What Is Universal Basic Income?
Pros and Cons of a Guaranteed Income
(EXPERTISE: U.S. and world economies, CURRENTLY – President, World Money Watch – EDUCATION – MIT Sloan School of Management)
Universal basic income is a proposed government-guaranteed payment that each citizen receives. It is also called a citizen’s income, guaranteed minimum income, or basic income.
The intention behind the payment is to provide enough to cover the basic cost of living and provide financial security. The concept is also seen as a way to offset job losses caused by technology.
Plans differ on who receives the income. Some would pay every citizen, regardless of income. Others would only pay those who are below the poverty line, whether they are working or not.
One proposal would pay just those left jobless due to robotics, a plan that 48% of Americans support.
The government sends the check, but plans differ on who funds the income. Some plans call for a tax increase on the wealthy, while others say corporations should be taxed.
Key Takeaways
- A universal basic income provides everyone with a minimum living wage, whether they are employed or otherwise.
- It was proposed to address job losses stemming from technological innovation.
- Many countries, states, and cities are experimenting with pilot programs.
What Is Universal Basic Income?
Universal basic income is a program where every citizen receives a flat monthly payment, regardless of whether they’re working and earning an income or not. Different programs outline who exactly receives the income—some state that all citizens would get it regardless of what they make, while other programs may only give it to those who fall below the poverty line.
In 1967, Martin Luther King Jr. said a guaranteed income would abolish poverty. That means reducing income inequality as well.
Economist Milton Friedman proposed a negative income tax. The poor would receive a tax credit if their income fell below a minimum level. It would be equivalent to the tax payment for the families earning above the minimum level.
In 2018, Facebook co-founder Chris Hughes outlined his plan in his book “Fair Shot.” He argued that U.S. workers, students, and caregivers making $50,000 or less a year should receive a guaranteed income of $500 a month.
“Cash is the best thing you can do to improve health outcomes, education outcomes and lift people out of poverty,” Facebook founder Chris Hughes said.
Hughes’ guaranteed income plan is financed by taxes on the top 1%. It would work through a modernization of the earned income tax credit.
To Hughes, it’s the only solution to an economy where “a small group of people are getting very, very wealthy while everyone else is struggling to make ends meet.”
Hughes said automation and globalization have destroyed the employment market. They have created a lot of part-time, contract, and temporary jobs. But those positions aren’t enough to provide a decent standard of living.
Sir Richard Branson said a guaranteed income is inevitable. Automation has fundamentally changed the structure of the U.S. economy. Elon Musk said robotics will take away most people’s jobs, so a universal income is the only solution.
Pros and Cons of Universal Basic Income
The snapshot below shows some of the program’s many pros and cons that exist for countries who wish to implement a basic income.
Pros
- Workers could afford to wait for a better job or better wages
- People would have the freedom to return to school or stay home to care for a relative
- May help remove the “poverty trap” from traditional welfare programs
- Citizens could have simple, straightforward financial assistance that minimizes bureaucracy
- The government would spend less to administer the program than with traditional welfare
- Young couples would have more money to start families in countries with low birth rates
- The payments could help stabilize the economy during recessionary periods
Cons
- Inflation could be triggered because of the increase in demand for goods and services
- There won’t be an increased standard of living in the long run because of inflated prices
- A reduced program with smaller payments won’t make a real difference to poverty-stricken families
- Free income may not incentivize people to get jobs, and could make work seem optional
- Free income could perpetuate the falling labor force participation rate
- Many opposed to giving money to the unemployed
Advantages Explained
An unconditional basic income would enable workers to wait for a better job or negotiate better wages. They could improve their marketability by going back to school. They could even quit their job to care for a relative.
It would also remove the problem with existing welfare programs that keep people below the poverty line.
If welfare recipients make too much, they lose food stamps, free medical care, and housing vouchers, even if their income is still unequal to the cost of living.This is a form of structural inequality that prevents the poor from building their wealth to better their lives.
A simple cash payment that goes to everyone could cut down on bureaucracy.
Current welfare programs are also complicated for administrators and recipients. A universal income would replace housing vouchers, food stamps, and other programs.
The simplicity of the program means it would also cost governments less. Cash payments that went to everyone would eliminate costly income-verification paperwork.
Only applicants with low incomes qualify for means-tested programs. Conservative Utah Senator Mike Lee told the Heritage Foundation, “There’s no reason the federal government should maintain 79 different means-tested programs.”
Some countries are concerned about falling birth rates. A guaranteed income would give young couples the confidence they need to start a family.
It would also provide workers the confidence to bid up wages. From a macro viewpoint, it would give society a much-needed ballast during a recession.
Disadvantages Explained
If everyone suddenly received a basic income, it would create inflation. Most would immediately spend the extra cash, driving up demand.
Retailers would order more, and manufacturers would try to produce more. But if they couldn’t increase supply, they would raise prices.
Higher prices would soon make the basics unaffordable to those at the bottom of the income pyramid. In the long run, a guaranteed income would not raise their standard of living.
Oren Cass, a Senior Fellow at the Manhattan Institute, says it would make work seem optional. Many recipients might prefer to live on the free income and would not acquire work skills or a good resume.
This could prevent them from ever getting a good job in a competitive environment and could reduce an already-falling labor force participation rate.
Studies of areas that have implemented some for of universal basic income have found that it does not impact overall labor force participation rate, and may in some cases increase employment.
How Much Would It Cost the U.S.?
Universal basic income would add trillions to the deficit. For example, in 2012, there were 179 million working-age adults. It would cost $2.14 trillion to pay each of them $11,945 (the poverty level) each year.
But it would replace existing welfare programs that cost $1 trillion a year. So it would add $1.2 trillion to the deficit, or 7.5% of the total economic output that year.
To save money, some programs would not pay as much. But research shows that payments of a few hundred dollars aren’t enough to make a real difference in the lives of the poverty-stricken.
A guaranteed income that’s enough to eliminate poverty would be too expensive.
But such a plan would be difficult to get passed in the U.S.
Over half of Americans oppose universal basic income. Many would only support it if tech companies paid for it. Even raising the U.S. minimum wage has been difficult, even though 67% of Americans are in favor of it.
Guaranteed Income History in the U.S.
In 1968, President Johnson’s administration launched a test of the negative income tax in New Jersey.
It found that welfare recipients received a higher payment from that program than they did from the standard income tax. A higher-paying program was tested in Seattle and Denver.
Results of two negative income tax trials showed reduced incentive to work.
Families also broke up, since husbands and wives no longer had to remain together for financial reasons. The administrative costs were very high for both programs.
The earned income tax credit is a form of guaranteed income. It provides a percentage tax credit for every dollar of earned income up to a maximum credit.
Since the credit increases along with income, it promotes the incentive to work.But as the income reaches a maximum level, the tax credit phases out and decreases.
That creates a disincentive to earn more, which is what could happen with universal basic income, too.
What Countries Have Universal Basic Income?
There are many cities, states, and countries that are experimenting with a universal basic income. It’s too soon to tell if these pilot programs will work. The universal income’s simplicity makes it an attractive alternative to welfare programs. But its proponents haven’t suggested solutions to its several potential issues.
United States
Alaska has had a guaranteed income program since 1982. The Alaska Permanent Fund paid each resident an average of $1,606 in 2019, all out of oil revenues. Almost three-fourths of recipients save it for emergencies.
In 2017, the Hawaii state legislature passed a bill declaring that everyone is entitled to basic financial security. It directed the government to develop a solution, which may include a guaranteed income.
In Oakland, California, the seed accelerator Y Combinator will pay 100 families between $1,000 and $2,000 a month.
In 2019, Stockton, California, began a two-year pilot program. It’s giving $500 a month to 125 local families. It hopes to keep families together, and away from payday lenders, pawn shops, and gangs.
About 43% of the recipients are still working. Most of the others were taking care of relatives, disabled, retired, or students.
Chicago, Illinois, has also considered a pilot program in which 1,000 low-income families would receive $1,000 a month.
Canada
Canada is experimenting with a three-year universal income program. It’s giving 4,000 Ontario residents living in poverty C$17,000 a year or C$24,000/couple. The government expects it will cost C$50 million annually.
Finland
In 2017, Finland gave 2,000 unemployed people 560 euros a month for two years, even if they found work.
The recipients said it reduced stress. They said it gave them more incentive to find a good job or start their own business.
Instead, the Finnish government found that they did not have higher incomes or more work days than the control group.
Kenya
In 2011, GiveDirectly, Inc. began distributing cash to poor households in Kenya via mobile phones.
A study of 63 Kenyan villages found that nine transfers of $45 a month improved local consumption and well-being.
It increased consumption of food, medicine, education, and social events without increasing alcohol and tobacco use. The households were also able to increase investments in livestock, furniture, and home improvements.
Scotland
Scotland has committed 250,000 pounds to four pilot areas. Research into a program that pays every citizen for life. Retirees would receive 150 pounds a week. Working adults would get 100 pounds and children under 16 would be paid 50 pounds a week.
Taiwan
Taiwan may vote on a basic income. Younger people have left rural areas in search of decent wages. Some have even left the country to look for work.
A guaranteed income might keep them from emigrating. It would also help the senior citizens left behind who live in poverty.
The country only spends 5% of its gross domestic product on welfare programs. The average for developed countries is 22%.
Under the proposal, the government would pay NT$6,304 per month for children under 18 and NT$12,608 per month for adults. It would cost NT$3.4 trillion, or 19% of GDP.
To fund it, Taiwan would levy a 31% tax on earnings above NT$840,000 per year. As a result, the program would raise the incomes of two-thirds of the population. The richer third would lose NT$710 billion.
Economists Kalle Moene and Debraj Ray propose a payment system tied to a country’s economic output. They suggest 10 to 12% of GDP go directly to the universal income payments. The benefit is it would automatically rise with national prosperity and inflation.