In 1920, Bertrand Russell argued for a new social model that combined the advantages of socialism and anarchism, and that basic income should be a vital component in that new society. More recently, particularly after Covid highlighted large inequalities, and with rising concern that technology (particularly AI) could both widen these inequalities and, perhaps, even change the nature of work, universal basic income (UBI) has come under more serious consideration. It has already been tried to a limited extent in several countries. An excellent video from The Financial Times (on.ft.com/3sQnYmz) explains the history and many pros and cons.

We are now at a time when UBI must become an integral part of fiscal policy—not just because inequality is at an all-time high, but also because, as we look forward, it seems clear that economic growth will likely be sustainably lower than over the past 50 years, exacerbating the situation.

Economics is linked to the real world through the following identity: economic growth = population growth + productivity growth.

Population growth has been slowing sharply in China and, to a lesser extent, in India; fertility rates are falling in most of the developed world; and there is considerable anecdotal evidence showing that many young couples are having just one child while many others (for a variety of reasons, interestingly including climate change) are simply not having, or certainly not planning, babies. World Bank forecasts global population growth to fall from 1.03% this year to 0.5% in 2050 (and further to 0.03% in 2100). Thus, economic growth in the future will be lower than in the past, unless there is game-changing productivity growth.

To be sure, several technologies unfolding will generate step increases in productivity—deeper penetration of smart phones into lower income populations; smart homes becoming the norm; AI usage spreading across industries; block chain technology making transactions more efficient, etc. On the other hand, over the past 50 years or so, productivity-enhancing technologies have entered the world, and become the norm by today—personal computers, the internet and mobile phones are just three examples. Today, each of us is, on average, already three times more productive than each individual was in 1961. While it is impossible to assess whether productivity gains in the future will be higher, lower, or more or less the same as in the past, it is important to note that gains from productivity appear, perhaps unsurprisingly, to taper off in time—the running average of annual productivity gains has fallen from 3.47% in 1966 to 1.90% today.

The accompanying graph picturises the story: both economic growth (dark line) and productivity growth (lighter line) have been quite volatile, but population growth (red line) has been declining steadily; the dotted red line uses World Bank forecasts for population growth out to 2050.

Assuming average productivity growth in the future will simply match that in the past, the mean productivity growth over the next 30 years will be 1.9%. With average population growth over the period at 0.73%, average annual economic growth would be just 2.63%. This means that global growth will likely be lower than this about 50% of the time.

Since 1961, global growth was below 2.63% in only 15 years—i.e., 30% of the time. In all cases, this slower growth was seen during or just before the six recessions: 1973 and 1974 following the first oil crisis; 1980 to 1983 as a result of very high global interest rates as the US Fed under Paul Volcker broke the back of inflation; 1991 to 1993, after the first Iraq invasion; 2001 and 2002 following the dot-com crash; 2008 and 2009 after the last economic crisis; and 2019 and 2020 post-COVID.

Thus, if growth is going to be sub-2.63% about half the time, as compared to 30% of the time in the past, recessions (or recessionary conditions) will be much more frequent than in the last 50 years. During recessions, growth slows down, people lose jobs, companies fold, interest rates fall and inequality increases. Clearly, public policy needs to recognise this and plan for lower growth and more frequent recessions, which is why UBI is an idea whose time has come.

Implementing it will require both sensible planning of existing benefits and higher taxes to ensure sustainable government surpluses. Many governments are already grappling with effective ways to raise taxes; and while there could be many models, the best way to do this without harming growth is to increase taxes sharply on assets (capital) and capital-based income while actually reducing direct and indirect taxes. This could likely be sold without creating too much trauma, particularly since so much capital is currently deployed at negative returns.

Given that growth is currently quite strong, there are more job openings than eager candidates, most companies, certainly in the organised sector, are doing well (with new ones sprouting everywhere) and interest rates are rising, the timing for introducing UBI couldn’t be better.

CEO, Mecklai Financial
http://www.mecklai.com