• A prolonged need for stimulus will have the White House exploring new options
  • Some form of Universal Basic Income (UBI) will be on the table, but distribution via a Central Bank Digital Currency (CBDC) is unlikely

Although there has been a change in administration at the White House, the American economy is still reeling from the impact of Covid-19. This impact, however, has affected the economy and workers in a dramatically different way: your ability to do your job remotely from the confines of your home effectively determines if you are using this upheaval to get ahead or if you are stuck on the sidelines of prosperity. Given that this only accelerates the gulf of inequality, lawmakers are looking at solutions that were once thought of as radical to ameliorate this economic pain. 

Popularized by Democratic leadership candidate Andrew Yang, the idea of Universal Basic Income — giving everyone a check for a fixed amount regardless of socioeconomic status — is once again being considered seriously as a means to pull low income earners out of a Covid-induced economic trap. After all, low-income earners are disproportionately impacted by health authority orders to close customer-facing businesses: hotels, restaurants and retail have laid off significantly more staff than the technology or professional services sector. For higher earners this extra cash would serve as pure stimulus to encourage further discretionary consumption (particularly as interest rates disincentivize saving). 

While the idea of free money might have many associating this policy with the far left, the reality is the idea of UBI is something that has support on both the right, center and left.

The Libertarian Cato think tank, often accused of being a shill to promote the interest of the Koch brothers, is a staunch proponent of it. Matt Zwolinski, one of the institute’s economists argues that by giving the economically disadvantaged money with no strings attached it provides them with agency to make the most efficient decisions. In contrast, the multitude of government-run welfare programs do not have a successful track record of reducing poverty — it continues to creep up — yet costs nearly $1 trillion. Zwolinski argues that the majority of welfare programs disincentivize work so should they be slashed, the $1 trillion could be better spent elsewhere. For libertarians it’s a win-win: reducing the size of government while boosting economic demand. 

Within the political center the argument holds that UBI is an effective tool of redistribution while encouraging work, as one does not have to worry about exceeding income thresholds of welfare programs and risk being cut off. Harvard Economics professor Maximilian Kasy argued in a 2018 paper that government subsidies of low wage work via welfare further depress wages, and punish higher-income workers for their efficiency through a higher tax rate. 

And on the left, the argument is based around the failure of trickle down economics to provide meaningful growth and an encouragement of rent-seeking behaviour. A favorable capital gains tax, for instance, means that equity from start-up wealth is taxed more favorably than wages. The coming loom of automation is bound to replace jobs for a cross-section of society: equities traders can be replaced through Artificial Intelligence perhaps more easily than taxi drivers. 

A Targeted Universal Basic Income Might Not Cause Rampant Asset Inflation

One of the arguments that’s often brought up with regards to UBI is the inflationary pressures it would cause. Giving everyone free money, as the logic holds, would surely drive up demand to the point where we would see a spike in consumables and asset prices. 

But in this economic new world order of Covid, where we travel less and stay at home more is this really the case?

Data from Canada throws some shade on the idea.

In response to Covid-19, Canada put out a targeted version of UBI without explicitly calling it such. Named the Canada Emergency Response Benefit, or CERB, a six-month program that paid anyone who had lost their job or had their income fall below $1,000 a month a CAD $2,000 stipend. However, in practicality this wasn’t a means tested program. Anyone that applied got it, with the promise that authorities would follow-up later. But the chances of that happening are slim. With 8.9 million applications, roughly 44% of the Canadian labor force applied despite an unemployment rate of 8.5% that’s slowly trickling downwards. 

Regardless, this is a long-awaited datapoint as to the question of inflation and UBI. And the result? Virtually non-existent. As of June, Delotte noted that inflation was well below what was expected as in a world where we stay home and consume less demand for goods was still quite weak. By October, inflation was virtually flat. Keep in mind this isn’t a good sign either, as a weakened economy was a moderator on asset prices but the reality is people just can’t consume as much when they are stuck at home. 

How was the CERB distributed? Via bank money on payment rails organized by the country’s tax agency. But are there more efficient ways, like through a Central Bank Digital Currency?

CBDCs and Universal Basic Income

One of the hottest terms in fintech throughout 2020 — aside from Bitcoin — has been the idea of a Central Bank Digital Currency, or CBDC. A CBDC is a digital form of central bank money issued by a central bank on a digital ledger (similar to a blockchain). This is opposed to digitized commercial bank money which is money held by a bank that has been digitized. It’s the kind of money used when you pay via a mobile app or debit card. 

China is considered the leader in this field with its digital RMB, known as DCEP.  But the Accenture-backed Digital Dollar Project, led by Christopher Giancarlo, former Commodity Futures Trading Commission chairman, is positioning the US to play catch-up.

Although Giancarlo argues that the US needs to update its financial infrastructure, arguing that the Federal Reserve offering tokens alongside notes is the way to do it, a US CBDC just doesn’t seem to have the institutional interest — let alone adopting it to distribute stimulus — that China’s digital RMB has. Part of this has to do with China’s money supply problem: the success of mobile payment platforms like Tencent’s AliPay means that the country has a bubble of digitized money, known as M2, sitting in commercial banks. As M2 money is hard to control when compared to base layer money, or M0, China’s central bank would prefer to flatten the curve. How does it do this? By building a competing payment rail via its own CBDC and forcing this to be integrated into the likes of AliPay. 

Back to the US — a lack of pressure to develop a CBDC means that China will launch it first by a long shot. But hypothetically speaking, if the US were to develop a CBDC would it be useful to distribute stimulus?

While there are theoretical advantages, the reality is, according to one specialist at a central bank that spoke on the condition of no attribution, that it would be too difficult to get buy-in from the general public. They argued that an unfamiliar digital payment platform would be too burdensome for many over a check or cash, and the risk for scams increases dramatically. 

“Would it be worth creating a CBDC for this, when there are perfectly good alternatives?  Probably not,” they said. “ Is there anything that a CBDC could do that couldn’t be done perfectly well by commercial bank money, existing payment systems, or a private money (a stablecoin, for instance)?  If the answer is “no,” then it’s not obvious why a central bank would go to the trouble and expense.”

  • Blockworks
    Reporter
    Sam Reynolds is a reporter for Blockworks, covering how regulations impact the institutional crypto market in Asia and beyond.