Does UBI cause inflation? A reply to Scott Santens
I recently had a conversation with Scott Santens who referred me to his article on universal basic income and the question of whether it causes inflation. This reply represents a change in tack. I am replying to Santens argument not in the spirit of refuting it, but with the hope the advocates of UBI will strengthen their argument by removing some of its fallacious reasoning.
Personally, I don’t think UBI can ever work, but people on the Left seem wedded to the idea. I offer this response to Santens in hope that should UBI ever comes to pass, its supporters will be able to tell a useful version of the program from the nightmare many on the right are now proposing.
UBI and the so-called quantity theory of money
Scott Santens takes on the argument against universal basic income (UBI) that it will just cause inflation without appreciably improving the living standards of the working class:
“By far, the most common concern … about the idea of an unconditional basic income was that all prices would inevitably go up as a result, immediately reducing the value of each dollar … In economic terms, this concern is the fear of inflation or even hyperinflation, and it is possibly the most common reflex to the notion of just transferring more money to the lower and middle classes. So how grounded in reality is this concern?”
Some opponents of UBI argue a universal income program simply would produce inflation and add nothing to the real output of production and, therefore, the real consumption of society. Santens sets out to refute this argument by explaining what gives state issued currency its value in the first place.
This explanation takes the form of a video presentation by Doug Levinson on the subject, based on what is known as the Quantity Theory of Money (QToM). According to the Levinson video, the ‘value’ of a currency is determined by a direct proportional relationship between the quantity of the currency in circulation and the sum of prices of the commodities in circulation. Following Wikipedia, the law can be stated this way:
If the quantity of currency in circulation is increased, there would be a proportional increase in the price of goods; and if the currency in circulation is decreased, there would be a proportional decrease in the price of goods.
To understand the implications of this alleged law, you have to realize it implies a universal basic income program will indeed add nothing to the real output (and therefore the real consumption) of society, but will only increase the prices of commodities already in circulation — just as the critics of universal basic income argue.
Not a problem, Santens says, we should want some inflation because this encourages something he calls, “economic growth” — a term he doesn’t define but which he, like Levinson in the video, clearly believes is good for us. However, since UBI cannot actually increase output, the term, “economic growth”, can itself only mean higher prices for what has already been produced.
I will return to this point later.
What about the velocity of currency?
So is Santens conceding to the criticism made by opponents that UBI is inflationary? Well, not so much. Despite having just walked us through this sophomoric QToM explanation of inflation, Santens argues a basic income program should not cause inflation because the currency required for it is already in circulation. The government will not be adding any new currency into circulation when it implements its universal basic income program:
“The money for a basic income guarantee would be already existing money circulated through the economic system. It would not be new money, just money shifted from one location to another. This means that the value of each dollar has not changed. The dollar itself has only changed hands.”
How Santens can make this assertion is really quite puzzling, but let’s go with it and assume Santens is correct that the total volume of currency remains as before. Is this the only factor to consider in the discussion of the potential inflationary impact of UBI? What about the velocity of the currency? If you double the number of purchases a single dollar makes possible in a given period, do you not effectively double the real quantity of money in circulation? Is the velocity of the currency not a factor here? Even if the government only employed the existing stock of the currency for UBI, it effectively increases the stock of currency in real terms simply by increasing its turnover in a given period of time.
Santens has failed to mention an important caveat of the QToM regarding inflation here: It is not simply the absolute quantity of physical units of the currency that should concern us, but also the velocity or turnover of these physical units, i.e., how rapidly dollars already in circulation will change hands in a given period of time. Even if the absolute quantity of currency remains unchanged, according to QToM the increase in the turnover of physical units of the currency in a given period of time will also contribute to inflation.
This point is essentially what Santens is conceding when he asserts the Fed’s quantitative easing measures have failed to appreciably increased inflation. Although the Fed has been injecting new currency into the banks, empirical evidence suggests the velocity of currency has fallen to historic lows — a fact Santens acknowledges only later in the article. Santens offers no reason why a universal income program, which he argues will increase velocity, will have the same effect on inflation as the Fed’s quantitative easing program.
By asserting there would be no real increase in the quantity of currency in circulation and by ignoring the impact of velocity of the currency on inflation in the QToM, Santens can then assert that, in theory at least, UBI does not necessarily cause inflation or hyperinflation.
In fact, he doubles down on his argument by asserting both an increased quantity of currency in circulation and increased velocity may not produce inflation:
“So even though basic income would not be printing new money for everyone, even if it were, inflation would not be a guaranteed result.”
Using this specious argument, which clearly overlooks the fact that, according to Santens own theory, UBI means the velocity of the existing dollar stock will be rising, even if the quantity of money remains unchanged, Santens essentially argues the inflationary case against UBI is at best unproven.
All told, Santens argument on the inflationary impact of universal basic income seems to come down to this:
- UBI doesn’t cause inflation.
- Well, okay, it does not cause that much inflation.
- Listen, inflation is good for us.
- Well. at least it works for the capitalists.
The inflationary impact of UBI is not an argument against it
Of course, even if a universal basic income created inflation, this would be no real argument against UBI. Money is simply a medium for circulation of commodities. Inflation can play an important role in redistributing income between classes in society — the state and the banks, for instance, have long been implicated in debasing the money to surreptitiously enlarge themselves at expense of the rest of society.
Inflation may be a good monetary policy if you simply want to redistribute real income from one class to another. The question posed by UBI, however, is can the whole society benefit from inflation? Can society as a whole increase its consumption through inflation as is implied by the term, “economic growth”?
Here are the inflationary effects implicit in most models of UBI: According to MMT, the state, as sovereign owner of the currency, can simply credit everyone’s account by a sum equal to the UBI. It has now increased the sum of currency in circulation by an equal amount to the sum of all the individual allotments of UBI. At the same time the output of real goods and services has not increased. According to the QTOM, the purchasing power of the currency must depreciate, while prices will rise.
To keep the purchasing power of the currency unchanged, the state must now withdraw an equal sum of currency from circulation; something it can accomplish by:
a. Taxing the excess currency out of existence;
b. borrowing the excess and accumulating public debt; or,
c. reducing its own public spending.
The net effect of these monetary operations, some might argue, is to redistribute income from one class in society to another. To the extent UBI is non-inflationary, in other words, it amounts to a redistribution of existing income between classes. Now there is also no reason, in principle, why we should be against such a redistribution from the capitalist class to the working class if redistribution were possible and did not have other negative economic effects.
Santens three arguments denying inflation
So does the redistribution of income between classes have other economic effects? Well, let’s see.
Santens approach here is to first deny UBI causes inflation, then to subtly concede it does. He then offers ‘evidence’ it is actually anti-inflationary. So let’s look at this evidence.
Exhibit A is Alaska, which Santens offers as an example of a partial UBI. In fact, the Alaska Permanent Fund Oil Check is not a UBI at all. As Santens admits, it is a dividend paid out to resident based on income the state receives from oil production. What is the distinction? If the state receives revenue from capitalist investment it can choose to do with this revenue as it pleases. The revenue already exists and the question is how it is to be spent.
Not so with UBI: in this case, the state receives no revenue at all. It begins with the state crediting the accounts of citizens. In other words, rather than spending an existing pile of cash, with UBI the state creates the cash that will be spent. While the revenue from Alaska’s dividend come from real economic activity that has already taken place, the revenue from a UBI appears in our accounts by means of a computer operation. Unless Santens can show that oil extraction is the same thing as entering a figure into a computer, his argument is fallacious.
In truth, Santens wants us to think they are same solely because the state disburses both UBI and the Alaska Permanent Fund Oil Check. He needs to admit they are not the same and cannot be equated for purposes of analysis.
In his second argument, Santens suggests a UBI is only a change in the form of payment to individuals. A person might buy a gallon of milk using food stamps or she might buy milk using her UBI.
In this case there is no net increase in the consumption of the working class. The means used to make the purchase changes, but not the amount of the purchase. The same quantity of currency is spent in either case. Insofar as no more money is spent on necessities than before, UBI is not inflationary.
Having made this obvious point, Santens then introduces a rather incredible assertion. UBI will not affect the prices of necessities:
“Where demand already exists and supply is already paid for, demand is unlikely to change as basic income simply replaces one method of payment with another. E.g., replacing food stamps with basic income is unlikely to make people buy more milk. It just means people will likely buy the same amount of milk with cash instead of SNAP.
Where demand is actually increased, depending on the good or service, supply can also easily be increased, be increased with some investment in capacity, or not be increased. It is this third case where prices can rise, and points more to increases in prices for luxuries, and not basic goods and services.”
Price inflation, says Santens, would most likely only occur for purchases of luxury goods!
In practical terms, on what does Santens base this argument? He doesn’t even define the terms, ‘luxury goods’ and ‘basic goods’. Even if we accepted his argument that UBI only drives up the prices of luxury good, how would we know what this means practically in terms of a family budget? Perhaps we would know this only in retrospect: if prices rise these are ‘luxury goods’; if they don’t, they are ‘basic goods’.
Which brings us to his third argument: Where we have to ask ourselves,
“Is housing a basic good or luxury good?”
According to Santens, the reason many are homeless is not of a lack of available housing for them to live in, but because they can’t afford homes that already exist and are standing unused — now estimated at 18,600,000 vacant homes. These 19 million homes exist, but we simply can’t afford to rent them.
Santens argues basic income will make it possible for everyone to pay rent.
“There are five times more vacant homes than homeless people in the United States today. This represents a large unused supply that need only be made available. The reason many people are not living in these homes is because they were at one time but couldn’t afford to keep them. Basic income rectifies this and puts people back in homes.”
Moreover, argues Santens, a basic income program will force the owners of the homes to reduce their rents to compete for renters, because, “for the first time in history, a nationwide market for ultra-affordable housing will be created”
Wha … wait!
Why aren’t prices falling today until it gets to a level people can afford to rent? The homes already exist, right? People can’t afford to live in them right now, right? If there is a massive supply of homes that are going unrented today solely because people can’t afford them, why aren’t rents falling right now until they reach a price-point people can afford?
In other words, what is preventing this “nationwide market for ultra-affordable housing” from coming into being right now based on the available stock of housing estimated, by Santens, to be five times what is needed? Mind you, the housing exists right now. They are empty, which means no income is being generated on this supply. On the other hand, if the homes were on the market to be rented, the supply of housing would dramatically increase and rental prices would fall.
Why is this not happen?
Further, how does basic income fix this problem other than to increase the amount of rent people can pay, i.e., make the unaffordable rental prices affordable based on higher incomes? How does higher income made possible through a universal basic income lead to ultra-affordable rents?
Truth be told, it appears Santens basic income scheme is not so much a way to create an ultra-affordable housing market, but a way to prevent unaffordable rents from falling. But, who knows, maybe it is me. When Santens claims he wants to create affordable housing, I keep thinking he means the other thing — maintain high rents.
And this is why Santens thinks UBI is good for capitalism
Why buy the milk, when you can get the cow for free?
This raises a much bigger question of the causes of homelessness in the face of what is clearly, even by Santens calculation, a massive supply of unoccupied housing. And it calls into question the whole objective of advocates UBI. If, as many UBIers argue, the problem is that we lack money to buy available stuff, this implies massive excess supply of stuff in the economy. The problem then is not lack of money, but that the owners of the stuff want higher prices for it than we have in our pockets. UBIers think they can fix this problem by paying the extortion demanded by the owners of the stuff.
This seems to be what Santens mean when he argues, “capitalism will be enhanced” by UBI. Essentially, we will satisfy the demands of the extortionists by printing currency and handing it over to them. Again, this is an interesting argument and by no means a negative for UBI in my opinion. Paying the extortion is a simple and effective means of making the extortionists go away — but, and this is the point, you want to be sure the extortionists really go away. It makes no sense to pay them today and have them come back tomorrow for another bite of the apple.
In theory at least, the government could address the extortionists demands by paying everyone enough UBI to afford exorbitant rents. Or, it could simply buy the stock of unoccupied housing that is producing no income at all and rent it at very low, even below market, prices. If this is done correctly, people would have housing at ultra-affordable rates and the housing monopoly of banks would be broken.
Since, according to MMT, the government can print up currency in any quantity, it could just keep on buying unoccupied residential property until it drove the capitalist out of the housing market entirely. And since the currency belongs to the state, it can tax it back out of existence after it has completed this process.
In other words, there are two ways to use UBI:
- To buy groceries.
- To buy the farm.
If you now own the farm, you don’t have to keep paying for groceries. If UBIers had any sense, they would be demanding the government buy the means of production instead of groceries.
What UBIers never tell you is that there is no lack of stuff like housing, only a lack of money in the hands of workers to pay for it. This means the owners of the stuff demand the rest of us pay exorbitant prices for it. This is extortion. The way you deal with extortion is to kill the extortionists or make them wish they were dead.
Killing the capitalists (speaking figuratively, so our Leftists don’t get the vapors) is as easy as making it impossible for them to make a profit. If the state owns the currency, it can buy up assets and rent or sell them at levels that make profit impossible. It can even rent or sell the assets out below costs of production.
How can the state do this?
Weren’t you paying attention? The state owns the currency. Since it own the currency, the government doesn’t need to make a profit. People who don’t own money have to “make money” by selling a commodity or selling their labor power. The state owns money and has no need to sell anything to make money. Not only does the state not have to make a profit, it doesn’t need to recover costs of production nor receive any revenue at all.
Now, if the above is true, what is the purpose of UBI?
So far as I can tell, the sole purpose of UBI is to keep capitalism alive — to keep paying the extortion to the owners of capital.