Tag Archive: Economics

Basic Income: A Bold Solution to a Big Problem

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Peet van Biljon

While most corporate directors in the United States are focusing on the social and business impact of recent tax reform, some of them have another economic matter on their minds: the concept of universal basic income (UBI). This is our future, says a recent article quoting Silicon Valley’s Ray Kurzweil, Google’s director of engineering. Kurzweil is not alone. Other tech luminaries such as Marc Zuckerberg and Elon Musk have expressed support for it. Meanwhile, public sector leaders from Canada to Kenya are already looking at implementing this economic model.

So, what is UBI? One way to define it is to see what it is not. It was reported recently that Finland has discontinued its year-old UBI pilot. The Finnish government’s discomfort with handing out money with no strings attached got the upper hand. (However, Finland retains its generous unemployment, free college, and universal healthcare benefits.) While Finland is abandoning unconditional income guarantees, it will be lumping all government benefits together in a single monthly sum, a universal social credit. The UK government is following a similar lump-sum approach, the so-called universal credit. But neither is a basic income.

A true UBI is both universal (i.e. paid to every citizen), and unconditional, ( i.e. recipients do not have to meet any obligations to maintain their eligibility). The tax treatment of a UBI is intended to avoid any distortions normally associated with the transition point between social benefits and wage income. This distortion can be a disincentive for benefit recipients to start working. On the other hand, UBI is tax free; only additional income from other sources like wages, called the market income, is taxed. Even as market income goes up, UBI is not taxed. Tax brackets are designed so that a gross income (UBI + market) above a certain level makes an individual a net contributor, meaning what someone pays in taxes will exceed his UBI receipts. For example, with a 33.33 percent flat income tax rate, the recipient of an annual UBI of $12,000 will reach the breakeven point when her taxable market income is $36,000, on which she will be paying $12,000 in taxes balancing out the UBI. Every dollar of market income after that makes her a net contributor of taxes. The system is startling in its simplicity.

The modern idea of a basic guaranteed income has been around since Bertrand Russell made the case for it 100 years ago, but Thomas Paine proposed a form of basic income as far back as 1797. A close variant of UBI is the negative income tax, which entails payments only to those who would be net recipients under the basic income system, like those earning less than $36,000 in the example above.

So, why are so many leaders of institutions (from government and non-governmental organizations to corporations) looking at UBI right now? It is because of the ongoing unemployment trends in recent decades. In countries such as the United States, these trends are better reflected in a 20-year low workforce participation rate and precarious employment than in unemployment claims, which are currently low. There is widespread fear that the elimination of low- and medium-skilled manufacturing and administrative jobs will accelerate as new automation technologies such as artificial intelligence (AI)  spread like brushfire through the economy.

The predictions on the worker dislocation by AI and other automation technologies are piling up: In 2013 Oxford University researchers estimated that 47 percent of U.S. jobs had a high probability of being automated by 2033. This started off a range of estimates and predictions by consultancies, think tanks, and governments. For example, late last year McKinsey estimated that by 2030 between 400 to 800 million jobs worldwide may be lost due to automation, including 73 million lost jobs in the United States. PwC in 2017 estimated that up to 38 percent U.S. jobs are vulnerable to automation by 2030. On the low end is the Organisation for Economic Cooperation and Development’s 2016 measure, which estimated that 9 percent of jobs are highly automatable and another 32 percent have a significant risk of automation. There are also optimistic estimates of millions of new jobs being created by this technology—but most such predictions only offset the job loss. They do not erase the net loss that will surely result.

Both job losses and job creation have indeed been part of previous industrial revolutions, but that does not mean serious disruption can be avoided in the transition. We could have one or more lost generations of workers before the system rights itself. Just this past month, Brookings researchers provided a grim warning that with job dislocation around 38 percent (a forecast mean), “Western democracies likely could resort to authoritarianism as happened in some countries during the Great Depression of the 1930s in order to keep their restive populations in check. If that happened, wealthy elites would require armed guards, security details, and gated communities to protect themselves, as is the case in poor countries today with high income inequality. The United States would look like Syria or Iraq, with armed bands of young men with few employment prospects other than war, violence, or theft.”

This is a bleak future we all want to avoid. What’s needed is a policy response equal in size to the disruption. UBI may be a big part of the answer, but the concept is too often met by skepticism or outright hostility from business leaders who have a distaste for anything that smells like socialism.

Concerns for personal responsibility immediately come up when UBI is discussed: Won’t it take away the incentive for people to work? Won’t some people abuse it? Perhaps no one better addressed these concerns than that paragon of free market capitalism, Milton Friedman, in a famous 1968 article titled “The Case for a Negative Income Tax: A View from the Right.” Friedman pointed out that onerous conditions for social assistance interfere with personal freedom and dignity when large numbers of government bureaucrats have to screen and police recipients to make sure they do not violate eligibility requirements. It is also highly inefficient. Friedman argued that replacing the multitude of existing welfare measures with one unconditional payment would be much more efficient, increase the incentive to work, and reduce the number of permanent poor living off government programs.

More practically, if the UBI is set at a low-enough amount, and recipients keep their after-tax income from employment, ample incentives remain for people to find work to improve their status in life. For example, the Ontario pilot UBI for individuals is set at only $13,000 US per year per individual, and $19,000 US per couple. This is hardly enough to live a life of luxury on the dole.

For the same reason, companies need not worry that a modest UBI will drive up wages for low-wage workers, because the UBI might depress the labor supply.  It may do the opposite, that is enable more people to take low-wage jobs similar to the current situation where many low-wage workers in the United States are supported by the Supplemental Nutrition Assistance Program (SNAP, previously known as food stamps) program. It is estimated that U.S. taxpayers already provide working families  with over $150 billion in annual public support through the current patchwork of state and federal programs like SNAP, Temporary Assistance for Needy Families, Medicaid, and the Children’s Health Insurance Program. By design, UBI eliminates the so-called poverty trap in which people are discouraged to take work because they may earn less from wages than from the sum of these benefits. And since everyone from the CEO to janitor will get a monthly UBI directly from the government, there is no regulatory or administrative burden for companies. Furthermore, the UBI becomes a permanent safety net for laid-off employees who have exhausted their termination and unemployment insurance benefits.

Will UBI give struggling people the opportunity to lift themselves up or will it create a permanent underclass? Preliminary anecdotal feedback from the Ontario pilot is that participants are eating healthier, retiring debt, and feeling less stressed, enabling them to focus on economic advancement. This is consistent with the so-called Maslow argument for UBI. Longitudinal data is needed to properly assess the societal welfare effects of UBI and these are scarce, which is precisely why properly designed UBI pilots should be supported. One of the only UBI-like programs to have existed for years is the payment funded by casino royalties (currently about $12,000 annually) to every member of the Eastern Band of Cherokee Indians in North Carolina. The program has been extensively studied by social scientists who found compelling benefits: a 40 percent decrease in behavioral problems among poor children to a level equal to non-poor children, and a 22 percent decrease in minor crimes which means fewer kids in jail, and higher high school graduation rates.

The last big concern is the cost burden of UBI for a country. A full-scale UBI implementation could be partially funded by absorbing many existing programs into the single universal payment. Significant savings will also come from collapsing the large government bureaucracies currently employed in administrating those programs. A tiny new bureaucracy can send every citizen a monthly check or bank transfer, and the existing tax bureaucracy (e.g., the Internal Revenue Service) will process any taxable income and payments as usual. But some incremental public spending will likely be needed, and new revenue sources found for it.

Earlier this month, Canada’s Parliamentary Budget Office estimated the cost of extending the Ontario pilot to every Canadian citizen at the current rates, net of expected savings in existing spending, to be in the order of $23 billion (Canadian). To scale this to other economies like the United States, this is roughly one per cent of gross domestic product, and could be paid for with about three additional points on the federal Canadian general sales tax (GST).

UBI is a bold new mechanism for social support. But so was unemployment insurance and Social Security in their time. There are details to be worked out, and hypotheses to be tested, before rolling out such massive programs nationwide. The best way to do that is to proceed with, and copy, controlled experiments like the current pilot in three cities in the Province of Ontario. Board members and other business leaders would do well to monitor these developments and to keep an open mind on UBI. It may just save our society from the social havoc that could be wreaked by artificial intelligence.

Peet van Biljon is founder and CEO of BMNP Strategies LLC. He advises clients on strategy, innovation, and new business building. He focuses on Industry 4.0 and transformative technologies such as artificial intelligence, digitization, fintech, and the Internet of Things. He previously managed McKinsey’s global innovation practice from 2010 to 2015. Peet is an adjunct professor at Georgetown University, where he teaches a graduate course on innovation. He co-chairs the General Principles Committee of the IEEE Global Initiative on Ethics of Autonomous and Intelligent Systems (A/IS). Peet authored a book on business ethics, Profit with a Higher Purpose, and has developed Ethics-driven Innovation, an innovation process to help clients meet the highest ethical standards. He is an electrical engineer, licensed as a professional engineer in Ontario, and also has degrees in accounting and economics. All thoughts expressed here are his own and do not necessarily reflect those of NACD.

What Does the Trump Presidency Mean for the Economy?

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Joseph Brusuelas

The upset presidential election victory of Donald J. Trump and the Republican party’s victory in races for the House of Representatives and the Senate signal major changes ahead in both the federal government’s approach to growth and the Federal Reserve’s approach to monetary policy. Most evident among forthcoming policy changes will be a return of supply-side tax cuts, large operating fiscal deficits, and a move back toward more traditional monetary policies that, over time, should lead to higher short and long-term interest rates.

Below is an outline of my views on the implications of a Trump presidency for economic growth, taxes and infrastructure, central bank policy, and interest rates and trade.

Economic Growth

My firm anticipates that the Trump administration will attempt to achieve the economic equivalence of a strategic breakout with respect to the pace of economic growth. In other words, with the economy mired in a long-term sluggish growth path below 2 percent, the administration will turn to deficit spending, infrastructure, and fiscal stimulus to achieve stronger economic growth. The administration will also seek to reform Dodd-Frank in a significant way, which would be a boost for Wall Street, and will also move to inject private competition into the health care system.

While there will likely be a faster pace of growth in the near term, uncertainty about the role and status of the U.S. in the global economy may combine to create longer-term issues, particularly involving free trade that, ironically, act as a drag on growth.

Taxes and infrastructure

From a purely economic point of view, it will be difficult to lift the long-term growth trend much above 1.5 percent without significant tax reform and productivity-enhancing changes related to tax investments and improving national infrastructure. Given the major demographic challenges associated with the aging of the Baby Boomer generation, and the gradual entry of the Millennial generation into the workforce, the underlying conditions of the post-Great Recession economy are not conducive to a quicker pace of growth unless there is major tax and entitlement reform.

In our estimation, based on visits to policymakers in Washington, the order of operations for the first two years of the Trump Administration will likely proceed in the following fashion.

  • A move to engage on comprehensive tax reform will likely be one of the primary orders of business in January 2017. We expect the Trump administration to work with Congress to craft a deal that would revolve around lower individual and business tax rates along with an end to corporate tax inversions. Under these conditions, an attempt to lower individual tax rates based on the framework set out in the House Republican blueprint released in June of this year of 12, 25, and 33 percent, would be the most significant tax reform since 1986.At the heart of Trump’s tax plan is the intention to reduce taxes on pass-through entities (eg, sole proprietorships, limited liability companies, S Corps., and so on) to 15 percent, which would decisively favor the middle market, which accounts for 40 percent of GDP and employs one-third of the labor force.
  • The probability that a bipartisan bill on a multi-year infrastructure project will pass is high. The glue that would hold this together would likely be parallel legislation that would seek to tax the $2.6 trillion in corporate profits being held abroad. There is growing realization in both political parties that the infrastructure around the country has been allowed to slip into such disrepair that it has become something of a national embarrassment.

It is important to note that a robust infrastructure is not an economic panacea. It is a long-run productivity-enhancing policy that is more of a legacy issue, as opposed to something that will jump start economic activity in the near-term. If there is no tax reform, then growth will remain decisively in the sub 2 percent range.


Joseph Brusuelas is chief economist of RSM US.

Four Things Boards Should Know About Global Markets

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Companies continue to face significant global economic uncertainty. Although U.S. economic prospects have improved in recent years, structural weaknesses in other regions pose significant challenges for multinational companies. To ensure their organizations thrive in this volatile environment, boards and senior executive teams must pay close attention to regional trends and international politics and how these affect the growing interdependence of markets worldwide. During a presentation at the 2015 NACD Global Board Leaders’ Summit, Kaushik Basu, chief economist and senior vice president of the World Bank Group, identified four major market conditions that will influence the growth prospects for many businesses.

Emerging Markets speaker Kaushik Basu

  1. The shape of the post-crisis recovery continues to change. In recent years economists have been hard-pressed to forecast how global markets will behave. After the 2008 financial crisis in the United States, economists initially anticipated a V-shaped recovery, in which the market hits bottom and then recovers. As it became clear that the recession would continue, they altered their predictions, asserting that the recovery would be U-shaped instead. When the European debt crisis occurred, economists then foretold a W-shaped recovery. The lesson seems to be that economic cycles have become less predictable and no longer adhere to historical patterns. In response to this increased uncertainty, directors and management teams must now expand their strategic planning process to incorporate a range of possible economic scenarios.
  2. The economic fortunes of emerging economies are not uniform. Brazil, India, and China are often touted as emerging centers of economic power; however, . In the past year only India and China saw growth in their gross domestic products, while Brazil—which has endured corruption scandals, tax increases, and spending cuts—has experienced virtually no economic growth. When discussing potential investments in these foreign markets, boards should require management to provide forward-looking country assessments in order to responsibly evaluate the potential risk and rewards.
  3. Economies are porous. Directors need to be aware that local economies are inextricably intertwined, and that deteriorating economic conditions in one country can therefore spread quickly to other nations. For example, the ramifications of slowing growth in China are significant because so many countries are increasingly dependent on continued Chinese investments and consumption. Africa, Latin America, and Germany are likely to suffer most as major exporters to China. Conversely, India’s economic growth has recently accelerated, due in part to structural tax reforms that have created a more welcoming investment climate, resulting in a rapid surge of foreign direct investment in 2014.
  4. Increasingly disparate monetary policies among the developed nations will have global economic ramifications. Directors will be expected to understand the consequences of divergent policies—especially those of developed countries—for the world’s biggest economic blocks. For example, the Federal Reserve is debating a possible rise in interest rates after seven consecutive years of record-low borrowing costs. While a rate hike would ostensibly strengthen the U.S. dollar by encouraging investments in this country, it could also raise the prices on U.S. exports and undercut the economic viability of U.S. products in foreign markets. In the Eurozone, the European Central Bank (ECB) has in recent years maintained loose fiscal policies, increasing the supply of money flowing through international markets in hopes of facilitating economic recovery. A U.S. interest-rate hike would result in a weaker euro, which in turn could lead to a boost for Eurozone economies because buying trends would begin to favor domestic products. On the other hand, tighter U.S. fiscal policies could readily be undone by the European Central Bank injecting even more liquidity into the markets to keep euro values low and maintain the viability of Europe’s export market. Emerging markets, too, might experience a negative impact from these proposed policy changes. Because they have been borrowing money in U.S. dollars at near-zero rates, these countries will almost certainly see an increase in debt and decreased economic growth if U.S. interest rates rise.