Globally, an economic debate is underway as heads of major economic institutions are perplexed at the broken link between wages and inflation. The world economy is growing but wages are stuck and labor productivity is lagging. One answer being offered these days is Universal Basic Income (UBI), a concept first proposed by Thomas Paine in the 1700s and currently experiencing a renaissance.

What should we think of UBI: Is it a total farce or does it possess genuine economic merit?

The first thing to point out is that the debate over UBI is a theoretical one. Despite being around for centuries, no governing body to date has implemented UBI in the sort of way that could furnish us with actionable data. There is some experimentation with UBI taking place in certain parts of the world — but, again, the limited nature of the trials means we cannot rely on these results when we consider UBI as a large scale economic solution.

The reality is, we just don’t know; this is an exercise in theory.

Universal Basic Income In A Nutshell

What is UBI?

Investopedia defines it as:

A system…in which all citizens of a country receive a set amount of money on a regular basis. This money is typically provided by the government or a similar public organization. This income, provided unconditionally, is given in addition to any income for which a person works. The goal of a basic income system is to allow every person to have a fair chance at an adequate quality of life. It is a way to combat income inequality and ensure that each citizen has enough money on which to live.

Everyone gets paid a nominal wage from the government in virtue of being a citizen. Nominal amounts suggested by UBI advocates are around $20,000 per year. For a frame of reference, let’s consider a major city in Australia and a mid-level city in the United States. The 20K figure equates to $384 per week or 71% of the median rent for a Sydney home. In Kansas City, the median rent for a two-bedroom apartment is just under $225 per week.

Why is UBI proposed? In no particular order, here are some reasons offered (this list is not exhaustive).

1. Reduce poverty
2. Increase living standards
3. Facilitate innovation, creativity, and entrepreneurialism
4. Provide more leisure time
5. Stimulate the economy and create more jobs

So the idea seems to pass a minimum threshold of intelligibility, and those goals seem like worthwhile ones to pursue. But how is the UBI process supposed to work?

The most common thing to point out is that a basic income is not about directly expanding the money supply. It doesn’t involve printing more money, but it can involve mixes of the following for funding.

1. Increasing taxes
2. Reducing/Removing existing government benefits

So in a nutshell a universal basic income is an amount of money created by higher taxes or spending realignment (or both) that the government then pays to all of its citizens in order to improve their lives and the economy.

Assumptions, Assumptions, Assumptions

As is any theoretical proposal, UBI is built on a lot of assumptions.

When something like these assumptions have been built into prior proposals and initiatives, how have they fared?

History provides us with imperfect and limited examples for exploring some of the salient features of a UBI initiative in the form of socialist regimes. Let’s start with our own day and age.

Consider, for example, the nature and range of the social democratic elements found in places such as the United States, Britain, Germany, the Netherlands, and generally speaking most OECD countries that provide basic services that go beyond a minimal safety net.

These nations — all of them uncontroversially prosperous — are also prominently fitted with the machinery of capitalist markets. They are configured to combine the statist elements of pure socialism but within a framework of free enterprise.

One imperative for any regime wanting to prominently utilize the power of free markets is that they include as many participants as is feasible, establish the free flow of information, and secure safeguards against genuinely exploitative behavior. If these are seen as critical features, then it follows that meeting everyone’s basic needs becomes just as crucial. For example, education, healthcare, transport, and communication infrastructure suddenly become essential to participation.

Is UBI the answer that best accomplishes this requirement for basic needs provision?

It’s important to note that if UBI damages the integrity of free markets, democracy, and capitalism, then it might be too high a price to pay. These are the forces that have raised standards of living the most and in the shortest time. Quality of life from the 1800s to now is drastically different.

Let’s explore.

Prices

Intuitively it feels that if we give everyone more money then prices have to rise. Yet based on the quantity theory of money this won’t actually occur as the government isn’t printing more money; rather, what it’s doing is redistributing existing money. Thus, based on this theory, prices wouldn’t rise — at least not for this reason.

But they may rise due to different considerations.

Consider that the money has to be coming from somewhere and that brings with it an opportunity cost. Of course, the redistribution must be coming from the coffers of the wealthy. Statistics show that the wealthy have a higher propensity to save than the average person — courtesy of the excess cash no doubt. These savings are either invested, loaned out, or held in non-growth contributing forms like gold or required reserves. By taxing the wealthy more, we reduce their ability to invest or save. If in the short term they tap into savings to fund consumption then we are taking money that may not have been “in” the economy as it was in the form of required reserve ratios and are now injecting that cash into the economy. This effectively expands the money supply. Reduced overall savings reduces required reserves and in effect increases the money supply and therefore raises prices.

The redistribution puts money in more peoples hands. Individuals that were once unable to compete for goods and services are able to enter the market. Broader purchasing power is achieved, which is genuinely great. It increases standard of living, boosts aggregate demand, and creates more jobs. In the short term.

The initial periods of universal basic income will increase all of the previously mentioned factors as the introduction of the UBI is a giant stimulus. Over the medium term we could expect prices to rise as competition for goods mean suppliers react and courtesy of profit maximization they increase their prices. If 10 people could afford one gallon of milk today but 100 can afford it tomorrow then what would you do as the producer? Even more importantly, what would the 100 people looking for milk do?

The solution to inflation is to peg the UBI to the Consumer Price Index (CPI) and ensure that it rises with inflation. This would hopefully smooth any market distortions and prevent any boom-and-bust cycles caused by the introduction of a UBI.

Then there are considerations of whether $20,000 just becomes the new $0 and the whole benchmark shifts up? What if the government prints more money to keep up with inflation and as a result hyperinflation occurs? Will workers demand pay rises to ensure that their relative “value” doesn’t diminish?

Reducing Poverty

No one needs to be sold on the worthiness of alleviating poverty. Not even those caricatured as being indifferent to poverty actually are; it’s just that they’re unwilling to countenance the tradeoffs required for doing so. But if a system could alleviate poverty while keeping other things equal or even augmenting other points along the wealth distribution continuum, then it’s a no-brainer.

One of the selling points of the UBI is that it is superior to automatic stabilizers, such as existing welfare and welfare-like structures. It is the assumption that giving everyone money is better than assisting the targeted few. By contrast, Australia has just embraced “needs” based school funding which functions in line with existing transfer payments for social welfare and provides more funding to schools with kids of lower socio-economic backgrounds.

What happens when we move away from means-tested strategies and toward universal strategies? Let’s consider the institutions we’d want to universalize and the costs associated with a UBI.

Healthcare, elderly care, education, transportation, communications infrastructure — these are the essentials; the tools of opportunity. The cost of a UBI of $15,000 per person in America would be approximately $4.83 trillion, not including administrative costs. That’s 27% of GDP.

Currently, according to OECD data, the United States spends approximately 20% of GDP on social welfare, so moving to a UBI would represent a 7 percentage point increase. But the question was never over the dollar amount; it’s always been about efficiency and effectiveness.

Is it more efficient to give everyone money, or to target particular needs?

Here are some facts.

• Preventive measures are more cost-effective than reactive measures.
• There is a natural rate of unemployment.
• Healthcare, education, access to society are important.
• UBI creates “choice” based spending. Recipients are able to choose whether they participate in society, get an education, and pay for the dentist or buy drugs, alcohol, and be a part of the underground/illegal economy.

One can make a good case for thinking that a UBI will increase standards of living. It may do that in the short term — the problem is: when it comes to the long term, we just don’t know. We know that free markets have delivered a better quality of life, and we know that command governments, such as the various communisms of the 20th century, have failed.

We also know there has been rising wealth inequality and we have the possibility of fitting a UBI program within a broader capitalist system. It could be just what is needed.

Leisure Time, Innovation, Entrepreneurship, Education

A UBI provides some economic security and a fall back position that will enable entrepreneurship, education, and leisure time. But a big problem stems from the possibility that our inclinations to be lazy are stronger than our inclinations to be industrious. A universal basic income won’t suddenly turn people into creatives or business magnates. Those people arguably have that drive and those traits regardless of the environment you put them in.

A UBI may facilitate more education and research but it also may not. Why spend $20,000 to $100,000 on a tertiary education if you may not receive the benefit of higher income due to higher taxes? Or do you study just for the fun of it? What value does UBI actually place on education, risks, and the things that people choose to spend their time and money on to carve out a better life, a better self?

In a UBI model we seem to assume that people will spend money on good things. What if we don’t spend money on health, education, food, water, and rent? What happens if we remove public funded healthcare to pay for UBI and then you spend your money on cigarettes and alcohol or at the casino? Who pays for your healthcare? Or do we have to fund healthcare + UBI?

Considerations for conservatives — surely a faction that must be brought in if this project has any hope of implementation — is that the UBI would replace, not supplement, the existing buffet of welfare programs. If the UBI project is presented as a Welfare Plus option — how will it be embraced by small government types?

What is always needed, the ideal we must continue to enshrine, is a government that seeks to ensure that civil liberties are preserved and basic needs are met. Ultimately, it’s about quality of life.

Whether the UBI can help us come closer to achieving this, I’m not sure.