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Mo Money Mo Problems: The Universal Basic Income


Matt Lagamba

By

August 22nd, 2016


Ahead of tonight’s big debate between Melbourne and Monash, Matt Lagamba weighs in on the universal basic income.


A topic almost as contentious as salt and vinegar chips, the debate over universal basic income has come and gone in line with the business cycle. Whilst the concept of free money may appear to be an economic and political panacea, it has struggled to move past a socialist stigma that always beckons the same pragmatic question: how much will it cost?

 

The idea of a universal basic income has enjoyed historical support from both sides of politics: Martin Luther King embraced the idea, so too did neoliberal economist Milton Friedman and Republican President Richard Nixon. A universal income would be distributed to all citizens regardless of employment status, a form of citizen dividend that would strive to disrupt the current system.

 

Herein lies an interesting conundrum – a choice of utility – where the recipient of universal payments could choose between incurring the payment on top of their existing wage, or to not work and conceivably survive on the payment. However, unlike the current system the opportunity cost of work is drastically decreased. As all citizens are conferred an equal payment, the choice of shifting from unemployed to employed would not cost the recipient the value of current welfare. The current Newstart allowance, of $501 per fortnight for single people, only allows for earnings of $104 per fortnight before the payment is affected.

 

In this scenario, as an individual increases their level of employment the security conferred by the welfare stipend drastically decreases – suggesting far greater risk in pursuing unemployment in a labour market that is becoming increasingly more difficult for those on the margins. Under a universal system, the opportunity cost of additional labour would be zero, sheltering workers from excessive risk in an unstable labour market.

 

Perhaps such a scenario would even placate Malcolm Turnbull and his passion for innovation – as a guaranteed income cushion may make the choice to pursue investment ideas far easier.

Incentives play a large role in contemporary economic thought. Incentives and opportunity even tend to guide domestic economic policy, with our population currently being forced to innovate or perish. It is foolish though to consider the introduction of such a scheme to result in large swathes of the population to decide that being part of the labour force is overrated. Even to a humble arts student, whose existence in one of perpetual fear of unemployment, would observe the introduction of such a scheme to not only be an opportunity to buy more beer but to pursue employment in fields that may carry greater employment risks.

 

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(Click to see GIF)

 

Whilst WuTang might think that cash rules everything around them, it is clear that the more money we come across the more problems we see. First expressed by Aristotle (I think), “mo money mo problems” is a concern that is deeply embedded in the current fiscal position of our nations budget deficit. Tax reform and new ideas to raise and conserve revenue have been key in contemporary political debates, especially in the lead up to the election with Turnbull’s short lived ideas of taxation reform. Accounting for approximately 35% of budget spending, our existing welfare network is one in which Australia draws immense pride. Yet incumbent cuts and reform add to a system already rife with inefficiency – as yearly it is estimated administration of the Centrelink system costs approximately $3 billion.

 

Mikayla Novak, research fellow at the institute of Public Affairs, furthered arguments revolving around the libertarian notion that a leaner government welfare system would be far more efficient. With spending standing at about $146 billion, “each adult Australian resident could have received $714 per month in basic income during 2013-14, leaving the social security budget no worse off”.

 

Of course such costings are indeed optimistic, and payments are dramatically lower than what is currently conferred, thus more realistic models peg an effective scheme totalling approximately 1% of GDP. In a political climate of debt and deficit, it is clear policy makers would be not so inclined to pursue the scheme despite clear flow on effects in consumer spending, growth and employment. Financing such a model is a distinct hurdle and our nations inability to cope with mature discussions about tax reform send a worrying signal regarding the applicability of a universal income scheme.

 

The recent decision of the RBA to cut interest rates to a new record low may have been primarily focused on reducing downward pressure on the Australian dollar, however it is acknowledged that a situation of low domestic inflation is responsible for this being a possibility. Yet spending just will not budge. As we rapidly approach the bottomless pit of low interest rate hell, retail spending grew at its slowest annual pace in three years – at only 2.8%. The declining household growth trend stipulated by Citi chief economist Paul Brennan is unlikely to be rectified by further interest rate cuts, many of which will not be passed on to consumers. Thus the question arises, would a universal income scheme provide a direct injection in the economy? Would such a Keynesian move mirror Rudd’s decision to pursue economic injection in GFC period? Perhaps. The spending ramifications of the scheme provide an interesting perspective in the debate.

 

Another concern that a universal income scheme may address is the increasing automation over the coming century it is understandable that many will find themselves unemployed. Whilst our Prime Minister may dearly hope the factory worker from Victoria will learn how to build submarines, modelling from the Committee for Economic Development of Australia suggests 40% of Australian jobs have a moderate to high likelihood of automation in the next 10 years.

 

Even the humble commerce graduate, so sure of their double major’s vocational security, may face high likelihood of their accounting graduate position being replaced by a machine. A universal income system would not only soften the blow of automation, but create the innovative conditions required to rejuvenate economic growth in Australia. It is difficult to conceive that an outdated taxation and welfare system would provide the scope for an innovative shift in Australia’s economy.

Under a universal income scheme, incentives to take greater risks may become more prevalent, whilst the economy wide shift away from resources and manufacturing will be softened. As this process unfolds there will of course be winners and losers – a universal income scheme will ensure a level of cushioning during this transformative process.

 

Despite a mostly positive rationale behind the scheme, a lack of trials, real world data and a hostile political environment deem the scheme little more than a topic for debate. One which Melbourne University better win tonight.

 

From next year, Finland will be the first country to trial a universal income scheme – where 5,000 to 10,000 Finns being paid a basic income of €500 to €700 a month – considerably less than the average Finnish income of €2,700. Such a scheme, if applied, would see the nation’s spending on social welfare shrink. Similar trials will also be run in Dutch cities throughout 2017. However, it is imperative that attitudes toward such schemes do not denote it a socialist ideal only achievable in Nordic states whom already possess high social welfare.

 

Despite the positivity, contemporary political and economic perspectives appear to prohibit the opportunity of such schemes coming to fruition. Switzerland’s recent referendum on this exact issue offered confusing results – the population voting resoundingly against the proposal. The suggested monthly income of $3400 AUD per month was voted down largely due to concerns of increased economic migration to the country.

 

A UBI offers tremendous potential benefits if the world envisioned by its supporters does indeed come to pass. However, it is far from clear whether it is in Australia’s interests to pursue the establishment of a UBI. Regardless of this, though, the concept of “free money” offers enormous scope for economic debate and thought. It is a shame we are only debating Monash.

 

 

 

 

 

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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