There is a pretty serious gap in how the economy functions right now, has been for decades, and we have to close it.
I’m not here to be all “tax the rich” even though I maybe think that’s a good idea too.
I’m not here to say “free markets are amazing” even though I kinda do believe that as well.
This is a simple, mechanical problem that needs fixing, and we fix it with VAT and UBI. I’m tired of being calm about this. If you so much as whisper “that’s socialist” or “you’re defending the bourgeoisie” I will beat you to death with a sickle tied to a demand curve (joking!).
This is not a political post1
Because automation has moved labor markets so much that labor can no longer be the only way that people get money to participate in the economy. We have automated away jobs tied to the most basic goods that we need, and the jobs we create are tied to marginal gains in utility that are poor measures of output. Important necessities have been highly productive for decades, meaning a single person employed by say, the agriculture industry, can feed exceedingly many people. Automation replaces jobs, and yet, the economy is wonderful in that we can and will always create new jobs, we will never run out of work for people. But that is also a runaway train, we need to stop and ask “do we want all those new jobs?”. Here are the main reasons we need VAT and UBI:
This one is quite easy: Because it’s the fairest. You get money for existing. Whether you work or not, you are given some money to participate in the economy, to buy the things you want and to signal to the economy which things you want. It’s simple to administer because there are no checks or barriers you need to pass, and it discourages working less than most alternatives because your income doesn’t go down if you start working.
This is a little harder but not too hard: Because it’s the mirror of UBI. The UBI will fund consumption, VAT taxes consumption. A 50% VAT raises the price of bread by 50%. The existing economy sitting underneath goes untouched, the base price of bread is set by scarcity and is paid by labor income, as before. The additional VAT on top funds the UBI in a circular fashion. (For questions about saving as opposed to consumption, I talk about that later in “what about saving?”)
Yes, and a bit more than 50% (or whatever the VAT increase is), at least in the beginning. Here’s some examples of some people:
So, yes, this is technically a form of redistribution. Buying power is being transferred from the rich, to the poor. However:
The point of this system is to adjust for the fact that the nature of what jobs can be done is changing. Physical labor, the kind that almost anyone can do, is mostly automated away. Other forms of labor require training that not everyone can obtain or learn, or takes years. Those jobs are in jeopardy too now, since regardless of what you think about AI it is able to do cognitive tasks to some meaningful degree. That’s not to say we can just wait for mass unemployment before saying “maybe now not everyone needs to work!” because the economy will almost always be able to create new jobs, and that will not save us. Those jobs chase marginal utility over marginal cost, i.e something that wasn’t worth doing before but now is. However, the speed of automation makes this system imperfect2, and the jobs we are creating at the frontier of utility either do not employ many people, or they are very low marginal utility.
Automation replaces jobs, and yet, the economy is wonderful in that we can and will always create new jobs, we will never run out of work for people. But that is also a runaway train, we need to stop and ask “do we want all those new jobs?”.
Yes, but not that many. Firstly, costs have risen because of the VAT, for many the UBI is mostly eaten by this increase. Only those that make very little doing a job they hate may choose to quit their job. Secondly, keep in mind that most people actually don’t like doing nothing. Right now, struggling to cover costs with a meager salary means you stay busy hunting for work or working. With support from a UBI people have opportunity to learn, obtain skills, try new things that actually in turn may contribute back to the economy.
No, because the VAT eats into most of the UBI. This is by design, demand doesn’t actually rise that suddenly or that much because most peoples buying behaviour hasn’t changed much. However, a few points are worth mentioning:
That’s to say raising the VAT in lockstep with the UBI is what makes the UBI stable. The pressure it exerts on the economy is much smaller as compared to funding the UBI with anything else, both in terms of labor and consumption pressures.
As I’ve described it the VAT and UBI are circular. They don’t actually extract from the rest of the economy3 in the way that paying labor does. Two points here:
The point is this:
You can go fight over how much other stuff to tax and how we should redistribute it and how big government should be, I do not care about that right now. This is about fixing the fact that paying for labor isn’t a good enough measure of true economic output anymore.
It works in part because individual consumption rises as a component of the economy in relation to all other economic activity. We are amplifying consumers signalling to the economy to make up for that which is lost from shifting labor. That’s the end of this post. Everything after this is addendum and I promise to stop shouting as much.
To escape the idea that this is at all tied to government, lets actually have this policy managed by the central bank. The method is this: Chose a target percentage of median income and a timeline. That gives you your target UBI at the end of x years. Calculate the theoretical VAT needed for that, and each month, linearly increase it towards the final value at year x (add it on top of any VAT the government is already collecting, again, we’re sidestepping the politics here). Crucially, the UBI you pay out is whatever was gathered by the VAT in the previous month. This closes the loop and avoids any discussion on how to fund this or if it will incur government debt. As you approach year x you need to observe how the economy responds. You may need to slow down your timeline or adjust your target UBI and recalculate the monthly VAT increase. Either way this will take time and for that reason we should start now.
This comes originally from a simple thought experiment that I’ve written on this blog before. In a perfectly stable, automated economy, where all industries are perfectly sized and all work is automated already, how do you give money to people and fund it? The answer is UBI and a tax on rent bearing scarce resources. You might be surprised to hear me say “a tax on rent bearing scarce resources” and not VAT, but that’s because VAT has a key advantage in the area between our current world and this one that is, in truth, impossible to reach. VAT funds consumption through consumption, and therefore is easy to measure and has no “slack” (responding immediately to change). In a perfectly stable economy, you don’t need it. If you try and set up a UBI right now funding it is hard. Hard to calculate. Tax the wrong thing and you will get a big market distortion. Even if you tax the right things, you can expect big market swings that will suck for everyone unless you are exceedingly careful. VAT temporarily sidesteps this problem (although, not permanently). That’s why it’s the apolitical solution that we need right now. The hard stuff, the stuff we fight about in politics, who to tax, how much work is real work, should we encourage business or protect individuals, are all things we built our democracy and governments and election systems and institutions to solve. Those things are becoming harder to do because as work becomes more automated we make these links more brittle and separate people from the complexity that gives them the goods they need or desire.
The lack of slack is also a risk though. A small note on procyclical effects: You might be pointing out now that in a recession, consumption falls and thus our UBI does too, hitting consumption harder, making the recession worse. This is roughly similar to how loss of consumption can spiral into unemployment, as companies cant afford workers, feeding itself. That’s already a problem we try and deal with today. There isn’t an easy fix but this is another reason a central bank is well suited to managing it. Buffers, which admittedly now reintroduces quasi-debt and other funding questions, can help alleviate these cycles and it becomes something that a central bank would have as an important lever in their control of recessions. The best counter to procyclical effects is to slowly transition UBI funding from VAT to, you guessed it, rent bearing scarce resources like land, assets, IP. That can be solved later.
When you give people money it’s not guaranteed that they will spend it on consumption. Since most of my logic is based on that, what if people save the UBI they are given? The answer is that they mostly wont. Again, because of the VAT, for many most of the UBI is eaten or is even insufficient. For those that the UBI does add purchasing power they are likely people who would happily consume more. There will be some saving, but once again the VAT counterbalances most of the sudden distortion created by an unbalanced UBI. With all that said though, saving and savings erosion is another reason you still roll this out slowly over years.
This sort of policy will change the map of labor costs. Most of all it will put significant upward pressure on the price of unskilled labor. We may “sadly” lose gig economy jobs and services like foodora drivers and cheap ubers. Because of the VAT balance, the effect will be slow but it will be there. Baumol’s cost disease4 will also become more of a problem, governments will have to pay labor intensive public sectors like education, nursing, police more than before, and that tax should come from rent bearing scarce resources. A significant aid to this problem would be the elimination of income taxes, but now I’m getting into “the sticky politics of it all” so you can ignore me on this. If you only take one thing from this post, it’s that we need UBI funded by VAT.5
By this point you can probably guess my answer to this. Negative income tax operates on whatever work there is remaining to do, and as such suffers from the same disconnection from real consumption as everything else. It has the advantage of encouraging working more and making labor cheaper, but it also now needs to be funded and we end up in our politically sticky funding problem again. We could fund it with VAT, and that is in all honesty the non-redistributive or even regressive version of this policy (depending on if you eliminate income tax or have negative tax, respectively). If you really want that version, fine, and then I have one more question I want to answer.
Isn’t VAT regressive? (Hurting the poor more than the rich?)
Classically we say this because the poor are the ones who consume so they are hit more than a rich person. This isn’t really the right way to think about it, for two reasons.
However, as should be obvious at this point, a bare unbalanced VAT is effectively regressive, as is supported empirically6, especially whilst labor income remains a big part of the economy. That’s why the VAT should fund a UBI.
The reason to do it this way, VAT funding a UBI, is it’s stupidly difficult to mess up. It shouldn’t be a morality question, a work ethic question, a left or right political or economic question. It’s just a tweak to how the economy functions that we need already and will need more in the future.