A Universal Basic Income Would Destroy Our Economy

At first it was about the return on capital and now it is about the return on labour. One at a time, the main incentives that keep a market-based economy oiled are being wrecked. Central banks have already eliminated interest rates, discouraging saving; now governments want to introduce a universal basic income, which will discourage labour. When people aren’t paid to work or save, we can expect a bleak future plagued with economic retreat and ever rising prices. What may have started with good intentions may well end up generating bigger problems than those that led to such action. Next Sunday, the Swiss will vote whether they want every citizen in the country to be entitled to the right to receive 2,500 francs per month unconditionally.

For the last few centuries the world has surpassed many challenging barriers, some of which were so disruptive they required radical changes in society and in the way the economy was organised. But unlike what many thought at the time, it was never the end. The industrial revolution, for example, certainly destroyed jobs in agriculture, but it created a new kind of job that didn’t previously exist. Later, the automation of many tasks through the use of machinery destroyed many jobs at the factory, but new jobs were created in services. Innovation always leads to disruption and radical changes in society, but that should never be understood as a bad thing. Fear creates an aversion to change, because we are uncomfortable with the unknown. But a man can only progress when leaving his comfort zone.

The recent advancements in technology and, in particular, in robotics and virtual reality, are generating a high degree of awareness and fear about what will happen to jobs in the near future. Robots are already intensively used in factories and will start replacing truck drivers on the roads, waitresses in restaurants, and other staff in almost every walk of life. At the same time, virtual reality will allow us to participate in many things at a much lower cost, thus also reducing the need for many existing jobs. “The ability to visit places without actually being there in person also raises questions for the travel and tourism industry”, explains James Faulkner in this month’s Master Investor Magazine (“Virtual Reality Is Here“, p. 17). Workers do have reason to worry, as “machines don’t talk back, don’t need healthcare, and don’t get sick… they do work all the time and their costs are coming down”, as Jim Mellon explained at the Master Investor Show 2016 (and in “Mellon on the Markets“, p.6).

The future is disrupting the present, threatening to reap the majority of our jobs, and raising question marks over incomes. To address the issue, governments and labour unions have been trying to find a way of solving the puzzle. How can we deal with a new society where robots do our job, replacing us? How can we get an income and survive the new technology revolution?

Many believe we can’t. They argue that the best way to deal with it is through the payment of a Universal Basic Income (UBI), which is basically an unconditional government payment given to all citizens, as a supplement to (or in replacement of) wages. Finland and the Netherlands are planning limited experiments, in which some citizens are paid a monthly income of roughly €1,000 (around £775). Switzerland is going further, as the country will face a public referendum next Sunday (June 5th) to decide whether the government will start paying a UBI of 2,500 francs (£1,750) to every citizen.

The UBI seems to be the solution to the new challenges created by innovation, in particular the automation of our economy. But there are many points worth considering before advocating the payment of a flat wage to everyone.

The first point that comes to my mind is that it is still too soon to engage in any kind of UBI package, in particular in such an advanced economy like Switzerland where the unemployment rate is near 3%. If there’s a country where things are already working well it is Switzerland, so why mess with something that isn’t broken? The past demonstrates that disruptions often lead to profound changes, but also to new opportunities. In the 19th century many jobs were lost in agriculture, but more were gained in industrial activities; and in the 20^th century many jobs were lost in industrial activity, but more were created in nascent activities in the services sector. We just don’t know whether automation will erase all jobs or change the existing opportunities.

A second point is related to the distortions created by any type of guaranteed income that is not contingent on anything. We currently have a complex government structure because it is difficult to create a system to address inequality issues and to protect people in unfavourable conditions while keeping our economy oiled to deliver sustainable growth over time. If I offer readers a 20% interest rate to lend me £10,000 for one year, there may be someone interested in incurring the risk involved. If I offer a rate of 0%, I bet no one would lend me a penny! The reason is because the compensation on this second offer is the same you can get from putting the money to rest under your mattress, where there is no hassle involved. Why would you bother working to bring home a monthly wage of 2,500 francs if the government paid the same for you to be safe at home, resting on your mattress?

The problem with zero interest rates and with guaranteed wages is the removal of the incentive for people to save money and to work, respectively. In a market economy these incentives are crucial for economic development. Without them, our society would stagnate – at best.

The main goal of a government is to address the inequality that stems from certain handicaps, and not exactly income inequality per se. I believe that it is fair for someone working hard to receive a higher income than someone not working at all – if this second person just does not want to bother working. In that sense, income inequality would be a fair and desirable outcome, as it would be a reward for achievement. The UBI puts money in the hands of every citizen, giving an income to all those that don’t want to work, as well as those who just don’t need it. Worse than this is the fact that such an income would be a burden on those who decide to work and thus a huge incentive for them to stop working. At some point we may have a society where no one wants to work. When that happens, the government won’t be able to provide the UBI without support from the central bank. At that point, the central bank will need to print money for the government, bringing inflation and stagnation – stagflation.

I really hope the Swiss vote “no” next Sunday. I believe we need a welfare system aimed at solving the vulnerabilities of a market-based economy – not a system messing with its fundamentals and amplifying existing problems.