Although some mainstream and some functional finance/MMT economists agree that a livable level of UBI is sustainable, some economists in both camps argue that it is not. (See my previous post for definitions of mainstream, functional finance, and MMT.)
The argument in mainstream terms is fairly simple. If UBI gives people the choice whether or not to accept jobs, too many people will refuse to work. They will leave their jobs causing wages and prices to increase. If so, two things can happen. If UBI goes up to maintain livability, more people quit their jobs, and a hyperinflationary spiral follows. If UBI doesn’t go up, inflation peters out once the real (inflation-adjusted) value of UBI falls to the point where people are effectively forced to go back to work.
The MMT argument starts in a different place, but finishes with the same inflationary spiral for very much the same reason. In MMT theory, the reason currency has value is that people need it to pay taxes. David Graeber (who incidentally was a UBI supporter) has a great explanation of this view:
Say a king wishes to support a standing army … if one [the king] simply hands out coins to the soldiers and then demands that every family in the kingdom … pay one of those coins back …, one would, in one blow, turn one’s entire national economy into a vast machine for the provisioning of soldiers … Markets are brought into existence as a side effect.[i]
Through this method, taxes give value to otherwise worthless tokens. The coins don’t need to be made out of anything valuable like gold or silver. As long as people need currency to pay the tax, worthless tokens, pieces of paper, or entries in an electronic ledger take on powerful value.
Graeber’s example uses a head tax: the law demands one coin from everybody. UBI is a negative head tax: the law gives one coin to everybody. As a head tax gives value to money, a UBI can devalue money. With UBI in place, no one needs to do anything to get more money if they don’t want to. The motivation that gives value to money in Graeber’s example is absent. A simplistic MMT argument against UBI would declare this problem insurmountable and stop there. The same sort of inflationary spiral describe as mainstream theory above would begin if the government tried to maintain the value of a negative head tax.
This version of the argument is oversimplified because even though UBI is a negative head tax, other taxes are available to give value to the currency despite the downward pressure on the value of currency caused by UBI. For one, humans are not the only factor of product that can be taxed. The government can give value to the currency by taxing land, capital, and noncorporeal resources like the broadcast spectrum. The owners of these resources create markets, including the labor market as a side effect.
Taxes on humans can also do the trick. Head taxes don’t exist in most countries today. We have income taxes. No one is legally required to pay income taxes. People who make no money will eventually become homeless and hungry, and that threat is effectively forces people work, pay taxes, give value to the currency, and provide things people want to buy in the market.
People who have a livable UBI aren’t forced to work, but they still have a significant motivation to obtain more currency than UBI provides: the desire to buy luxuries. If enough of people chose to work and therefore to pay income taxes, they will give value to currency, and provide things we want to buy in the market. To say definitively that UBI is unsustainable one would have to add an additional premise to the argument: if UBI gives people the choice whether or not to accept jobs, too many people will refuse to work.
That’s the same operative premise employed in the mainstream argument against the sustainability of UBI. The need for this premise is probably why both mainstream and MMT economists are divided on the issue of sustainability. Some people in both camps think there are many people who will refuse all work if their needs are met no matter how many luxuries they’re offered; others think everyone has their price.
Whether enough people will work or not is an empirical question. It cannot be determined by pure theory alone. The relevant questions are what is the highest sustainable UBI, and is it large enough for people to live on? The only way to find out with certainty is to try, but theory can give us some idea whether a livable UBI is likely to be sustainable.
For example, recall the most basic insight of functional finance: anything that is physically possible is financially possible. Is the voluntary-participation economy physically possible? It necessary to force the lower and middle to accept employment to get them to do the jobs necessary to sustain the economy? Is it physically possible to use solely positive rewards—such as good pay and good working conditions—to get the lower and middle classes to provide the necessary amount of labor, or is it strictly necessary to use negative sanctions—such as homelessness and hunger?
I strongly doubt force is necessary. I can’t prove it until we try, but I’ll argue that there’s good reason to give it a try. My forthcoming book (UBI: Essential Knowledge) argues that experimental evidence for the sustainability of UBI is promising. The rest of this post discusses theoretical arguments and casual observations that also suggest UBI is likely to be sustainable.
One reason to disbelieve the premise that too few people will work if given the power to choose is that of all the people who use it, I never seen one produce hard evidence to support it. I don’t know of any monetary economy that has ever really given the lower and middle classes the choice of whether or not to work, but yet for hundreds or perhaps thousands of years, people have claimed they know for sure that once you give people who aren’t already part of the wealthiest class a real choice of whether or not to work, the whole system will collapse. If they know this, how do they know it? Perhaps so many people think they know it because so many other people keep saying it.
The legal system has effectively forced the vast majority of people to work—and therefore to accept lower wages and working conditions than they otherwise might—for centuries based largely this belief. Shouldn’t we at least test this belief? Show us the proof or let us try it out so we can find out for sure.
We shouldn’t fear trying to identify the highest sustainable level of UBI because we doing so cautiously involves little or no risk. We could start with an unlivable UBI, gradually increase it to barely livable UBI, and eventually to a comfortably livable UBI. Try different taxes and regulatory policies to counteract UBI’s inflationary effects, and when we seem to be running out of effective ways to counteract those effects, hold or reduce the UBI.
Another experiment would be to start with a comfortably livable UBI for a limited number of years—say people are eligible only when their age is an odd number so they go in and out of eligibility throughout their lives or everyone is eligible except when they’re in their 30s, so they have a significant period in which they are effectively forced to work but they are free most of their lives. If the age-limited UBI proves sustainable, gradually increase the number of years of eligibility.
Another reason to believe luxuries are sufficient to motivate people to work even if their basic needs are met is that our economy produce a lot of luxuries. US economic output (measured in terms of per capita real GDP) has doubled four times since 1933. That means that US output is 16 times what it was then.[ii] Although 1933 was the worst year of the Great Depression, the U.S. had more vacant homes than it had homeless people and it produced more food than would have been necessary to feed everyone.
Our economy now is six-to-eight times larger than it was when the U.S. government removed nearly every able-bodied, 18-to-40-year-old male from the productive labor force to fight World War II while keeping them supplied with food, clothing, guns, ammunition, planes, bombs, landing craft, and so on. Is it reasonable to believe that a six-fold more productive economy can’t produce enough luxuries to entice people to do the necessary labor to meet everyone’s needs without threatening them with hunger and homeless if they refuse? I don’t think so.
In the 1960 and 1970s, hundreds of leading economists, include several Noble Laureates, agreed with me and endorsed the guaranteed income. Our economy has more than doubled in size since then.
If the doubling, doubling, and doubling again that our economy capacity has experienced over the last century wasn’t enough to make UBI sustainable, certainly it must have gotten us closer. How much more economic growth do we need before a voluntary-participation economy becomes sustainable—or at least until we feel comfortable experimenting with it?
Fans of the market economy have used claims about its enormous productivity as a central justification of it almost as long as the market economy has existed. But these claims often go out the window whenever someone suggests that we use some of that productivity to give the lower and middle classes the freedom to choose of whether or not to participate in that so-called free market. They seem to believe that the freedom to refuse to take orders is and will always be beyond the capability of the luxury-generating machine we call our economy. I suggest that only upper-class bias and status-quo bias can explain such incongruous beliefs. We ought at least to try.
Most functional finance economists think of themselves as critics rather as fans of the market. They think of themselves as progressive, pro-worker reformers, but they could be a little more progressive and a little more pro-worker if they were willing to question the unproven premise built into the argument that the voluntary participation is unsustainable. A truly pro-worker economy would experiment not only with guaranteeing everyone job, but also to with guaranteeing everyone the power to decide whether that job is good enough for them to take.
[i] Graeber, Debt: The First 5,000 Years.
[ii] Author’s calculation from FRED Economic Data, “Real Gross Domestic Product per Capita.”