Short Read

UBI: A leap into the dark?

Universal Basic Income (UBI) is a government initiative consisting of an unconditional periodic payment to every adult citizen. UBI has been described as one of the most ambitious social projects in history that could reap countless benefits if implemented correctly. On a microeconomic scale it would lift every citizen above the poverty line, whilst on a macro scale it would act as a catalyst to economic growth by providing income security and increasing capital flow. Is it a policy miracle or mirage? Let’s pick it apart.

First, the idea that the middle-class would receive payment from the government seems absurd to some. However, by offering income security, UBI provides an overall economic stimulus as well as a psychological benefit. A guaranteed source of income would give people a higher tolerance for riskier careers which is a key factor for innovation. It also results in a more competent workforce, as people are no longer dependent on work for subsistence, and can thus wait longer for more specialised employment. Income security also provides psychological well-being, as people are less stressed about providing for their basic needs. The results of Finland’s UBI system showed that 5% more people said they were “Living comfortably”, and 5% fewer said that they had “[any] stress at all”. A reduction in stress is not only valuable in itself, but leads to more productivity. A study conducted by The American College of Occupational and Environmental Medicine found that those who had high levels of stress were 11% less productive in the workplace.

The most common proposal for financing UBI consists of higher taxation on the rich. Currently in the UK, the top 10% of households own 44% of wealth. Most of this is not spent in a way which benefits business, as it is outside the consumer market. A tax on the wealth of the most affluent members of society could finance UBI. This would increase disposable income among middle and lower-class households. As a result, more money would be spent, boosting the consumer market, which accounts for about two-thirds of the UK’s economy. This increase in expenditure would drive up aggregate demand, spurring economic growth. The Roosevelt Institute found that as a direct result of increased aggregate demand from UBI, the American economy could sustainably grow at 12% p/a for eight years. An increase in demand without a corresponding increase in supply would lead to inflation. However, increased demand encourages an increase in supply, which would require greater production and therefore more labour, resulting in greater employment. This high employment environment encourages wage growth due to increased competition. As a result, the negative effects of inflation would be mitigated, as purchasing power would remain the same.

The redistribution of income is already present in social welfare, but UBI has one main advantage over the current system: it encourages employment, whereas social welfare can actively discourage employment. The transition from welfare to employment can often be incredibly harsh, because in many cases monetary support is dramatically decreased even with the slightest increase in income – resulting in up to a 93% effective marginal tax rate, often meaning individuals’ real incomes are in fact greater without employment. This strongly discourages those on benefits from seeking jobs, reducing potential economic productivity and hindering social welfare’s goal of reducing income inequality. An unconditional payment instead of a welfare program would eliminate this problem, as there would be no possibility of its withdrawal by the government. UBI’s benefits to employment were shown in Alaska, where introducing UBI increased part-time employment by 17% (with full time employment staying roughly constant).

Those against government handouts worry that they can encourage laziness, as there is less incentive to work, resulting in more unemployment. However, the experimental evidence on UBI suggests otherwise. When UBI was trialled in Canada in the 1970s, there was “virtually no decline” in employment. Instead, the high-school completion rate rose, as the financial security from the basic income meant that there was less pressure on students to start earning money. A UBI would relieve financial pressure, resulting in a greater focus towards education, which has much greater benefits to long-term livelihood.

Others feel that strong social welfare schemes accomplish the same aims as UBI for a fraction of the cost. They argue that concentrating funds solely on those who need them the most is far more efficient. But welfare results in a decrease in social mobility from governmental actions. A 2017 study by the Social Mobility Commission found that the government focused too heavily on getting people off social welfare and into employment, while neglecting the quality of these jobs, increasing the skill gap. Pressure from the government to get off welfare leads to long-term economic detriment as a result of decreased social mobility. UBI eliminates this problem, as the payment is unconditional, so the government cannot threaten to remove it. Instead, job allocation becomes more efficient, as discussed earlier.

Critics of UBI are also quick to point out that the program would be incredibly costly. This is true; introducing a minimum basic income to the US would cost an estimated $3.8 trillion a year, 21% of GDP. Economist Paul Krugman describes this amount as “not politically achievable” in the current political climate – the high investment required for UBI is daunting to most governments. Many believe that there simply is not enough money for both UBI and a strong public service sector. Diverting money to cash handouts could compromise the integrity of health care systems and educational systems which both serve to facilitate UBI’s aim of social justice. But with UBI replacing social welfare, there is no longer a need for expensive bureaucracy in welfare programs, as the payment is unconditional. Also, the investment is a small price to pay for the myriad improvements UBI would bring to total economic output. It would contribute to higher tax revenues, as well as better well-being and standard of living. Furthermore, the initiative would not only be paid for by increasing taxes on high-earners, but also by taxing rent-seeking practices, which are not productive for the economy, with levies on intellectual property. The ILO found that imposing a small set of levies and taxes to financial activity would provide up to 23.2 per cent of GDP in high-income countries, more than enough to pay for UBI. Financing UBI would be challenging, but certainly feasible.

An important factor to consider is that UBI has never been fully trialled on a national scale. Critics worry that even trials of UBI such as those in Alaska, Finland and Kenya do not scale up well, as they have been on very select demographics and have almost never been enough to cross the poverty line. However, significant change can only come about through replacing social welfare with a completely different model.

While UBI seems ambitious to some, it would benefit the economy and well-being of citizens by providing income security, greater capital flow, and increased social mobility. In the future, UBI could also be a solution to the increasingly large problem of human redundancy caused by AI and technology. Overall, UBI has fantastic prospects. It only remains for a brave nation to implement it.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: