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.)

The Gift of the Economist

This post is inspired by Michael Sandel’s What Money Can’t Buy: The Moral Limits of Markets.  Let me begin by saying that Sandel teaches "Justice", Harvard University's most popular course ever, and if you watch one of his lectures (which is easy to do), you will immediately know why.

In What Money Can't Buy, Sandel provokes some important questions about how we have moved from a market economy to a market society, where anything and everything is for sale.   Today we look at "The Case Against Gifts" and "Monetizing Gifts" (pp 98-107).

The economist's case against gifts is simple: it is not a rational social practice.  Sandel (who I should point out is not promoting this idea) outlines it in this way:

From the standpoint of market reasoning, it is almost always better to give cash rather than a gift.  If you assume that people generally know their own preferences best, and that the point of giving a gift is to make your friend or loved one happy, then it's hard to beat a monetary payment. [...] Your friend or lover can either spend the cash on the item you would have bought, or (more likely) on something that brings even greater pleasure.

A great champion of this view is Joel Waldfogel, an economist at the University of Pennsylvania.  I started my review of Waldfogel's work with his 1993 article The Deadweight Loss of Christmas.  The essential message is that gifts are a poor way to maximize utility for the recipient (econo-speak for "make them happiest").  Assuming that the greatest result is achieved by purchasing exactly what the recipient would buy for themselves, anything less represents money spent that does not return full value.  He estimates that this typically ranges between a 10% to 35% drop in value.  In 2009, he presented his case in a more popularly accessible book: Scroogenomics: Why You Shouldn't Buy Presents for the Holidays.

Reading over the book's Table of Contents, I thought I might personally find his arguments very appealing.  In the interests of full disclosure, I hate Christmas gift-giving.  But if you expect Waldfogel to condemn the rampant consumerism of this multi-billion dollar holiday, you might be disappointed.  His take is still that of an economist, trying to maximize utility.  More on that in a moment.

Back to the original book, Sandel points out that a contributing factor to cash not being a popular gift is the stigma attached to simply giving money. It has a lazy, uncaring connotation.  Alas, the recent and fast-growing trend of gift card giving seems to be blurring that distinction.  The recipient knows exactly how much money was spent on the gift, but now it seems slightly more personalized - that single step from cash makes it more socially acceptable.  And if the recipient really doesn't like the retailer featured, there are websites that allow you to cash them in - at a discount that presumably reflects Waldfogel's value drop (as well as the profit margin of the middle-man).

And yet, imagine the perfect economist's world of the utility maximization through giving cash.  Christmas rolls around and I give my good friend a $100 bill, and my friend gives me a $100 bill.  So what?  And what is the message when the amounts are different?  The kiss of death for this practice, for me, is the attachment of a number to the exchange.  When the value of gift-giving is expressed and measured as a number, you introduce all of the awkward baggage that comes along with number-based values - baggage that is derived from the unique properties of numbers themselves.

Numbers are linear, consistent, and universal.   Ten is always greater than five, and always by the same amount.  If the value of a ten-dollar gift is measured by number alone, then a ten-dollar gift will always be worth twice as much as a five-dollar gift.  When the gift is cash, there can be no other value than a numeric one.  So far, Waldfogel would not only be in complete agreement - he wouldn't see the problem.

I believe the fallacy of this entire line of inquiry is in the primary objective of utility maximization.  I propose that, at its most important level, that is NOT what gift-giving is about.  The giving of a gift is a communication between two people. The message conveyed is derived from many factors, only one of which may or may not be the monetary cost of the gift.  No matter how much your girlfriend wants to lose weight but can't afford the fees of her favourite weight loss program, I don't recommend picking up the tab for her with a gift card to a weight loss clinic.  When was the last time you received a hand-made birthday card and bemoaned the fact that the giver may not have spent a dime of money on it?

I contend that when I give a gift, I am not trying to maximize utility by giving the recipient something that I know they would have spent the money on anyway, given the cash.  Think about the most 'successful' gifts you have ever received.  How many are measured by their monetary value?  Are they things you would have bought for yourself anyway?  Or are they instead powerful expressions of love and thoughtfulness based on what went into their creation or selection?  Many great gifts are 'luxuries' that the recipient might never have spent their own money on, or they might lead to discoveries of new interests and pleasures.

One of Waldfogel's areas of research was the correlation between the closeness of the relationship between giver and receiver, and the resulting value drop.  Not surprisingly, the more remote the relationship, the less likely that the value of the gift to the recipient will match the money spent.  If Aunt Gloria doesn't know you very well, her selection of the dollar-store crockery and butterfly cardigan might not be a hit on Christmas morning.  In such cases, it might be more appropriate to give the gift card or cash.  I would agree with this, because it is also a more accurate reflection of the real message behind gift: "I feel I should give you something, but I don't know you well, so I'm not going to pretend that I do."  Personally, my preference in such cases is to either give a tasteful consumable, such as the ubiquitous bottle of wine, or to not give anything at all - which to me seems more honest.

Fans of "The Big Bang" TV series may recall the episode where super-geek Sheldon Cooper goes out and purchases several gift baskets at varying prices so that when he receives a Christmas gift he can reciprocate with a matching monetary value.  When Penny from next door gives him a signed paper napkin used by Star Trek icon Leonard Nimoy, Sheldon is overwhelmed and gives her every basket in his possession - and it still isn't enough.

The old adage is that it's the thought that counts.  I hope this gives you something to think about.