Ive been thinking about how introducing an unconditional basic income is going to affect people's disposable income if it is introduced.
Unconditional Basic Income is a payment made to every citizen by the government and it is meant replace all conditional welfare payments. By removing conditionality you ensure that nobody faces hardship waiting for the state bureaucracy to assist when they find themselves unemployed .
I have put together a spreadsheet which I used to compare disposable income before and after basic income. I have use the income tax calculator and benefits calculator from money saving expert to work out disposable income at different levels of pay.
Needless to say the existing benefit system makes it very difficult to compare, so I based the benefit calculations on a single man living in Manchester.
I chose Manchester because the housing benefit paid in London pushes the level of basic income quite high. If basic income was expected to replace housing benefit then it would make people out in the cheaper areas wealthy and others in expensive areas destitute. Basic Income UK are proposing a basic income of £12,000 per year which would be inadequate in London and so we should assume that a basic income might be supplemented with some form of housing benefit in expensive areas like London
So if the UBI was set at the same level as our single man in Manchester receives, he would be expected to pay his rent out of it. But someone in London would need to claim an additional housing allowance. Retaining some conditional benefit would means not all the efficiency savings of UBI would be achieved but it probably still be cheaper to administer than the current system.
In order to simplify things a bit I have assumed a flat rate of tax. This makes it a bit easier to work out how much tax could be raised and makes the spreadsheet slightly simpler.
Of course if you favoured a negative income tax to basic income because it allows higher withdrawal rates then you could use tax bands so that basic income gets withdrawn faster. This would give you the capability to withdraw UBI as people start earning but still retains all the advantages of an automatic payment. It places the conditionality in the tax system and not in the benefit system.
With the spreadsheet I was then able to see what affect could be had on disposable income with different levels of UBI
Basic Income UK are proposing a relatively high basic income of £12,000 and I am assuming that a tax rate of 50% would be needed to help fund it. You can see that even with 50% tax you have to be earning quite a lot before you start to feel the pinch. Higher levels of basic income tend to push things out a bit.
Bear in mind also that for UBI we are combining tax and national insurance. People paying the top rate of tax used to pay 52% with national insurance. Even with a flat rate of 52% you would have to be earning over £52,000 to end up with less disposable income than at present.
I also considered what would happen if we set a tax rate and level of UBI that means that the top rate earners were worse off than today. In this case you can see that there are some losers between the higher rate and top rate. I don't think that is ideal.
For my next trick I'll have a look at building in some tax bands so we can model more complex proposals like the citizen's income trust.
All the data is available from this link
Friday 21 November 2014
Monday 17 November 2014
Monopoly Money
Update: I have got some details about spending of deposits wrong. I'll be writing a followup post with new details I'll be updating this post with a corrections
Most people have no idea how banks actually work. They don't lend deposits, they actually create the loan and the deposit simultaneously. If you don't believe me then go and have a look at what the Bank of England have to say about it. The good people at positive money also have a lot to say about it.
I thought it would be a great idea to put together some custom rules for Monopoly that would portray a realistic bank not because it would make the game any more fun but because it would perhaps give people a sense of how unfair it would be to have another player not only having the game rigged in their favour but also attributing their good fortune to skill or luck.
Game play would involve double entry book keeping so you can imagine that this variant of the rules would be tremendous fun for all the family
Having sat down to work out the mechanics of the gameplay using spreadsheets I was quite surprised at what it taught me.
So let's start with the rules and see how that goes.
The board is set up as usual except one player is designated the bank and they keep tally of all the transactions on a spreadsheet instead of handing out cash
All players get to keep their money in the bank. The bank not only gets to spend it's own money, but it gets to spend the player's money as if it was its own.
The bank can lend money to players without regards to deposits. Fresh money is deposited in the player's account and the bank is able to spend that money as if it was its own. The debt is counted as an asset of the bank. Loan repayments are made every time the player passes go. The player pays back 10% of the loan and no more than 10% interest. The bank may set the interest rate lower than 10% if it wishes.
If a player is unable to make a loan repayment, they may sell their assets to repay the loan in full, If they still have insufficient funds then they may restructure their loan spreading the remaining debt across 10 repayment periods.
If the bank has spent all of the deposited money and needs to pay its bills it may auction any property or debts that it possesses to other players.
If the bank is not able to raise sufficient funds to pay its debts then it is declared bankrupt and all the players lose their money. The player with the highest value assets wins.
So how does this work in practice? Lets look at a three player game.
The players roll a dice to see how gets to be banker. The high roller gets to be the banker.
The bank has £1500 starting money as do the other two players. The bank records two liabilities of £1500 each for the other two players and increases its current account by £3000
So the bank has an asset (the money) and a liability (the money it owes the players) the bank has capital which is equal to its assets minus its liabilities.The capital hasn't changed so the net worth of the bank is still £1500 that it started with, but it now has £4500 that it can invest in revenue generating property. What the bank has done is borrowed the savings of its customers.
Right from the start the bank has as much spending money as all of the players put together. That seems a little unfair doesn't it?
After a few rounds the players are running out of money and want to borrow some so that they can continue buying property. So the bank lends a player £1000. For the sake of simplicity we will set the interest rate at 0%
The bank gets a new asset. It is the IOU from the borrower and it's worth £1000. The borrower gets a deposit of £1000 but a deposit is a liability because the bank gets to use the money as if it was its own.
So the bank has the deposit of £1000 plus the IOU of £1000 which makes £2000 of assets but it only has a liability of £1000 so by making a loan of money that it didn't possess, it increases its current account by £1000 and its capital has also gone up by £1000. This must be why banks like lending.
This capital gain is only temporary, when the borrower pays the money back this gain in current account and capital will go back down but in the meantime the bank can invest it and hopefully make more money. So even at 0% interest there is some value in making loans.
If the bank has spent all the deposits and gets faced with a bill, its going to have a liquidity crisis. It will have assets which are the streets that it bought with the money but in the real world these types of assets would take time to liquidate and the bank would have to borrow money to pay for it, if the bank is under-capitalised then the other banks might not want to lend to it. In which case it would go bust , or get bailed out by the tax payer.
In the game the bank will need to sell some of it's assets either to the players or directly to the state. You can probably tell that it is very unlikely that the bank is going to have a capital crisis where it has insufficient assets to pay money out.
What I have taken away from this is that not only does the lending of money create money for the lender but it also creates money for the bank even if they are not charging fees. Lending money increases a bank's capital and liquidity simultaneously.
I'll be writing some more on this using worked examples from a spreadsheet to explore different transactions and what happens when people default.
We can also look at the moral hazards that are created by this situation.
Update: I have got some details about spending of deposits wrong. I'll be writing a followup post with new details I'll be updating this post with a corrections
Most people have no idea how banks actually work. They don't lend deposits, they actually create the loan and the deposit simultaneously. If you don't believe me then go and have a look at what the Bank of England have to say about it. The good people at positive money also have a lot to say about it.
I thought it would be a great idea to put together some custom rules for Monopoly that would portray a realistic bank not because it would make the game any more fun but because it would perhaps give people a sense of how unfair it would be to have another player not only having the game rigged in their favour but also attributing their good fortune to skill or luck.
Game play would involve double entry book keeping so you can imagine that this variant of the rules would be tremendous fun for all the family
Having sat down to work out the mechanics of the gameplay using spreadsheets I was quite surprised at what it taught me.
So let's start with the rules and see how that goes.
The board is set up as usual except one player is designated the bank and they keep tally of all the transactions on a spreadsheet instead of handing out cash
All players get to keep their money in the bank. The bank not only gets to spend it's own money, but it gets to spend the player's money as if it was its own.
The bank can lend money to players without regards to deposits. Fresh money is deposited in the player's account and the bank is able to spend that money as if it was its own. The debt is counted as an asset of the bank. Loan repayments are made every time the player passes go. The player pays back 10% of the loan and no more than 10% interest. The bank may set the interest rate lower than 10% if it wishes.
If a player is unable to make a loan repayment, they may sell their assets to repay the loan in full, If they still have insufficient funds then they may restructure their loan spreading the remaining debt across 10 repayment periods.
If the bank has spent all of the deposited money and needs to pay its bills it may auction any property or debts that it possesses to other players.
If the bank is not able to raise sufficient funds to pay its debts then it is declared bankrupt and all the players lose their money. The player with the highest value assets wins.
So how does this work in practice? Lets look at a three player game.
The players roll a dice to see how gets to be banker. The high roller gets to be the banker.
The bank has £1500 starting money as do the other two players. The bank records two liabilities of £1500 each for the other two players and increases its current account by £3000
So the bank has an asset (the money) and a liability (the money it owes the players) the bank has capital which is equal to its assets minus its liabilities.The capital hasn't changed so the net worth of the bank is still £1500 that it started with, but it now has £4500 that it can invest in revenue generating property. What the bank has done is borrowed the savings of its customers.
Right from the start the bank has as much spending money as all of the players put together. That seems a little unfair doesn't it?
After a few rounds the players are running out of money and want to borrow some so that they can continue buying property. So the bank lends a player £1000. For the sake of simplicity we will set the interest rate at 0%
The bank gets a new asset. It is the IOU from the borrower and it's worth £1000. The borrower gets a deposit of £1000 but a deposit is a liability because the bank gets to use the money as if it was its own.
So the bank has the deposit of £1000 plus the IOU of £1000 which makes £2000 of assets but it only has a liability of £1000 so by making a loan of money that it didn't possess, it increases its current account by £1000 and its capital has also gone up by £1000. This must be why banks like lending.
This capital gain is only temporary, when the borrower pays the money back this gain in current account and capital will go back down but in the meantime the bank can invest it and hopefully make more money. So even at 0% interest there is some value in making loans.
If the bank has spent all the deposits and gets faced with a bill, its going to have a liquidity crisis. It will have assets which are the streets that it bought with the money but in the real world these types of assets would take time to liquidate and the bank would have to borrow money to pay for it, if the bank is under-capitalised then the other banks might not want to lend to it. In which case it would go bust , or get bailed out by the tax payer.
In the game the bank will need to sell some of it's assets either to the players or directly to the state. You can probably tell that it is very unlikely that the bank is going to have a capital crisis where it has insufficient assets to pay money out.
What I have taken away from this is that not only does the lending of money create money for the lender but it also creates money for the bank even if they are not charging fees. Lending money increases a bank's capital and liquidity simultaneously.
I'll be writing some more on this using worked examples from a spreadsheet to explore different transactions and what happens when people default.
We can also look at the moral hazards that are created by this situation.
Update: I have got some details about spending of deposits wrong. I'll be writing a followup post with new details I'll be updating this post with a corrections
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