Politics & Economics

Universal Basic Income

I am very glad I found Andrew Yang’s book, The War on Normal People. It affirmed my own ideas and clarified a number of issues for me. Andrew is a bright non-politician who has declared his candidacy for the 2020 presidential elections. He may be a long-shot for the presidency, but he would make a major contribution if his ideas are able to influence the political agenda. He is a proponent of Universal Basic Income (UBI), which is one of the solutions put forward to deal with disruptive technological shifts. Since many of you may not have the time to read his book (although I strongly recommend it), I will freely quote below from one of his chapters. UBI is not a new concept. Some form of UBI has been seen as an imperative by many voices.

Quote: Today, people tend to associate universal basic income with technology utopians. But a form of UBI almost became law in the United States in 1970 and 1971, passing the House of Representatives twice before stalling in the Senate. Versions of the idea have been championed by robust thinkers of every political persuasion for decades, including some of the most admired figures in American life. Here’s a sampling: Thomas Paine, 1796: Out of a collected fund from landowners, “there shall be paid to every person, when arrived at the age of twenty-one years, the sum of fifteen pounds sterling, as a compensation in part, for the loss of his or her natural inheritance,… to every person, rich or poor.” Martin Luther King Jr., 1967: “I am now convinced that the simplest approach will prove to be the most effective—the solution to poverty is to abolish it directly by a now widely discussed measure: the guaranteed income.” Richard Nixon, August 1969: “What I am proposing is that the Federal Government build a foundation under the income of every American family… that cannot care for itself—and wherever in America that family may live.” Milton Friedman, 1980: “We should replace the ragbag of specific welfare programs with a single comprehensive program of income supplements in cash—a negative income tax… which would do more efficiently and humanely what our present welfare system does so inefficiently and inhumanely.” Bernie Sanders, May 2014: “In my view, every American is entitled to at least a minimum standard of living… There are different ways to get to that goal, but that’s the goal that we should strive to reach.” Stephen Hawking, July 2015: “Everyone can enjoy a life of luxurious leisure if the machine-produced wealth is shared, or most people can end up miserably poor if the machine-owners successfully lobby against wealth redistribution. So far, the trend seems to be toward the second option, with technology driving ever-increasing inequality.” Barack Obama, October 2016: “What is indisputable… is that as AI gets further incorporated, and the society potentially gets wealthier, the link between production and distribution, how much you work and how much you make, gets further and further attenuated… we’ll be debating unconditional free money over the next 10 or 20 years.” Warren Buffett, January 2017: “[Y]ou have to figure out how to distribute it… people who fall by the wayside through no fault of their own as the goose lays more golden eggs should still get a chance to participate in that prosperity, and that’s where government comes in.” Bill Gates, January 2017: “A problem of excess [automation] forces us to look at the individuals affected and take those extra resources and make sure they’re directed to them in terms of re-education and income policies…” (Gates later suggested taxing robots.) Elon Musk, February, 2017: “I think we’ll end up doing universal basic income… It’s going to be necessary… There will be fewer and fewer jobs that a robot cannot do better. I want to be clear. These are not things I wish will happen; these are things I think probably will happen.” Mark Zuckerberg, May 2017: “We should explore… universal basic income so that everyone has a cushion to try new ideas.” Unquote. (Yang, Andrew. The War on Normal People (pp. 166-168). Hachette Books. Kindle Edition)

Yang calls his version of UBI the Freedom Dividend. He is proposing $12,000 (indexed to inflation) per person per year between the ages of 18 and 64 independent of their wealth status or income. The Freedom Dividend would replace a majority of the existing welfare programs. Yang contends that UBI will eliminate the disincentive to work that may be inherent in existing welfare programs. With UBI, if you work you can actually start saving and getting ahead.

Some other incentives of UBI that Yang argues for:

It would be a massive stimulus to lower-cost areas.
It would empower people to avoid making terrible decisions based on financial scarcity and month-to-month needs.
It would be a phenomenal boon to creativity and entrepreneurship.
It would enable people to more effectively transition from shrinking industries and environments to new ones.
It would reduce stress, improve health, decrease crime, and strengthen relationships.
It would support parents and caretakers for the work that they do, particularly mothers.
It would give all citizens an honest stake in society and a sense of the future.
It would restore a sense of optimism and faith in communities around the country.
It would stimulate and maintain the consumer economy through the automation wave.
It would maintain order and preserve our way of life through the greatest economic and social transition in history.
It would make our society more equitable, fair, and just.

Yang calls his version of UBI the Freedom Dividend as he uses the analogy of a company distributing profits to its shareholders. Are citizens not similarly owners of the country entitled to a return on GDP – especially since GDP, with the help of robots can increase at human expense? In his book Yang offers practical ideas and ways to finance UBI. If we can spend billions of dollars bailing out banks without any return, we can surely restructure our economy to support UBI and improve the quality of life for our citizens.

A Robot Will Not Buy Anything

More than 40 years ago when I was reading some books on economics, I came across the following sentence (paraphrased as I do not recall the author): “a robot will not buy anything.” This was in the 1980’s when technology was beginning to make strides in society. Naysayers and negative predictions about technology were silenced by quoting Joseph Schumpeter’s idea that capitalism and new ideas will replace the old, and therefore new technologies will replace old technologies which will continuously improve prosperity. However, that one statement, “a robot will not buy anything,” stuck with me as it struck at the core of economic theory where consumption is key.

Over the years, we have seen technology take over our lives, but the inevitable disruption appeared to be manageable. However, as increased technological change starts displacing more jobs, it behoves us to revisit that statement and the necessary economic and political changes that may need to be considered. Technological improvements are a good thing but their consequences need to be carefully considered and managed. The following is a simple, but by no means simplistic examination of the saying, “a robot will not buy anything.”.

So, “a robot would not buy anything”: In the short term, robots will continue to keep producing things for the consumer market. Production efficiencies will be realized and profits will increase. But, consumers will need work to derive income that will allow them to continue to be consumers. When they are no longer able to consume, the particular market for that product will shrink and new markets need to be discovered to maintain consumption and profits. Wealth will be concentrated in the hands of the robot owners, who will use their wealth to improve their lot by lobbying legislation to promote their cause for labor regulations and access to markets. Over the long term however, as technology impacts other markets, the consumer market as a whole will shrink. Let’s take this scenario to its logical conclusion. Rapid unmanaged technological change will cause massive disruptions in jobs and markets. As robots increase and human producers and human consumers decrease, the economy as we currently know it must necessarily evolve or implode.

We need to seriously look at managing the disruptions that technology is causing and going to cause. People whose jobs are being displaced by technology will need alternative forms of income, not only to survive, but to continue to be part of the economic consumption formula. So, terms like Universal Health Care, and, Universal Basic Income are not socialist ideas, but universal ones that are very timely and much needed for the survival of American society as we currently know it.

Our politicians are not going to help us as long as we keeping sending self serving and unthinking people to congress who can be readily influenced and/or bought by lobbyists. On the subject of technology, you only need to have listened to the questions posed to Facebook’s Mark Zuckerberg when he appeared before congress, to understand how clueless some of our legislators are about technology. They are not going to appreciate the import of the massive disruptions technology will cause us. We need our representatives in government to be honest and ethical, knowledgeable, continuous learners open to new ideas and learning, and committed first and foremost to the betterment of human capital in an economic society.

Since my retirement, my interest in the sentence “a robot will not buy anything” in the context of our current economy, has reoccupied my thinking. I hope to spend some time learning about and sharing some of the problems, ideas and possible solutions that surround this issue. One book on the issue that I am currently reading, that may be promising, is Andrew Yang’s “The War on Normal People.”

John Maynard Keynes

John Maynard Keynes (1883 -1946) studied Politics and Economics at Cambridge university in England. He rose to prominence prior to World War 1 and his major contributions to economics arose out of his analysis of the economic depression of the 1930’s. He published The General Theory of Employment, Interest and Money in 1936.

Keynes ideas were focussed on macroeconomic theory. Macroeconomics looks at the economy as a whole. Macroeconomic policies allow the government the ability to stabilize markets through changes in government spending (fiscal policy) and the money supply and interest rates (monetary policy) in an economy. For example if the economy is sluggish, the government may decide to stimulate the economy by creating jobs through government projects and infrastructure improvement (fiscal) as well as increase the more supply by lowering interest rates as well as buying government bonds (monetary). Conversely if the economy is growing too fast and causing high inflation, it may reduce government spending and increase interest rates and sell bonds to reduce the money supply.

Keynes was not against Capitalism. He saw and appreciated the benefits of Capitalism. He wanted above all to ensure that these benefits be shared as widely as possible. His ideas gained popularity after the Great Depression. Keynesian intervention is meant to ameliorate the human impact of unhealthy inflation and unemployment during the economic cycle.

Karl Marx

Karl Marx (1818 0 1883) was born in Prussia, present day Germany. He studied law and philosophy but his ideas were considered too radical for a profession as a university professor. One of the pivotal moments of his life was when he defended peasants who took wood from their landlord’s estate to keep warm during the winter. The peasants were prosecuted for theft and Marx defended them in the newspaper he was writing for. He lost his job for his efforts, but this story would stay with him as he studied economics in England.

The word term “capitalism” was first coined by Marx in his book Das Kapital to describe the free market system. Marx proposed that the key motivating force of capitalism was the exploitation of labor. As owners get richer and workers get poorer, Marx predicted that capitalism, which he viewed as unsustainable, would collapse under the weight of its own contradictions.

Marx explained that because profits mainly revert to the owners as markets develop, some would become richer than others and own more of the productive machinery. Everyone else would have try and to sell their labor. As workers compete against one another for fewer jobs, they will see their wages decline. To protect against this, workers need to organize themselves into trade unions and align themselves with political parties that support labor interests. Marx predicted that eventually labor organizations would become strong enough to overthrow capitalism and establish social control of industry.

Social control of industry meant that all economic production would be centrally planned and based on the real needs of society.

Marx’s Socialism however did not account for the role that material incentives played in human behavior, and that greed and abuse of power by the few party planners could lead to major economic dysfunction. This was eventually recognized in the failed extreme communist socialist countries like the Soviet Union and China,

Adam Smith

The Scottish Philosopher Adam Smith, who is often described as the the father of economics, published An Inquiry into the the Nature and Causes of the Wealth of Nations in 1776 – a date that coincides with the Declaration of American Independence.

Among the many ideas that Smith put forward, there are three that best describe his philosophy. They concern (1) The Nature of Wealth, (2) The Necessity of Free Markets, and (3) Specialization and the Division of Labor.

Wealth

Moving away from the Mercantilist definition of wealth as the amount of gold accumulated by a nation, Adam Smith defined wealth as the production of goods and services in a nation that sought to improve the lives of the general population. Our current economic measure of GDP (gross domestic product) would fall under Smith’s definition (although some may argue whether some of the goods produced actually improve the lives of the population).

Self Interest and Free Markets

Smith believed that we are social beings that enjoy social interactions and typically care about our neighbors. However, Smith contended that ultimately we would always look out for ourselves and our families. He also believed we should be free to choose and compete in the work we do, rather than be born into certain professions. This personal self interest, freedom to choose and competition would result in the better workers being able to sell more of their goods and services. He contended that Market institutions consisting of individual participants seeking their own self interest are therefore best for producing wealth (Capitalism was not a word used yet, but this was what Smith was describing). However Smith recognized that the free market system has flaws and should be protected from unfair competition. Smith also recognized that while some inequality was necessary in a market system, the government’s role was to ensure fair competition and protect the market against monopolies and unfair commercial practices.

One important point that is often forgotten when Adam Smith’s philosophy on personal freedom is quoted, is his stipulation that freedom of action should be carried out within the laws of justice. The following are his own words from “The Wealth of Nation.” “Any man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interests in his own way, and to bring both his industry and capital into competition with those of any other man, or order of men.”

The Division of Labor & Specialization

The third idea that Smith put forward was that of the Division of Labor and Specialization. Quite simply this was to break down a task into its connected components and to have different people specialize in each function. The example given is the production of pins. If four people worked independently to produce pins, they would do all the tasks themselves, from (1) straitening the wire, to (2) cutting the wires to pin size, (3) sharpening the pins and (4) dulling the heads. They would each produce a certain amount of pins. However if each of the four specialized in one of the tasks – i.e. one just straightened the wire, one cut the wire, one sharpened the ends and one dulled the heads – they would be able to produce much more pins than if they worked independently. Specialization also allowed workers to get better and faster at what they did, thus improving productivity. This idea was an important innovation at the time that Smith wrote the Wealth of Nations as it was written at the beginning of the Industrial Revolution.

Smith defined what wealth was (the production of goods and services to benefit the population) and identified the drivers of wealth (individual self-concern working in free markets; and specialization and the division of labor). He laid the foundations of a free market economy which is still practiced today.

In my opinion, Adam Smith had a lot right except for one important point (which he briefly acknowledged in paragraph 5 above). Unfortunately self interest is a double edged sword. While it encourages free enterprise, it can also stifle it. If left unchecked by government and appropriate regulations, self interest can lead to the many ills that has impacted and will continue to impact unbridled Capitalism. Some of these are the consolidation of self interest among certain constituencies (the problem of being beholden to political lobby contributions); the growing remuneration gap between labor and management; and, the growing uneven distribution of income.

What is a Social Democrat

There are many words and terms thrown around in the political arena. Many have evolved from their original meaning to describe the opposite of their original intent. Some examples are the words conservative, liberal, republican, democrat, social democracy and democratic socialism.

I would like to dwell on the latter two in this post as one of them describes my political leanings. Most people who call themselves Democratic Socialists in the United States are actually Social Democrats. And while it may not make much of a difference (at least in the US) since they are freely used interchangeably, it is important to know how they originally differed.

I am a Social Democrat. A Social Democrat believes in Capitalism and sees it as an efficient instrument in running the economy with some exceptions. The Laissez Faire system of Capitalism as defined by Adam Smith sees “personal self-interest” as the hidden hand that regulates the economy. However, even many capitalists agree that “personal self interest” does need to be regulated otherwise it will lead to situations where wealth is concentrated in the hands of a few. The laws we have against the development of commercial monopolies are an example of regulation in a capitalistic society. Here are some acts and regulations that were used to ensure a more equitable capitalism. The Homestead Act of 1862; the Morill Land Grant College Act of 1862; The Sherman Act of 1890; and The Clayton Act of 1914. We have had an understanding and history of ensuring that Capitalism does not widen inequity. We should continue to ensure that Capitalism remains fair for all constituents.

Besides regulations that are needed to stabilize a capitalistic system, there are some areas that by their nature should not be just left to free market forces. We recognize that National Defense and Security is one of these areas. However, we have yet to fully recognize and accept that Education and Health are important areas that should not be solely left to the market. My own rationale – besides the fact that free market forces lead to gross inequity and inefficiencies in these areas – is based on my contention that human capital and ingenuity are the prime movers of any thriving economy. If we believe that, then it makes sense to ensure that we have healthy and educated citizens who can readily and successfully contribute to the growth of the economy.

While we are at it, let’s see why I have problems with the term Democratic Socialist. A Democratic Socialist (in the original sense) sees Capitalism as a failure and through democratic means seeks to introduce state ownership of the factors of production. This is not what I believe, and not what so called Democratic Socialists in the US believe. Capitalism with proper regulation in needed areas is a very efficient economic system.

We need to support a healthy Capitalism but we must have measures in place that will intervene and prevent the growth of unhealthy Capitalism. To simply label such programs like Social Security, Universal Health Care, and other human oriented initiatives, “socialism” is misleading and reveals a certain lack of appreciation and concern for reality and the human condition.