Why Universal Basic Income Would Not Work: An Economic Analysis

The Nature of Money and Why It Has Value

To understand why the concept of basic income would not work, it is necessary to understand the meaning of money and how it has value. Money has value because of two things: (1) confidence — the confidence placed in the currency by those who use it — and (2) the fact that it represents a store of worth. For example, if a person works ten hours on a roof, he expects to be compensated. He could theoretically be compensated with wheat, milk, beef, gas, or some other goods or services in exchange; but to facilitate the exchange and the agreement between the hirer and the laborer, money is introduced. Money thus acts as a store of wealth: the laborer who works on the roof for ten hours agrees to be compensated by a set amount of dollars, euros, pounds, renminbi, or whatever currency the two parties agree upon. Money is an easy way to settle exchanges and eliminate the need for bartering.

In earlier times, money was represented physically by coins — gold, silver, copper — metals that have been commonly used throughout history and across societies as a medium of exchange. The reason these metals were used as money is that they were widely believed to retain their value over time. Unlike today's fiat currencies, which can literally be printed by the world's central banks at any moment, metals like gold and silver required a great deal of labor, man-hours, and energy to mine and forge into coins. Why does this matter? The point is to show that in order for money to be useful, it must retain its value over time. If a nation decided to use loose-leaf sheets of paper as its currency, public confidence would quickly erode, since such sheets can be created and distributed with little effort. The more sheets in circulation, the less value each one holds.

Gold and silver are believed to hold their value over time precisely because they cannot be acquired without an exchange of labor and energy. Money, it could be said, represents energy. The amount of energy one puts into one's work should be commensurate with the amount of energy stored in the money received in return. That is the fundamental nature of money: it makes it easier for people to exchange their energy.

How Basic Income Corrupts the Monetary System

If, however, a society decides that people should receive a basic income for free — that is, without any exchange of labor or energy — it corrupts the system and concept of money to the core. Granting a basic income to all does two things: (1) it dilutes the value of money already in supply, and (2) it creates the false impression that the money given to the public for free has value. Since no exchange of energy, labor, or alternate form of value has taken place — since the basic income is simply generated out of thin air and supplied to the public — it carries no real value.

Quantitative Easing, Inflation, and the Limits of 'Free' Money

Proponents of basic income are aware of this problem, which is why they point to funding methods that do not simply replicate the actions of central banks such as the Federal Reserve, the Bank of England (BOE), and the European Central Bank (ECB) — all of which have printed trillions in their respective currencies to prop up markets since the Great Economic Crisis of 2008. Since that crisis, which has defined the past decade in terms of monetary policy, the major central banks have engaged in a strategic policy of quantitative easing (QE), designed to send "trillions of euros [dollars, and pounds] into the financial system" (Van Lerven, 2016, p. 237). While QE tends to prop up market prices, its stated goal is to jumpstart the economy — much as basic income is meant to do. The reasoning is that the more money people have, the more likely they are to spend.

That is why figures such as Elon Musk and Mark Zuckerberg have expressed support for basic income — it is a populist idea that puts more money in people's pockets, money they are expected to spend and thereby stimulate GDP growth (Schiller, 2017). The problem with this reasoning is that it makes a number of assumptions about consumer behavior — assumptions based on the habits of prior generations, which offer no guarantee of how a thrifty generation that has lived through a credit collapse will respond to receiving free money.

Moreover, the one near-certain consequence of "free" fiat money — money printed by central banks rather than raised through taxation or debt sales — is currency devaluation (Haitsma, Unalmis, & de Haan, 2016). The injection of liquidity into the market increases the supply of the currency. A rapid increase in money supply leads to inflation. The more money pumped into a system, the less value it holds: this is the basic principle of supply and demand. Central banks have added trillions to the marketplace in an effort to stimulate the global economy, and while debate continues over whether the economy has truly been stimulated, one thing is not debatable: inflation has occurred. Asset prices have risen across the board since QE was launched in 2008. This phenomenon occurs whenever credit is expanded — the more access to money the public has, the higher prices move. One can look at housing, medicine, education, equities, bonds, or precious metals: everything has risen in recent decades as a consequence of QE and the credit expansion that preceded it.

Basic income would produce the exact same effect on prices if the money were printed out of thin air by central banks. Van Lerven (2016) argues that QE did not really stimulate the economy. Basic income funded by money creation would likely fare no better.

Conclusion: Why Basic Income Cannot Fix the Economy

Without any viable option for funding basic income, the conclusion is straightforward: basic income simply will not work. It would place too much strain on an economic system that is already sinking under a mountain of debt — a mountain that risks becoming a landslide the moment rising interest rates reintroduce the full weight of economic pain to a global economy that has relied on central bank intervention for a decade. When central banks remove the stimulus, and markets are forced to reckon with underlying reality, the consequences will be far more severe than a mild hangover.

The concept of basic income will no doubt be raised by politicians seeking popular support — but applying it to the current economic situation would be like placing a bandage on a hemorrhaging wound. Basic income cannot solve the structural problems of the global economy. Those problems run deep: they are rooted in decades of monetary distortion, arguably traceable to the moment the U.S. dollar was taken off the gold standard. They are rooted in the fact that central banks hold the keys to monetary policy and have effectively transformed the free market into something resembling a command economy. No amount of basic income can fix that — because there is simply no real economic foundation left to make it work.

References

Curran, E. (2018). Global debt hits record $233 trillion. Retrieved from https://www.bloomberg.com/news/articles/2018-01-05/global-debt-hits-record-233-trillion-but-debt-to-gdp-is-falling

Haitsma, R., Unalmis, D., & de Haan, J. (2016). The impact of the ECB's conventional and unconventional monetary policies on stock markets. Journal of Macroeconomics, 48, 101–116.

Schiller, B. (2017). A universal basic income would do wonders for the U.S. economy. Retrieved from https://www.fastcompany.com/40463533/a-universal-basic-income-would-do-wonders-for-the-u-s-economy

Van Lerven, F. (2016). Quantitative easing in the Eurozone: A one-year assessment. Intereconomics, 51(4), 237–242.