Growing up in a capitalist society, we were indoctrinated with the notion that each member of society would be compensated based on how much they could contribute. The idea that everyone in society receives a share of profit without playing a part in the process seems rather far-fetched. Or is it?
One of the biggest flaws of a capitalist economy is the causation of extreme poverty, which is further worsened by the ever-changing landscape of technology. Nevertheless, policymakers are constantly striving to overcome this prevalent issue. Over the past few years, the term universal basic income, a.k.a. UBI has been gaining traction due to the candidacy of Andrew Yang in the upcoming election for President of the United States of America, 2020. Andrew Yang vowed to make UBI a reality for the Americans.
There is no predetermined definition for the universal basic income as the mode of implementation is widely debatable. It can be generally defined as a form of income that is provided to each individual above a stated age regardless of employment status. UBI is not something new as it was first mentioned in the writings of Thomas More, Utopia during the 16th century. Back then, he believed that giving away the means to live could effectively curb thievery instead of simply sentencing thieves to death. While Sir Thomas didn’t make great strides with his idea back then, various nations began conducting UBI as experiments and to this day, some countries have even successfully implemented this policy, those of which will be mentioned below.
Andrew Yang stated that the primary motivation of the UBI was to address technological unemployment. Other prominent figures of the tech industry like Mark Zuckerberg and Elon Musk have expressed similar views on this matter. They believe that job automation would lead to technological unemployment in the long run. However, the claim that technology would displace jobs is equivocal. Most have only considered jobs that are or were being destroyed without taking into account jobs that have been created. History does offer some interesting perspectives on the matter. The Industrial Revolution drastically increased operational efficiency by incorporating machinery production. This change sparked opposition from workers who had lost their jobs such as the Luddites. However, the Luddites were wrong as the revolution didn’t lead to a massive reform in the labour market. Today, our current unemployment is close to hitting new lows despite the exponential increase in productivity. Nevertheless, we are not implying that history inevitably repeats itself. To compare the first industrial revolution to whatever might happen in the future is presumptuous. Unfortunately, there is a lack of significant evidence of how widespread automation will shape our labour markets as of now (Jerome, 1934).
Intuitively, it is believed that UBI would inevitably lead to massive inflation since it increases the money supply in circulation, ceteris paribus. However, this is a flawed view with a lack of understanding of how UBI is funded. With the implementation of UBI, various welfare programs like unemployment benefits would become redundant and subsequently abolished. Ultimately, UBI simply reforms and centralizes these programs into one that is available for all. Even more so, Andrew Yang also plans to fund the UBI with Value Added Tax (VAT), which again, merely shifts the money in circulation without increasing the money supply (Masterson, 2016).
There is another misconception about UBI where giving out free money would make people lazy, hence discouraging employment seeking attitude. This is untrue when you compare the nature of UBI and unemployment benefits. One must be jobless to receive unemployment welfare, whereas everyone has equal access to UBI irrespective of employment status. However, another argument arises, with UBI, people are able to self-sustain without being employed. Most propose that the UBI is to be provided at levels similar to minimum wage, which depending on location, is barely sufficient to live on. This is further invalidated in multiple basic income experiments, which will be highlighted later. Unfortunately, this result also effectively refutes the claim of UBI encouraging employment seeking attitude.
Some doubt the feasibility of UBI, due to concerns of possible scenarios where the low-income bracket spend on temptation goods such as alcohol and tobacco. Despite this, current studies show that UBI does not induce similar negative behaviour. It is highly likely that such concerns stem from the negative stereotypes targeted towards those that struggle with addictions (Evans & Popova, 2014).
UBI can potentially lift the impoverished out of their vicious life cycle. While many know that being in poverty isn’t beneficial to themselves from physiological and psychological viewpoints, poverty also brings about economic costs. Most arguments revolving around poverty are built upon moral and ethical cases, with emphasis on unfairness and individualism. However, there is a major economic case for the topic of poverty. Research has suggested that the existence of the poverty class is holding back economic and productivity growth. Children who grew up in poverty are susceptible to higher mortality rates and more likely to engage in crime, women are also more likely to end up in lower quartiles on the income hierarchy. Hence, channelling funds back to the people via UBI can simply be viewed as a process of reinvesting.
Policies help shape the structure of a society, but most policies come with unavoidable externalities – bureaucracy. The implementation of policies almost always require additional organizational manpower. As we compare the UBI to traditional welfare programs, the latter are requirement-heavy and come in varying forms such as food, housing, cash, et cetera, whereas the classical UBI’s requirement only involves the individuals to be a resident of the country and above a certain age. This effectively removes the need for regulatory bodies, since the verification of employment status is lengthy, whereas age and nationality can be verified through a person’s identity card. Not to mention, the absence of bureaucracy also reduces the occurrence of corruption.
One of the best arguments against UBI is its huge costs. Estimating the monthly minimum wage in America of $1,100 as a proxy for UBI payment, it takes $13,200 for every resident in America to fully fund UBI, compare this amount to the GDP per capita in 2018 of $62,641 and you obtain a whopping 20 per cent, indicating that one-fifth of that value is merely spent on transfer payments. Despite the UBI substituting social welfare programs, this largely exceeds the amount spent on social welfare. This effectively forces the government to fund the UBI by raising taxes, which raises questions on ethicality while withholding long-run economic growth.
In order for the UBI to work seamlessly, one of its characteristics is to ensure all residents above a certain age receive it, including those with above-average incomes. While fairness is maintained, it prompts questions regarding the purpose in which those at the top quartile earnings to receive further income.
When a nation provides greater opportunity to its citizens, the inflow of immigrants is bound to increase. Given that the eligibility of UBI depends on one’s citizenship, this incentivizes immigrants to obtain residency at the desired country via illegal methods. While further political implications are hard to forecast, policymakers are forced to deal with issues related to immigration, the solution possibly to strengthen the barriers to secure citizenship. This also increases the entitlement gap between residents and immigrants, potentially causing domestic strife.
There are numerous experiments on UBI, but none of them came close to the ambitious Finnish UBI Experiment. It was conducted recently in 2017 – 2018, currently only preliminary results are available. 2000 unemployed participants were randomly chosen to receive 560 euros for two years. While showing no significant changes in unemployment, participants, however, did experience greater life satisfaction, health improvements and trustworthiness towards the authority. Unfortunately, this experiment is flawed in nature since its participants were only unemployed citizens, the lack of randomization possibly creating a sampling bias (Kangas et al.,2019).
Alaska has had its own UBI since 1976, however, it is not heavily cited during UBI arguments for specific reasons. It is known as the Alaska Permanent Fund and is managed by the Alaska Permanent Fund Corporation, where dividends are paid to eligible citizens. It operates similarly to an investment fund, mainly investing in bonds and equities, with a steady increase in net asset value held throughout the decades, up to approximately 66 billion dollars in 2019. Most of the funds came from stated-owned revenue from the oil and gas industry. To clarify, Alaska’s economy is heavily dependent on the oil and gas industry due to the harsh geographical conditions. Since the large portion of the people’s income is prone to the volatility of the oil and gas industry, the state has agreed to set up the fund to smooth out the cyclicality experienced, while guaranteeing income for future generations. Research once again shows no major changes in unemployment, while showing a slight increase in part-time labour. Given that most countries are unlike Alaska, solely dependent on the oil and gas industry, it is only natural that citing the Alaska Permanent Fund isn’t quite relevant (Jones & Marinescu, 2018).
One alternative to UBI is the negative income tax. The negative income tax requires people earning above a certain amount to pay taxes, whereas people earning below a certain amount are to be compensated with extra pay. In the 20th century, America had conducted a series of experiments in specific states and towns. All experiments point towards a common finding, higher unemployment rates, which differs from the general experimental findings of UBI. This is because the lower one’s income, the greater one will be compensated, giving an incentive for the participants to remain at low-income levels to maximize compensation. When President Richard Nixon proposed the negative income tax in 1972, it was not approved by the Congress due to concerns over its feasibility. To establish a negative income tax is to reform complicated income tax laws, which quickly proved to be politically difficult (Robins, 1985).
In summary, UBI does show promise in experiments, but it comes with its own share of problems to be implemented practically. Ultimately, it would require further optimization and legal reforms from the local authorities. As the political appetite towards UBI grows, only time will tell the truth of UBI feasibility conducted on a large scale over long durations.
Evans, D.K. and Popova, A., 2014. Cash transfers and temptation goods: a review of the global evidence. The World Bank. <http://documents.worldbank.org/curated/en/617631468001808739/Cash-transfers-and-temptation-goods-a-review-of-global-evidence> Jerome, H., 1934. Mechanization in industry, no. 27. National Bureau of Economic Research, New York. <https://papers.nber.org/books/jero34-1> Jones, D. and Marinescu, I., 2018. The labour market impacts of universal and permanent cash transfers: Evidence from the Alaska Permanent Fund (No. w24312). National Bureau of Economic Research. <https://www.nber.org/papers/w24312> Kangas, O., Jauhiainen, S., Simanainen, M. and Ylikännö, M., 2019. The basic income experiment 2017–2018 in Finland: Preliminary results. <http://julkaisut.valtioneuvosto.fi/bitstream/handle/10024/161361/Report_The%20Basic%20Income%20Experiment%2020172018%20in%20Finland.pdf> Masterson, D., 2016. Giving Better: Lessons from Cash Grants for Syrian Refugees in Lebanon. Refugee Research and Policy in the Arab World. <http://ubi.earth/studies/lebanon.pdf> Robins, P.K., 1985. A comparison of the labour supply findings from the four negative income tax experiments. Journal of Human Resources, pp.567-582. <https://www.jstor.org/stable/145685> Researcher: Cheong Jian Yan Editor: Stella Download article: Universal Basic Income
Subscribe us form
Evans, D.K. and Popova, A., 2014. Cash transfers and temptation goods: a review of the global evidence. The World Bank. <http://documents.worldbank.org/curated/en/617631468001808739/Cash-transfers-and-temptation-goods-a-review-of-global-evidence>
Jerome, H., 1934. Mechanization in industry, no. 27. National Bureau of Economic Research, New York. <https://papers.nber.org/books/jero34-1>
Jones, D. and Marinescu, I., 2018. The labour market impacts of universal and permanent cash transfers: Evidence from the Alaska Permanent Fund (No. w24312). National Bureau of Economic Research. <https://www.nber.org/papers/w24312>
Kangas, O., Jauhiainen, S., Simanainen, M. and Ylikännö, M., 2019. The basic income experiment 2017–2018 in Finland: Preliminary results. <http://julkaisut.valtioneuvosto.fi/bitstream/handle/10024/161361/Report_The%20Basic%20Income%20Experiment%2020172018%20in%20Finland.pdf>
Masterson, D., 2016. Giving Better: Lessons from Cash Grants for Syrian Refugees in Lebanon. Refugee Research and Policy in the Arab World. <http://ubi.earth/studies/lebanon.pdf>
Robins, P.K., 1985. A comparison of the labour supply findings from the four negative income tax experiments. Journal of Human Resources, pp.567-582. <https://www.jstor.org/stable/145685>
Researcher: Cheong Jian Yan
Download article: Universal Basic Income