Alternative Forms of Income

The preceding sections of the economic discussion, along with the many references, have attempted to provide a general outline of the various components within a functioning modern economy, i.e. government, banks, industry and people. While all these components serve a different function within the economy, we have assumed that all require the flow of money to finance their operations. In this respect, the issue of inflation and debt within most modern economies appears to have become increasingly problematic, especially if debt rises to a level it cannot be serviced. However, it has also been recognised that debt, in the form of loans, has been used to fuel economic growth, which has possibly been compounded by the monetary policy of many central banks in the form of quantitative easing (QE).

So how might this system change in the future?

History suggests that the current economic system is becoming increasingly unstable in terms of the frequency and depth of repeated ‘boom & bustcycles, which have invariably led to increased unemployment and the loss of income for many, either on a temporary or permanent basis. However, the predictions of growing AI and robotic automation across the entire spectrum of the job market may come to further challenge economic stability, which in-turn could then further affect social and political stability, unless some alternative form of income can be devised for the long-term unemployed.

Note: As a present-day benchmark, the number of working age people (16-64) in the US is estimated to be in the region of 210 million of which only about 130 million (62%) are estimated to have full-time employment. While the official unemployment rate in the US is stated to be less than 5%, it is doubtful that this figure truly reflects the scale of mental and physical disabilities plus social commitments that prevents many gaining meaningful employment, which may then be compounded by part-time employment and zero-hour contract work. Therefore, if we simply use the 62% figure, this would mean that something like 80 million (38%) of the US working population is not in full-time employment, which future technology innovation might easily push towards 50% and above.

However, before we can really assess the viability of any alternative forms of income, we possibly need to better understand the financial implications of any solution, when considering the scope of the unemployment problem suggested in the note above. In this respect, we might use a modified version of an economic model previously discussed.

In the modified model above, the ‘people’ component has been expanded to represent the possibility that the ‘unemployed’ may come to outnumber the ‘employed’. This model also highlights the expectation that the government continues to receive tax revenue from industry, banks and people in order to finance its benefits and service commitments. However, for the purpose of this discussion, we might assume that while the introduction of future technology may drastically reduce the number of people employed, the industrial and banking sectors are able to maintain GDP as a comparative figure. However, while the government might still receive the same tax revenue from industry and banking sectors, the diagram above suggests that the tax revenue from the smaller number of people employed must be reduced, while unemployment benefits must presumably be increased based on current levels of the benefits being maintained. In the previous discussion entitled the role of government, a generalised breakdown of the UK tax income and outgoings was estimated for 2014, which suggested that the UK welfare system was already the highest percentage line-item (30.3%) in the UK outgoing commitments. As such, the previous diagram suggests that this situation would only get worst unless a government can find additional sources of tax revenue, which we might first consider in terms of the next chart. 

Again, simply using the UK as an example, the chart above suggests that the government has already explored most options for exploiting the possibility for additional sources of tax revenue, such that it might only be left with the option of increasing the rate of taxation, especially on industry and the banking sectors, assuming that they have become more profitable with the adoption of future technology, i.e. they have reduced employee costs.

Note: The assumption that the industry and banking sectors simply come more profitable with the continued adoption of technology by an associated reduction in staff may have to be challenged in the context of global competition. However, we might also have to consider the fact that the bottom 50% of today’s low-paid employed may contribute only about 10% of the income tax revenue of the government. As such, any change to the government income may be difficult to assess, although it might still be reasonable to assume that not all economies around the world will be net beneficiaries of the changes being outlined in any of the brave new worlds scenarios under review.

If the prediction of increasing unemployment becomes a future reality, there are a number of potential courses of action. For example, those in power might consider the option that those who become effectively destitute be simply left to fend for themselves, irrespective of the consequence. While many might be horrified by the mere suggestion of this option, the truth is that this is exactly what happens every day across the world in economies unable to provide a safety-net in terms of a welfare system. However, on the assumption that this would only be an option of last resort in the wealthy economies, we might now consider the implications of a redistribution of wealth in order to fund an extended welfare system, if a larger percentage of the population become the victims of long-term unemployment. However, we possibly need to first make some estimate of the costs, which we might equate in terms of the 2014 UK minimum wage simply as a comparative benchmark.

Minimum wage £7 per hour
£38 per day
£263 per week
£13,650 per year

While the previous 2014 figure of £13,650 is only intended as some ballpark estimate of a ‘minimum income’ that might only cover the basic essentials of life, we might equate this figure to the 2014 UK budget breakdown previously outlined in the role of government discussion. Therefore, it needs to be highlighted that the actual  unemployment benefit for an individual over the age of 25 is in the region of £70 per week, which would only translate into £3,640 per year or 27% of the previous minimum income.

Unemployment Benefit £70 per week
£3,640 per year
27% of minimum

However, if we replicate the previous breakdown of the UK welfare budget, but exclude the provision for pensions, we might see an opportunity for the unemployed to claim additional income under the various categories suggested below. Again, these are only intended as comparative estimates rather than actual figures.

Unemployment Benefit £37,332,000,000
Disability Benefits £37,332,000,000
Housing Benefits £37,332,000,000
Family Benefits £37,332,000,000
Social Services £37,332,000,000
Welfare Benefits £186,660,000,000

At this point, it might be useful to understand whether there is any correlation of the £3,640 figure allocated to the unemployment benefit, outlined above, to the total figure of the unemployment benefit, i.e. £37 billion, in the table above. We might attempt this correlation by considering a breakdown of the UK population as follows:

Total Population 64,000,000 100%
Working Age 38,400,000 60%
Employed 28,800,000 75%
Unemployed 9,600,000 25%
Benefit for 25% £3,889 per year

In the case of the UK, we might use a 75%-25% split in the working age population, divided into employed and unemployed. On this assumption, we might divide the $37 billion figure by the 25% unemployed, which gives us the figure of £3,889, which is in the same ballpark as the unemployed benefit £3,640 quoted above. While it is unlikely that all unemployed would qualify for an equal amount under the other categories listed under the UK welfare provisions, we might see how many might get closer to a minimal income of £13,650 per year. However, having provided a possible explanation of how the current UK welfare system is financed, we need to consider the next question:

How might the government provide income for the growing unemployed?

We might initially proceed on a somewhat optimistic assumption that the GDP underpinning an economy will not be adversely affected by growing unemployment if productivity is maintained or even increased by technology automation. However, we might have to assume that government revenue from taxation from the employed population may still fall. If so, the government may need to consider ways in which to increase its revenue by stimulating economic growth to pay for the additional demands on the welfare system being linked to increased long-term unemployment. Historically, governments have often attempted to restore economic growth by revising its fiscal policy and by exerting pressure on the central bank to adjust its monetary policy.

Note: Fiscal and monetary policies are the two most widely recognized tools used to influence a nation's economy. Fiscal policy is normally determined by the executive and legislative branches of government and sets the rules for taxation and spending allocations. In contrast, monetary policy is primarily concerned with the management of interest rates and the total supply of money in circulation, which the central bank conceptually determines independent of any political influence.

In terms of monetary policy, the adjustment of interest rates to encourage borrowing and increase spending in the economy has often been an initial action, although recent history suggests that even after reducing interest rates to near-zero, it has not necessarily stimulated the economy. As a consequence, central banks now often resort to quantitative easing (QE) to increase the money supply in circulation. However, there is evidence to suggest that this approach has only allowed large investment institutions, e.g. private banks, to inflate the stock markets and equity property markets, while providing little stimulus to the wider economy. So, while many may still argue that QE is not just printing money as the balance sheet of the central bank shows the liability, this liability may only be meaningful if the QE currency is actually removed from the money supply, which may never happen. Equally, while this stimulus might help the economy in some respects and therefore aid the government’s ability to fund a larger welfare system, its overall efficacy might be questioned, if it also increases the government’s overall debt. However, an alternative method of introducing the additional QE currency into circulation has been forwarded in terms of a ‘debt jubilee’ that would allow QE to be distributed into the population, as either a cash payment or tax rebate.

Note: The idea of a debt jubilee has a long history, where individuals who had been reduced to slavery or debt bondage were freed, typically on some significant event or cyclic period, in order to stabilise society and its economy. In a modern context, we might better describe this type of debt relief in the form of a tax rebate that would be given to the entire adult population with the possible caveat that those in debt must use the tax rebate to pay down their debts, while the rest might use the windfall to stimulate all sections of the economy. A more extreme form of a debt jubilee might be considered in terms of a debt default in order to reduce the level of household debt in an economy. However, this idea is invariably resisted by powerful banking interests that would have to write-down these loans as losses on their balance sheet.

The other idea that is now often discussed takes the form of a ‘universal basic income (UBI). While there are many variations of UBI, we shall just outline one conceptual variant that involves providing an unconditional income to everybody over the age of 18, i.e. working-age plus the over 65. As such, this income would be paid automatically to every adult without any means testing such that eligibility would not be affected by any change in financial circumstances and would not depend on any previous level of contribution to the system. Within the general assumptions of this system, an individual would have no obligation to look for employment and where the income received into a household would not depend on marital status or any preconceived ideas of family composition. However, while there may be reasons why such a scheme should be given serious consideration, it is not clear how it would work financially within economies that may already be struggling to maintain any semblance of growth, where political issues, such as immigration, might only compound the debate. Again, the scope of all the arguments, both for and against such a scheme are beyond the scope of this discussion, such that following reference papers are provided for those interested in more detail:

While the references above provide far more detailed analysis, we might still attempt some basic sanity checks against the 2014 figures provided for the UK government budgetary income and outgoings. While we will retain the figure of £732 billion for the total government income, it is highlighted that this figure included £84 billion of deficit borrowing, which we might reasonably assume cannot continue indefinitely. However, we might still attempt a ballpark comparison by assuming that the entire UK welfare budget is allocated to the UBI scheme, such that it would represent the only pay-out that people would receive from the government.

Government Income: £732,000,000,000 100%
Welfare System £219,600,000,000 30%
Total Population 64,000,000 100%
Eligible Population 51,200,000 80%
Universal Basic Income £4,289.06 per year
Minimum Wage £13,650 per year
UBI/Minimum Wage 31%  

Based on the figures above, there is a suggestion that this scheme would only be able to realise 31% of a minimum income, which would not provide a sustainable long-term living income. On the assumption that the UBI scheme would, at least, have to achieve the minimum wage for the eligible population, we might calculate its cost and determine the deficit against the current welfare budget.

Current Welfare Budget £219,600,000,000 30%
UBI/Minimum Wage £13,650 per year
Eligible Population 51,200,000 80%
UBI Cost £698,880,000,000  
Welfare Deficit £479,280,000,000 218%

On the basis of the ballpark figures above, there is the suggestion the UBI scheme would cost somewhere in the region of £698 billion if required to provide the minimum wage, which would exceed the current welfare budget of £219 billion by £479 billion. On the assumption that the government would not be able to significantly adjust its other outgoing commitments, then the only other option to finance the UBI scheme might be increased taxation. While we might assume that the government would want to distribute the increased costs over as many of 24 tax classes previously listed, we shall simplify this complexity by assuming the required increase only comes in the form of a single tax, which we might show in terms of the previously defined income tax groups.

Income Group % Population
(Millions)
% Tax Income Tax
(Millions)
Pro-rata Revised Tax
(Millions)
Pro-rata
Top 1% 1% 0.384 24.1% £52,779 £137,445 £168,218 £438,068
90-99% 9% 3,456 29.2% £63,948 £18,503 £203,816 £58,975
50-90% 40% 15 35.1% £76,869 £5,004 £244,998 £15,950
10-50% 40% 15 11.0% £24,090 £1,568 £76,780 £4,999
0-9% 10% 3,840 0.6% £1,314 £342 £4,188 £1,091
Total 100% 38,400 100.0% £219,000   £698,000  

The UBI scheme under consideration is assumed to provide a minimum income of £13,650 per annum for 80% of the population, i.e. 51.2 million, over 18 years of age. Previous estimates suggested that the tax system had to raise £219 billion to paid for the welfare, which the UBI scheme would increase to £698 billion. While tax revenues are collected from corporation, currently they only account for something in the order of 10% of the required total of £732 billion, such that we might make the simplified assumption that most of the increased taxation would have to be paid by individuals in work. Therefore, based on the ‘income groups’ shown, we might work out a pro-rata cost on each person within these groups based on a working population of 38.4 million. While this population might be reduced by unemployment, we will also make the assumption that job losses will affect the lowest paid groups first, although this is questionable given the nature of AI automation. Based on all these speculative assumptions, the UBI scheme, as describe, appears to require a 300% increase in individual taxation. If these estimates come anywhere near the required ballpark increases required, then it is suggested that a UBI without means-testing may be unrealistic, both in economic and political terms.

What else might be considered?

Of course, if the current scheme of means-tested welfare were still retained, then the increase to the welfare budget would presumably only have to be increased in-line with the increase in unemployment. While this position would hardly quantify as an evolutionary step-change in alternative income for the unemployed, it may remain the only viable solution in terms of all the mounting problems within many economies along with the increasing political difficulty of attempting to maintain some semblance of social stability.