Two-tier basic income – The ideal monetary system, part 9

In the previous part, I argued that instead of asset purchases or boosted lending, we could much more successfully avoid deflation and stimulate the economy by means of a monetary basic income financed from newly printed money.

But then the question arises whether it is possible to base the system of inflation targeting on monetary basic income in normal times as well. Let us carry out the mental experiment: instead of a policy rate, the Monetary Council would set a basic income so as to keep inflation under control.

There are two principal problems with this idea. One is that its operations would be interfered with by the current mechanism of money creation resting on the foundation of commercial banks. It could work nevertheless, but it would operate really efficiently in a full-reserve banking system, which means that banks had better be closed in their present form. We would not lose much with that anyway as the banking system is malfunctioning, see a number of banking crises in history, such as the one a few years ago.

The other problem is much greater. We have no means to manage the inflation fueled by an overheated economy. A situation could certainly arise in which money supply should be restricted, but it is not possible to withdraw money, i.e. to provide a negative monetary basic income.

The situation would be completely different if the system included another form of basic income paid out of the budget. As this would be financed by the government from tax revenues rather than the central bank from newly printed money, it would not affect the supply of money. Let us therefore call this fiscal basic income.

When basic income is mentioned, usually this type of income is meant. Contemplating unemployment-based society, I too discussed it here and here. I would not go into too much detail on my previous arguments. The point is that based on the current values of our society, we consider it appropriate for people to work for a living. We must see, however, that in some rich and developed countries, this is already a moral issue only. Even today, they would be economically capable of making a basic standard of living a civil right by introducing (fiscal) basic income. But perhaps later we will have no choice. The more advanced intelligent machines, robots and software become, the less human work will be needed. And something will have to be done about the unemployed whose numbers are expected to skyrocket as the world becomes more automated; for instance, they could be granted a (fiscal) basic income.

If this were to happen, it would offer inflation targeting with a two-tier basic income on a silver platter. The government would assess a fiscal basic income financed from taxes, which the Monetary Council would fine-tune either up- or downwards with monetary basic income. It would either top up the income from newly printed money, or cut it and withdraw the amount of the cut from circulation. In both cases, it would ensure that prices remain unchanged.

It is true that inflation targeting based on the regulation of money supply is not working nowadays, but this is due to severe inequalities in the distribution of money. If additional cash is injected into the system by means of the methods currently in use, it will be channelled to the rich, who will save it rather than spending it on consumption, they will not drive inflation, and there will be no growth effect.

The situation would be completely different if the money pumped into the system was allocated to everyone. The average person is not rich and would spend it on consumption. In times of recession, raising the monetary basic income could boost the economy and help avoid deflation. Assistance would be provided to the unemployed and indirectly to the budget when necessary. Support would go to competitive businesses and not to the creditworthy. The reverse effect is achieved when negative monetary basic income is used to withdraw money from an overheated economy, in which everyone makes a good living anyway.

Recent years have shown that an interest-rate targeting monetary system could fall into a liquidity trap, i.e. it could manoeuvre itself into a hopeless situation from which it cannot disentangle itself using its own means. As we can see, this could not occur in a system of two-tier basic income, which can efficiently generate inflation and deflation in all circumstances.

This would considerably shorten the time horizon of monetary policy. The Council would not have to wait years until it can make an impact on price levels through lending. With monetary basic income, the impact is virtually immediate.

It does not lure policy makers into stimulating the economy through artificially low interest rates and excessive lending, which means that no credit crisis (savings crisis) could evolve either. Setting interest rate levels could be left to the market, and monetary socialism could be brought to an end. We could trust in the appropriate pricing of credit risk, since in a full-reserve banking system, there is no need to bail out banks. If you misprice, you are free to fail.

Basic incomes must be decoupled completely from lending. That is, such incomes could not be pledged as collateral to back a loan, meaning that I could not consume my future basic income. Consequently, I would not get into any trouble if I could not repay my loan. My survival would be ensured by my basic income, which would be strictly mine in all circumstances. In such a world, there would be no need to save foreign currency debtors. The same would apply to lenders who (or their banks) lend irresponsibly and blow their entire savings. They would not have to be saved either, there would be no need for a deposit guarantee that is alien to the market (where ultimately the depositors of irresponsible banks are paid by responsible banks), or to save careless large banks—no one would be too big to fail.

Of course, what works so neatly in theory just might not do so in practice. The side effects could generate problems that are more severe than the ones resolved; we have seen that happen in world history. Yet, there is no harm in considering alternatives, as there are serious problems coded in our financial system. However, a few things are still missing from our ideal monetary system. These will be discussed in the upcoming parts.

Next in the series: A world built by hypnosis

Previous part of the series: Monetary basic income

Related posts:

Towards an unemployment-based society

Life in an unemployment-based society

Kapcsolódó tartalom

Smarter money printing