Friday, February 19, 2021

Basic Income - Where Does the Money Come From?

Believe it or not, back in the 1970s, President Nixon's administration was a heartbeat away from instituting what was effectively a Guaranteed Basic Income (GBI) program for the entire United States (before a few individuals derailed the plan). Today, with 2020 hindsight, everyone is realizing that a Universal Basic Income (UBI) would have been the best possible solution to the CoViD-19 economic crisis. The impact of our global pandemic has thus contributed to a renewed awareness of the power of Basic Income schemes, and many people are now pushing for those programs to be revisited.

The concept of a Basic Income for an entire population raises a lot of questions, but the most prevalent is this one:

Where is the money going to come from?

I believe this is a misleading question. The equivalent, for me, is hearing on the radio that a very significant rainfall is forecast and asking where all that water is going to come from. There won't suddenly be less water in your taps or in your well.  Your cistern won't suddenly be depleted. Nor will the lakes and reservoirs go down - in fact, their water level will obviously rise.

Water is necessary for life, just like money is now necessary for today's economy.  But plants and animals don't really consume water - they use it. Water facilitates the processes of life. Water moves in a cycle, and if that cycle were to stop, all life would soon end.

Money is exactly the same. We don't consume money - we use it. Money facilitates the processes of economic transactions. Money has to move in a cycle, and if that cycle were to stop, all economic activity would soon end. (That's what happened in the Great Depression: money stopped moving.)

One of the key concepts to be grasped for basic income programs is that "income" is not the same as "wealth". When we imagine the government handing out cheques to the population every month, it is a mistake to only consider that step of the cycle and wonder where all that money is going to come from. When money goes to people who really need it, that cash does not get added to Wealth - it gets spent. To use the water metaphor, only rich people have huge reservoirs and sealed aquifers that trap water and don't allow it to flow (wealth). Money, for everyone else, moves as streams and rivers, flowing out so that goods and services can flow in.

Here's how the simplified money cycle looks (to me):

The green lines show the cycles of money. The blue lines are also money (and luxury assets), that represent the discretionary transfers to and from Producers or Consumers that have a stockpile of Wealth.  (Other than bringing in money from Wealth and injecting it into the money cycle, retained Wealth is not part of the flow.) The red lines represent the flow of Goods and Services (materials and energy) - I include them just for completeness.

The major flow of money in our present economy is made up of Purchases and Wages. Both of those flows are Taxed so that the Government can meet society's Infrastructure needs. If you introduce a Basic Income, that money does not get added to Wealth (where it can pool and stagnate) - it gets immediately injected into the monetary flow, increasing economic activity. Purchases go up, demand goes up, production goes up, tax revenue increases correspondingly, and the cycle continues. Taxation is like evaporation - the money/water doesn't disappear; it simply reloads the system!

[NOTE: For those who hate Taxation and call for less Government, it is true that the cycle would still work with nothing in the centre, but the main green circle would soon get smaller, and (since the Producers would control the Natural Resources) the blue arrow on the right would effectively disappear.]

Basic income programs do not reduce the number of people willing to work, any more than rainfall results in plants not growing roots, but a guaranteed living allowance does reduce their dependence on dead-end jobs. (In other words, a GBI eliminates the slavery imperative: find a job or starve.) Over time, a GBI can also facilitate increased automation and shorter work weeks for all.

When the system is in balance, there will be dramatically decreased welfare supplements (which are like costly irrigation systems in areas with no rainfall), lower infrastructure costs (due to better health and lower crime rates), less stress for everyone's future, and a higher quality of life for all citizens. And yes, with all of that extra activity, it is possible that a higher Tax rate on Wealth might be necessary just to keep the revved-up cycle from being entirely diverted into the private reservoirs of the billionaires. Remember, they are not creating the jobs or driving the economy any more (if they ever were) - it's the Basic Income that's now doing that.

A Basic Income program does not demand that a nation have more money - it just moves a lot more of it around, and redistributes the flows in such a way that benefits everyone. (Read about its impact on me, for example.)


  1. Excellent overview and simplified explanations. I especially liked and appreciated your willingness to use your own situation to illustrate and further clarify your position and thinking.

    1. Thanks, Peter. No doubt, there are readers who would want a more accounting-centred approach with actual numbers. My view is that, once a GBI (or UBI) is in place, the public sector balance sheet will change first, followed by prices, wages, investments, everything - the system will need to reconfigure itself, so the numbers (taken out of that context now) won't be meaningful when a new equilibrium is reached.


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