July/August 2017

Dollars and Sense: Money, long-term high unemployment, and universal basic income

By Shiraz Jetha

Causes of prolonged periods of high unemployment can range from economic mismanagement—such as over-expansion of money supply—to broad-based underlying structural changes. Economic mismanagement is often correctible over a shorter period of several years, but structural changes like globalization and free trade can take much longer, and additional measures are often needed to redress the impact to the affected workforce.

A potential structural concern looming ahead is technological unemployment—unemployment from powerful new technologies that enable automation and new business models and, in turn, threaten to upend the employment models of important sectors of global economies. With the employment losses come the related livelihood concerns.

One idea being looked at in several countries is that of an unconditional periodic payment of a certain basic amount to all citizens—universal basic income (UBI). This article will touch on technological unemployment, revisiting the concept of money briefly before discussing UBI.

Technological Unemployment 

Over the past few years, there has been a substantial amount of discussion about the increased prospects for sustained high unemployment as sophisticated technologies bring in new business models—such as has happened in entertainment, media, communications, retail, and with the sharing and gig economies—which wreak havoc in the labor markets. These technologies include the full range of artificial intelligence subfields—deep learning, natural language processing, vision, robotics, machine learning—and technologies such as 3-D printing and drones, all of which can, uniquely or in combination, reduce the need for labor.

The idea of technological unemployment has been around for many years; the phrase itself was coined by John Maynard Keynes in his optimistic 1930 essay, “Economic Possibilities for Our Grandchildren.” However, unlike Keynes’ optimistic perspective, with a global population of over 7.5 billion and growing, the looming potential for widespread job losses from technology-initiated economic transformation, accompanying financial hardships, governments’ short-term planning focus, other risks (e.g., climate)—the concerns about severe societal stress have increased.

In their groundbreaking 2013 study, Frey and Osborne[1] estimated that 47 percent of U.S. employment is in the “high risk” category of jobs that could be fully automated within the next one to two decades. Recognizing that this projection reflected a “standstill” technological state and that the actual pace of sophistication since then has increased (including previously nascent technologies such as 3-D printing, drones, and quantum computing, all of which are now nearly ready for “prime time”), the outlook may have changed. The labor impact is now thought to be both severe and global.[2]

As new technologies sweep through world economies, a societal challenge could arise because the speed of change could exceed workers’ abilities to bridge the growing “knowledge gap” to stay current with the demands of the economy. This would make it challenging to rehabilitate the displaced workers into similar or better-paying jobs, instead of being forced to compete for low-paying jobs that remain.

For the purposes of the rest of the discussion, this negative but plausible scenario will help provide a context for structural change in the economy. This, though, is not a unanimous perspective; there are also those (e.g., David Autor, an MIT economist[3]) who hold the view that the fallout from advanced technology could be quite the opposite and prove to be a catalyst for economic expansion, as has happened previously throughout history.

To comprehensively explore technological unemployment, a much more in-depth look is required—not only into advanced technologies and their impact on the economy (both the potentially positive and negative labor market outcomes) but also at how any associated economic transformation unfolds, the human condition as jobs become scarcer, the possible range (and urgency) of political responses, and perhaps some consideration of possible end-states.

Several solutions have been proposed in response to an employment outlook that is significantly worse than of the late 20th century. These include a “robot tax”[4] that could provide funds for retraining (and act as a mild disincentive to adopting new technology) and programs such as UBI. While there are variations, UBI generally refers to a national income program that provides unconditional, periodic, preset payments to all the citizens of a country, in lieu of the different safety net programs such as unemployment benefits, earned income tax credits, and others payable on satisfying program criteria for the benefits.

Before considering UBI, though, it may be helpful to revisit the topic of “money” because UBI may seem to be a radical departure from current norms for income—such as its give-and-take relationship with labor, for example.

And, perhaps to a lesser extent, because actuaries’ work is closely allied to monetary evaluations, a refresher on the concept may add more color to our world.

The Color of Money 

In what follows, the treatment of “money” is rather focused, not exhaustive. The description here is in the context of the U.S. environment, including the U.S. dollar’s international role as a reserve currency.

So what is money? Money essentially is an abstract idea predicated on trust, without which it does not work. When it does work, it is indeed a very powerful idea. Money shapes and defines us and is an important factor in the choices we make—whether individually or collectively. It has been a key ingredient in the development of market economies.

Before the advent of currency, barter was the method for trade, which had become an important economic activity. Barter is not the easiest practice, and so it gave way gradually to commodity-based currency and over time to fiat currency.[5]

Fiat money, unlike money based on a commodity like gold, has no underlying value, nor a “promise of redeem-ability” into something of value. On its own, it is composed of cheap paper and worthless metal. It derives its value from its status as legal tender for payments and because of universal trust in its stability. Central banks, however, target a certain level of inflation in an economy (presently around 2 percent in the United States) and so build in a gradual erosion to its purchasing power.

Most major currencies—U.S. dollar, euro, yen, British pound, Swiss franc—are fiat currencies; some currencies are pegged to others, e.g., the U.S. dollar or the euro.

Neha Narula, research director of the Digital Currency Initiative at MIT, in her TED talk, “The Future of Money,” mentions that irrespective of what is backing the currency, “The only reason these things [i.e., currencies] have any value is because we’ve all decided they should. And because we’ve decided that, they do. Money is about the exchanges and the transactions that we have with each other. Money isn’t anything objective. It’s about a collective story that we tell each other about value—a collective fiction.”[6]

One way this fictional aspect comes through is when we consider how money is created. For fiat systems, this is almost intuitively obvious—it is created out of thin air. This was evident during the financial crisis when the U.S. Federal Reserve (Fed) engaged in buying non-Treasury assets as part of the quantitative easing programs. Stephanie Kelton, professor of economics at University of Missouri, explains that the Federal Reserve “can acquire an asset simply by crediting a bank account. In other words, the bank pays by creating money. As Alan Greenspan explained, the Fed has an unlimited capacity to spend in U.S. dollars. It can pay trillions of dollars with a single keystroke.”[7]

The “fractional banking” system, in which a small percentage of a commercial bank’s deposits are required to be held as reserves and the rest available for lending, allows the commercial banking system to “create money.” This process brings into play a powerful multiplier, which ripples through the economy. As an example, with a 10 percent reserve requirement by the Fed, a new deposit of $10 could result in a multiplier of around 9—that is, $90 is injected into the economy. Simplistically, interest aside, “money equals debt”; if all debt is paid off, money disappears. And were this to ever happen, the economy could come back a full circle to the barter system.

Perhaps the most interesting fictional aspect of money comes through in the idea of “helicopter money,” a term derived from a paper by Milton Friedman. Conceptually, this idea refers to the handout of “free” money directly by the central bank (caricaturized as money dropped from the sky by helicopter). It would be a last-resort stimulus when an economy is not responding to other expansionary measures. This is not a fringe economic concept; it has been discussed by leading monetary authorities, including Ben Bernanke, former chairman of the Federal Reserve Board. And in the case of Japan, where the economy has been sluggish and not responding to traditional stimuli, the helicopter money option has been suggested. There is a lot of hesitancy to using this tool, however, as there are risks—such as hyperinflation from inadvertently over-stimulating; central banks are not entirely comfortable in taking the lead on this approach.

There are also local (complementary) currencies operating side-by-side with a national currency, and often convertible to it. An example is the BerkShares,[9] a currency that is used in the Berkshires region in Massachusetts. Such currencies strengthen local economies by enabling consumers, farmers, businesses, employees, and local banks to interact through them.

The next generation of currencies, so-called cyber- or crypto-currencies, have started taking their place in our future. These currencies work globally and are transferrable directly from one individual to another, bypassing the banking institution. For the most well-known of these at least, bitcoin, there is nothing tangible backing it. Bitcoins can be “mined” by anyone by solving complex mathematical problems. The bitcoin system has a maximum limit of 21 million coins, which can be divided to eight decimal places. Once the limit is reached, expected around 2140, no further coins can be added.[10] Bitcoins can be converted to most if not all of the major currencies. There are over 700 crypto-currencies in existence, and many will not survive.

Money originated from the need to expedite trading; and that is its primary purpose—a medium of exchange. Money’s interchange in an economy occurs through an economic exchange; through daily usage in this manner over centuries, we have become conditioned to look to labor as a means to obtain money for our needs. Our mental paradigm automatically connects the two—so much so that decoupling money and labor would be troublesome and run into strong resistance.

Because fiat money allows indefinite exchangeability (planned erosion by central banks or currency failure aside), it also serves as a catalyst, when spiced with human curiosity can power up our ingenuity to solve even the most intractable of problems. At the individual level, we have mostly forgotten that the true value derives from our collective ingenuity.

It wouldn’t be unusual in the future to hear new ideas on the permanency of exchangeability in fiat money. This discussion on money may be helpful in the discussion of UBI.

The Basics of UBI

As mentioned above, “pure UBI” would include:

Regular payments of unconditional, tax-free money to all citizens, probably indexed to inflation, for basic needs of food, clothing, and shelter.

Income above the UBI level would be subject to taxation, with tax brackets fine-tuned to retain work incentive and other objectives.

UBI would replace all other safety net programs such as unemployment, food stamps, child/earned income tax credit, etc., other than government-provided health care options for poor and senior citizens. Social Security, work pensions, etc. can be treated as income for tax purposes.

What are the perceived pros and cons of such a program? Pros may include:

Sense of financial security across the nation.

Freedom for would-be entrepreneurs and others to pursue their passions in vocation choices (or retire) instead of being stuck in jobs they are not suited for. The June 2014 report of the Conference Board finds that the percentage of workers satisfied with their jobs was only 48 percent, a reduction from 61 percent in 1987.[11]

Freedom to upgrade skills and education to find preferred employment.

Budget impact would be offset by eliminating benefit payments being made under support programs in place (and their administration cost).

Lower level of work-generated stress; reduced stigma for not working.

The cons could include:

Potential for widespread loss of work ethic; could increase the size of the “underground economy.”

Money may be wasted on alcohol, gambling, drugs, etc., which could increase crime and health care costs.

Even as there will be offsets from the current program, there may still be a residual cost for an adequate program.

Could increase inflation by adding “nonproductive” spending dollars in the economy.

May be perceived as “free money” and thus be politically unacceptable.

Costs can vary by city/state/region. Uniform payment to everyone could overpay in some areas and underpay in others.

What do we know about outcomes from any previous UBI initiatives? Before looking at these, it is interesting to note that Alaska’s Permanent Dividend Fund, which makes an annual per capita payment to each resident of the state, is very popular and has some similarities to the UBI idea. Annual payments have varied, ranging from $1,000 to $4,000 annually over its long history.

Other than social dividend programs, there is little to look to from the past for direct comparability with UBI. However, two previous large-scale experiments are worth mentioning—the randomized 1968 evidence-gathering in the United States around the “war on poverty” initiative and the 1973 “mincome” experiment in Dauphin, Manitoba, Canada.

In the first, four negative-tax experiments in different parts of the country, reflecting different demographics—low-income, rural, urban, and African-American households (with emphasis on those headed by females)—were started in 1968. The primary intent was to study the impact of guaranteed income on the labor market; secondary aims were on associated variables such as health, education, family breakdown, and others. These experiments ran from two to nine years, although the original plan was for 20 years.

Meanwhile, President Nixon’s Family Assistance Plan (FAP), which would guarantee a level of income for all Americans with children, was introduced in Congress twice, starting in April 1970; both times the House passed it by strong margins but the legislation stalled in the Senate. In time, the momentum of the idea dissipated and was dropped when Nixon left office. Interestingly, Milton Friedman, Friedrich Hayek, and over 1,000 other economists from 125 universities signed a statement in support of a national system of “income guarantees and supplements.”

Back to the negative tax experiments, the design recognized both the importance of the guaranteed income level and also the disincentive from the “take-back tax” (or marginal rate) on incomes subsequently exceeding the guaranteed threshold. For the former, six income levels from 0.5 to 1.46 times the federal poverty level were tested. The multiples 0.75 and 1.0 were applied in all experiments. Similarly nine take-back rates were tested. With so many subgroups, the volume of data in some groupings lacked statistical credibility for complete analysis.

The experiments would show better school performance but small change in labor market outcomes for the primary earners (under 10 percent reduction of hours worked); for the spouse and children, the data showed a fairly significantly reduction in hours worked. The concern that one or more segments in the experiment would completely withdraw from the labor market was not confirmed in any of the experiments. It is important to keep in mind that both the income guarantee level and the take-back tax design can impact the incentive to work. A generous income level with low take-back tax, for example, brings in work disincentives.

In the March 1973 Canadian “mincome” experiment, all residents of Dauphin, Manitoba—a small town of 12,000—were guaranteed a basic income at the poverty level with the support gradually withdrawn as income increased above this level. The “poverty line” threshold resulted in some 30 percent of the town’s inhabitants (1,000 families) receiving monthly checks. This continued for about five years before coming to an abrupt end, with all data packed up and stored. In early 2000, Evelyn Forget, an economist at the University of Manitoba, gathered and studied the outcome data. From the health side, the study group had 8.5 percent fewer hospitalizations, as well as lower level of contacts with physicians, especially for mental health; the analysis also showed a higher high school graduation rate and no increase in fertility or family dissolution—and no reduction in hours worked, except for mothers with newborn children who wanted more time off after birth.[12] Otherwise, labor market outcomes were largely unchanged.

Another source of insight is the more recent 2015 paper on research into the earned income tax credit (EITC) and child tax credit (CTC) from the Center on Budget and Policy Priorities, a progressive think tank. Its findings supported those in the previously discussed experiments. The report also states that “children who benefit from tax credit expansions have been found to do better throughout childhood and have higher odds of finishing high school and thus going on to college. The education and skill gains associated with the CTC and EITC likely keep paying off for many years through higher earnings and employment.”[13]

These research studies show that even though there may be costs to these programs, long-term societal benefits, such as from health and education outcomes, may justify the costs. It is important to keep in mind that the subjects in all three research studies were low-income wage-earners. The 1970s experiments also took place during a period of stagflation—high unemployment and high inflation—and so the outcomes observed may not be as directly representative of today’s economic environment or of a UBI program.

There has been a resurgence of interest in UBI, attributable to the concern for widespread labor redundancies due to technologies. New experiments are underway, this time with support also from tech and venture capital communities. They include short-term studies in Finland, Ontario, India, and the Netherlands; Kenya is undertaking an experiment with a much longer duration.[14]

There does not appear to be a practical way to deliver a satisfactory proof of concept for UBI; however, these and other experiments underway may give insights that can be helpful.

Even so, a well-designed UBI program supplemented by education incentives may be better suited for situations of high unemployment—at least in early phases of increasing unemployment—if the costs are expected to be reasonable. In an extreme scenario of high long-term unemployment, though, it is questionable whether UBI or other safety-net programs could help. Indeed, in such a scenario, the whole idea of money as a reward for “labor” may need to be reconsidered.

It is important to note that the discussion on UBI is not intended to make a case for deficit spending. Uncontrolled deficit spending will inevitably destroy the national currency. Attention still needs to be paid to a country’s finances, as always, within national and internationally accepted parameters such as relative debt-to-GDP benchmarks, responsible budgets, and so forth.

It is important to keep in mind that the work automation and the climate change phenomena are unfolding in the same time horizon; and in evaluating one, the potential spill-over from the other to amplify (or moderate) the severity of outcomes should not be ignored.

The Role of the Actuary

Why is UBI important for actuaries? From a strictly professional perspective, UBI is perhaps only of tangential interest to actuaries. It is mostly in the context of consideration of a risk scenario that the concept is pertinent.

A large part of the renewed interest in UBI centers around concerns of widespread unemployment from new, powerful technologies. There are at least three reasons why this outlook would be of interest to actuaries:

As risk professionals, technological sophistication and its economic fallout is an emerging societal risk that may have a profound impact on the economy; actuaries can help bring a better understanding of this risk;

The topic is of public concern; media attention to it as well as the changes entering the economy and workplaces are generating questions from an anxious public; and

It will likely affect us—whether in our work or in other ways.

Our employers are probably looking at the business merits and impact on industry’s products of the emerging technologies. As an example, consider what new actuarial issues would need to be addressed in developing a “bitcoins universal life” policy, or how the so-called insurtech innovations will impact us.[15]

While our profession is small, and even as we remain well placed in our traditional areas of practice, the profession may want to consider whether we have the skills to contribute to this dialogue and on other relevant societal issues—and if so, whether we should.

SHIRAZ JETHA, MAAA, FSA, CERA, is an actuary in Olympia, Washington. He can be reached at s.jethaa@gmail.com. The author is grateful to Paul H. Grace, FFA, for his support and peer review of this article.



[1]    The Future of Employment: How Susceptible Are Jobs to Computerisation?; Carl B. Frey and Michael A. Osborne; Oxford Martin Programme on Technology and Employment; Sept. 17, 2013.

[2]    The Speed of Disruption and Impact on Business—The Fourth Industrial Revolution Has Begun; Charlie Kingdollar; Gen Re Research; April 2017.

[3]    “Will automation take away all our jobs?”; TEDxCambridge; September 2016.

[4]    “The robot that takes your job should pay taxes, says Bill Gates”; Quartz; Feb. 17, 2017.

[5]    In an October 2012 speech at the Bargeldsymposium of the Deutsche Bundesbank, “The Role of Money in a Market Economy,” Peter Praet, a member of the executive board of European Central Bank, presents a hypothetical evolutionary, first to commodity-based and then onto fiat money systems. Accessed from www.ecb.europa.eu/press/key/date/2012/html/sp121010.en.html on May 23, 2017.

[6]    “The Future of Money”; Neha Narula; TED@BCG Paris; May 2016. Accessed from www.ted.com/talks/neha_narula_the_future_of_money/transcript on May 23, 2017.

[7]    “Where Did the Federal Reserve Get All that Money?”; Stephanie Kelton; New Economic Perspectives; March 30, 2012.

[8]    Quarterly Report on Federal Reserve Balance Sheet Developments; Table 1; Board of Governors of the Federal Reserve System; May 2017.

[9]    See, for example, https://en.wikipedia.org/wiki/BerkShares.

[10]  “Bitcoin: What is it?”; Khan Academy.

[11]  Job Satisfaction: 2014 Edition; The Conference Board; June 2014.

[12]  Stephen J. Dubner, “Is the World Ready for a Guaranteed Basic Income?” Freakonomics Radio, April 13, 2016.

[13]  EITC and Child Tax Credit Promote Work, Reduce Poverty, and Support Children’s Development, Research Finds; Center on Budget and Policy Priorities; Oct. 1, 2015.

[14]  “The Future of Not Working”; The New York Times Magazine; Feb. 23, 2017.

[15]  Digital disruption in insurance: Cutting through the noise; McKinsey; March 2017.

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