There has been a lot of talk about Universal Basic Income (UBI) over the past few years. It has recently resurfaced as former Presidential hopeful Andrew Yang called for a $1,000/month payment (Freedom Dividend) to every American. UBI is seen as a potential solution to the growing income inequality in the U.S. It is also designed to help those that might fall behind due to the rise of automation and artificial intelligence in the workplace.
UBI has been a popular idea in Europe for decades (currently, 71% of Europeans support it), but it has only been becoming more popular here in the U.S. in the past few years. In fact, a recent Hill-HarrisX poll found that 49% of Americans favor universal basic income.
There are a lot of Americans that struggle to make ends meet, especially as higher inflation levels have outpaced wages. A monthly paycheck from the government sounds like it would certainly help those that need it. At the very least, it could provide financial stability so the individual could get a better-paying job, right? But is UBI the solution to societal ills, or is this a handout destined to create more havoc than intended?
This article will delve into the viability of UBI with examples, data, and expert opinions. The pros and cons will illustrate the myriad of views on this critical national debate.
What is Universal Basic Income?
In its purest form, UBI is a fixed income that every adult – regardless of economic status – would automatically receive from the government. This payment would not require a means test or a work requirement; it would be automatic to all citizen adults.
Some welfare systems are sometimes regarded as a step towards UBI, but they are not considered a basic income as they have conditions attached, such as earned income requirements.
History of Universal Basic Income
UBI began as a utopian proposal to create a world without poverty, where the basic income floor allows individuals to live more creative and fulfilled lives. According to the Stanford – Basic Income Lab, the concept emerges from the social democratic, anarchist, and socialist thinkers.
This social safety net concept isn’t new. For example, in 1797, Thomas Paine proposed that all citizens receive a lump sum payment at adulthood. In 1848, Belgian socialist Joseph Charlier recommended giving the people a “territorial dividend” of regular income. James Meade suggested a “social dividend” in the 1930s.
More recently, Martin Luther King Jr. and the Black Panther Party also evaluated a guaranteed income strategy.
Feminists in the 1970s put forth the Wages for Housework movement as a proposal to reward the contribution of women’s non-paid labor in the home.
There have since been many small-scale trials of UBI, but the biggest and most ambitious study occurred over two years in Finland. It’s final results were released in May 2020.
Universal Basic Income in Practice
The Finnish study is the most recent and thorough case study on the topic and, as such, should be relied upon as the go-to data.
Participants in this study received 560 euros ($600) per month from 2017 to 2018. Those included were part of a randomly selected group of 2,000 jobless people between the ages of 25 and 58. The funds they received included no strings attached.
The study’s original aim was to examine how the social security system could be reshaped to promote active employment participation by giving people a stronger incentive to work. In short, would giving unemployed individuals a basic income increase the national employment rate?
The answer is no. The landmark trial concluded that Universal Basic Income would bring happiness, but it would not boost the job market.
The basic income improved the mental well-being of recipients, making them feel more secure with their finances. However, it did not show that it would activate people at the lower ranks of society to seek self-reliance.
“In simple terms, the idea was to test if the carrot works better than the stick in encouraging the unemployed to accept new job offers and to seek income from entrepreneurial activities. With that respect, the results were disappointing. Basic income recipients did not have more workdays or higher incomes than those in the control group. Despite the fact that basic income recipients had clearly better incentives to work, there were no statistically significant differences between the groups. The results show that among the young and the long-term unemployed other obstacles for work, such as outdated skills and health issues, are more important than financial incentives.” (Source: University of Helsinki)
Cost of UBI
UBI is expensive. Very expensive. As an add on, without simultaneously trimming government programs, it would require a significant tax increase.
Following the Finnish study results, Kari Hamalainen, chief researcher at the VATT Institute for Economic Research, said implementing a universal basic income for all citizens “would be expensive. If we had a universal basic income, we’d have to incorporate taxation”, and based on these results, “it would be unsustainable.”
Bridgewater Associates conducted a study in 2018, which found the cost of a $1,000/mo stipend to every adult in the U.S. would run approximately $3.81 trillion per year. This amount represented 21% of US GDP or 78% of tax revenue in 2018. (Source: CNBC) Yes, the stipend would help to make people feel more financially secure, but as the Finnish study proved, it would not meaningfully increase employment or production. It would merely be an enormous expense, one that would likely cripple the U.S. economy.
A UBI program will require a massive tax overhaul and an in-depth evaluation of existing social programs. Some believe the cost would be partially offset by the removal of other social programs and the diminished administration costs that come from running a program without a “means test.” This would be a concept that requires program administrators to ensure recipients meet specific qualification standards. While in the pure UBI, the payment goes to all citizens.
Disadvantages of UBI
Naval Ravikant, co-founder, chairman, and former CEO of AngelList outlines other reasons we should be avoiding Universal Basic Income. He believes that those who are down on their luck don’t want handouts.
“The moment I start giving money to you, I’ve lowered your status. I’ve made you a second-class citizen.”
Naval Ravikant
Naval believes that it is better to help lower-income individuals gain meaningful lives through education and success. “You have to teach a man to fish, not basically throw your rod and leftover carcasses at him and tell him ‘here, eat the scraps,'” he continues.
Others believe that there are better uses of government funds than the “handouts” of UBI. In a recent Financial Times article, Ian Goldin, a professor of globalization and development at the University of Oxford, claims that “Individuals gain not only income but also meaning, status, skills, networks, and friendships through work. Delinking income and work, while rewarding people for staying at home, is what lies behind social decay.”
Joseph Stiglitz, Nobel laureate in economics, professor at the Columbia Business School, and Chief Economist at the Roosevelt Institute believes that people have a desire to work and gain dignity from doing so.
This previous statements strike a chord with me. Self-sufficiency is an essential aspect of well-being. Steve Taylor, Ph.D., says, “Self-sufficiency is the quality of feeling secure and content with oneself, a deep-rooted sense of inner completeness and stability.” What would be the knockoff effects if we take this away from an entire populace? Will we see a drop in production? Would there be higher levels of unhappiness and self-worth?
Will Reduce Pay
While some economists argue that UBI could drive up wages, others believe it will drive them down. Why would an employer pay more if UBI gives citizens enough money to live on? They will most likely try to get away with paying them less, as these individuals have another source of income.
What is happening in the gig economy is proof enough that this can be the case. Many gig workers are willing to work for low wages as they have other sources of income.
Automation Will Not Reduce Jobs
As stated earlier, Andrew Yang believes that robots and automation will purge America of countless jobs. Will automation replace some jobs? Yes. It is almost guaranteed that some jobs will be phased out. But other, more meaningful jobs will be created in its place. This has been the case since the rise of humanity.
Automation is not a new concept. Since the earliest times, tools and machines have been invented to make a task easier. In 1722, the lathe was invented, a tool designed to hold a section of material to be carved, cut, or shaped. The lathe is credited with being the first machine tool that led to the invention of all subsequent machine tools.
Think of the invention of the automobile (an automated mobile). The need for relying on horses to do the heavy lifting of daily work, pulling trolleys, carriages, delivery carts, etc., severely diminished with the rise of the automobile. Many industries collapsed as a result: streetcar operators, carriage manufacturers, blacksmiths, horse breeders, stable keepers, etc. However, the number of new jobs created because of the rise of the automobile more than made up for this. Workers were needed for assembly lines, road construction, oil and steel industries (including vulcanized rubber), and even motels for long trips.
Today, there is little need for blacksmiths, cobblers, VCR repair shops, or milk truck delivery drivers. Yet jobs for computer programmers, online security specialists, plumbers, and HVAC repair workers continue. Although retraining may be needed in certain fields to counteract the changing economy, implementing a UBI is like a societal band-aid, perhaps a drag, and not a viable solution to economic disparity.
Societal and economic change is constant, and allocating free money to the public won’t change this fact.
Increases Taxes or Federal Deficit?
In the U.S., the Roosevelt Institute think tank says that a $1,000 a month payment would grow the economy by $2.5 trillion by 2025 if paid for by increasing the federal deficit. On the other hand, if the UBI were paid for with taxes, there would be no net benefit to the economy.
However, net wealth is not created by simply redistributing money from one class of people to another. Wealth is created by increased labor, trade, and innovation. As such, I have difficulty believing that UBI could grow the economy by $2.5T.
As stated earlier, Bridgewater Associates conducted a study in 2018, which found the cost of a $1,000/mo stipend to every adult in the U.S. would run approximately $3.81T per year. The simple math of taxing Americans $3.8T annually to gain zero economic boost does not add up.
Pesky Inflation
If UBi were to be financed by increasing the federal deficit, it would most undoubtedly fuel inflation. As a reminder, inflation is caused by a more rapid increase in the quantity of money than the quantity of goods or services produced during the same time period.
In other words, if the nation’s printing press produces money at a greater rate than its economy can produce, the result will be higher inflation levels. Printing an extra $3.8T yearly will surely cause inflation to roar. If our irresponsible fiscal spending habits during 2020 and 2021 taught us anything, it is that handing out money to anybody and everybody does not contribute to low inflation levels.
Conclusion
The idea behind Universal Basic Income comes from the heart. It is a human-centric policy that aims to help those who could use it. However, the policy does not make logical sense. As with anything related to finance, emotions should not rule the decision-making process. Data should be relied upon, and in this case, the data says that we should avoid UBI.
While UBI helps people feel happier (who wouldn’t want free money?), it does not boost the job market, nor does it show that it would encourage those at the lower ranks of society to seek self-reliance (which is the populace UBI seeks to help out).
The old adage, “if it seems too good to be true, it probably is” applies here. The laws of the universe apply no matter who or where you are. There is a price for everything. Society cannot receive something if nothing is given in return, no matter the intent behind it.
If we really want to help out those at the lower ranks of society, training our young people to succeed in today’s world will be far more effective in the long run than simply throwing money at the problem. Yes, we need a social safety net, but paying every citizen $1,000+ per month is not a social safety net. It would cause extreme inflation and destroy our society’s very fabric. Best to move on from this idea.
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