Why We Need a Universal Basic Income

Economics, Medium Reads
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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 but could reap countless benefits if implemented correctly. This essay focuses on the model of a minimum basic income – enough money to lift every citizen above the poverty line. UBI is not only a better means to social justice than ordinary welfare but can also act as a catalyst to economic growth by providing income security and increasing capital flow.

First, the idea that the less-needful middle-class would receive payment from the government seems absurd to some. However, by providing income security, UBI provides an overall economic stimulus as well as a psychological benefit. A guaranteed source of income means people have a higher tolerance for riskier careers, 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 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”.[1]

Currently in the UK, the top 10% of households own 44% of all wealth [2] – most of this is not spent in a way which benefits business, as it is outside the consumer market. Higher taxes on the wealthy which would sustain UBI would inevitably result in an increase in disposable income among middle and lower-class households. As a result, more money would be spent, boosting in the consumer market, which accounts for about two-thirds of the UK’s economy.[3]. This increase in expenditure drives 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.[4]

The redistribution of wealth 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 amount of income – resulting in up to a 93% effective marginal tax rate, often meaning individuals’ real wages are in fact greater without employment.[5] 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%.[6]

Others feel that strong social welfare schemes accomplish the same aims of UBI for a fraction of the cost. They argue that concentrating funds solely to those who need it the most is far more monetarily 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. [7] Pressure from the government to get off welfare leads long-term economic detriment as a result of decreased social mobility, whereas with UBI, there is no regressive welfare system, so there are no disincentives to employment.

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.[8] Economist Paul Krugman describes this amount as “not politically achievable” in the current political climate – the high initial investment 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 which 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 to finance UBI. [9] Funding would clearly not be a problem.

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, this should not discourage governments – as described earlier, the current system is broken and is in dire need of reform. 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 would 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.

Bibliography

[1] Charlton, E., World Economic Forum, https://www.weforum.org/agenda/2019/02/the-results-finlands-universal-basic-income-experiment-are-in-is-it-working/,

[2] Equality Trust, https://www.equalitytrust.org.uk/scale-economic-inequality-uk,

[3] Wikipedia, https://en.wikipedia.org/wiki/List_of_largest_consumer_markets

[4] Nikiforos, M.Steinbaum, M. and Zezza, G., Modeling the Macroeconomic Effects of a Universal Basic Income, Roosevelt Institute, 2017, page 3

[5] http://policyinpractice.co.uk/93-tax-effective-tax-rates-explained/, accessed on 11/03/2020

[6] Jones, D. and Marinescu, I., The Labor Market Impacts of Universal and Permanent Cash Transfers: Evidence From the Alaska Permanent Fund, National Bureau of Economic Research, January 2020

[7] Time For Change: An Assessment of Government Policies on Social Mobility 1997-2017, Social Mobility Commission, June 2017, page 6

[8] Dalio, R., https://www.linkedin.com/pulse/primer-universal-basic-income-ray-dalio/,

[9] Ortiz, I., Behrendt, C., Acuña-Ulate, A., Nguyen, Q.A., Universal Basic Income proposals in light of ILO standards: Key issues and global costing, International Labour Organisation, 2018, page ix

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