Wednesday, March 14, 2018 / Perth Australia / By Niekie Jooste
In this edition of "The WelderDestiny Compass":
Another week where a topic of discussion pushed its way to the front of the queue here at The WelderDestiny Compass. The topic this week being the Universal Basic Income. (UBI) Just in case you are not familiar with the concept, it is proposed that all citizens or residents of a country should be given a social security payment, regardless of their employment situation. This payment is called a universal basic income.
This idea is reaching a mainstream level, where many high profile business people, such as Mark Zuckerberg, are proponents of a UBI. In fact, it is a very popular idea within the tech sector of the economy. Finland is even one year into a trial implementation of such a system. My opinion is that the Finland trial is not really a UBI. It is just unemployment benefits by another name.
Given our interest in the future job market and landscape, such an idea is important, because it can radically change our drivers for employment. Today we look at where this idea comes from, and its probable outcome if implemented.
If you would like to add your ideas to this week’s discussion, then please send me an e-mail with your ideas, (Send your e-mails to: email@example.com) or complete the comment form on the page below.
Now let's get stuck into this week’s topics...
Our primary driver for establishing the WelderDestiny website, and indeed The WelderDestiny Compass e-zine, is our concern regarding the job market in an era of increasing automation. After "the rise of the machines", where will people find gainful employment? The UBI is driven by the same concerns.
The thinking being that if there is a UBI available for everyone, then loosing your job is no big deal. Go and do something creative and self fulfilling instead. No worries, bring on the robots. I need a break!
It is instructive to note that the biggest proponents of a UBI are actually executives from technology companies. The very same companies that are working on developing the machines that will be replacing humans in those jobs that will be lost.
If we think logically about this dynamic, then we would have to conclude that automation is a self limiting problem, because once enough people have lost their jobs to the robots, then there will no longer be a consumer base to purchase the products made by those robots, regardless of how cheap the products are. If however the government hands out money to everyone, then the corporations no longer have this problem on their hands. In essence the unemployed populace serves as a mechanism for consuming their products and services, while it is paid for by the governments.
Now, it is not only the tech sector that are proponents of a UBI. It has become quite popular with people from many divergent political persuasions. Let's face it, selling the concept of free money for everyone would not be very difficult. In fact, it may become one of those election issues that nobody wants to go against, because it could very easily sink a political party.
Henry Ford (of Ford motor company fame) famously stated that he wanted to pay his employees enough that they could afford a Model T Ford automobile. Henry Ford saw the obvious. In an industrialised economy, the employees are the consumer base to whom the manufacturers sell their products.
In other words, a poor employee base would result in a poor consumer base, that could not afford to buy many manufactured consumer products. In short, for manufacturing companies to make more money, they needed to pay their employees more. Obviously this is a zero sum game, unless productivity increases faster than wage growth.
Automation does in fact increase this productivity, leading to the potential for higher wages and higher profits for manufacturers. If this is the case, then we need to ask why there has been an almost zero real increase in wages since the 1970's in the USA? There has been a huge gain in automation, computerization and infrastructure. All these areas directly increase productivity, so we would expect to see meaningful increases in real wages, but we have not.
There is another dynamic that can inject money into the consumer's pocket, without increasing wages. This dynamic is credit. Now, if one consumer lends their money to another consumer, then there will be no nett change in the amount of money in the system. It will be a zero sum game. When we introduce bank lending within a fractional reserve banking system, then the picture changes radically. Suddenly a $1000 balance in a savings account can change into $10,000 of debt within the real economy. This is assuming a 10% reserve being kept by the bank. This is conservative. Many European banks have a much lower reserve requirement, allowing them to change $1000 into $25,000 or even more.
Globalization is also a factor, because many manufacturing jobs are "outsourced" to countries with lower labour costs, in effect increasing the productivity when measured in "return on investment" for businesses. Globalization does however not explain a sustained lack of wage growth, despite business growth, because the consumer still needs to get money to pay for the goods, whether it is imported or local.
We get back to the answer that the only way that businesses can be increasing their bottom line while consumers are not experiencing wage growth, is through credit growth. Indeed, the global debt is around $300 trillion. This is 3 times the global GDP. Most of this has been accrued since the 1970's.
This debt growth has been encouraged by a steadily decreasing interest rate since the 1980's.
In summary, salaries have not been increasing, despite productivity gains, because they did not have to. Consumers took on so much debt, that there was no need for wage growth by corporations. The financialization of the developed economies lead to consumers financing their lifestyle through debt.
Double income families also played a role in this dynamic, because it became necessary for a larger percentage of the population to become "economically active", to ensure that standards of living of families did not decrease.
As we have previously mentioned when we discussed the concept of the economic rent, as value was added due to the productivity increases, this additional value needed to be trapped somewhere. In the final analysis, it tends to be trapped in land values, hence the significant increases in land values.
It should be obvious that unbridled debt growth is a Ponzi scheme in the long run. There is a limit above which debt becomes ineffective, due to the need to pay interest, and the need to repay the principle that was borrowed. What cannot continue, will eventually come to an end.
The global financial crisis of 2008/2009 was in fact such an event. It was a credit crisis caused by excessive loans that could not possibly be repaid. The way that it was contained was by the central banks and the governments extending even more debt. It worked, but it made the problem even bigger than before. In effect it managed to get the pyramid scheme going again.
Will this way of dealing with the next credit crisis work the same way? Probably not, because at some point confidence will be lost in fiat currencies. Lost confidence in fiat currencies is not a new thing. Hyperinflation is what we call such a loss of confidence. Hyperinflation has happened in Weimar Germany, Zimbabwe, and many South American countries. It even happened in the USA, with the "continental" dollar.
Given that a UBI will in effect be financed by debt of some kind or another, the UBI will just aggravate and speed the decline into a currency crisis.
If a UBI results in a currency crisis, then people will flee to "real assets" for currencies. Precious metals obviously fit this bill. Seeing as crypto-currencies have not been around long enough, we do not know what will happen with them during such a crisis. It is instructive to note that the value of cryptocurrencies tend to spike in countries where political instability and hyper inflation is experienced. Cryptocurrencies may just be a possible option, although there will obviously be a big risk associated with them, because governments can pass laws to restrict their use or make them entirely illegal. The problem is that a government controlled cryptocurrency, that is not backed by real assets, will not be able to maintain its value in a currency crisis.
In summary, the introduction of a UBI has the potential to precipitate excessive inflation to the point where fiat currencies loose almost all their value. This outcome would not be to the benefit of anybody that is in the lower and middle economic classes. The higher economic classes will mostly be able to protect themselves through property and precious metals ownership, so will be least affected.
Another unfortunate effect of a UBI, is the psychological effect. If there is an expectation that anybody can get by without having to work for a living, then a large number of people will not prepare themselves adequately for a productive role in society. If something does go wrong to derail the UBI plan, then all those people will basically find themselves in an untenable situation.
Relying on a UBI sounds like a very high risk path to take.
Yours in welding
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