What if the government covered your living cost? Would you still go to work? What even is Universal Basic Income? Could it work?
2020 was the biggest challenge our social systems have seen in a long time. It forced countries to become creative and find new solutions. One of these solutions was Universal Basic Income or UBI. Whilst it’s not a new concept it bounced to the forefront of our attention. We saw different examples last year from the American stimulus checks to the travel grants in Japan.
The first hurdle the policy faces is its definition. Some call for a replacement of welfare by UBI and others for an addition. The longest-standing “experiment” of UBI is the Alaskan “oil dividend”. Which sees any permanent resident of Alaska receiving an annual monetary stipend.
This monetary stipend has not had an impact on employment or wealth imbalance in the area. It has seen an increase in part-time work and “evening” studies. We will explore this more later.
I believe that UBI could open the doors to Financial Independence to many as well as giving more time for meaningful work. Less risk of living paycheck to paycheck and higher chance to make a valuable contribution. This ties in with the ideas I explore in “Financial Goals: I was wrong“.
So today let’s explore what Universal Basic Income is, what it means for the economy, and the pros and cons.
What is Universal Basic Income?
Universal Basic Income is quite easy to define it’s the idea that every adult should get a monthly stipend. Although, it sounds utopic and simple. It’s far from easy to put in place. There are many different takes on it from a no questions asked to check to a restricted special use debit card.
This concept has been around since the 16th century and is back with a vengeance currently. Tough economic situations suggest a radical solution. UBI is one of the options. The perfect amount is not a matter of economics but politics. The one rule the policy would abide by is that no matter who you are, what you do, or what you believe you are entitled to it.
Additionally UBI is not a plea to make people work less. It’s the power to enable them to a job that matters. It not only means an increased chance to work according to your values. It empowers workers in less enviable positions as they gain leverage to request higher working conditions.
Implementing it could be as a supplement to the welfare offered by the state which would increase the overall cost and tax at higher incomes. Or replace it partially/fully and become a new and fairer approach that has diminishing returns as you go up the income ladder. All in all, it is an effort to bridge the wealth gap. But can it work?
How could UBI Work?
At the end of the day, UBI starts with tax reform and implementing a negative income tax (yet another name for UBI. To help you visualize the situation in table 1. You can see the impact on your taxes and net income. The data is based on the European Average tax level in 2019 39% and the global average of 31%. As well as a £1000 per month income or £12000pa.
If you are more of a visual thinker the curb looks like this :
As you can see with a negative income tax as the basis for UBI taxes would normalize fast. Instead of creating an inflationary situation it would lead to the redistribution of wealth whilst giving an equal footing to all.
Gyeonggi province in Korea has had a basic income for under 24-year-olds for some time now. The idea was that they get a quarterly stipend of 100’000won or 85USD which they had to spend in local business with a revenue of under 830,000USD. (article link)
The program has now been expanded to the whole of the adult population since the start of COVID-19. It allows the state to subsidize small businesses whilst empowering and protecting its people. With the spending restricted and limited to certain regions.
By directing the cashflow via local spenders and increasing the regional GDP – the population is also enabled to invest. Not only in stocks but in themselves. It empowers workers to focus on their education and retrain new skills. This is particularly important in a country with a strong increase in automation.
Why not check out the video below from the Wall Street Journal which visited a recipient of this variant of UBI.
Welfare can often feel like a trap. With clear thresholds that are arbitrarily set and rarely updated. By generalizing aid and removing constraints you give a chance to recipients to use the funds as growth support. Supporters of the cause call for this to be funded by existing welfare funds as well as with saved administrative costs. The OECD (Organisation for Economic Co-operation and Development) says its members spend on average 20% of their GDP on welfare. Or 8700USD per capita in 2019 raising to 22.7k for Luxemburg.
This data excludes 2020 were due to COVID-19 relief efforts the value is certain to raise. It also excludes the cost of administration for such efforts.
What are the risks of Universal Basic Income?
In this category, it’s essential to differentiate perceived risks and risk themselves. In this case, I will explore the biggest perceived risks and whether or not studies see them as founded or not.
People will stop working
A big if not the biggest sociological fear around UBI is that people will stop working. The idea that UBI which causes higher taxes and a stronger base for a living will incentivize people to stop working.
Evidence shows that indeed working rates significantly decrease when focusing on child labor. Although it only made it disappear in 8/19 studies it did show a decrease in hours worked in all studies! Which in turn led to an increase in school attendance and literacy.
As for the adult workforce, cash transfers did lead to a slight decrease among the elderly and those that care for dependants.
People will misuse the funds
But wouldn’t people just use the money on booze and cigarettes? A 2017 University of Chicago study on “Cash Transfer and Temptation Goods” has shown that when offered a basic income or subsidy the expenditure has a significant negative effect with a -0.18 standard dev. Studies have therefore been showing that concerns around tobacco and alcohol consumption are not applicable!
Indeed the research paper also points out that temptation goods are subject to high substitution effects When one unlocks the fund for more valuable substitutes they tend to gravitate towards them. These alternatives include a higher education with uptake in reskilling as well as health-based replacements such as nutritious foods or exercise equipment.
How about inflation?
The worry of inflation is linked to the decrease of work in relation to the income earned. As seen above UBI doesn’t lead to a significant decrease in working hours and thus should only mildly impact inflation.
Seeing it as a general raise is correct. A great example being Alaska’s oil dividend once more. Prices in Alaska although inflated rank 41st in the country despite supplementing income far from the likes of California, DC, or New York.
Additionally, an approach in line with Gyeonggi pay would make sure UBI would be redirected and consumed within the region. Boosting the local economy in turn. In a study by the Roosevelt Institute on the Macroeconomic Effects of UBI, they point out a potential uplift of the GDP by 12.56% over 8 years.
They also conclude that there was as of 2017 no empirical data that such a program would lead to an inflationary economy.
Why Do We Need Universal Basic Income?
It often feels like the status quo is fine. It’s comfortable and easy as we know how it works. The goal of this article is to challenge your understanding and try and give you an alternative point of view. We grew up with our social system in place but go back 70 or 80 years and Paid Time Off was unimaginable.
The strength of humanity is its constant evolution. With 2020 in the rear mirror and 2021 looking just as bad, the question stands are we doing enough?
The Wealth Gap
This graph shows the striking difference in income growth between 1980 and 2014. We seem to think that the rich get richer was always true. Yet a measly 30/40 years ago the trend was reversed. With a wealth gap that was shrinking.
Of course, it would be delusional to think we could go back to the economic growth of the past. Yet redistributing the cards at the top of the range would make a large difference. Systemic poverty is engrained and not moving as the wealth gap increases.
An egalitarian UBI would give the chance to the 98% to bridge the gap and start working towards a greener future. Currently juggling multiple jobs with a constant fear of losing them leaves no space for hope or betterment.
Often when working towards Financial Independence we forget that the deck was stacked in our favor. Of course, there are exceptions and inspiring stories. Yet recognizing my privilege and looking to help others grow is equally important.
A security net
If COVID-19 has taught us anything, we can’t be prepared for everything. With 40% of British people between 22 and 29 having no savings at all. Many have found themselves in dire situations as the age group was the hardest hit.
With no social security net or protection in place in the United Kingdom, the jump below the poverty line is very fast.
Not only does the crisis happen but it’s foreseen that 1 in 4 Americans will lose their job to automation in the next 12 years. UBI would allow peace of mind whilst these workers retrain for newly profitable jobs.
Of course, it would be easy to say prepare in advance but when living paycheck to paycheck that is an option many can’t sustain.
With the rise of platforms like Patreon we see an increasing amount of creators relying on donations from their followers to live. This is no different than a basic income provided by self taxation. UBI is no different and would allow the extension of such principles to a bigger share of the population.
By paying, a consistent stipend and delivering what is effectively an income floor. Residents are empowered to take more calculated risks and create their own path. In turn, creating employment and boosting the economy.
Ask yourself, how often do you hear people wish they could afford to start a company. But it’s just too risky they might lose everything. The impact knowing one can feed his family has on ambition is astounding.
My goal here wasn’t to convince you we need to adopt UBI. It was to dispel preconceived notions of economic downfall. Of course, just like every societal revolution, there will be repercussions and tradeoffs.
Yet it doesn’t mean we will be taxed to all hell. Of course, we can expect an increase in taxation in the short term. Yet the chance of creating opportunities for everyone equally is worth it in my eyes. UBI, when tested, has led to an increase in GDP, education, and morale.
As studies have shown an increase in mental health across the board!
I would love to hear your thoughts and ideas around this issue! How would you reform societal help?
- Our Broken Economy, in One Simple Chart, New York Times, 2017
- Cash Transfers and Temptation Goods, University of Chicago, 2017
- Cash Transfers: What does the evidence say?, ODI, 2016
- What Would Happen If We Just Gave People Money, FiveThirtyEight, 2016
- On the Economics of a Universal Basic Income, Intereconomics.eu, 2017
- Gyeonggi to give emergency basic income of 100,000 won to all Korean residents to cope with virus fallout, The Korea Times, 2020
- How South Korea uses local currencies for basic income, COVID-19 relief payments, Ledger Insights, 2020
- Universal basic income gains support in South Korea after COVID, Nikkei Asia, 2020
- Modeling the Macroeconomic Effects of a Universal Basic Income, Roosevelt Institute, 2017
- Unboxing Universal Basic Income, Berkeley Economic Review, 2020