Universal Basic Income by Independent Trader
It wasn’t long time ago when Swiss had a referendum about universal basic income (UBI). They rejected it. The initiators of the campaign for UBI wanted a minimum salary to be paid to everyone regardless of their age, occupation or level of income. The UBI was aimed to replace pensions and benefits thanks to which numbers of bureaucrats would decrease. One argument for such a change is advancing automation and the end goal is to disconnect salary from work.
The Swiss economy is one of the most efficient economies in the world. Robotised manufacturing produces high-quality goods and thanks to that country records a big surplus in foreign trade for nearly four decades. High productivity and relatively small intervention of government in the economy make sure that salaries both in nominal terms and when compared to costs of living are very high. The unemployment is practically non-existent.
Swiss have realised that a truly free market (do not mistake with monopolies) and small government translate into prosperity for everyone. Because of this, a few months earlier they refused a proposal for a minimum wage. At the beginning of this month, they rejected the idea of UBI. It seems so that Swiss understand the very basic rule of government spending – if the authorities are about to give you something they first have to take at least 150% of the handout in taxes.
There is an equal number of those for and against the idea of UBI. This is why I will analyse the topic thoroughly.
1. Automation of work
The main argument to introduce UBI was the advancement of automation – replacement of human capital with machines. If you can do the same work but more effectively without humans should people work at all? This view is very simplistic and with this angle, you may even go further and say that machines will replace all workers. Developing technologies change the structure of employment but do not wipe it out.
Two hundred years ago 90% of the population was working in agriculture doing nothing else but produce food. Technology enabled us to push this number down to 30% and still feed 100% of society. Today in developed countries agriculture share of the economy reaches 3% of the population. Is the rest 97% unemployed? No.
In XIX century former farmers migrated to cities to work in factories and industry’s role in the economy was growing. In time services sector crowded out the industry in developed economies. Automation and development helped to create new occupations or even sectors, expanding human potential. Just 20 years ago no one heard of personal fitness or yoga trainers. The share of tourism in the global economy literally exploded thanks to cheaper transportation. Apparently, deflation (fall of prices) is terrible for the economy :-)
Automation indeed lowers the demand for human work but technological progress creates new jobs and sectors changing the structure of employment. Should we then give away money because automatons take over part of our jobs? In my opinion, no – at least not on a massive scale.
2. UBI – it’s all about the money
Campaigners for UBI assumed that it can stimulate spending – especially the poorer part of the population – and this in turn will increase the velocity of money circulating in the economy fostering the economic growth. It should also simplify the system and limit counterproductive bureaucracy as it would replace benefits and pensions. They have a point here. What is more, in Switzerland the majority of society treats occupation not as a necessary evil but a chance for self-actualisation. It is not likely for people to resign from jobs just because they would have alternative – UBI.
This doesn’t change the fact that you still have to get the money from somewhere to fund this project. Printing money is out of the question because it produces hidden inflation tax. In Swiss constitution, there is a ban on budget deficits. The last option is to raise taxes. Increasing VAT? I doubt that – increase in prices hurts those who spend most of their money to satisfy basic needs – the poor. Raising income tax? Also a bad idea as a total contradiction to the spirit of UBI. The last one is CIT (corporate income tax) and it may seem a logical solution because it is the corporate world that benefits from automation the most. In theory. With taxes being too high some entrepreneurs will start to optimise their tax payments, some lose spirit to work as hard as before and corporations move to more tax-friendly states. This is how it works unfortunately, politicians rarely understand this simple mechanism.
3. Social benefits of UBI
a) Change of the employment structure
Campaigners for UBI raised a very important issue – raising the standard of living. According to their data, UBI is approximately at the same level as an unqualified people’s low income. For this reason, they would stop working and focus on self-actualisation and raise their qualifications (sounds a bit dreamy to me). Simultaneously, a decrease of able hands in the job market should increase wages.
Let’s analyse this train of thought a bit longer. The result of an increase in wages is an inevitable hike in prices of goods, lowered productivity and competitiveness especially when compared with imported goods. This, in turn, shrinks sales and leads to layoffs. At the end of the day, we are back at square one with a big difference: lower tax revenue for the government.
The effect is similar to a minimum wage increase – although the idea is beautiful we have to judge it on its merits and effects – it leads to more unemployment and poverty. In whole Europe, it seems that only Swiss understand that fact.
b) Elimination of pathology of poverty
The UBI campaign assumed that many people who live on the verge of poverty are ‘coerced’ to make a living out of crime. Basing on this assumption they implied that UBI has to decrease ‘pathology’. I think, it will have the opposite effect. Criminal element exists in every society. In the case of Switzerland, it is extremely low with 3.3%. If someone doesn’t have a job it is only because one chooses not to have it.
UBI is going to make part of the society value their job less than what they can get for free. They will resign and turn to ‘vegetation’ mode with fewer aspirations and no self-development which can lead in some cases to crime.
Very good example of this is suburbs of Paris. The majority of the population there lives off benefits. The crime rate is record high there. Another example of this is a town only 12 km from the city where I live, where immigrants from Marocco are now the majority (70%) and live only from governmental handouts.
Due to the level of welfare, especially in the case of big family, no one thinks about getting a job, developing oneself or guaranteeing better education for children. This model of ‘welfare family’ is being transferred onto younger generation because this is the only thing children see and will naturally try to copy it later in their families.
The difference worth highlighting here is the attitude you have towards money which is given and money which is