Recently, more and more voices go up in favour of the introduction of a Universal Basic Income (UBI). In Germany, the CEO of Telekom came out in favour of it (see here). Yanis Varoufakis is making a European tour propagating a UBI. The argument is that, today, the technological evolution is destroying so many jobs that there is no longer any other choice than to decouple income from work. This argument is absurd for many reasons, but mainly because productivity nowadays is rising much slower than several decades ago (I analysed this here in detail). If, one day, productivity would increase substantially again, it will be both possible and necessary to increase wages. The working time can be reduced in small incremental steps and problems associated with demand can be solved accordingly, as Friederike Spiecker and I have shown here and in several other contributions. This means that there is no ground for such a major step as the implementation of a UBI.
Even the euro crisis is being used as an argument by the proponents of a UBI. The case is being made that Germany drove the countries in the south against the wall with its high productivity and that we are therefore now in need of fundamental change. But it was not productivity that caused the crisis in Europe, but solely German wage moderation.
Even if these arguments are nonsensical, the BGE obviously fascinates many. Like many other such ideas, it seems to solve at once a lot of serious problems in the confusing world in which we now live. A UBI leads to a welfare state without the endless bureaucracy and without attacking the human dignity of benefit claimants. It would not be means tested. It would create space for individuals to better contribute to society according to their own intrinsic abilities. As a consequence, people would be more motivated. In one word, a UBI would lead to a more humane society. The problem is however that the proponents of these ideas exaggerate the positive effects of their proposals and by and large ignore the negative effects. Criticism from economists is often dismissed as overly ‘technical,’ as a counter-argument that can be dealt with anytime if the political will is present.
This is more than just problematic. If our criticism deals with a central point that cannot be easily surmounted politically, one should not ignore it. The refusal to take note of valid arguments leads to the formation of discussion and activist groups that are disconnected from the real world. They support ‘solutions’ that have great appeal to a lot of not well-informed people and they raise hopes that remain unrealisable. We hope to make a contribution to this debate by explaining why a UBI cannot work. There are much better ways to help people than introducing a UBI.
Income and production cannot be divorced
What is the problem in concrete terms? Most of us earn an income because we sell our labour on the labour market in exchange for a contribution to the production of goods and services. Others receive an income from the state, because they – for whatever reason – are unable to earn an income on the market. Tertium non datur: a third way do not exist. All payments, all transfers derive from either market exchange or redistribution. Interests paid to investors for loans are also earned through the production of goods and services, at least if the investment turned out to be successful. Is there is insufficient investment, as is the case nowadays, interests also disappear. Income and production cannot be separated divorced. One cannot, in the longer term, have the one but not the other. Even if the state would create money out of nowhere in order to overcome the stagnation in the development of income, the fact remains that incomes which will be paid after the recession recedes must be covered by increases in production. It is for this very good reason that production (this is, the origin of wealth) is on one side in the national accounts and the distribution (this is, the social allocation of the results of production) and the use of income (the demand side) are on the other side. They are intrinsically the two sides of the same coin. Nominal income growth, which does not have an equivalent in the production leads, as a rule, to price increases (i.e. inflation) so that real income growth matches the pace of increases of production.
Setting aside these basic and real relationships, many support the cause for an unconditional basis income. There is little question that their motives are generally honourable. But the best intentions cannot override fundamental relationships.
It is, in fact, quite amazing how these simple truths are being ignored in debates on the UBI. I recently listened to a discussion (see here), in which the two advocates of the UBI (Ronald Blaschke and Daniel Häni) broke off the discussion exactly at the moment when the question came up of how the basic income should be financed, which is nothing else than the question of how to put together production and income. Daniel Häni, who had already declared that he would not discuss ‘certain UBI models,’ remained completely silent when the question of financing came up.
Everyone already has a basic income – but it is not unconditional
Häni said something to the effect that the income was already there: virtually everyone has some sort of a basic income, it now just a question of making it ‘unconditional.’ But that is precisely the separation of production and income, which cannot be accomplished in the longer term. If a part of income, say for example one-third, which was previously linked to the contribution to production and could only be paid for by successful (i.e. profit-making) productivity becomes unconditional, how is the level of production going to increase to make this possible? Let us have a look at both logical extremes. Let us assume, first, that most people decide, after the implementation of a unconditional basic income (wherever it may come from – see below for more on this) which amounts to, say, one third of the average income of the national economy, to reduce their working time by one third. They then work one-third of the time less, but their income remains unchanged. This is nothing but a giant step in terms of a (voluntary) reduction in working time with full pay. It is a step, mind you, that makes even the biggest supporters of the reduction of working hours shudder.
How do people react?
In this case, income increases per hour (the basic income is of course included) by one-third, but the productivity per hour remains unchanged, because lost labour (even if one assumes, unrealistically, that demand for goods and services and production would remain constant overall) cannot be replaced overnight by machines. Unit labour costs are rising and therefore – as we have shown repeatedly (most recently here) – the rate of inflation increases. This means that a significant portion of nominal income growth per working hour is being depreciated – it is lost for consumers because of rising prices. One can see the same phenomenon from the production side: if, realistically, production falls by one third, but the total income remain unchanged, it can only be compensated by rising inflation.
The second extreme is that almost all people decide to continue working just as they do today. They would then earn their current salary and receive a basic income on top of it. Regardless of the question where the basic income would come from – who would finance it – it is clear that this miraculous multiplication of income would cause inflation, because earnings go up while the output of production remains unchanged. Between these two extremes one can come up with many possible cases, but none alters the basic problem: either not enough work will be done or too much will be earned. Furthermore, if some people work less and still earn nominally the same as before, it is easy to imagine that those who continue to work the same amount of hours as before but see their real income decrease because of rising inflation will protest.
There may, nonetheless, exist a basic income without inflation. This is only possible – and this is an essential condition – if it is the result of state redistribution and if such redistribution is widely accepted by employers so that it is not seen as an opportunity by companies to raise prices. If one tries to finance the UBI through higher VAT, the result is inflationary immediately because higher taxes will be passed on by companies to customers to a significant degree. The consequences for redistribution would be fatal. How the state can accomplish redistribution without triggering such adverse reactions is a completely open question.
One has to realise that in order to implement a UBI of about € 1.000 a month (there are also proposals for a UBI of € 1.500 euros ), the state needs € 800 billion additional revenue (total revenue in Germany stands at about €700 billion nowadays). It is true that in most UBI scenarios, the state would no longer pay social benefits, but this also means that it will no longer receive social security contributions. This was never a problem because the entire social security has an approximately balanced budget (I explained this thoroughly in a book Irrweg Grund Einkommen that I wrote up a couple years ago together with some colleagues).
It is hard to understand how the state would be capable to double its revenue without powerful groups – entrepreneurs and big companies – passing on costs to customers and thus creating inflation. The redistributive effects are likely to be same as with all tax law changes in recent decades. It attracts those with great political and economic power. Anyone who wants to prevent that, at the end, the rich, with a cold smile on their face, will profit from a basic income that is being accumulated by the poor must have a deep think and inform herself or himself about the distributional effects of different types of state financing.
It is essential to have a clear and proper understanding about these questions. It is nothing but hocuspocus to never address these issues in a serious manner and to present the UBI as a great remedy for all sorts of ills in society. Those whose spread such misinformation and illusions and give hope to many people, which will only be disappointed, act irresponsibly.