Basic Income, Money and Real Estate

Basic income is one of those grand ideas that is constantly present in my mind. Somewhere in the back, slowly burning, without consuming too much mental energy, but sometimes reminding about itself. Basic Income, often called UBI — Universal Basic Income.

Universal Basic Income

To quickly remind everybody what it is — every person in a given country would receive a set amount of money, no questions asked, every month. No matter if person is poor, rich, educated, employed, unemployed — there would be money transferred every month. Same amount for everybody. It would replace every possible payout that government is doing right now. There would be no pensions, no children benefits, no disability payments and no unemployment support schemes. And there would be no need for a small army of bureaucrats who are managing all this machinery.

Universal Basic Income would provide everyone with good base level of livelihood, would eradicate extreme poverty and allow people to escape problems often associated with being poor with no escape in sight — alcoholism, gambling, drug use, crippling payday loans, etc. People are not doing those things because they are happy. They are using them to escape dark reality as they tend to provide immediate (imaginary) relief and small (also imaginary) hope for the better. UBI would allow people to focus on education, allow to search for better jobs longer, etc. There are many studies that show that this would happen. Of course, there are also lots of people who interpret results differently, and many people are not so supportive. Anyway, this article is not purely about UBI itself and its history.

Modern Monetary Theory

Other piece of knowledge that lies far away from my day job, yet still resides in my head is Modern Monetary Theory. Before I explain it, there is short introduction of my way of understanding it:

When economic crisis of 2008 hit, there was a moment when Latvian financial system was hit badly, real estate bubble burst and many banks, firms and individuals were in dire need of additional money to survive. Banks got bailout, firms downsized heavily and individuals learned how to live with less. Latvian government introduced strong austerity program, as that was seen as the only way how to balance the books. Previously government was spending way more than it should, running the deficit. And when the bubble burst, tax revenues dropped significantly. Running this huge deficit was not politically sustainable anymore, as nobody was willing to lend money (for reasonable rates at least).

And international monetary fund, lender of last resort, was willing to lend only if government would dramatically cut costs. Of course, government was to some extent bloated, and not very efficient, so some people saw this forced cut as a blessing in disguise. However, it was still very painful, especially given that option of currency devaluation was not really available. That would have been more classical way of how to deal with such crisis, though it’s political and economical ramifications would have been way harder to predict. But Latvian currency was pegged to euro, and nobody wanted to open the pandora’s box of floating it, especially in such a volatile time.

So at the end there was a lot of austerity, huge loan from IMF and generally miserable couple of years for everybody. And during this period I kept thinking, why, just why central bank just does not print bunch of new money to plug this hole?

My thinking went as follows — main argument against just issuing new money is inflation. If there is more money around, then that means, that more stuff is being bought, demand increases, supply stays constant, hence prices increase. And at the end, one unit of money can buy less stuff, as it now costs more. There might be some little relief, but it might happen that ordinary people lose out, as all their savings become worth lot less. But I kept thinking – what inflation? If we are in a deep hole, supply is constant, but demand has fallen dramatically, as nobody has any spare money left. Then if we would introduce new money in the system, just to bring it back up to the level before bubble burst, then there should be no inflation, life should just continue as it was before, right?

This year I found out that this type of thinking has its own name — Modern Monetary Theory. Its basic premise is exactly that — there is available supply of goods and services, and if demand falls and growth stalls, then new money can be injected in the system until it starts working well again and begins growing. If demand exceeds supply too much and inflation starts to grow higher than is healthy, then extra supply of money can be extracted from financial system by taxation.

This is a relatively radical theory, and many prominent economists are against it. Like Paul Krugman, one of worlds leading economist (not particularly liked in Latvia, as he was against austerity, and it was seen by some as him dissing Latvian struggle). He agrees with some premises of MMT (or functional economics as it is also called), but disagrees that it might be sustainable (articles might be behind paywall). However, his argument is that getting new money in the system means borrowing it. Which in turn means that state debt keeps rising, it becomes more and more expensive to pay interest on it and after some years it will become an unbearable burden. And debt will also need to be repaid. This seems like the part that he does not seem to get correctly, according to me, for what it is worth.

In his world money is something real, that needs to be borrowed for it to appear. In the world of MMT and in my mind central bank can just print new money and give it to government with no strings attached. Usually central bank prints it and then gives to government or banks in a form of cheap loans. Thus creating debt. But this is pointless in the world of MMT. Just create it, give it to government as much as is deemed safe by inflation. And then if inflation raises above critical level, either raise taxes, or introduce some other economy slowing rules that would apply to all economy. Like bank capital requirements or base interest rates.

Money is not real. Money is an idea of trust, in digital form. But I digress.

So, printing money using MMT as a base macro economical theory could be one way of how to provide funds for basic income. But that is not mandatory, it could easily be financed by stopping spending on military and collecting taxes more efficiently. At least in richer economies. (One can dream).

Real Estate Problem

Coming to the main topic of the article — I have this constant nagging voice in my head that keeps saying that even if general inflation can be managed well after introduction of universal basic income, there is one area which could derail the whole idea — real estate.

In most growing economies there is way more demand than supply. Especially if we look not only at units of real estate, say apartments, but also at location and size. If I have a 40 square meter studio apartment, I will want 60 m2 one bedroom. Or 90 m2 two bedroom. And not in the sleepy part of the city one hour from the center, but in the middle of down town, overlooking the central shopping street. Demand is not easy to satiate, and while there might be exceptions, I think in general it is not going to dwindle down any time soon, especially given that urbanization is increasing, more people are moving to the cities and biggest global cities are attracting more migration internationally.

So what would happen if suddenly everybody in the country had extra 500 euros every month? I am sure that some landlords would raise their rents next time they can. After all — tenants surely have more money than they had last month, so they can afford it. Some tenants would choose to rent bigger apartments, thus using more out of all the available square meters. And best locations would definitely attract more attention, as people have more money. Of course, some people would opt to buy, now that they can afford bigger mortgage. More buying, same amount of housing, means only one thing — prices going up. New supply takes years to arrive, especially in best and most attractive cities, that tend to be over-regulated.

So all this frantic activity would push prices up. And poor person who had only small pension or some benefit payments before, but now has 500 euros per month — she will be left with higher rents all around her. If she is lucky, rents will have increased only slightly, leaving her still better off in net result. If she is unlucky, she will be worse off. And in either case, government will have failed to provide nice cushion for her to escape poverty. Instead landlords, landowners and real estate investors will reap all the benefits.

So far I have seen very little in popular writing about how proponents of UBI plan to reduce risks of inflation. But whatever those plans are, I doubt that they take into account inherent scarcity of housing supply. It is hard problem.

Related, though probably less direct effect, could also be caused by MMT. If new money is distributed widely, as it should, then inflation of housing prices might be lot less susceptible to controls of general taxation.

Rosy darkness ahead

This is a bleak picture that I have painted. And there is no immediate solution that could solve it. Real estate is one of the trickier asset classes due to its inherent limits. There is only limited amount of land available, and only limited amount of housing that can be built in a short distance around nice locations. This is not going to disappear. And humans (as all animals) tend to really value the ability to ‘own’ home, so you can’t just go and nationalize everything to somehow share it fairly among everybody. And it wouldn’t be possible to do it ‘fairly’ anyway, given that there are way more people that would like to live right in the nice location, than there are apartment towers that can be built there. (and they might like to live in a townhouse, not an apartment anyway).

So, while there is no simple solution to the problem, there is definitely a complex solution to be found. It would most likely involve some sort of new zoning and housing regulations that would allow to build more housing. And probably also some innovative ways to tax income that is acquired just by the increasing prices of property, without adding any work or value. And maybe also some new forms of ownership, some new ideas in the middle between freehold and rent.

And my main point is — politicians and economists that keep talking about UBI (and to lesser extent — MMT), need to start seriously thinking of how it will affect real estate markets and people inhabiting them. So please do.