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.
At this year's Sohn Investment Conference, Dan Sundheim, the founder and CIO of D1 Capital Partners, spoke with John Collison, the co-founder of Stripe. Q1 2021 hedge fund letters, conferences and more D1 manages $20 billion. Of this, $10 billion is invested in fast-growing private businesses such as Stripe. Stripe is currently valued at around Read More
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 earned. The price you are paying in your hard work makes you respect money as you had to sacrifice 8-12 hours for it. This link doesn’t exist in the head of a person receiving money for nothing.
4. Dependency on the government and the “Big Brother”
What campaigners for UBI forget is one very important fact. When you put people on any kind of governmental program most likely they will become dependent on it. Society more dependent on the government is going to bend according to the will of their rulers much easier. Politicians manipulated by lobby groups could threaten to decrease or annul UBI unless cash will be eliminated. With enough leverage, authorities are able to push through reforms that in normal circumstances wouldn’t be possible. Another example is similar to the situation we saw in 2008. Imagine some supervisory body – the European Commission – being able to coerce governments to buy toxic vaccines just like in 2008 under the threat of withdrawing funds for UBI.
What seems impossible today, in the case of society dependent on the government, may happen without any substantive dissent. Being even more reliant on the government – UBI – can enable the rulers to have yet another way of exerting their power over ourselves. This is definitely a scary path for a free society to take.
We cannot forget that it is all of us who need to pay for anything that government gives to some particular part of society. On top of that, any handout making nation more dependent on the corruptible government turns us eventually into slaves unaware of our shackles.
5. Feudalism – slavery – the façade of freedom
The biggest pathology of today’s world is overreaching socialism coupled with the dictatorship of corporations of which only 5% of the population is aware. In the majority of ‘Western’ countries, public participation in the economy is around 40-45%. In the insolvent EU, it is gargantuan 48%. Inefficient, corrupted government is responsible for the half of the economy. Overgrown administration, unnecessary regulation and welfare payments make this enterprise very expensive. The Tax Freedom Day in the majority of countries is around the end of May/beginning of June. This means that for nearly half a year you are working not for yourself but only to pay for government expenditure! To put it into perspective, in the US during early XXth century the Tax Freedom Day was at the end of January. The state was able to function with great success, burdening average Joe with taxes 7 times smaller than today.
6. Future of UBI
Switzerland is not the only country interested in UBI. Alaska already has one funded partially from hydrocarbon tax. Countries like Canada, the Netherlands and Finland are preparing for local pilot programs of UBI. As much as I am against UBI in the big scale I am interested in these pilot programs as I believe, ultimately all social payments will be reduced to one fixed benefit. The power corrupts since the beginning of time. Sacrificing independence and being at the mercy of politicians is the definition of a relation between modern slave and its master. We cannot change human’s nature. The paramount objective for those wielding power and architects of this system is the control exercised through a distribution of capital.
7. An alternative to UBI
Advancing automation of production may not necessarily render human labour superfluous. If we had told farmers living 200 years ago that soon 97% of population is not going to produce any food they wouldn’t have believed us. “What else are they supposed to do? The system would collapse!”
Right now we react similarly to technological developments. In my opinion, separation of income and work is not a good solution.
The people are creative. Many of us want to develop and pursue our dreams. It is people – not governments – pushing technological breakthroughs beyond what we previously understood as the limit. The institution of government, as we learnt from history many times, is more of an obstacle. There are many other solutions that improve living standards but virtually all of them require serious reduction of the government’s role. We shouldn’t rely on the whim of politicians to administer handouts but rather improve the system. With modern technology without any problems, we could reduce our working day to 4h and not only sustain but better our standard of living.
a) Total elimination of taxation on labour
Human labour is very expensive today not because of machines but due to taxes. Labour in some countries is taxed on the punitive level of excise taxes on alcohol or tobacco. Social security and income taxes make employment’s cost double when compared to what the employee gets. The solution is the replacement of human with a machine. Elimination of labour taxation will dramatically lower the cost of employment and in turn, lower the unemployment rate. What is more people’s ambitions will not be curbed and many young aspiring entrepreneurs will choose to create their own companies, further improving the situation in the job market .
I am not against automation. It is vital for lowering prices of many goods and services. Assembly line robots are not taxed, human labour is. This puts humans on the losing side.
b) Abolishing minimum wage and other employment regulations
Employment is nothing else than a contract between employee and employer. The state by intervening in 90% of cases result in the negative effect notwithstanding good intentions of the legislators. This negative effect is increasing the cost of employment for the employer, raising costs of labour and drop in efficiency. The amount of regulation is positively correlated with unemployment.
Minimum wage makes the job hunt for unqualified people or those without experience much harder because they are not able to take a job below an arbitrary level of salary set by the central planners of the government. This precludes people in poorer regions to gain experience which could increase their salary in the future. The introduction of the minimum wage or raising it will inevitably end up in exclusion of the vulnerable group from accessing the job market, jump in unemployment, lower productivity, rise in prices and slower economic growth.
There are countless examples of such predicaments to growth:
– Prevention of employers against firing people 2 years before reaching the retirement age. The effect is that employers make people redundant 6 months before this safety period. No one wants to employ people he is not able to dismiss. For politicians, it doesn’t matter whether someone who can’t be dismissed is working efficiently and adds value to the company or not.
– Require from employers to pay for “special, expensive training” for employees and you won’t see those jobs being created in the first place.
I believe I’m not overestimating when saying that 90% of the law which is supposed to guard the rights of employees has the opposite effect. The correlation between unemployment and regulation is proven by countries with low regulation having low joblessness rate. The best guardian of employee’s rights is not the government but low unemployment. In such circumstances, it is the employer who has to fight for the employee, not the other way around. With high employment ratings, we need to offer many things to attract specialists to work for us. Starting with high salary and ending with free medical insurance, gym, a decrease of working hours or great team of people to work with.
c) Bureaucracy on every level
The absolute majority of regulations is harmful. The main “sponsors” of most of them are international corporations that ‘buy’ the law detrimental to competition securing their spot in the market. Today, SMEs are fighting the uphill battle against big corporations. To comply with all the law corporate word spends less than 1% of revenues but if you are a 5-emloyee SME the battle with the bureaucracy monster is too costly and can drag for years.
Countries with very high level of regulation tend to ‘enjoy’ bigger share of corporations in the economy. Now in Switzerland small and medium enterprises produce 75% of the GDP thanks to minimising the impact of regulation on the market. In Europe, we see unfortunately the opposite trend of destruction of SMEs. This leads to big corporations gaining a dominant position in the market, becoming monopolies to the detriment of the society’s good. Who will take care of the client better – owner of the family business knowing his clients for 30 years or cashier in the market with a minimum wage?
d) Elimination of monopolies
Monopolies in any sector create barriers of entry to stifle competition and lower the quality of their services while margins increase with prices. With time we can expect them to break the law on a massive scale and the victim is always the consumer – 99% of the society. There is only one winner – the shareholder of the monopoly. In just one decade we moved from “Bail-out” to “Too big to fail” arriving at “Too big to jail”.
Another problem with monopolisation is planned obsolescence – creating a product which stops functioning after the warranty ends. Consumers instead of using their hard-earned money on something they planned to buy have to purchase the equivalent. The equivalent, again, will function 10 times shorter than what we could expect from the real competitive environment.
In terms of effectiveness of anti-monopoly bodies and consumer protection authorities you can judge for yourself but it is not far from the bureaucratic efficacy of the rest of administration.
e) Elimination of the government from the life of the individual
The role of the government should be limited to internal security (police, fire department), external (military), judicial branch and energy, transport and water infrastructure.
Everything else can be left to the private sector to take care of.
– Why schools can’t realise their own educational programs that actually fit the job market? Better schools will prevail while the bad ones will disappear from the market. Who knows best what is good for children? Parents or some clerks pushing common core into every child’s head?
– Why medicine can’t be exclusively in private hands? Why the patient can’t decide for himself which therapy to choose – just like in Mexico where many ‘incurable diseases’ are being treated? The difference between Mexico and 98% of countries is that it is constitutionally guaranteed for a patient to choose his method of treatment. This freedom enabled competition, reduction of costs and significant increase of the quality of services. The effect is visible for citizens of San Diego in Southern California who go to Tijuana for treatment.
– Why should it be up to the state to allow you to build your house on your land?
– Why hundreds and thousands of licences are introduced to block so many people from working? Wouldn’t it be good for them to be employed rather than jobless?
Leaving those spheres – now monopolised by the state – in private hands could solve economic problems while lowering costs thus, improving salary/cost of living ratio.
Finally, the end result of all of the above would be an increase in the efficacy of the economy, plummeting unemployment and lowering prices due to competition forces. What is more important, everyone would feel the rise of their real income. This enables you not only to cover your living costs but also start saving.
The long-term effect would be shrinking working week from 40 to approximately 25 hours. This reduction cannot be forced by regulation but rather an unwritten compromise in the free market environment between employers and employees. Are you young, ambitious and in need of money? Work even 60h per week – the decision is only yours to make.
In case your free time is worth more and you prefer 25 working hours and can sustain yourself with that – again – it is your decision. The government is not going to interfere.
This is the path to take instead of public overspending! Economic freedom and low taxes are the ingredients fuelling the economy, lowering unemployment and increasing real income. The government with its redistribution of goods is an anchor slowing down the aforementioned process. Unfortunately, there are very few countries which understand that simple fact.
The place where I live, where the ratio of income to living costs is high, many of my friends work only 8 months in a year. Considering a 12-month framework, it is 25 hours per week system.
If we were able to eliminate the ‘parasites’ living off benefits only, saved money could be used to lower taxes and suddenly it may occur to average Joe that working 4 hours per day or 6 months in a year completely suffices to cover basic expenses. Annulling piling regulations and directives would definitely result in a speedy process of healing the economy and enable a further decrease in working week.
This is the way forward, not the bankrupt system where politicians look for a way to coercively make everyone happy with regulation lobbied by interest groups.