UBI worth considering in turbulent times
What to do with the wage subsidy scheme? As New Zealand moves to level 3, senior ministers are deciding what sort of cash support to provide from mid-June.
The decision will affect all of us, coming with enormous short-term fiscal costs, and a major factor in how quickly and smoothly the economy shifts to a post-Covid-19 world.
The first option is returning to the famed “automatic stabilisers” of the business-as-usual welfare state.
This would provide a quick facade of normality. But it implies the downsizing or collapse of thousands of the businesses the wage subsidy scheme has kept together to provide a platform for recovery.
Worse, it risks trapping tens of thousands of families in long-term welfare dependency.
The second option is extending the wage subsidy scheme, perhaps for another three months. But the longer the scheme goes on, the less it will be about supporting basically sound companies temporarily affected by the lockdown and the more it will direct the bulk of the Government’s stimulus cash to those who don’t have any chance of returning to viability in the postCovid-19 world anyway.
Moreover, if you worry about how hard it is to get beneficiaries off social welfare, wait until you see how difficult it is to get companies off corporate welfare, especially in industries able to afford powerful lobbyists.
It’s the best explanation for Air New Zealand’s share price remaining so high.
The hard truth is there cannot be a shock as great as Covid-19 without a consequent massive reallocation of labour and other resources. There just aren’t going to be as many jobs for people who know how to drive jetboats, white-water rafts or aircraft, or host international conventions.
The sooner labour and other resources are reallocated, the better for everyone, including those who must confront the need to retrain.
This brings us to the third option ministers are considering: a Universal Basic Income (UBI), negative income tax or whatever the Beehive’s PR people may call it.
In recent times, the UBI is mostly associated with the left and far-left. Andrew Little flew the UBI kite as Labour leader. The Greens are big fans. Among its supporters are those who would use it to smoke cannabis all day while pretending to be post
modern poets. Another political problem is that Graeme Hart would get the same weekly cash.
But the idea’s more serious prophet was Milton Friedman, in his 1962 Capitalism and Freedom.
Friedrich Hayek joined him in 1979.
In New Zealand, the closest formal proposal to a UBI was Roger Douglas’ guaranteed minimum family income scheme, announced in December 1987 but scuttled by David Lange in January 1988. National’s Lockwood Smith tried unsuccessfully to have his party adopt something similar in the 2000s.
The simplest way to think of the scheme is that your tax in dollars would be, as now, some percentage of your income, but less the UBI. Those with stable jobs under PAYE would notice no major difference. Business owners would have to make one extra calculation, but Xero would do that for them.
The biggest change is for those who move from work to unemployment and retraining, and then back to work.
Whatever happens during the looming depression, they would receive the UBI, which would need to be set somewhere just below the current dole. There would be no stand-down. With the money available universally, much of the bureaucratic apparatus of Work and Income New Zealand and student allowances could be abolished.
But the most important point is that when part-time work re-emerges in their community, they will be able to take it on without the current paradox of being financially punished as the bureaucratic machine abates away their dole.
Had the UBI been in place during the 1980s and early 1990s, as Friedman and Hayek proposed, much of the misery associated with those times would have been reduced and the reallocation of resources would have progressed more quickly, with lower long-term unemployment. To use one example, it wouldn’t have been as disastrous for a miner to lose their job in a lossmaking pit, and they would have been able to take on part-time work much more quickly when new industries emerged.
“The advantages of this arrangement are clear,” Friedman wrote nearly 60 years ago.
“It is directed specifically at the problem of poverty. It gives help in the form most useful to the individual, namely, cash. It is general and could be substituted for the host of special measures now in effect. It makes explicit the cost borne by society. It operates outside the market. Like any other measures to alleviate poverty, it reduces the incentives of those helped to help themselves, but it does not eliminate that incentive entirely, as a system of supplementing incomes up to some fixed minimum would. An extra dollar earned always means more money available for expenditure.”
With Labour and the Greens favourable to a UBI, the final decision will fall to Winston Peters.
He may not like Friedman, Hayek, Douglas, Smith or the far-left of the Greens. But he ought to take the UBI seriously because it is a far better option to provide social support while the necessary reallocation of resources occurs, than providing oldfashioned welfare to either beneficiaries or corporates.