Malcolm Henry sets out an argument for a Universal Basic Income based on his analysis of the failings of the banking system.
Author: Malcolm Henry
Everything that I’ve read about universal basic income (UBI) suggests that its champions have come to the idea while searching for ways to overcome poverty or promote social justice and, having discovered the appeal of UBI, then look around for ways in which it can be funded. I appear to be unusual in arriving at UBI from a completely different direction.
While investigating the credit crunch of 2007/08, and the subsequent financial traumas, I found myself emerging from the fog of confusion that surrounds the nature of money and credit. What became clear to me is the dysfunction that arises from using money as a means of exchange while also using it as a proxy for wealth.
As a means of exchange - a tool for facilitating commerce - money is pure genius, possibly the cleverest thing that humankind has ever invented, but for the tool to work effectively money has to be available and mobile. Unfortunately the idea that money is the same thing as wealth drives us to capture and hoard as much of it as we can, rendering it unavailable and immobile – the exact opposite 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 thing as wealth. The idea that money and wealth are the same thing is so deeply entrenched in our culture that 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 us feel good – family, community, entertainment – are wealth. The things that help us to get what we need and what we enjoy – machinery, infrastructure, education – are wealth. Money is merely the tool that we use to facilitate the production and transfer of wealth. If we can accept this concept then funding 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 hands every month. Money flows from customers to businesses as we buy the things we need, and between businesses as they buy goods and services from each other. Some of the money flows back to customers in the form of wages and dividends.
There are also flows of money from businesses and individuals to government in the form of taxes and government borrowing, and flows from government to individuals and businesses in the form of salaries, welfare payments, interest on government debt, and all the other government spending that goes on.
All of these flows of money represent activity in the productive economy – activity that provides us with everything that we need for our security and comfort – the only bit of the economy that really matters. As long as money is available and mobile the productive economy thrives. If money becomes scarce 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 money flowing through it. The pump that drives the economy is customer demand, but customers can only buy 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, and welfare payments but all of these methods are precarious or inadequate, or both. This is where I came across the idea of a universal basic income which seemed to me to be an ideal mechanism for distributing 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 in our 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 calendar month. Any UBI money that you fail to spend or transfer out of your UBI account before the end of the month disappears – use it or lose it. The other feature of the UBI account is that you can’t pay any money 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 the economy, 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 pot ready for the start of the following month. Our current collection methods include gross profits (used by businesses to pay wages, dividends and interest), taxation and government borrowing (used to pay for government programmes and welfare), but these are notoriously inadequate with all sorts of unpleasant consequences including widespread poverty and debt.
Every proposal that I’ve seen for funding UBI relies on some form of conventional taxation, most of which is directed at commercial activity – income tax, corporation tax, VAT, etc. Taxing the productive activities on which we all rely for our survival and comfort has always seemed to me to be counterproductive to the point of stupidity, so I started to look for alternative ways of managing the collection 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 facilitate productive activity. If we shave off a small percentage from every bank balance every hour of every day, not only do we refill our UBI pot in a way that’s proportionally fair, we also discourage the longterm hoarding of money.
What I’m proposing is effectively a negative interest rate (sometimes called demurrage) on all money wherever it’s held, with the exception of the money in your UBI account. When we spend or transfer our UBI money into the mainstream banking system the negative interest rate kicks in and encourages 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 that businesses have customers. Some will get invested in activities where the money is spent on something productive (rather than gambled). Some will be lent to individuals, businesses and government 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 rid of the mountain of positive-interest bearing debt under which we are currently buried. The evils of compound 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, state pensions, tax credits, and so on, which will allow us to immediately abolish some of the taxes that are a drag on commerce (e.g. VAT and NICs), and it should be possible to reduce or get rid of other unhelpful taxes (e.g. corporation tax, income tax) as government departments learn how to manage their cashflows using temporary loans from businesses and individuals who have spare money and are 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 summarise a 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 a new 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 a negative interest rate of around 2.5% per month. This means that if you have £5,000 lying idle in your bank account at the beginning of the month, by the end of the month you’ll only have around £4,884 left because £116 will have been taken out and put into the UBI pot. This sounds terrible until you remember that on the first day of the next month you get your UBI payment of £1,000. If you use £116 of the UBI to replace what was “lost” the previous month you still have £5,000 in the bank and £884 of spending money. You can repeat this month after month, ad infinitum to keep your £5,000 intact. If you have other income off which you are able to live, the £1,000 that you get as UBI every month will maintain 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 have in 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 can accumulate a huge pile of money over the course of a year because the collection system – the negative interest rate – can only work with electronic money. The most elegant way around this is to abolish notes and coins and replace them with convenient electronic payment methods (which are already catching on). To placate those who will doubtless complain about the loss of physical money I propose that the UBI fund is established with the money that’s taken out of circulation when notes and coins are abolished. In the UK, to provide everyone with a cashflow of £1,000/month the UBI pot would 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 people are 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 to buy 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 price of houses beyond the reach of many as well as raising rents. We would need legislation to prevent bubbles in the prices of essential assets like houses. Making it illegal to provide a mortgage of more than, say, 90% of the insurance value of a house (i.e. the cost of rebuilding it) would provide a restraint 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 the country 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 not the case. The wealth of a country is represented by its natural resources and its people. When someone in the UK decides to exchange their millions of pounds sterling for US dollars they don’t remove a single atom of wealth from the UK. They don’t even take any money away. All that happens is that a bank gives them dollars, taking the unwanted pounds in exchange. At some point the bank will find a customer from the US that wants to buy millions of pounds worth of Range Rover cars, for example. The bank gets dollars from the US buyer and the pounds get spent back into the UK economy via the manufacturer of the cars. In a conventional financial system the problem with capital flight is that lots of the native currency gets stuck in the banks, leaving the productive economy short of 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 discussed more fully in my book – Our Money. In the book I present the UBI and negative interest as a unified system called the Common Cashflow Fund (CCF).
For readers who are enthusiasts of universal basic income the CCF provides a reliable, affordable means of funding UBI that acts as a stimulant to commercial activity rather than a drag. The CCF will make UBI much easier to sell to skeptics, especially those in the business community who feel most keenly the burden of conventional taxation. When they realise that UBI can be part of wider reforms to our financial systems that will increase the opportunities for commerce they will be more inclined to get 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.
Basic Income, local government, tax and benefits, Article
