Without Scaring The Horses
Author: Malcolm Henry
Everything that I’ve read about universal basic income (UBI) suggests that its champions have cometo the idea while searching for ways to overcome poverty or promote social justice and, havingdiscovered the appeal of UBI, then look around for ways in which it can be funded. I appear to beunusual in arriving at UBI from a completely different direction.
While investigating the credit crunch of 2007/08, and the subsequent financial traumas, I found myselfemerging from the fog of confusion that surrounds the nature of money and credit. What becameclear to me is the dysfunction that arises from using money as a means of exchange while also usingit as a proxy for wealth.
As a means of exchange - a tool for facilitating commerce - money is pure genius, possibly thecleverest thing that humankind has ever invented, but for the tool to work effectively money has to beavailable and mobile. Unfortunately the idea that money is the same thing as wealth drives us tocapture and hoard as much of it as we can, rendering it unavailable and immobile – the exactopposite of what we need money to be if we want our economy to flourish.
Possibly the hardest bit of what I’m about to propose is the concept that money is not the same thingas wealth. The idea that money and wealth are the same thing is so deeply entrenched in our culturethat it’s hard for us to grasp the folly of it.
The things that we need for our survival – food, shelter, fuel – are wealth. The things that make usfeel good – family, community, entertainment – are wealth. The things that help us to get what weneed and what we enjoy – machinery, infrastructure, education – are wealth. Money is merely the toolthat we use to facilitate the production and transfer of wealth. If we can accept this concept thenfunding a full UBI becomes not only possible, but economically desirable.
So let’s forget about the idea of money sitting in a pile in the bank and think of it purely as cashflow.Every individual and every business in the land needs a reliable flow of money through their handsevery month. Money flows from customers to businesses as we buy the things we need, and betweenbusinesses as they buy goods and services from each other. Some of the money flows back tocustomers in the form of wages and dividends.
There are also flows of money from businesses and individuals to government in the form of taxesand government borrowing, and flows from government to individuals and businesses in the form ofsalaries, welfare payments, interest on government debt, and all the other government spending thatgoes on.
All of these flows of money represent activity in the productive economy – activity that provides uswith everything that we need for our security and comfort – the only bit of the economy that reallymatters. As long as money is available and mobile the productive economy thrives. If money becomesscarce and stagnant (e.g. if it’s being hoarded) the productive economy suffers.
So, if we want to keep the productive economy productive, we have to find ways to keep moneyflowing through it. The pump that drives the economy is customer demand, but customers can onlybuy if they have money to spend, so the first thing we have to do is make sure there is a regular,reliable distribution of money to all the customers in the economy (i.e. everyone).
Our current system attempts to distribute money as a combination of wages, dividends, interest, andwelfare payments but all of these methods are precarious or inadequate, or both. This is where Icame across the idea of a universal basic income which seemed to me to be an ideal mechanism fordistributing money throughout the economy on a regular basis.In order to ensure that the money flows through the economy and doesn’t get siphoned off to rot inour bank accounts my version of UBI has some novel features.
First it’s paid into dedicated individual UBI accounts from which we have to spend it within a calendarmonth. Any UBI money that you fail to spend or transfer out of your UBI account before the end of themonth disappears – use it or lose it. The other feature of the UBI account is that you can’t pay anymoney into it. The only money that can enter the account is your monthly UBI payment.
So we have a steady flow of money being distributed as UBI and spent (or transferred) into theeconomy, thanks to the use-it-or-lose-it feature.
We now need a collection mechanism that gathers money from the economy to refill the UBI potready for the start of the following month. Our current collection methods include gross profits (usedby businesses to pay wages, dividends and interest), taxation and government borrowing (used topay for government programmes and welfare), but these are notoriously inadequate with all sorts ofunpleasant consequences including widespread poverty and debt.
Every proposal that I’ve seen for funding UBI relies on some form of conventional taxation, most ofwhich is directed at commercial activity – income tax, corporation tax, VAT, etc. Taxing the productiveactivities on which we all rely for our survival and comfort has always seemed to me to becounterproductive to the point of stupidity, so I started to look for alternative ways of managing thecollection part of the cashflow cycle.
When we understand the need for money to be available and mobile the target for our collection system becomes obvious: idle money. Money in the bank is stagnant, doing nothing to facilitateproductive activity. If we shave off a small percentage from every bank balance every hour of everyday, not only do we refill our UBI pot in a way that’s proportionally fair, we also discourage the longtermhoarding of money.
What I’m proposing is effectively a negative interest rate (sometimes called demurrage) on all moneywherever it’s held, with the exception of the money in your UBI account. When we spend or transferour UBI money into the mainstream banking system the negative interest rate kicks in andencourages us to make use of that money before we “lose” it back into the UBI pot.
So instead of money lying idle it will be put to use. Some will get spent, which will ensure thatbusinesses have customers. Some will get invested in activities where the money is spent onsomething productive (rather than gambled). Some will be lent to individuals, businesses andgovernment departments that need a temporary cashflow boost.
It’s likely that most lending will be done at interest rates of zero or below, which will, over time, get ridof the mountain of positive-interest bearing debt under which we are currently buried. The evils ofcompound interest will disappear from our lives, as will the costs of servicing government debt.
The UBI will remove from government the costs of funding most subsistence benefits - welfare, statepensions, tax credits, and so on, which will allow us to immediately abolish some of the taxes that area drag on commerce (e.g. VAT and NICs), and it should be possible to reduce or get rid of otherunhelpful taxes (e.g. corporation tax, income tax) as government departments learn how to managetheir cashflows using temporary loans from businesses and individuals who have spare money andare looking for ways to preserve its value.
The proposal throws up more questions than can be answered in an article like this but I’ll summarisea few of the most common ones.
What about savings? If money in the bank is being eroded every month how can we save up for anew car, or a deposit for a house, or make sure we have a cushion of cash to cover a family crisis?
A UBI that gives everyone in the UK a guaranteed cashflow of £12,000 per annum requires anegative interest rate of around 2.5% per month. This means that if you have £5,000 lying idle in yourbank account at the beginning of the month, by the end of the month you’ll only have around £4,884left because £116 will have been taken out and put into the UBI pot. This sounds terrible until youremember that on the first day of the next month you get your UBI payment of £1,000. If you use £116of the UBI to replace what was “lost” the previous month you still have £5,000 in the bank and £884 ofspending money. You can repeat this month after month, ad infinitum to keep your £5,000 intact. Ifyou have other income off which you are able to live, the £1,000 that you get as UBI every month willmaintain an idle balance of up to £43,000 in the bank, which is enough for most people’s “rainy day”.
What about notes and coins? How can the UBI collection system gather 2.5% of the cash that I havein my pocket? Surely I can hoard money as cash.
If I transfer my UBI payment to my high street bank and then withdraw the money as cash I canaccumulate a huge pile of money over the course of a year because the collection system – thenegative interest rate – can only work with electronic money. The most elegant way around this is toabolish notes and coins and replace them with convenient electronic payment methods (which arealready catching on). To placate those who will doubtless complain about the loss of physical money Ipropose that the UBI fund is established with the money that’s taken out of circulation when notes andcoins are abolished. In the UK, to provide everyone with a cashflow of £1,000/month the UBI potwould have to contain around £60,000 million, which is conveniently similar to the value of notes andcoins in circulation.
What about inflation? If money in the bank loses value at a rate of 2.5% per month then lots of peopleare going to buy up assets, which will push up prices of property, for example.
When money is no longer a viable proxy for wealth people who have spare money will be inclined tobuy things that they think will hold their value over time. This will be good for artists, antique dealers,yacht builders and the like but could very easily cause a property bubble which would push the priceof houses beyond the reach of many as well as raising rents. We would need legislation to preventbubbles in the prices of essential assets like houses. Making it illegal to provide a mortgage of morethan, say, 90% of the insurance value of a house (i.e. the cost of rebuilding it) would provide arestraint on house prices, for example. As for non-essential assets, let the market decide.
What about capital flight? Surely all the people who have lots of money would take it out of thecountry leaving us with nothing for investment, so our economy would collapse.
The fear of capital flight is based on the belief that money is wealth, which we’ve established is notthe case. The wealth of a country is represented by its natural resources and its people. Whensomeone in the UK decides to exchange their millions of pounds sterling for US dollars they don’tremove a single atom of wealth from the UK. They don’t even take any money away. All that happensis that a bank gives them dollars, taking the unwanted pounds in exchange. At some point the bankwill find a customer from the US that wants to buy millions of pounds worth of Range Rover cars, forexample. The bank gets dollars from the US buyer and the pounds get spent back into the UKeconomy via the manufacturer of the cars. In a conventional financial system the problem with capitalflight is that lots of the native currency gets stuck in the banks, leaving the productive economy shortof cash. But the negative interest rate ensures that banks will not leave money lying idle for long.
They’ll soon lend or invest it into the productive economy.
These questions, and others relating to the nature of money and our relationship with it, are discussedmore fully in my book – Our Money. In the book I present the UBI and negative interest as a unifiedsystem called the Common Cashflow Fund (CCF).
For readers who are enthusiasts of universal basic income the CCF provides a reliable, affordablemeans of funding UBI that acts as a stimulant to commercial activity rather than a drag. The CCF willmake UBI much easier to sell to skeptics, especially those in the business community who feel mostkeenly the burden of conventional taxation. When they realise that UBI can be part of wider reforms toour financial systems that will increase the opportunities for commerce they will be more inclined toget involved.
Watch the film Crazy Money by Malcolm Henry.
Email Malcolm Henry
The publisher is The Centre for Welfare Reform.
How to Fund a Universal Basic Income © Malcolm Henry 2014.
All Rights Reserved. No part of this paper may be reproduced in any form without permission from the publisher except for the quotation of brief passages in reviews.
