A discussion concerning automatic stabilisers is necessary for two reasons. First, when advocates talk of a UBI, they aren’t talking about modest payments of, say, £600 per month. They are insisting that the monthly payment will be a “living wage” payment. The term “living wage” is quite vague, but we can assume to some degree that, at the time of this writing, they mean somewhere between £1,600 – £1,900 per month in the UK, and around $2,500 per month in the US. With payments this large, the UBI will be inherently inflationary.
The second reason for discussing automatic stabilisers is that I will be contrasting the UBI with a Job Guarantee in this series. The Job Guarantee is an automatic stabiliser, unlike the UBI which I will explain momentarily. So, for those of you beginning your journey, I will keep things very simple. Re-read if you must until you understand.
For those who’ve a greater understanding of concepts, this part will be short, so you can either skip over to the next instalment, or use it as a refresher if need be.
UBI is not an automatic stabiliser
Most of the general public does not possess a background in Macroeconomics. I don’t blame them, really. Still, given the fact that politicians conflate Modern Monetary Theory (MMT) with something as highly-opinionated and ideologically-motivated as politics, it is little wonder that some of these people will think that MMT is just opinion, and that everyone’s input is valid.
Because it is all opinion, they tend to think that they are making good arguments when they are actually failing to make any sensible argument at all. One example: “Index the UBI to the actual rate of inflation” – hmmmm.
Not much of a solution, since the actual rate of inflation within a “living wage” universal basic income regime will be influenced by the UBI itself. So, what this person is unwittingly arguing is that once the universal basic income causes inflationary pressures to rise, that will signal the central government to increase the size of the UBI payments to compensate for the rising cost of living, thus causing the inflationary episode to accelerate.
The only real choice for the central government at that point would be to either tax away most of the payments, which means that the UBI would no longer be “universal”, or to simply end the UBI programme altogether.
Yet another error, and one that is relevant to our discussion, is the following: “Its the same as getting money from welfare. A UBI is welfare for all and it is an automatic stabiliser! Everyone will have stable lives when they can afford the basic necessities.” No, sorry. That’s not even remotely correct.
A UBI is not an automatic stabiliser in any way, shape, or form. Let’s explore what an automatic stabiliser is and how it functions.
Automatic stabiliser: helping the economy from a major collapse in consumer spending
People believe that welfare, benefits payments, food assistance, tax credits, and unemployment insurance are programmes whose core purpose is to help the poor and the unfortunate.
They are not.
That belief is the product of politicians redefining these programmes with the intent to create an issue where no issue really exists. In other words, they purposefully mislead the public for ideological reasons to create drama.
The economic intent is not to help the less fortunate, but rather, to help the entire economy avoid a major collapse in consumer spending (aggregate demand). They are automatic stabilisers for the economy, and most nations employ them.
How does an automatic stabiliser work?
An automatic stabiliser provides a floor in the economy which prevents consumer spending from falling below it. I will illustrate the concept with an analogy.
Imagine being in an upstairs bedroom of a home. You are standing on a floor. Now, imagine climbing up on a ladder, and then dropping a tennis ball. What happens? The ball initially goes into a free fall, but then it soon stops when it hits the floor.
Now, remove a large chunk of the floor, and drop the tennis ball over the hole. What happens? The ball goes into a free-fall, it falls past where the floor used to be, and continues to fall until it hits the bottom.
So, nothing technical, nothing too abstract for a beginner to understand here. When we talk about a “floor” in the economy, we mean exactly the same thing as a floor in a house. An automatic stabiliser ensures that a consumer spending and mass unemployment sink hole will not form in the economy.
Without automatic stabilisers in place, should the economy stall or experience a downturn, there is nothing preventing a large collapse in consumer spending. Spending can go into a free fall and when it does, unemployment will rise dramatically. Welfare, food assistance, and unemployment payments provide a means to maintain some level of spending, thus preventing that free fall. Let us consider everyone’s favourite program in the US that they either love to hate or love to love: SNAP. For those outside of the US, SNAP (Supplemental Nutrition Assistance Program) is a food assistance programme.
US food assistance programme: SNAP; another automatic stabiliser
When SNAP recipients spend these dollars on food, some of those dollars will in turn pay labour. Labour, in turn, goes out and spends its wages buying clothing, food, petrol, toothpaste and a myriad of goods and services.
Let us now assume that SNAP does not exist. Without it, grocery stores would experience a contraction in income, and so, they would be forced to sack workers to offset the fall of income. Since those unemployed workers have lost their income, they slow their spending on clothing, petrol, toothpaste, and a myriad of goods and services. In turn, clothing stores, petrol stations, and other businesses experience a fall in income. They, too, then sack workers to stop the fall of income.
Like a virus, the spending contraction spreads across the economy. One unemployed person leads to another unemployed person, resulting in a situation of mass unemployment and recession. SNAP, as an automatic stabiliser, serves to restrict that potential.
In conjunction with welfare and unemployment claims, the economy has some stability, meagre and imperfect, though it is.
Thus, we aren’t subsidising “moochers” and layabouts. On the contrary, we are, in fact, preventing those who are employed from becoming unemployed. In other words, the “moochers” are ensuring that you, the responsible hard worker, has a better chance of not ending up in unemployment lines. So, we understand (hopefully) the stabiliser part, but what about the “automatic” part?
Why the term: automatic?
When the economy stalls, job additions halt. Some businesses begin to sack workers at this point. Some of these workers will then seek government assistance in the form of food assistance, tax credits, welfare, and unemployment payments.
More people are now receiving assistance from these programmes, and that increase in recipients and payments causes the central government’s budget deficit to automatically increase. Hence, the term, “automatic” stabiliser. No discretionary action is required on the part of Parliament/Congress. The programmes ensure that the central government’s deficit will automatically increase to compensate for the fall in consumer spending.
Conversely, as consumer spending improves and the economy expands, fewer people will require government assistance, ensuring that the central government’s deficit will automatically decrease to compensate for the rise in consumer spending.
Returning now to the UBI, we can understand that it is not an automatic stabiliser. Programmes such as tax credits and benefits in the UK, and SNAP and unemployment insurance in the US are made available to all that need assistance, but the key point here is that not everyone in the nation is receiving assistance.
UBI’s purpose: increase consumer spending. A potential destabiliser.
A UBI provides income assistance to everyone regardless of need. Therefore, the entire economic purpose of the UBI is to increase aggregate demand (consumer spending) without any price anchor feature, which is similar to “pump-priming”, but it is nothing like an automatic stabiliser. A UBI of £1,600 – £1,900 per month in the UK, and around $2,500 per month in the US would eventually become a destabiliser.
Why? I will answer that question in the next instalment.
Up Next: Part III – Production, Output, Labour Supply, Inflation, and the UBI