By Matthew Parish*
Should we regard welfare benefits as charity for the poor, or as a key plank of macroeconomic policy? Where the number of the poor threaten to overwhelm the state so much as to suppress demand for consumer goods and thereby perpetuate recession, we should change our focus from the former to the latter. Doing so carries with it a number of ancillary administrative and social benefits. The aftermath of the Covid-19 lockdown threatens to generate such burgeoning unemployment and widespread poverty that we should henceforth consider welfare benefits in an entirely different fashion. We should act radically, abandoning contemporary models of means-based income supplements in favour of a universal scheme driven principally by a desire for economic stimulus. This idea is not new, but circumstances have not previously given rise to the political impetus for its implementation. It is called universal basic income. This essay outlines how it works, and why it is an important tool for a moderately affluent post-Coronavirus society.
Western societies are wealthy enough to endure the economic hardships caused by Coronavirus. They have proven themselves able to access more food than is necessary to feed their populations, to supply more consumer goods than is necessary to live comfortably, to provide more housing than is necessary to accommodate people to a reasonable standard, and to deliver more healthcare infrastructure than is necessary to treat people. The healthcare architecture of western societies did not collapse even at the height of the Coronavirus lockdown. Nor did people run out of food. The homeless were found places to sleep. Western society is sufficiently bountiful to ride out even so grave a health crisis as that we have recently experienced.
Nevertheless there is an economic crisis afoot, and it is driven not by absolute want of commodities but by the threat of change. The prescient dramatic changes in the hospitality sector at the time of writing are an example of this. There is quite enough food to feed everyone, but nevertheless many people are destined to lose their jobs in the catering, restaurants and hotel industries as demand for food served in restaurants has collapsed and many restaurants and hotels are unlikely to reopen. Or if they do, then they will be severely scaled down.
This is not just because Coronavirus has killed people who might otherwise want to eat in restaurants, or even just that the risk of catching Coronavirus has deterred people from dining in public places where the risk of transmission of the virus is higher. More predominantly it is because consumer confidence has collapsed. People feel poorer as a result of the spread of Coronavirus and the ensuing lockdowns. They feel afraid about their economic futures. They therefore resort to the habit of any person who feels threatened by change: hoarding. They switch out of consumer behaviour patterns that are expensive, luxurious, flamboyant or elite, and into behaviour patterns that are cheaper. This enables them to save resources, either because their incomes are lower (they have lost their jobs or the prospect of a bonus) or because they fear that they may become lower in the future.
These fears become a self-fulfilling prophecy. Our consumers switch their eating habits from the more expensive hospitality sector to the less expensive supermarket sector, and even more drastically to the discount supermarket sector. This is good for people who work in supermarkets, or who want to – they will be offered the opportunity of working longer hours (hence more pay) and/or there will be more jobs for them. However it is bad for people who work in hospitality. They will lose their jobs, because restaurants and associated venues that make money serving food in more expensive circumstances will cease to operate and/or will not operate with the same margins permitting the employment of as high numbers of staff. The result is mass unemployment, which itself compounds the misery of the hospitality sector (unemployed people do not eat in restaurants because they cannot afford to do so) and the downward pressure typical of a recessionary spiral.
One might retort that these two factors balance off one against the other, and those who lose their jobs in hospitality and catering might instead take up the new jobs available in supermarkets. In the long run, this is right: members of the labour force can retrain, move to where the new jobs are, adjust to different pay and employment conditions, and the like. But as John Maynard Keynes notoriously observed, in the long run we’re all dead. The costs of transition of labour from one type of work to another are notoriously high, not just by reasons of different skills and training required for different work but because so many aspects of a person’s life are associated with their employment. There may be a question of whether one can travel to an alternative place of employment; personal and professional connections with one’s friends and colleagues; concepts of class and prestige, and the like. Or there may not be as many jobs in the newly opening sector as there were in the contracting sector.
There are other side effects of contractions in consumer demand. Cities and towns in which hospitality venues (or other sorts of vending facilities such as shops, because there is a parallel effect as between high street shops and delivery services for goods ordered by internet purchase) are closed will end up looking “washed out”, that is to say all the businesses in the centre of town may end up closed and/or boarded up, which makes urban areas look ugly and depressing. Again, in the long term city centre property prices will adjust to lower-value uses, such as residential (although Coronavirus has clogged up the liquidity of property markets as people in fear of their financial futures tend not to be willing to invest in moving home) or arts-and-crafts (specialised products not mass produced). But in the short term, the urban environment is damaged.
The universal basic income is a form of economic stimulus by which the government provides funds for people to consume. It is a demand side stimulus, in that it creates demand that under ordinary market conditions would not exist. (Contrast infrastructure investments, another form of government economic stimulus, that provides supply side stimulus, creating a supply of jobs that would not ordinarily exist.) UBI has in common with social security schemes, another form of demand side stimulus (whereby government pays money to the underprivileged) that it aids the unemployed and otherwise poor. The benefit to, and change to the demand and consumption habits of, those who receive a universal basic income decreases as the individual becomes wealthier.
If a person has a income of €10,000 per month or liquid assets of €1,000,000, then a universal basic income payment of €1,500 per month will not make much difference if any to that person’s spending habits. Why then pay the universal basic income to the wealthy? Why not save money by paying it only to those two truly need it, and instead operate an enhanced social security scheme? There are three answers. One is that the costs of administration of a differential scheme, including the detection, prevention and prosecution of fraud, may be similar to or even outweigh the costs of paying the same benefit to everyone. The second is that social stigma is less likely to attach to claiming a benefit to which everyone is entitled. The third is that the incentives upon people not to work are less than they are under a conventional social security system.
To see why, consider a person claiming universal basic income of €1,500 per month and who has the capacity to obtain a job paying €1,500 a month. Under a conventional social security system, such a person has no incentive to take the job, because by doing so they will lose their social security benefit. Under a system of universal basic income they receive €3,000 per month. Granted, the system of universal basic income disincentives work compared to a system in which there is no social security. But the insight upon which universal basic income rests is that society has reached a level of plenty and automation that not all of us need to be employed full-time to yield the benefits sufficient for everyone to be housed, eat and receive healthcare adequately. To the extent that not everybody in society receives these private goods in sufficient quantities, that is the result of inequality of distribution that governments through the ages have seen it in their interests at least partially to rectify.
Giving every potential member of the labour force a basic income not subject to qualifications for entitlement undoubtedly does produce a disincentive to work, and thereby creates what economists call a deadweight loss for society. This is true of all stimulus programmes, all taxation programmes, and all social welfare programmes. Nevertheless the point made by advocates of universal basic income is that society can now afford the deadweight loss created when we incentivise a proportion of the labour force not to work or to work less than they used to. This is principally the result of the efficiency advantages of automation, because automation increases the supply of basic needs while requiring less labour to produce those needs for everyone in society. Hence we have seen the average number of hours per week worked by labourers reduce over the decades and indeed centuries as society has advanced in terms of technology, and typical working conditions have likewise improved.
Legislation setting minimum wages, maximum numbers of hours, and minimum conditions of employment, all have deadweight losses associated with them too. Nevertheless society has been able to accommodate those deadweight losses by reason of technological advances and increasing wealth, and the universal basic income is another such development in the long path of social progress. The premise of universal basic income is that there exists a level of sustenance that society, being sufficiently affluent as a whole, can afford to provide to every citizen irrespective of whether they work.
The Coronavirus lockdown has shown us indeed that our societies are sufficiently affluent for this purpose. That is because, so the reasoning goes, during lockdown a large proportion of society did not work; yet everyone was fed, housed and received medical treatment of sufficient standards. Naturally there were some wrinkles on every count; but such was the theory. We have proven, in this time of crisis, that society can afford a universal basic income because the government subsidy and furlough schemes inaugurated during lockdown were arguably substantially more expensive to the public treasury than would be universal basic income. Nevertheless we survived.
Now, to avert the costs of transition by reason of dramatic shifts in consumer demand, we need a further economic stimulus programme. A universal basic income model of stimulus assumes we accept that the majority of changes in consumer demand, that promise to wreak havoc in the hospitality sector and the high street amongst others, are driven by consumers’ economic anxieties. Paying people a guaranteed income will not save restaurants, bars and hotels to the extent that the reason people are no longer going to them is because they fear catching a fatal illness. But to the extent it is because people are hoarding, and fearful of spending, we save these sectors of the economy by removing consumers’ anxieties. We do this by promising a minimum income indefinitely far into the future for all persons.
The result may be to slow down the dramatic shifts in economic concentration caused by a collapse in consumer demand in one area of economic activity and its transfer to another area. Indeed the consequence of introducing a universal basic income may be to delay indefinitely those economic ruptures, and thereby to delay indefinitely the political ruptures that invariably follow economic ones. For this reason, politicians may now push the idea of a universal basic income over a certain type of conservative element who argue that it creates a moral hazard in appeasing people with the mindset of habitual benefit seekers. That moral hazard is one we can afford to bare. Only a colossal demand-side economic stimulus programme can arguably save our hospitality and retail sectors; universal basic income is the most logical such stimulus, even for the more orthodox of economists.
Hence universal basic income may develop as a contemporary right-wing economic policy to offset the worst effects of the post-Covid recession, and acquire widespread acceptance in societies that can afford it. Indeed versions of it have already been seen in two of the most right-leaning, and Anglo-Saxon, administrations in the wealthy West. The United States wrote “Covid cheques” to every person in the country to stimulate consumption during the height of the lockdown crisis beginning in March, and appears due to do so again. The United Kingdom has not yet gone this far, but its government did pay employees who would otherwise have been laid off not to go to work, and it is now in the course of paying people to eat in restaurants. These are variants on the universal basic income species of stimulus, both with administration costs and market-distorting effects that can be reduced if a permanent, universal scheme is introduced.
The final question that emerges about the universal basic income is the most contentious: the level at which such an income should be set. The short answer is that, like minimum wage legislation, an empirical approach is the best. One should begin with a relatively modest level, at the same time as eliminating the vast majority of social security benefits that the UBI replaces. Then one should observe the effects upon the economy and the treasury, and adjust upwards as it emerges that society can afford it. (Adjusting downwards is politically difficult, and the possibility of it should be excluded if the reassurance necessary to counter consumer anxiety is to be maximised.) As independent a body as is possible in a contemporary democracy should be fashioned to supervise the process of setting and varying the universal basic income, much as with a minimum wage law. It should then make independent recommendations on adjusting the UBI, based upon macroeconomic considerations rather than politics.
The effects of a UBI upon inequality, a grave source of social corrosion in modern industrialised societies, may be profound. The opportunity for genuine social revolution as a result of the Covid-19 crisis is real. Politicians should be brave enough to seize it. They may have no choice; the businesses that otherwise stand to wither and die may insist upon it as a means for their survival.
*Matthew Parish is an international lawyer and scholar of international relations based in Geneva, Switzerland. He is an Honorary Professor at the University of Leicester; was elected as a Young Global Leader of the World Economic Forum; and has been named as one of the three hundred most influential people in Switzerland. An expert in UN reform, he is the author of several books and over three hundred articles. www.matthew-parish.com