Brothers doing startups. Building the world we want to exist.

CHRIS: West Point. Army. CEO/Founder of SignNow (acquired by Barracuda). GM of Automation @ Barracuda.

ANDREW: Vanderbilt. GE Capital. Actively involved in building multiple startups.

Basic Income Is Practical Today…Necessary Soon

This is part 3 in an ongoing series. Check out part 1 and part 2

No one, as a child, ever aspired to scrub toilets or flip burgers or restock merchandise. But you had to earn money to live your life, and these were the jobs being offered to tens of millions of people.

-Marshall Brain, Manna

Workforce automation will drive away the need for humans to work, allowing us to enter a new era of post-abundance society with Basic Income. We are going to discuss why this is something that is possible today, easy to accomplish in 20 years, and necessary in 40 years.  Let’s look at a few numbers.

Assumptions

We assume that the current system of taxation and spending would be re-worked to make Basic Income practical in the short term and to realize its full benefits. There are a variety of ways this could occur, and we won’t go into too many specifics here. We do, however, make the following assumptions about how things would occur:

  • All current means-tested social safety net programs (e.g. food stamps) would be dismantled.

  • All age-related social programs, such as Social Security and Medicare would be dismantled.

  • Any government paid benefit, such as pension fund obligations or VA benefits, that are less than or equal to Basic Income would be replaced with Basic Income.

  • Basic Income would be not taxed.

  • In our last post, we argued that Basic Income should start at $12,000 per year, or $1,000 per month.  This isn’t that different than the official poverty line of $11,670/year, despite the fact that they were calculated very differently (see blog post 2).  GDP Per Capita in the US is $51,749 in 2012 according to the World Bank.1

  • Today, roughly 43% of Americans do not pay income tax, of whom 16% live below the poverty line.23  We assume that there will be structural tax changes to the tax code so that most Americans would contribute roughly the same net tax revenue after the introduction of Basic Income.  In other words, if someone pays $8,000 in income tax today, and tomorrow Basic Income is introduced, that person would likely pay $20,000 in income tax, but receive $12,000 in Basic Income, netting $8,000 in income tax.  This means in effect that we assume that Basic Income will be only a net cost, after taxes, for 43% of Americans.

  • We only look at providing Basic Income for adults in this particular discussion.  Providing for children will be addressed at a later time.  We will look at the costs of providing Basic Income to adults and children separately.  We will go into this in more detail, but in general our opinion is that Basic Income for children does introduce some negative incentives, but Basic Income for adults is a no-brainer.

Measuring Affordability

To measure affordability, we are going to look at the level of government spending on various programs versus GDP.  We use GDP for the following reasons:

  • GDP growth has been predictably driven by productivity gains historically, so we can reasonable predict GDP growth in 20 and 40 years.  Basic Income is closely related to productivity.  

  • GDP per capita is generally seen as a measure of standard of living.  The level of Basic Income compared to our total economic output gives some sense to the scale of its effect.

  • Tax revenues closely track the economy, and GDP is a measure of the economy.

 

Basic Income Is Realistic To Provide Today

Lets look at the cost of providing Basic Income today for adults.

 

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The US Federal and State governments spend 13.5% of GDP annually on programs that would be immediately and directly replaced by Basic Income.

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Bottom Line: Because our current social spending programs cost 11.4%, and Basic Income would be expected to cost 7.7%, we expect to save 3.7% of GDP by switching to Basic Income.

 

20 Years - Basic Income Becomes Easy To Provide

Currently, there are many jobs that need to be done, that few would do without monetary benefit (eg. cleaning, plumbing, garbage collecting, industrial farming, and accounting).  Over time, these are being roboticized.  This technology-driven-automation is helping drive GDP per capita growth since the industrial age, measured by productivity.  If you look at trendline real GDP growth per capita you will see that we have risen it from roughly $5,000 in the late 1800s to over $44,000 by 2012 as the economy began to pick up.

image

Source: Visualizing Economics

With real GDP per capita growth of 2% (an inflation-adjusted historical average), real GDP per capita will be $76,896 in 20 years.5  This means providing the same level of Basic Income will drop from 7.7% to 5.2% of GDP, or that the level of Basic Income could easily be increased.

40 Years - Basic Income Becomes Essential

Within 40 years, $1,000 machines are expected to have computing power comparable to the human brain, and the service industry will be dramatically impacted by automation.  At this point, assuming productivity growth continues, we calculate Real GDP to be approximately $114,263.  

We have no idea what percent of the population might no longer be employable and able to contribute to the government coffers.  Providing all Americans a the originally proposed amount of Basic Income would cost only 3.5% of Real GDP.

What if technology increases unemployment?

If the historical average productivity growth continues, in 20 years years productivity improves by almost 48.6%.  This means almost one half of the number of people are needed to produce the same economic output every 20 years.  That is a lot of jobs that will be impacted.  Historically this has created new opportunities, particularly in the service industry.  Technology has enabled people to do things previously impossible.  However, as automation is increasingly targeting the service industry, this trend could run its course.  There will certainly be new, higher paying jobs created, but more and more people may simply not be able to compete against automated labor…for any task.

We don’t have a model to know what this might look like, but it is worth making some simple guesses.  Lets say that for jobs disrupted by productivity gains over the next 20 years, 75% are replaced by a better job.  25% are eliminated, increasing the unemployable population.  This means that in 20 years we would expect 12.2% of the workforce to be unemployable.  With a current workforce of 156 million, this is 19 million people.6  This elimination of jobs would increase the number of people for whom Basic Income will cost to 49.9%.  Under this assumption, Basic Income would cost 6.0% of GDP (versus 5.2% using the previous assuptions).

In 40 years, if we assume that another 25% of productivity gains create unemployment, than the percent of people costing money grows to 56.0%, and  Basic Income would cost 4.5% of Real GDP (versus 3.5% using the previous assumptions).

This is pretty remarkable.  Even assuming that 25% of productivity gains every 20 years create unemployment (an effect entirely unseen to date), we are able to provide basic income for the unemployable at a steadily declining rate.

Not Only Affordable…Better

None of these numbers take into account that technology should reduce the cost to provide services.  Software has already driven the cost of entertainment, education, and information to nearly zero.  For example, medicine is largely an information science, and should trend towards $0 marginal cost over time. 25% of a residential construction project is field labor. Approximately 80% of a food’s cost is labor. It is probable that we will decrease the costs in inflation adjusted terms of essential goods to half of today’s levels, while improving quality.

Don’t Believe Our Numbers?

There have been several studies and research that provide evidence that my numbers fall within a reasonable and respectable range.  From Wikipedia:

Specific, though informal, measurements were made by Pascal J. for Canada.7   A 2004 taxable basic income benefit of $7800 per adult could be afforded without any tax increases by replacing welfare, unemployment, and core Old age services…

To estimate affordability of basic income in the US, the starting point of 265M adult citizens and $6.3 Trillion in estimated federal, state, and local government spending means that replacing all US government spending can provide nearly $25k per citizen in basic income….

Naturalfinance.net estimates that by cutting the $1.85T spent on social security and welfare in the US, $9905 can be given to each adult American citizen as a taxable basic income benefit8   

Quick Note On Children

For the purposes of this discussion, we will look at the costs of providing Basic Income for adults only.  We consider Basic Income for children to be a separate issue, and we will discuss it in more detail in a separate post.  There are many questions around incentives and the size of the funding.  Here are some high level thoughts:

US Government spending on children is approximately $348 Billion today, or 2.1% of GDP.9  The cost to provide a Basic Income of $12,000/year today is 5.5%.  Calculations below:

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Unlike for adults, Basic Income for children costs more.  The combined cost to provide Basic Income to adults and children at $12,000 annually is 16.9% of GDP.  Our existing spend is 13.5%.  So the argument for including children, while quite possibly a good one, does increase the overall level of spending.  Some people will be uncomfortable with that, so we’d prefer to not dilute the message.

The primary reason that there is no cost savings for providing Basic Income to children is that the current level of financial support for children is much lower for a child than for an adult.  It is not clear to me why it should be significantly different, as a 12 year old needs basically the same as an 18 year old.  My best explanation for this is that historically many of the adult programs have been trying to accomplish more wide ranging things (such as getting people back to work) and that adults can vote on benefits for themselves.

Next Post: Next Steps in Making Basic Income a Reality

To date we’ve defined Basic Income’s benefits, figured out the appropriate level of Basic Income, and shown how economically practical it is.  Next we will discuss practically how we might go about starting Basic Income.

 1 http://data.worldbank.org/indicator/NY.GDP.PCAP.CD

http://washington.cbslocal.com/2012/11/15/census-u-s-poverty-rate-spikes-nearly-50-million-americans-affected/

http://www.cnbc.com/id/101015065

States noted to have spent 29% of the federal budget in  http://budget.house.gov/uploadedfiles/rectortestimony04172012.pdf

5 http://www.multpl.com/us-real-gdp-growth-rate

http://www.bls.gov/news.release/empsit.t01.htm

7 Wikipedia.  ”Instituto pela Revitalização da Cidadania”. ReCivitas. Retrieved 2013-07-24.

8 Wikipedia.  ”Namibian Basic Income Grant Coalition”. Bignam.org. Retrieved 2013-07-24.

http://www.urban.org/UploadedPDF/412903-Kids-Share-2013.pdf

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