Over 15 years ago, in the midst of a trip to the Middle East to speak with small business owners, I learned one of my first practical lessons in real world economics.
Months earlier, I had co-founded a non-partisan, not for profit micro-finance institution focused on creating new businesses for Palestinians and Israelis who had lost their jobs in the second intifada and related border closures, which at the time were being used daily by a few hundred thousand Palestinian blue collar workers.
I had come to the West Bank to meet with some of our clients and see the new businesses being created. While there were indeed plenty of those, what I found surprising was that an unexpectedly large amount of our micro-loans were being used not for opening new businesses, but for help in financing the day-to-day operations of their existing businesses – from replenishing inventory to patching a leaky roof.
These small businesses were using our micro-loans the same way individuals might use a credit card – to spend a relatively fixed amount of money every week, and balance out uneven income.
Fast forward a few years, and we’re seeing an accelerating march of artificial intelligence and with it, a growing impact on our lives, professions and broader labor markets across the world.
Along with the growing ubiquity of AI has come increasing interest (and debate) about the idea of Universal Basic Income – providing a fixed amount of money, on a regular basis, to all citizens regardless of other conditions.
It’s not a new concept. Richard Nixon began the process of securing congressional support for a US basic income program in 1969. Hillary Clinton almost included it as a pillar in her campaign. We’ve even seen the beginnings of this in practice – from a small scale pilot in the San Francisco Bay Area led by YCombinator to larger scale implementations led by governments, including in Finland and other parts of Europe.
Universal Basic Income will undoubtedly play an increasing role in the future, and the research on its efficacy is still very nascent (I’ll potentially leave that for a future blog post).
However, I wonder this debate is somehow missing a very important and more immediately achievable goal for the world – rather than focusing on universal basic income, what if we started with ensuring that everyone was able to achieve universal basic consumption?
What do I mean by “Universal Basic Consumption”?
The concept is rooted in something I learned in economic development graduate school (thanks Dani Rodrik). The same behavior I observed in the West Bank years earlier – of small business owners striving to keep their spending relatively constant while their expenses varied, or the timing of their income varied – is something that economists observe and study worldwide – they call it consumption smoothing.
Consumption smoothing is an economic concept concerning people’s desires to have a stable path of consumption – or core spending, to put it a bit more understandably.
The global debate seems to generally jump straight to “Should governments directly provide stable and unconditional income to their citizens?” and “How might this be done most effectively?” along with the highly polarizing related debate on wealth distribution, inequality, and the whole related shebang.
However – what if we started instead by asking an easier question, with a possibly more easily achievable solution: “How might governments or companies help evenly smooth our income?”, or stated in human speak, “How can each of us afford to live basic, healthy, stable lives, and get a bit of help when our income or expenses are a bit less stable at times?”
By focusing on Universal Basic Consumption – rather than Universal Basic Income – we focus increasingly on helping people get fair, affordable credit, and don’t immediately jump to problem solving how to provide income for everyone on planet earth. After all, for many (but not all), the core challenge is actually less about income and more about the financing of that income (getting paid a bit earlier when needed) and getting smarter about spending (learning to spend a bit less and budget a bit better).
Thankfully, there are really exciting and encouraging green shoots of this change emerging all around the world from the startup community, and I’m guessing in pockets of the most progressive governments.
Even is one of the more interesting companies I’ve seen recently in this space. They started a financing company initially focused exactly on solving the income smoothing challenge – via a product called PayProtection. In the years since launch, they’ve worked to refine their product and focus more on an affordable income advance solution called Instapay. (There’s a great blog post detailing their product and customer feedback journey here). For all the Europhiles out there, you might also want to check out a similar company called Trezeo based in the UK.
In the direct lending space, there is still ample space to help provide more equitable alternatives to payday lending. Lendup and Upstart are interesting examples of companies looking to provide easier access to affordable term loans that can help educate and build credit, including often using non traditional underwriting data and machine learning to provide credit to underserved populations. Oportun (formerly Progreso Financiero) is doing great work in serving the Hispanic market within the US.
There’s also lots of interesting work focused closer on universal basic income.
In the non-profit space, an inspiring company called GiveDirectly is paving the way in directly providing small conditionless basic income grants in developing countries, as well as using gold standard statistical methods to research the impact (I continue to be deeply inspired and amazed by the work of my classmate Rohit Wanchoo, who helped co-found the company).
Lastly, with the growing gig economy and structural changes in labor demand, supplementing income will likely be an increasingly important part of any long term solution. On this front, startups like Steady are making easier for anyone to supplement their income with less friction. Plus, you can’t go wrong when you have Shaq on your advisory board ;0
I remain highly encouraged by the growing pace of startup innovation in this space, and I hope we will see increasing amounts of innovation – both in the US and around the world. Of course, given the scale of the challenge, public policy will need to be a major component of the change we need to see as well.
Ultimately, I don’t expect to see the debate and interest in Universal Basic Income fading away. In fact, we can expect it to continue to grow as the impact of AI on global labor markets continues. However, I wonder if we are better served by reframing the debate toward Universal Basic Consumption – something just as equally relevant to all of us, and possibly much easier to get started with implementing.
In the end, the more we can implement and experiment, the more lives can be positively impacted and the more the entire world can move forward in shaping our economic lives proactively, rather reactively.