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WORLD

CRISIS IS THE TIME FOR BOLD THINKING ON INCOMES

May 26, 2020

It takes a crisis to concentrate minds on wicked problems, and the coronavirus pandemic has finally thrown a spotlight on the chronic failure of Australia’s income system. The dysfunction did not start with the virus, and it won’t end when the current crisis passes – unless we get serious about real reform.

 

What’s wrong with the current system?  Many things, but the root problem is that income is almost entirely tied to workforce participation. At any time around 50% of the population cannot participate in paid work – the young, the old, the sick or disabled and their unpaid carers, and the significant but relatively small number who are able to work but do not have a job. Those outside the paid workforce are not a static group. The people in it constantly change. The young grow up and babies are born. People age, retire and die. Some unemployed find paid work, while others lose their jobs. People move between full-time, part-time, casual and seasonal work, in and out of unemployment and underemployment. Those not in paid work are not usually idle. Many are learning, training, caring for home and family, and volunteering. And looking for work. If you don’t think looking for work is work, then you have never looked for work.

 

But if you are outside the paid economy, you have no direct access to income, and you cannot buy the goods and services you need.  People in this constantly shifting population might fall back on savings, or they might borrow. When these avenues reach their limits, they must rely on welfare, or charity, or crime.  Quite evidently, these systems fall short, with 12% of the population in poverty, a number that has stayed more or less constant over time. Economic growth cannot solve this problem, as decades of recent history show the percentage of people in the ‘unpaid’ group remains about the same.

 

A Universal Basic Income (UBI) is the only effective, systemic solution to this problem. Done right, it can deliver higher incomes, lower wage costs and a stronger, guaranteed social safety net.  But it requires a rethink of the concept of income, by thinking of it in two tiers – a basic income to meet basic needs, and earned income (from work or investments) on top.

 

The UBI would be a weekly payment to all adults. It would need to be phased in over time, but it could be done without triggering a budget crisis, a labour shortage or a damaging inflationary impact.  It requires a gradual expansion of the money supply – quantitative easing – something many governments have turned to as a tool for recovery from recession anyway. The gradual increase in the rate of the UBI would to give people and businesses time to adapt to a changing level and mix of demand as the new money enters the economy. It also requires an adjustment to existing income streams as the system evolves towards a stable two-tier income structure.

 

As the UBI is introduced, wages could be reduces via the employer, and via the tax system for self-employed and passive income earners, as follows:

  1. If you earn less than 25% of the median income, say $300/wk, you keep all your income, on top of the UBI.

  2. Above $300 earned income, you keep the whole UBI, but your earnings would be reduced by 40 cents in every dollar earned above $300 up to $1,576 (which is about 125% of the median wage)

  3. Above $1576, your earnings would be reduced by the full amount of the UBI. At this level, there would be little incentive to give up your earned income to live on the UBI… though you would have that choice!

The UBI would also be treated as normal income for tax and welfare purposes.

 

The capacity to pay the UBI, and the need for it, flows from our collective real wealth – our natural and human resources, our infrastructure, and our ever-advancing technological, organisational and knowledge resources.. These resources have allowed us to produce more with fewer people, a trend likely to continue well into the future. 

UBI would drive some labour costs up, but others down, and overall it would allow most employers to lower their labour costs, as wages would effectively be supplemented by the basic payment.  Wages for some low-paid and insecure jobs would need to increase, as workers already receiving a basic income might require greater incentive.  The change need not be radically disruptive, as the market will fairly quickly sort out wage rates.

 

There is little reason to worry about people losing the incentive to work –indisputably, most people want more than the basics.  A majority of people would earn more in total from the combined UBI and other income than they do now. The rest would be no worse off. The extra spending would boost demand, driving turnover and profits. Weak demand has been a drag on Australia’s economy for many years.

 

In the event of unemployment, the basic income would allow you to continue to meet your basic needs until you find another job. No need for the current burdensome, complex and cruel system, where Centrelink has become an electronic poorhouse and the out-of-work treated as second-class citizens. And much less of the perverse incentives and  poverty traps of the existing welfare system.

 

UBI would also provide direct income to those staying at home to care for children or elderly parents – correcting a current distortion in the system that fails to recognise the enormous value they contribute to community well-being. As a result, we’d see less despair, suicide, domestic violence and other crime, as well as better health and education outcomes, all resulting in less call on taxpayers. It would also narrow the chasm in lifetime earnings between women and men. Everyone would benefit from a stable thriving society.

 

This change is critical to facing the inexorably changing world of work.  There will be no end to work in any foreseeable future. However, much of the new work and the knowledge and skills required will be fundamentally different to most existing employment. Future work will even more focussed on services than today, as physical production of goods is more highly automated, requiring a highly skilled but ever-contracting specialist workforce.

UBI is no panacea, but it should not be dismissed. It has cascading economic and social benefits but at its core it solves just one system problem – lack of money in the hands of people to fulfil their basic needs. On its own it won’t resolve all entrenched social problems, rescue the economy or meet our environmental challenges. But it does offer a chance to repair a broken, dysfunctional part of our economic and social system.  Right now there is an appetite for bold ideas and a widespread feeling that we can’t and shouldn’t just revert to the old status quo.  Let’s not waste this opportunity to start building something better.

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