There's Only One Way to Pay for a Basic Income

Basic income gives consumers money to spend. The only way to pay for a basic income is by having an economy that gives consumers something to buy with that money. If our economy can’t produce enough goods to match the level of consumer spending, then we end up with inflation.

There. I just gave you the answer. You can now skip the rest of this blog post. You’re welcome.

For some reason you’re still here. But that’s OK because you’re not alone. The larger conversation around basic income also seems to be stuck on the question of how to pay for it. In attempting to unstick themselves, people have gotten pretty clever in arguing about funding schemes.

On June 20th, our Boston Basic Income discussion group explored why some of these funding schemes feel so compelling despite being completely unnecessary.

To anchor our discussion, we read a a New York Times op-ed by policy analyst Matt Bruenig and a Medium article by basic income activist Scott Santens. The Bruenig piece describes the idea of a “social wealth fund”, which is a publically managed investment fund whose gains are equally distributed among the people. The Santens piece rattles through a laundry list of loosely related funding ideas, some wackier than others.

The common thread running through these funding schemes is that each one attempts to explain where the money can come from to pay for a basic income. But money doesn’t have to come from somewhere. If you’re asking where we can get the money from, then you’re asking the wrong question. What matters is whether the money has somewhere to go. We can hand consumers as much money as we want so long as the economy can provide something for them to buy.

I’ve previously noted that tax revenue does not constrain government spending. What does constrain spending is the amount of stuff that can be bought. What matters is the economy’s available resources and the size of its productive capacity. This is true of all government spending, not just basic income. Either we have the resources to support it or we don’t. Either the money has somewhere to go, or it doesn’t.

Importantly, taxation does not magically create more productive capacity in the economy. As I described in a post from last month, we can use specific taxes to free up specific resources. But the amount of money collected is irrelevant. What matters is how the tax affects people’s spending patterns. In particular, it doesn’t help at all to take money away from someone who wasn’t going to spend it anyway. That money wasn’t using up any resources to begin with.

Scott Santens does not understand that tax revenue won’t help. In his article, he first describes what he thinks is the “right” level of basic income and calculates the total amount of government spending needed to fund it. He then works backwards, cobbling together various funding sources until they add up the number he wants. We don’t need to analyze the validity of his particular calculations to understand that this is the wrong approach.

Santens is not just working backwards, he’s also thinking about it backwards. The market economy is a complicated beast. There’s no way for us to determine the appropriate amount of the basic income before we implement it. The optimal basic income depends on the level of consumer spending the economy can handle. We can only discover this amount by instituting a basic income and then gradually increasing the payment amount until the economy reaches its productive limit.

Insofar as there exists a mainstream school of basic income thought, Scott Santens' scattershot funding approach falls squarely within it. Andy Stern, whom I’ve picked on before, makes the same mistake. He writes about something similar in his book Raising the Floor. Starting on page 212, he presents “a menu of funding possibilities.”

It’s important to reiterate that this [is] a menu of funding options. Some combination of the seven options listed above will raise sufficient revenue to offset the costs of a universal basic income of $1,000 per person per month.
— Andy Stern | Raising the Floor | p. 214

There’s only one way to pay for a basic income. We pay for a basic income by ensuring that people have something to buy. The next time someone asks you how we can pay for it, you’ll have the answer ready.