This is the second post in my series of answers to questions about #FixingCapitalism. The first was about healthcare. Today’s question is about basic income.
Peter was referencing a statement I made in my previous post about why I have no friends, in which I said:
Now the hackers are moving on to basic income and they won’t be my friends because I say that basic income dilutes the value of the currency and deprives us of the opportunity to invest in public assets like infrastructure, education and defense. They still won’t be my friends.
So I will take this in two parts:
- Why does basic income dilute the value of the currency?
- How does basic income deprive us of opportunity to invest in public assets?
Basic income dilutes the value of the currency.
If you follow me on Twitter you may be aware that I have my own perspective on money. I do not believe that it is accurate to understand government issued currencies from a commodity perspective or from a credit perspective. Instead, I understand currency from an equity perspective. I believe that the currency which a monetarily sovereign government issues is actually an equity. What that means is that it conveys ownership (but not control) of a proportional share of any capital assets held by the government. In other words, if we were to liquidate the government, let’s say you owned 10 of 100 outstanding dollars, and the government balance sheet consisted of 10 aircraft carriers which were free of other liabilities (they were not used as collateral for any loans). Then you would receive 1 of those aircraft carriers in the liquidation. In other words, in my theory, government operates exactly like any private corporation when it comes to the fundamentals of financing itself.
The only notable difference between corporate equities and currency is that the common stock issued by corporations generally carries voting rights. But the voting rights are actually an additional asset (an option) which is bundled along with the equity. The equity issued by a sovereign government does not carry voting rights. Those options, which convey control of the balance sheet as opposed to ownership, are distributed to the citizens, not the shareholders.
You may or may not accept my equity theory, but if you can at least understand it, then you shouldn’t have a hard time seeing why I think basic income dilutes the currency. Imagine we have 10 aircraft carriers as capital assets on the government balance sheet as before, and you have 10 dollars as before, only this time there are not 100, but 200 dollars in existence. Now you would only get 1/2 of an aircraft carrier in the liquidation. This is the phenomena known as dilution.
I know, it’s silly to talk about liquidating the government and splitting up aircraft carriers into pieces to distribute them to shareholders. This is all useless theory, you say. What really matters is the prices at which transactions take place in the real economy. The actual purchasing power of the currency in the real world. Not in some hypothetical unwind of our government and (presumably) our entire way of life.
I have been talking about dilution, not inflation. I have been talking about values, not prices. In my theory, values apply to assets while prices apply to transactions. Assets are objects, while transactions are events. Objects define the balance sheet reality at a particular point in time, while events are alterations to that reality.
So, the prices at which transactions take place are often far above the values of the underlying assets which are exchanged. That is because the transaction prices embed assumptions about things that will happen in the future. For example, they implicitly assume that there will be new issues of currency by government, translating into increased dollars available for spending and eventually corporate profits. That is why people buy corporate equities; they expect a positive return.
This is why I talk about dilution as opposed to inflation. It is difficult to say how much currency people will want to own on their balance sheets. Money has been so hard to get, for so long, that I suspect they will want a lot of it. The reasons we want money are changing. What used to be for clothing and food and shelter is now for education, healthcare, retirement, entrepreneurship, world travel and many other big-ticket objectives. There are more people that want to be stakeholders in capitalism than ever before. That means they are going to want to work hard and earn a lot of money for a long time, and when they do finally earn that money, they are likely to put it towards investment rather than consumption. This means they are going to want positive returns delivered as dollars or access to dollars. This increases the demand for currency even further.
This is all to make the point that I don’t necessarily expect immediate inflation as the result of any basic income strategy. We might see inflation in the future, or we might not. If we do see inflation it could take some time before it starts. Also, if we do see short-term inflation it may resolve itself in the long run with increased productivity. It also depends heavily on what people choose to do with their money both when spending and investing. I think it’s a good bet that over the long haul, there will be some inflationary consequences to a basic income policy. But I’ll also note that I don’t really care about inflation very much. I am not one of those inflation “hawks” that you see on tv. I kind of like the idea of a negative real return on currency to get people to focus on investing in stocks which have natural protection against inflation via the earnings channel.
So, you might be wondering, if it isn’t clear whether dilution will cause inflation, nor whether inflation itself is all that bad, then why am I worried about dilution? I have an intellectual reason. I think we should know how to solve the problem of issuing currency that doesn’t acquire or gain purchasing power before we start getting all fancy with a new way for government to tip the scales. I think we should get good at operating capitalism. But, if you said that all of the worry about dilution or inflation was a minor quibble next to the needs of real people who could benefit greatly and immediately from a basic income, you might be right.
Which brings me to my real complaint against the notion of basic income.
Basic income deprives us of the opportunity to invest in our public assets.
The concept of basic income is that government creates a certain amount of money and gives it to people so that they will not run out of money to spend. They do not earn it by working or selling valuable assets. That’s what makes it a basic income. This puts basic income into the same operational category as interest payments on government “debt” and taxes. Both are situations where money is created or destroyed by government fiat. In the case of interest payments, government securities are sold at a systematic discount resulting in unearned profits for owners of reserves, bonds and deposits. In the case of taxation, money is destroyed and nothing of value is returned to the payer. Interest payments cause dilution as described above. Taxes are accretive, meaning they increase the value of the currency by the same argument.
Basic income would introduce a third channel through which government influences the value of its currency and economic behavior. Taxes are accretive and contractionary. Interest payments are dilutive and contractionary. Basic income would be dilutive and stimulative. This would make it the least unfair of the three ways that government creates monetary assets by fiat. (And please don’t get me started on the stupidity of trying to raise taxes to “pay for” a basic income program.)
But being better than other bad ideas does not make it a good idea. It is not only the dilutive effects on our existing financial assets, but the lack of growth over the base of public real assets which is the problem. For left and right “libertarian” advocates of basic income, this is a feature not a bug. Limited government is and has always been their goal. Of course, they do not understand the essential role of public assets in providing the value that backs the currency. Neither do they appreciate the value of the free public services which they already receive. Nor are they capable of seeing how they might benefit further from the additional services that government could provide, but doesn’t.
From a liberal perspective, the most vocal case I have heard for basic income is the triumphalist Silicon Valley argument that robots are replacing all of the jobs, leaving everyone except for the Valley ubermenschen, obsolete. Given the amount of toil which is still performed on a daily basis by human beings in factories throughout the world, who work for far less than robots, I find this rhetoric highly offensive. It amounts to tech jerks trying to steal credit for the miserable labor still being completed by human beings, for wages that no one on Earth should have to accept. I see no value added by injecting this sort of hype into our macroeconomic policy discussion. Save it for your company pitch.
The sensible case for a basic income guarantee is simply that people need money. But the truth is that we desperately need people to work for that money, otherwise we will continue to miss the opportunity to upgrade our public infrastructure. It’s not only about the value of the currency, but also about the value of the benefits that we receive from these government programs. We have already missed one generation worth of upgrades, leaving our nation behind on investments that other countries are making, such as universal health care and public transportation. We did it in the name of trying to balance the budget. That was dumb. Now we have to catch up. We can’t afford basic income. We need government deficit spending, where assets are acquired by government in exchange for the money which is created. And we need to pay not a subsistence wage, which is the goal of a basic income, or even a living wage. We need to pay a fully participating wage to anyone who is available and willing to work for the public cause. That means you make enough money not only to consume, but also to save and invest. That is how we will acquire the resources to upgrade our public services, while also addressing the opportunity gap and the scourge of inequality. That is how we will make the public and private sectors grow together and support one another. If we neglect to do that for another generation, we will do our descendants a great disservice.
My fear of basic income is that it would work early wonders, as people who have had almost no money on their balance sheets suddenly have additional funds available for spending, but that it would eventually lead to inflation and an angry backlash against government intervention in the economy. Meanwhile, our languishing public infrastructure will continue to deteriorate.
This is not a recipe for #FixingCapitalism.
