Economic Freedom

If you were to quit your job right now, could you still afford to take care of your basic needs? Could you pay for food, shelter, clothing, and so on? If you are retired, what if your company suddenly stopped paying your pension? If you are supported by a spouse or partner, what if you left that person?

If you could no longer meet your basic needs, then you are not economically free. Your decisions on how much of your labor to sell and whom to sell it to, whether to stay with your partner or not, which city or rural area to live in, are not free decisions. Many people in the U.S. today are not free in this fundamental sense.

A recent survey in the U.S. asked respondents if they had enough money to pay for a $1,000 emergency. Over two-thirds said they did not [59]. Other studies have found that about 75% of Americans over 40 are behind on saving for retirement and 31% of all non-retired adults have no savings at all [60] [61].

Crucially, if you are not economically free, you are not free to participate fully in the Knowledge Loop. Hence economic freedom is a cornerstone of the Knowledge Age. We must make people economically free so that they can participate fully in the Knowledge Loop. We want more people to be free to make music and create art that has the power to inspire. And we absolutely need people to have the time to learn new knowledge, from practical skills such as gardening to the latest theoretical physics. We need more people to create new knowledge using what they have learned. And finally we need more people to share their knowledge with the world for others to learn.

We have massive problems, such as climate change, to overcome and we need more participation in the Knowledge Loop than ever. To free us up to do so, we must be able to embrace automation, not fight it for fear of losing our livelihoods.

Universal Basic Income

Economic freedom is a reality today for some—those sufficiently wealthy, tenured professors, retirees with pensions and savings. How can we make it a reality for everyone? The answer is to provide everyone with a guaranteed ongoing income to cover basic needs, including housing, clothing, and food (see earlier chapter on Needs). This income would be unconditional, i.e. it would not depend on whether someone is married or single, employed or unemployed, rich or poor.

At first blush this idea of a so-called Universal Basic Income (or UBI) may seem crazy or outrageous. Getting money for having done nothing? Getting paid simply for being alive? Isn't that communism? Or socialism? And where would this money come from? Won't people simply descend into utter laziness and drug addiction? We will look at each of these objections to UBI in turn, but first let's consider arguments for UBI as a way of achieving economic freedom.

Concerns about economic freedom are by no means new. When the American republic was in its infancy, economic freedom seemed well within everyone's reach. There was plenty of land to be had (so long, of course, as one was willing to take it by force from Native Americans). As a result, any family could make ends meet by living off the land. Even back then, though, observers such as Thomas Jefferson and Thomas Paine understood that land would some day run out. They raised the specter of a time when citizens might be forced to trade labor to others in order to provide for their basic needs—when they would be economically unfree [62]. All the way back then they concluded that an alternative to land was to give everyone enough money to be free. The idea of a UBI in the U.S. thus goes back to the earliest days of the nation.

If you don't find this historic argument for UBI compelling, consider the case of air. We all breathe air to solve our basic need for oxygen. We can all afford to breathe air because air is free and well distributed around the globe (important caveat: regulation is required to keep air clean, we had lots of trouble with air pollution during industrialization and in China right now it is estimated that more than one million people die every year from air pollution [63]). Our freedom is not restricted by having to find air. The power of UBI is to make us equally free when it comes to our other basic needs, by making food, housing, clothing (the solutions to our basic needs) affordable and accessible by everyone!

As I argued in the earlier chapter on Capital, as a species, we have developed our technologies enough so that we are now capable of meeting everyone's basic needs. Farming can generate enough food for everyone. We can easily make enough clothing for the world. We can even provide everyone with shelter. All of this has been made possible by knowledge, the knowledge that humanity has created over millennia. And our technological progress is accelerating while global population growth is slowing down. So from here on out it will only get easier.

The question thus is not whether we have the ability to meet everyone's basic needs, but rather whether our economy and society accomplish the necessary resource distribution and allocation. That is exactly where UBI comes in. UBI enables the functioning of markets for basic needs such as food, clothing and shelter without forcing people into the Job Loop. UBI lets everyone freely participate in these markets. UBI thus frees up attention, frees up people to live where they want to and with whom they want to.

Industrial society presents us with two fundamentally different ways of distributing and allocating resources. One is individuals meeting their needs by participating in a market economy; the other is government providing solutions for people's needs directly. Those options form the extreme ends of a spectrum with a variety of “hybrid” arrangements in the middle, such as government subsidized or rent-controlled housing for which people still need to pay some rent. UBI solve the allocation issue while avoiding reliance on an ever-expanding government sector. Put differently, UBI recognizes just how effective markets have been in the allocation of resources, and by contrast, how many distortions are introduced by direct government activity, such as government built housing. UBI is the opposite of communism and socialism in that regard. It is all about reducing the size of government activity.

After World War II in the U.S., only about 5% of people were employed by government, which in turn comprised about 42% of the economy [64] [65] [66]. In the Soviet Union, by contrast, nearly 100% of people were employed by the state, and the state owned close to 100% of the economy. We now know quite well which system was more effective at allocating resources. Nevertheless, the size and scope of government employment and the government sector have gradually expanded here in the U.S. and in Europe. In many European economies, the government sector now accounts for a half or more of the economy.

I have only mentioned food, clothing and shelter when talking about basic needs, but what about education and healthcare? Can UBI cover those as well? That might seem wishful thinking given how quickly education and healthcare costs have risen, especially in the U.S. Yet UBI can cover these basic needs as well, and to understand how, we need to look at how technology is driving down the prices of almost everything. Technology can make education and healthcare far more affordable than they are today.

Technological Deflation

If you are currently struggling to pay for your basic needs, the world will seem like an expensive place to you. Yet the data shows that a lot of things have become cheaper, and that this trend has been gathering steam for some time now. In the U.S., as the following chart shows, the prices for consumer durables have been falling since the mid 1990s. Not only can we see the decline in the prices for consumer durables; we can also see the rise in the cost of education and healthcare.

Consumer Durables Price Index

What has produced the decline in prices for consumer durables? Once again it is technological progress. We are getting better at making stuff and a big part of that is the ongoing automation of production and distribution. While this progress hurts you if you are losing your job or your salary is remaining stagnant, it helps you if you have money to buy things, and that money goes farther and farther over time. With Universal Basic Income, you will have the money, and over time, it will buy you more and more.

Thanks to the decline in prices for consumer durables, clothing has become easily affordable. Technology also has been driving down the cost of smartphones, which we will be essential to making education and healthcare much more affordable. The price decline in this area will only accelerate as we further increase automation and use technology such as additive manufacturing (also known as “3D Printing”) to manufacture products only when they are needed and close to where they are needed [67].

What about housing? Technology is definitely making it cheaper to put up a building. In early 2017, the first house printed using mobile 3D printing technology was built in Russia in just 24 hours! [69] Another factor making housing more affordable is the more effective sharing of existing housing assets through services such as Airbnb and Couchsurfing. Despite such progress, it still costs a fortune to live in certain places like Manhattan or San Francisco, where the demand for housing exceeds the available supply. Here UBI functions quite differently from other solutions that make housing more affordable, such as government subsidies. With UBI, people can live in parts of the country (or the world) where housing is much more affordable.

The city of Detroit is currently giving away houses as an alternative to tearing them down [70]. Or if you prefer a rural setting, you can buy or rent a home for as little as a couple hundred dollars per month [71]. Right now, many people can't take advantage of these opportunities, since they can't find a job in these locations and would be left with no income. By breaking the connection with a job, UBI provides geographic freedom. People would no longer be trapped in expensive locations just so they can meet their basic needs.

Already today, a large group of people is no longer constrained by the need for a job: Retirees. And sure enough, we observe that many retirees move away from expensive cities to places where real estate is much more affordable [72]. When considering the cost of shelter, it would be a mistake to analyze how much people need to live where they may be trapped today. Instead, we should look at the future cost in a world that has UBI. And that cost will be declining because of technology.

As for food, here too technology has massive gains in store for us. While some argue that GMOs hold the key to affordably feeding the planet, other near-term breakthroughs don't carry some of the potential issues that GMOs pose. Indoor and vertical farming, for instance, allows for a precise delivery of nutrients and light to plants as well as huge increases in seeding and harvesting productivity. It also allows food to be grown much closer to its consumption, reducing the cost associated with transportation including spoilage. All this adds up to a dramatic reduction in the cost to feed a person.

Technology also promises to bring about a dramatic decline in the costs of education. At Union Square Ventures we became interested in education as an investment opportunity in 2009 when we held a one-day conference titled “Hacking Education.” Since then, the universe of online learning resources has grown rapidly, including many free or highly affordable ones, such as Duolingo for language learning (one of our portfolio companies). In addition to formal online courses such as edX or Khan Academy, millions of individual blog posts and even entire series of posts exist to explain a specific topic. And of course, YouTube is bursting with educational videos on subjects as broad as sailing and quantum computing.

Evidence exists that the exorbitant rises in tuition costs over the years in the U.S. are beginning to slow. When analyzing this data, we must remember that a huge amount of inertia exists in our educational system and job market. Many employers still believe they must hire from the best universities. This in turn drives up prices for higher education, with a ripple effect that extends all the way back to private nursery schools. It will be quite some time before most students will turn to free or extremely affordable online resources for all their learning needs. Still, the possibility now exists.

With healthcare, it's a similar story. Healthcare spending in the United States per capita far exceeds that of other countries, having risen for many years much faster than the rate of inflation—but that hasn't translated into better care. For instance, Cuba for years has had almost an identical life expectany to the U.S. despite spending less than a tenth on healthcare per capita [73].

Healthcare Expenditure Per Capita

Debates have been raging as to whether the Affordable Care Act or other legislative interventions will bring about lower healthcare costs or instead drive up insurance premiums further. Regardless of how this works out, progress with digital technology will push healthcare costs lower for a number of reasons.

First, technology makes prices on medical procedures more transparent, enabling more competitive pressures to exist that can push prices down. Second, to the extent that people better track their own health data through technologies associated with the “quantified self,” we will live healthier lives and require less care, especially over the long term (in the shorter term, folks who already enjoy above average health will most readily employ this technology). And third, technology will make possible faster and better diagnosis and treatment. If you want to feel inspired, just read some of the stories about how Crowdmed has helped people whose conditions went undiagnosed or misdiagnosed for many years. USV portfolio company Human Dx is also working on a system to help with diagnosis, and Figure 1 lets doctors exchange images and other observations. Flatiron Health is pulling together data on oncology patients to enable more targeted treatment. This says nothing of a whole group of companies that is bringing telemedicine into the app era, such as HealthTap, Doctor on Demand, Teladoc, and Nurx (another USV portfolio company). All promise to dramatically reduce the cost of delivering care.

One might object that so much of healthcare cost doesn't result from doctors' visits, but from pharmaceuticals. In fact, pharmaceuticals account for only about 10% of total spending [74]. Here too, we will likely see technology drive costs down. One successful pharma entrepreneur I spoke with described the potential for personalized treatment to dramatically improve the effectiveness for a wide range of conditions, including many cancers and even diseases such as ALS and Alzheimers. And on the horizon technologies such as CRISPR will give us unprecedented abilities to fix genetic defects [75] that today result in large ongoing expenses.

But Isn't Deflation a Bad Thing?

Now, you may find it confusing to hear me describe technological deflation as a good thing. Economists, after all, have painted deflation as an evil to be avoided at all cost. Economists are primarily concerned about growth as measured by GDP, which they argue makes us all better off. Their logic about deflation goes like this: If people anticipate that prices will drop thanks to deflation, they will be less likely to spend money today, which means that output will be lower than it could be. This in turn leads owners of capital to make fewer investments, which results in less innovation and lower employment. That in turn makes people spend even less, thus causing the economy to contract further in a vicious cycle. Economists point to Japan as a country that has been experiencing both deflation and contracting output. To avoid this scenario, they argue for policies designed to achieve some amount of inflation, including the Fed's so-called quantitative easing (cheap money), which is intended to expand the supply of money.

In a world of technological deflation driven by digital technology this reasoning is flawed though. GDP is increasingly not a good measure of progress because it ignores positive and negative externalities. For instance, everything I've said about making education and healthcare dramatically cheaper through free resources would serve to lower GDP while clearly making people much better off. We can also identify a second flaw in economists' reasoning: It assumes that technological progress is tied to growth in production. But it is possible to achieve technological progress even as economic activity, as measured by GDP, appears stagnant. Increases in economic, informational and psychological freedom allow us to accelerate the Knowledge Loop which is the foundation of all progress. A great example here is open source software, which has driven a lot of technological progress outside of the traditional economic model.

Once we break out of the job loop with the help of UBI, then in fact technological deflation becomes desirable. For individuals it means that they can afford more with the payments they are receiving and for society as a whole it means that UBI is affordable.

UBI is Affordable

So with all of this as background, your might wonder what a Universal Basic Income should pay. My working proposal for the United States is $1,000/month for everyone over age 18, $400/month for everyone over 12 years old, $200/month for every child. These numbers might seem extremely low, but keep in mind, the goal here isn't to make people well off; it's simply to let them take care of their basic needs. We have mistakenly come to embrace unlimited wants, and we can free ourselves from this by re-establishing a clear distinction between wants and needs. We should also remember that our basic needs will get cheaper over time, and we won't get UBI overnight. So my numbers are meant to work over time as other government programs are phased out and a UBI is phased in. Other policies I will discuss will also serve to help bring down the cost of education and healthcare.

Let's dig further into these numbers. While everyone will spend their UBI in different ways, a possible allocation for a typical adult would roughly break down as follows: $300/month for housing, $300/month for food, $100/month for transportation, $50/month for internet access and associated equipment.

You might wonder why I am proposing a lower payment for children and teenagers. First, we can meet many of their basic needs even more cheaply than we can for adults (for instance, several kids in a family might share a room). Second, I propose a lower payment in recognition of historic evidence that the number of children people have is partially determined by economics. UBI should not give an incentive to adults to have more children so as to “skim” their income. That's especially important with regard to slowing down and eventually stopping population growth: We want the birth rate to decline globally, as it has started to do in most industrialized nations in conjunction with economic progress and the decline in infant mortality. This will allow us to achieve peak population and put to rest the Malthusian fears of overpopulation and scarcity.

When you calculate how much money is required to provide a UBI for everyone in the United States based on the 2015 population size, you wind up with about $3 trillion annually [76] [77]. While that's a huge number, it only represents about 17% of the size of the economy as measured by 2015 GDP, and only about 10% considered as a percentage of 2015 Gross Output (the latter measures not just final output but also intermediate steps) [78] [79] [80] .

Where will this money come from? There are two sources: government budgets (at the local, state and federal level) and money creation. I will examine each of these in turn.

In the U.S., in 2015 total government revenues from taxation and fees were about $6 trillion or about twice the UBI amount [81]. So in theory the money for a UBI could come entirely from redirecting existing budgets. There would then be another $3 trillion of money for critical government activities, such as local law enforcement and national defense (the latter was $0.6 trillion in 2015 [82]). There is a long debate to be had about the political process by which such a reallocation can be accomplished but there is no fundamental impossibility, such as perpetually increasing government debt.

Having a UBI can also substantially increase government revenues. How so? At the moment there are many people who work but fall below the level for paying federal income tax. In fact this is true for nearly half of all earners (Mitt Romney's infamous 47 percent remark). Once people have a UBI, then every additional dollar earned should be taxed. For instance, if you are single and make $10,000 at present you do not even need to file a federal income tax return at all. With a UBI that could be taxed at a rate of say 25% generating $2,500 in new tax revenues. This effect could provide as much as $0.3 trillion or about a 5% increase in total government revenues. Of course people who are already paying taxes today would also effectively be paying back some of their UBI in the form or higher taxes. Applying a 25% tax rate for that group which would receive roughly half of all payouts, i.e. roughly $1.5 trillion, results in an additional $0.4 trillion. Another way of saying this is that the net burden of a UBI with a 25% federal tax rate applied to the first dollar earned is about $2.3 trillion.

Moreover, government revenues can be expanded in ways that accomplish other goals at the same time. For instance, we could and should be taxing pollution more than we are, in particular the emission of greenhouse gases into the atmosphere. Taxes are a well established way of dealing with negative externalities and we have made good use of that, for instance by aggressively taxing cigarette smoking, which has resulted in dramatically diminished consumption. Estimates of the revenue potential for a carbon tax are somewhere in the $0.3 trillion dollar range annually and potentially even higher. So between offsets via income tax (which will occur automatically) and a greenhouse gas tax (which we need in any case) we are down to about $2 trillion. Now that's still a massive number. On the other hand, for comparison, Social Security and Medicare/Medicaid are about $1 trillioneach. So in the extreme UBI could be financed through a massive reallocation of existing programs.

There is another way though to provide much or all of UBI by changing how money is created in the economy. This involves moving away from fractional reserve banking and issuing money directly to people instead. In today's fractional reserve banking system, commercial banks extend more credit than they have deposits. This carries with it the potential of a bank run and the Federal Reserve Bank (Fed) acts as the so-called “lender of last resort.” For instance, in the 2008 financial crisis the Fed stepped in aggressively by buying up potentially bad bank assets to give banks liquidity. Europe has had a policy of “quantitative easing” (QE) where the central bank makes it progressively easier for commercial banks to extend loans beyond their existing deposits.

Generally the idea is that as banks extend loans this will help grow the economy as the banks will lend to businesses that need to finance capital good or working capital. While banks have done that to some degree, they have also been lending to people who are already wealthy for acquiring second and third homes or for engaging in financial speculation. Conversely, bank lending to small businesses has actually been going down as banks have consolidated and have focused on larger customers. The net result of all of this has been that quantitative easing has amplified wealth and income inequality.

An alternative system would be to remove banks from money creation by forcing them to hold all of their deposits at the Fed. This is known as “full reserve banking” and eliminates all risk from the commercial banks. Credit extension could instead happen via marketplace lending as enabled by companies such as Lending Club, for individuals, and Funding Circle, for businesses (both former USV portfolio companies). This would allow money creation to happen by simply giving new money to people as part of their UBI payments, which is sometimes referred to as “QE for the people.”

What magnitudes are we talking about here? In the United States we have unfortunately stopped tracking the larger monetary aggregates, such as M3 and are only using narrower measures, such as M2 (M0, M1, M2, and M3 are different measures of how much money has been created in the economy). Even the M2 measure though has been growing by about $1 trillion annually over the last decade. The actual amount of money created in the economy by quantitative easing is likely to be much bigger. We can consider the development of debt more directly. U.S. households have about $8 trillion in mortgage debt [83], over $1 trillion in auto loans [84], over $1 trillion in student loans [85] and nearly $1 trillion in credit card debt [86]. Total household debt can go up as much as $1 trillion in a single year. U.S. business debt is a total of $25 trillion, of which about $15 trillion is in the financial sector and $10 trillion in non-financial businesses. These too have grown by as much as $1 trillion in a year.

As a first approximation the amount of annual money creation is in the trillions of dollars and thus in the same ball park as UBI. Historically, the idea of the government “printing” money is associated with fears of runaway inflation, such as occurred in the Weimar Republic. There are several reasons why this would not be the case with a proper UBI scheme. First, the amount of new money creation would be fixed and known in advance. Second, as we saw earlier, technology is a strong deflationary force. Third, the amount of net money creation over time can be reduced by also removing money from the economy. This could be accomplished through negative interest rates on bank deposits above a certain amount where the payment is collected by the central bank (and not by the commercial bank). This is known as “demurrage” and would be easy to implement in a full reserve banking system.

I expect that the path to UBI will involve some mix of changes to government budgets, taxation and the monetary system. One exciting possibility is that the change to the monetary system can come about through newly created crypto currencies. No matter how we eventually get there, what the back of the envelope math above shows is that UBI is in fact affordable. Economic freedom for all is possible, if we want it.

Impact of UBI on the Labor Market

One of the many attractive features of a UBI is that it doesn't do away with people's ability to sell their labor. Suppose someone offers you $5/hour to watch her dog. Under a UBI system you are completely free to accept or reject that proposal. There is no distortion from a minimum wage. The reason we need a minimum wage in the current system is to guard against exploitation. But why does the opportunity for exploitation exist in the first place? Because people do not have an option to walk away from potential employment. With a UBI in place, they will.

The $5 per hour dog sitting example shows why a minimum wage is a crude instrument that results in all sorts of distortions. You might like dogs. You might be able to watch several dogs at once. You might be able to do it while writing a blog post or watching YouTube. Clearly government should have no role in interfering with such a transaction. The same is true, though, for working in a fast food restaurant. If people have a walk away option, then the labor market will naturally find the right clearing price for how much it takes to get someone to work in say a McDonalds. That could turn out to be $15/hour, or it could turn out to be $5/hour, or it could turn out to be $30/hour.

One frequently expressed concern about UBI is that people would stop working altogether and the labor market would collapse. Prior experiments with UBI, such as the Mincome experiment in Canada showed that while people somewhat reduced their working hours there was no dramatic labor shortage [NEED CITATION]. This should not come as a surprise as people will generally want to earn more than basic income provides and the price adjustment of labor will make working more attractive. That is especially true because UBI, in conjunction with the income tax change discussed in the previous section, removes the perverse incentive problem of many existing welfare programs in which people lose their entire benefit when they start to work, thus facing effective tax rates of greater than 100%. With UBI, whatever you earn is incremental to your UBI and you pay the normal marginal tax rate.

But what about dirty and dangerous jobs? Will there be a price of labor high enough to motivate anyone to do those? And will the companies that need this labor still be able to stay in business at that higher price? This is exactly where automation comes in: businesses will have a choice between paying people a lot more to do such work, or investing much more heavily in automation. In all likelihood, the answer will be a combination of both. But we should not fear that there is such a thing as an excessive price for labor. Because of the pressures created by technological deflation, we will not return to labor-price induced inflation.

UBI has two other, hugely important impacts on the Labor Market. The first has to do with volunteering. Today there are not enough people cleaning up the environment. Not enough people taking care of the sick and elderly. Not enough teachers. Labor is under-supplied in these sectors because there often is insufficient money behind the demand. For instance, the environment itself has no money and so the demand for clean up relies entirely on donations. As for the elderly, many of them do not have enough savings to afford personal care.

When you have to work pretty much every free hour just to meet your basic needs and/or have no control over your schedule, you cannot effectively volunteer. Providing people with UBI has the potential to vastly increase the number of volunteers. It won't do this all by itself; we will also require changes in attitude, but historically people have thought differently about volunteering.

UBI's second big impact on the Labor Market is dramatically expand the scope for entrepreneurial activity. A lot of people would like to start a local business, such as a nail salon or a restaurant, but have no financial cushion and so can never quit their job to give it a try. UBI changes that which is why I sometimes refer to it as “seed money for everyone.” More businesses getting started in a community means more opportunities for fulfilling local employment.

Once they get going some of these new ventures can receive more traditional financing, including bank lending and venture capital, but UBI also has the potential to significantly expand the reach and importance of crowdfunding. If your basic needs are taken care of, you will be much more likely to want to start an activity that has the potential to attract some crowdfunding, such as recording music videos and putting them up on YouTube. Also, if your basic needs are taken care of, you will be much more likely to use a fraction of any income you make to participate in crowdfunding.

UBI as a Moral Imperative

Before proceeding to examine Informational Freedom, we should remind ourselves why individuals deserve to have their basic needs taken care of. Why should they have this right by virtue of being born, just as they do the right to breathe air?

None of us did anything to make the air. It was just here. We inherited it from the planet. And none of us alive today did anything to invent electricity. It had already been invented, and we have inherited its benefits. Everyone in the world did. Not just you who can currently afford access to a refrigerator.

Human knowledge is our collective inheritance, and using it to take care of everyone's basic needs is our moral imperative. The beauty is that contributing to further grow knowledge can provide a purpose, addressing another common objection to UBI—that by obviating the need for a job, it will snatch away what for many is a source of purpose in life. There is a virtuous cycle in which UBI accelerates the very knowledge loop that gave us this inheritance in the first place.

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