Friday, July 21, 2017

Inflation & Universal Basic Income

The key drivers of inflation are (1) expectations, and (2) supply and demand

1) As we become used to inflation, we expect wage increases. Everything gets more expensive, so we are no better off, but most people don't think in mathematical terms - so they are happy because the number is bigger.

2) If there is no more stuff, but more people want the same amount of stuff - the price will go up. Fewer people will want the stuff as it gets more expensive. More people will provide the stuff as it gets more expensive. Inflation is a signal to use less, or make more.

Inflation happens most rapidly as a signal that there isn't enough production. Hyper-inflation happens is a great signal that things are falling apart. You have to spend your money quickly, because it won't be worth anything rapidly. It is a the most tangible sign that things are running out, and everyone is living hand to mouth.

If a Universal Basic Income (UBI) is funded by a transfer, there is no more money in the system. It is just changing hands. Expensive luxury goods may get cheaper if the net contributors have less money to pay for those luxuries. Basic goods may get more expensive, because people can now afford them. This would shift the incentives from producing luxury goods to producing basic goods. All good.

Even if a UBI was funded by printing money, if it was distributed universally, it would effectively be the same thing as a transfer. It would just be sneakier. Same total amount of goods, but more money. People who had nothing would now have at least a minimum (even if it was worth a little less). Basic goods may be more expensive, but (1) this would encourage more production, and (2) the UBI would be paying for that increase for poorer people.

If this doesn't make sense, just think of the sneakiness of normal inflation. A salary can increase without you being able to buy more! Money isn't actually a thing. It is a law. It is just a way of accounting for who owns what. An agreement. We could just decide that everyone owns enough to survive.

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