Tuesday 22 December 2015

How high could a UK Universal Basic Income be?

Tom Streithorst, in Coppola Comment, discusses the rationale for a Universal Basic Income (UBI). He states that:
It may seem impractical, even utopian: but I am convinced the BIG [UBI]will be instituted within the next few decades because it solves modern capitalism’s most fundamental problem, lack of demand.
It is a view that that I have a lot of sympathy with. There is clearly not enough demand in the economy and this is one way of fixing this. Also, as Streithorst points out, and I discuss here, technology may be improving productivity, but it is up to us to make sure that this translates into improved quality of life for everyone rather than a bounty for the owners of technology and serfdom for the remainder. UBI is one way of distributing the wealth of society more evenly.

When a £72 a week basic income was included in the Green party election manifesto, at a cost of £280bn per year, Natalie Bennett, the Green party leader, was ridiculed for not having details of funding. However, I believe that it is possible and here I propose to work out an approximate level of basic income that would be feasible given that the government is trying to hit a nominal GDP target.

The basis of these calculations is the DBCF model I develop here. This model looks at demand and how targeting of cash flows can influence this demand and hence NGDP. The analysis from the paper is that the UK economy has a structural savings rate of around 3%. This is to say that for every £100 spent on GDP additive goods and services in year 1, only £97 is spent in year 2. The remainder of the demand is made up for  in government deficits and private sector debt.

We currently have a chronic shortage of demand and the UBI can fill this gap. For this reason, and because it has a high multiplier, it is valid expenditure. It can be funded either with a helicopter drop or with government debt; the important point is that a NGDP level is targeted and that it is done responsibly so there is no loss of confidence in the government.

I attach a spreadsheet here with the calculations so any assumptions made can be changed by the reader.

The assumptions are as follows (the reasons for these can largely be found in my paper here):

  1. The structural savings rate in the economy is 3%.
  2. NGDP growth target is 5%.
  3. The multipliers of both UBI spending on NGDP and current government deficit spending on GDP are both 1.
  4. Recipients will be all people 15 years and older.
  5. Current government deficit is 4%.
  6. All UBI is taxed at marginal rates of income tax.
  7. The average marginal rate of income tax is 30%.
  8. The UBI replaces 80% of current pension spending.
  9. The UBI replaces 50% of current welfare spending.
Given all of these assumptions, a viable level for the Universal Basic Income is shown to be approximately:

Note that this level is around the level of the basic state pension, so pensioners would not lose out. This could replace tax credits and also a fair amount of welfare spending (I have put 50% into the calculation above). 

Obviously it would be recommended that this is slowly built up to; the assumptions, especially around multipliers, may be incorrect. But it gives an approximate idea - and I think that this is important.

Tuesday 15 December 2015

Working Paper: The Relationship Between High Debt Levels and Economic Stagnation, Explained by a Simple Cash Flow Model of the Economy

UPDATE: Download latest, Feb 2016 version here. This version contains the derivation.

My working paper, in which I bring together the ideas from this blog in the past year, has now been finished. It is available here (this link may stop working - probably safest to use the above one):

The Relationship Between High Debt Levels and Economic Stagnation, Explained by a Simple Cash Flow Model of the Economy

Empirical data is presented suggesting that high private and, to a lesser extent, public debt levels place a strong drag upon economic growth. A simple, demand based, cash flow (DBCF) model of the economy is developed, separating out flows by marginal propensity to spend. This approach is both logically sound and empirically consistent with the data. It supports a prognosis for the economy and estimate of future NGDP growth. Importantly, it is a model that is flexible enough to incorporate high debt scenarios, and is able to explain the secular stagnation currently experienced by Western economies and Japan. A simulation is also provided to show the danger to stability of allowing private sector debt to fill lost demand. The conclusion is that the zero lower bound has been reached because there is too much private sector debt for the economy to sustain. Demand is perpetually too low because of structural excess saving. The proposed solution is to rebalance the economy using large, preferably monetised, government deficits.