We have posted a number of articles concerning Universal Basic Income – pro and contra. In this posting Karl Brenke, using Germany as an example, comes to the conclusion that UBI is not economically feasible and would result in social conflicts.
Karl Brenke is an Economist at the the German Institute for Economics (Deutsches Institut für Wirtschaft DIW) in Berlin.
For Karl Marx, there was no question that the “Kingdom of Freedom” would be achieved in a not-too-distant future. Like “dialectic”, he had adopted this term from the philosopher Georg Wilhelm Gottfried Hegel. Hegel was an advocate of idealism, which for him meant the development of the objective mind. Marx was an advocate of materialism and understood it as the development of productive forces. Technological progress would increasingly replace human labour – resulting in increasing unemployment and working-class misery. As a result of this, inevitable revolution would sweep away the capitalist means of production and technological progress could be used to enable everyone to live according to their needs. People would be free from the need to do work because machines would do it. As we know today, this was a false prognosis.
Arguments for basic income are out of touch with reality
Nevertheless, such views continue to haunt us. The proponents of unconditional basic income (UBI) emphasise that Western societies are running out of work and that the state must therefore provide their citizens with an income. On the other hand, it is claimed that UBI makes people more independent and freer, so that they don’t have to accept every job. Somehow these two elements don’t fit together: on the one hand, work is running out; on the other, there are still some jobs – but people don’t want to do them.
Be that as it may, is the West really on its way to becoming a kingdom of freedom? Employment trends present a different picture. In the US, the number of people in employment is currently at its highest since statistics began in 1939. There are no long-term figures for the EU. Statistics for the EU states began in 1995, but here too we find the same picture: there are currently a record number of people in employment. However, it should be borne in mind that over time the amount of work per capita has decreased, mainly because part-time work has markedly increased. This only applies to Europe, not to the USA, where the average time at work has remained more or less constant since 2006 (earlier figures do not exist). The EU does not have any economic data on the number of hours worked, which is why I am using Germany as an example. In Germany, hours worked per capita fell by one-eighth between 1991 and 2017. However, because the number of people in employment has risen sharply, the volume of work, i. e. the total economic working time, has risen. In short, the development of employment shows that more work is done, not less.
Although employment has decreased in some sectors as a result of technological progress – in manufacturing and the construction industry – it has greatly increased in others, especially in the service sector. This was interestingly accompanied by a significant reduction in productivity growth. In the USA, for example, real economic output per person employed rose by an annual average of 1.2 percent between 2007 and 2017, but in the period from 2000 to 2007 it was at 2.6 percent. For Germany, the corresponding growth rates were 0.2% (2007 to 2017) and 1.2% (2000 to 2007). For Germany, there are also figures on economic output per hour: between 2007 and 2017, it rose by an annual average of 0.7%, compared with 1.2% in the period from 2000 to 2007. Data for the EU are currently available only until 2016, with average productivity per capita increasing by 0.5% between 2007 and 2016, and hourly productivity by 0.8%. Between 2000 and 2007 there was growth respectively of 1.3% (in productivity per capita) and 1.5% (in hourly productivity). Despite all the talk of digitalisation, in terms of the impact on employment there has been no acceleration of technical progress, but rather a slowdown.
Another aspect is population development. In all Western industrialised countries, the population has been in decline for a long time. In the USA, for example, 1.8 children were born per woman last year, and in the mid-1990s it was just under 2 children per woman. In the EU, 20 years ago there were 1.5 births per woman. The current fertility rate is 1.6. Approximately 2.1 children would be required to maintain population levels. Too few births in the past are already making themselves felt on the labour market: for example, the number of young people in the EU is falling. Experience shows that once population development has taken a certain trajectory it is difficult to counter that trend. It is therefore to be expected that the potential labour force in industrialised nations will shrink in the future.
All in all, the arguments on which UBI is based are completely at odds with reality. We certainly shouldn’t expect Western societies to run out of work. They are more likely to run out of manpower.
Would it even be possible to finance UBI? In Germany, three variants of a UBI have been proposed. There are financial difficulties with all three. And the same problems would apply to other countries.
A “citizen’s allowance” has been proposed by the neo-liberal Liberal Party (FDP) and some conservative politicians. Each citizen would receive 500 euros per month. This payment replaces all social benefits provided by the state and statutory social security. If all the cancelled social benefits were taken into consideration, the citizen’s income would actually be affordable at first glance. However, there are two problems. The vast majority of employees earn entitlements to a state pension scheme, which is higher than 500 euros per month. These claims would need additional finance. On the other hand, a person with 500 euros per month would have great difficulty surviving financially in Germany. Unemployed German citizens who are not entitled to unemployment insurance benefits already receive more than 500 euros per month: on average about 830 euros for food, rent, electricity, health insurance etc. The proposal to pay a citizen’s income of 500 euros can therefore be seen as an attempt to drastically reduce social benefits for the needy. However, this attempt would never become a reality, because Germany’s Constitutional Court would consider 500 euros to be insufficient.
The owner of a large drugstore chain in Germany, Götz Werner, and many people around him, have suggested giving every inhabitant in Germany 1,000 euros as an unconditional basic income. It would be financed by increasing VAT. Proponents argue that this would not fuel significant price increases, because the basic income would provide economic relief. This can only mean that wages will fall in line with basic income. For example, it is assumed that a part-time worker at a supermarket checkout gives their salary to the employer because they now receive the basic income. But even if that were the case, the sums do not add up. The amount to be financed for UBI would be 993 billion euros per year. However, the total social transfers of state and social security funds (including civil servants’ pensions) currently amounts to only 495 billion euros per year. There would therefore be a huge funding gap, and social benefits would have to be doubled in the case of UBI. The current rate of VAT would have to be raised from 19% to just fewer than 60%. This would result in massive inflation.
Finally, the third concept comes from the Links (Left) Party: their idea is that every adult receives 1,100 euros per month and children half that level. The aim would be to preserve the social security system. Some social benefits, such as child benefit, would be abolished, but there would be higher expenditure on labour market policies or free public transport. According to the party’s calculations, the costs amount to 1,500 billion euros. However, only vague information is provided on financing, and no information at all on price effects. In any case, there would be drastic tax increases here too. Expenditure under this plan would amount to about 90% of the total disposable income of private households in Germany. Almost all income would thus be coming from the state.
Effects and side effects
Periodically we hear reports that UBI has already been tested successfully in the field. But that isn’t the case. In Finland, for example, additional benefits were paid to the unemployed in order to increase their allegedly inadequate incentive to work. But an actual test would require a major restructuring of the tax and benefit system in a country or region. Above all, the new system should be self-sustaining; it must not be supported from the outside.
As UBI is dependent on considerable redistribution, it would have enormous impact. In any event, since social security benefits must be massively increased a sharp increase in taxes would be necessary. If the financing comes from income tax, those in employment will have a lower share of their gross income. If VAT is used as a source of financing, prices will rise. Price increases reduce purchasing power. However, if workers have significantly lower incomes or purchasing power, they will try to compensate for the losses. Major wage increases would follow, leading again to higher prices. If prices rise, UBI would soon no longer be sufficient to cover the cost of living, so it too would have to rise. However, this can only be done with higher taxes. There is therefore a risk of an inflationary spiral resulting in economic collapse.
The proponents of UBI argue that people would gain greater freedom of choice and could work on a voluntary basis instead of for a wage. That may well be true, but it would be counterproductive. This is because volunteer work does not generate taxes that are needed to finance UBI. The greater the number of people who abandon paid work, the greater the burden on those who still have a paid job. If this burden on wage earners becomes too great they will increasingly withdraw from employment. Accordingly, the burden on those remaining increases even more. Here too, sooner or later the funding source would collapse.
Generally speaking, the idea of freedom, which is connected with UBI, is essentially the opposite: namely the loss of freedom. It is no longer individual citizens who take care of themselves, but the state. The citizen thus becomes the subject of an increasingly powerful state. And because the state provides its citizens with income – which it has previously taken out of their pockets in the form of taxes – all future demands for higher incomes will also be directed at the state. The employers would be the winners. They would hardly have to worry about wages. There would no longer be strikes, unions would be superfluous. Employers could even expect their employees to provide them with a large part of their labour free of charge because of UBI. This is probably why some entrepreneurs support the introduction of a universal basic income.