goal that’s currently out of reach. So, when it comes time again to start implementing stricter lockdowns, a UBI makes it possible to make people stay home and rest assured that they won’t starve to death.
We can’t afford NOT to have a UBI
This is the reality… poverty costs us money too. High crime rates, higher hospitalisation rates are among the various costs associated with poverty. For example, there was a 42% drop in crime in Namibia when they implemented their UBI pilot program a few years ago and then there was a 8.5% reduction in hospitalizations in Dauphin, Canada, when they ran their program. There are countless incredibly costly consequences associated with the traumas of poverty that we haven’t even taken into account when calculating the cost and measuring the feasibility of a UBI program.
And then, when you consider the velocity of money – a measure of the number of times that the average unit of currency is used to purchase goods and services within a given time period – the economic benefits multiply even further. In a healthy economy, a rand will change hands about seven times and each recipient will pay taxes on this same rand as it changes hands.
Then, consider unemployment.
Scott Santens explains how a UBI can increase productivity, create jobs and completely alter the way at work with a pretty cool anecdote:
“Take an economy without UBI. We’ll call it Nation A. For every 100 working-age adults there are 80 jobs. Half the work force is not engaged by their jobs, and half again as many are unemployed with half of them really wanting to be employed, but, as in a game of musical chairs, they’re left without a chair.
Basic income fundamentally alters this reality. By unconditionally providing income outside of employment, people can refuse to do the jobs that aren’t engaging them. This in turn opens up those jobs to the unemployed who would be engaged by them. It also creates the bargaining power for everyone to negotiate better terms. How many jobs would become more attractive if they paid more money or required fewer hours? How would this reorganizing of the labour supply affect productivity if the percentage of disengaged workers plummeted? How much more prosperity would that create?
Consider now an economy with basic income. Let’s call it Nation B. For every 100 working age adults there are still 80 jobs, at least to begin with. The disengaged workforce says “no thanks” to the labour market as is, enabling all 50 people who want to work to do the jobs they want. To attract those who demand more compensation or shorter work weeks, some employers raise their wages. Others reduce the required hours. The result is a transformed labour market of more engaged, more employed, better paid, more productive workers. Fewer people are excluded, and there’s perhaps more scope for all workers to become self-employed entrepreneurs.
Simply put, a basic income improves the market for labour by making it optional. The transformation from a coercive market to a free market means that employers must attract employees with better pay and more flexible hours. It also means a more productive work force that potentially obviates the need for market-distorting minimum wage laws. Friction might even be reduced, so that people can move more easily from job to job, or from job to education/retraining to job, or even from job to entrepreneur, all thanks to more individual liquidity and the elimination of counter-productive bureaucracy and conditions.”
So, it can said with absolute certainty that there is no certainty in economics. A UBI may be a great success… it could fail… but we’re running out of solutions in this country and all evidence points towards the former being the case.
It provides an answer to extreme poverty, unemployment, low productivity, rent-seeking and, most importantly, the economic side-effects of lockdowns. Beyond that, it prepares us for a future of automation, where machines will do our jobs better than we can. We’d be free to enjoy some leisure and engage in more meaningful pursuits. Humans need security to thrive, and basic income is a secure economic base – the new foundation on which to transform the precarious present, and build a more solid future.
I haven’t seen a single study of a UBI trial out there with any empirical evidence of a net negative outcome. Not one. And, it’s important that, when the time comes, we all accept that this is the efficient policy that can effectively eradicate poverty, and we;ll implement a UBI in full. Half measures will not produce optimum results… compromises and saying “it’s too much money”, keeping existing social welfare programs in state to supplement a half-arsed UBI is just not going to cut it. And it has to be unconditional.
Any libertarians out there with moral objections to the idea of free money are, of course, welcome to donate their money to the SPCA or any charity/NPO of their choice. And, while the discussions surrounding a UBI are complex, its implementation is extraordinarily simple… the idea that it’s utopian is completely misguided.
The ditch that the South African economy finds itself is getting deeper and deeper. And socio-economic issues are pretty much beyond the point where they can be managed. A radical problem requires a radical solution and a UBI is the only one that has not been tried, despite a complete lack of evidence that it won’t work. And, if I haven’t convinced you, perhaps a man far more qualified than me, who can articulate it far better than I ever could, may be able to change your mind. Dutch historian, Rutger Bregman (author of Utopia for Realists) lays out the case for a UBI incredibly well in the following videos:
The people who write off the concept of a UBI as some kind of pipe dream have not truly examined how complex “giving people free money” can be… how sensible it is. So next time someone asks you, “how can we afford a UBI?”, ask them, “how can we afford not to have one?”