Basically Universal
10 minute read
***This topic could easily drag us into gritty detail about the technical differences between Universal Basic Income and a Guaranteed Basic Income, or a Negative Income Tax, or a Floor Under Incomes. That would be boring and as you know I like to keep things as simple as possible, so herein, when I mention UBI, assume I am talking about all of these kinds of unilateral government welfare pay-outs***
Universal Basic Income (UBI) is a simple idea, one that has been batted around economics circles for decades, the subject of ferocious debate. It had in fact been gaining a bit more airtime pre-pandemic (generally in the context of AI and increasing automation displacing human jobs), but since millions of people have made financially vulnerable by COVID, the idea has seen a real resurgence. It’s been boosted further by the fact that the public is getting a bit more comfortable with the idea of governments making cash payments directly to citizens.
Even beyond COVID, as and when the world returns to growth mode, is it not fair that all people are able to share in our collective economic prosperity? Countless studies have shown that reducing inequality makes everyone better off. Does society not have a responsibility to ensure that there is an economic “floor”, below which we do not allow anyone to fall?
A brief history
Economists have long debated the merits cash payments directly to citizens. In the US UBI enjoys support from the left as it’s a financial safety net for society; it’s also attractive to conservatives as it could reduce the size of the welfare state. Variations of UBI have enjoyed a fantastic variety of fans, from 1940s economist Milton Friedman to Richard Nixon to Martin Luther King Jr. But does it work?
As it turns out, there have also been quite a lot of attempts 50 (and counting) experiments have been conducted in various forms since the 1960s. Alaska has had a partial UBI since 1982, Namibia saw a 42% drop in crime linked to their version and Dauphin, Canada saw an 8.5% reduction in hospitalisations thanks to their “Mincome” experiment. During the pandemic, many countries have boosted their support for individuals, some, like Spain, have taken the opportunity to launch full-blooded UBI pilots.
So what exactly makes government handouts Universal Basic Income? They must be:
For everyone
Regular
Unconditional
Individual
Paid in Cash
Why not?
The first and most obvious criticism of UBI is around incentives. Specifically, if you just give people money to live on, they no longer have an incentive to work and will drop out of the labour force, to the detriment of the economy as a whole. Sure, this is true if a person has super-low ambitions and is content to live on an absolute basic minimum. In reality, this assertion could not be further from the truth.
If you receive UBI, every pound, dollar, euro or franc earned is an incremental improvement to your situation; accepting any kind of job (full-time, part-time, gig) will make you better off – not so under a conditional welfare system. Take the UK benefits system, a claimant will lose all or part of their benefits if they get a job, this could result in a drop in their overall income – this averages out as equivalent to an 82% tax rate!! Moreover, if a claimant, gets a short-term contract at a level which stops all their benefits altogether, there is a very real risk is that they could go for weeks with no income at all after their contract has ended and they are re-applying for their benefits – now that is a disincentive to work!!
A system whereby a person knows that they can take a job and not risk losing their financial safety net, can surely only motivate more people to seek out work. They will earn more, have more spending power, support the economy more and simply live better. Oh, and by the way, the majority of the experiments that have been done have shown that people don’t simply quit their jobs in favour of sitting on the sofa writing blogs.
UBI actually goes beyond this, it makes the labour market more free. If you have a little safety net, you are more likely to leave a job you hate and find one that is more fulfilling. Even if you earn the same wage, you are happier and better off overall. You also free up your old job for someone (who perhaps is unemployed) who might actually enjoy it. Yes, this assumes a plentiful supply of jobs to move in to; perhaps the economic stimulus that comes with people having a bit more disposable income will help with this?
The second obvious criticism is that paying people who earn enough to not need it is a waste of money. Universal pay-outs will obviously make more of a difference to those on low incomes (that’s the whole point), but we don’t choose to only install seatbelts in old unsafe cars owned by risky drivers. All cars have seatbelts because even the best drivers in the safest cars can get into accidents that are not their fault (COVID lockdowns have caused a lot these accidents). Everyone gets a seatbelt.
Some detractors (usually privileged middle-aged white men) arrogantly say that the poor are poor for a reason, because they don’t know how to manage their money and their UBI will simply fuel cycles of dependency and addiction. I’m not quite sure where to start with the abhorrently offensive presumptions of this argument. An extreme minority of people struggling with addiction need support and protection, simple as that; this is not a reason to write off the 14m Brits struggling below the poverty line.
Think about it as a social dividend. We are all equal; equal shareholders in society and we are all entitled to an equal share of the prosperity of our country/continent/planet; or as in bad times, an equal level of support. Paying everyone the same amount is simple and much faster than means-testing recipients before making payments. Money gets to those who need it straight away and the tax system can easily be adjusted so that higher earners pay their UBI back.
The bill
So far, so idealistic.... but can this work in the real world? How much might UBI cost, and more importantly, how can it be funded?
The obvious answer is “it depends”. On how much you give people. On how the tax system is adjusted and on what other welfare schemes can be eliminated. Let’s say all 52m UK adults are given £10k p.a. and the 15m children get £4k. That comes to about £575bn every year. But, you can change taxes as you like, so that those earning over a certain threshold pay their UBI back, or even overpay and partially fund the UBI of the poorest. Take this to an extreme and the net cost of UBI could, in theory, be zero, but that all sounds a bit communist. Nevertheless, you see my point, where you decide to put the “break-even point”, has a huge impact on the net cost of UBI, finding the right balance is not easy, but it’s not impossible.
Critics usually (and short-sightedly) cite prohibitively high costs. Roughly 22% of the UK population (10m adults and 4m children) live below the poverty line*, if we were to make it so that these people receive the payments and higher earners simply pay their UBI back in additional taxes (i.e. not even overpay), the cost of UBI would be about £127bn** – roughly half of what the government spends on social protection every year – much of which UBI could potentially replace.
It doesn’t stop there. While the economic domino effect of more disposable income leading to more jobs won’t happen straight away (perhaps philanthropists could help catalyse this by providing the risk capital to get things going?); but let’s look at the big picture.
The opportunity costs of not doing it are huge. Inequality and poverty are very expensive. They burden the healthcare system. They burden the criminal justice system. They burden the education system. They clip the wings of would-be entrepreneurs, stifle productivity and suppress consumer buying power and therefore entire economies. Even if UBI did represent a net increase in spending (which we’ve just show doesn’t have to be the case) savings across other areas of the economy mean it could pay for itself many times over (probably enough to fund the critical infrastructure investments and other public spending these same critics claim will suffer if investment is diverted into UBI).
Additional Impact
You could conceivably see a rise in fraud, abuse and exploitation against vulnerable people who suddenly find themselves in a (better) financial position to which they are unaccustomed. Financial dependency can be a factor in perpetuating cycles of abuse; if the choice is between staying in an abusive household and homelessness. With the right support and safeguarding, UBI could help provide a lifeline for victims to become survivors.
We’ve spoken a lot in previous posts about a just transition; the move to a low-carbon world will be bumpy and (in the short-term) there will be some losers, most obviously the employees of carbon-intensive industries which will shrink. UBI could help smooth over some of these bumps and, if used correctly, could help catalyse the redistribution of talent towards emerging green industries.
If the debate around UBI was heating up before the pandemic was, the seismic shifts we have seen in our economies and societies this year, to me at least, have made it a no-brainer. But its’ a massive call. Do our current crop of world leaders have the willing (let alone the ability) to enact such changes?
I suppose that would be a topic for another blog post :-s
*there are lots of detailed ways to calculate this, but for our purposes, we are using the well-established methodology of 60% of the median household income – or £193 per week / £10k p.a.
**In reality this is probably a bit of an underestimate as rather than a hard stop at £10k, taxes should gradually increase above £10k of income, with a commensurate reduction in the net UBI for higher earners.