Universal Basic Income – Does it Work?

Universal Basic Income - Does it Work?

By Jan-Henri van den Berg

For as long as we have been trading with one another, people have had financial troubles. Especially if you are a student, chances are high you have experienced some difficulty in making ends meet. Luckily, most Western countries have institutions that can offer temporary relief if need be. In most cases this relief comes in the form of a loan, or at least requires the person in need to meet certain criteria. However, in recent times, influential thinkers have proposed a radical change to this notion: free money for everybody, with no strings attached. In this article, I will go over the history, advantages, disadvantages, and implications of a universal basic income, to try and determine whether this proposal is realistic.

Before we start analyzing the feasibility of universal basic income, or UBI for short, it is important to clearly define what UBI contains. UBI is a periodic cash payment, which is paid to all citizens within a certain country or state, on an unconditional basis, meaning there are no requirements that need to be met. (Bidadanure, 2019)

Even though it may sound like the idea of a UBI is relatively new, variants have been around for centuries. A concept similar to UBI can be traced back to the end of the 1700s, when British philosopher Thomas Paine proposed a lump sum for all adult citizens. (Stanford, 2023) Interestingly, Paine is considered a liberal, whilst nowadays most people associate UBI with socialism. This has not held back deeply liberal countries such as the United States to experiment with UBI. For example, in 2019, the mayor of Stockton, California, launched a UBI pilot program. In this experiment 125 citizens were given $500 a month for two years with no strings attached. Even though the program may not be fully representative due to its limited timespan and scope, the results were promising. (Sreenivasan, 2021)

So what makes it that countries such as the United States are taking an interest in UBI? The direct, and somewhat obvious effect is that it helps eliminate poverty. This in turn has a variety of benefits. First of all, studies have shown that the overall mental well-being of the population increases, likely due to the increase in financial security. (Wilson & McDaid, 2021) Additionally, UBI increases consumers’ purchasing power, making it a useful means to stimulate the economy. Studies have also shown that people use the extra money to invest in themselves, whether that be in their own business, or in higher education, which both increase a country’s overall productivity. UBI would also allow for the elimination of current social security programs, such as subsidized housing and health care assistance, in addition to the extensive bureaucracy necessary to facilitate such programs.

Based on this, you could argue that UBI is an investment, which indirectly brings us to its biggest disadvantage: the sheer cost of implementing a UBI program. For the United States, it is predicted that maintaining a UBI program will cost around $3.9 trillion per year, which accounts for about 15 percent of its annual GDP. (Bureau of Economic Analysis, 2022) Furthermore, many people fear that implementing UBI will reduce the incentive to work. Even though experiments have shown that this does not necessarily have to be the case, it is a valid fear. The expected increase in purchasing power may lead to (hyper)inflation, which can nullify the positive effects of UBI altogether. Then there is also the potential for fraud and overall abuse of the system, for which a preventive infrastructure requires considerable investment in itself.

It is safe to say that implementing a UBI program is far from simple. In practice, it would lead to a major overhaul of the tax system, likely resulting in the rich paying higher income taxes to compensate for the government’s increased spending. There are some other ways in which UBI can be financed. First, the elimination of other welfare programs frees up the government budget. Second, a government can consider issuing debt if it believes UBI will pay for the increased interest expense in the future. Lastly, governments can cooperate with the private sector in return for tax benefits for private companies.

That being said, the biggest obstacle for UBI has nothing to do with its actual implementation. It is the political backlash that it has to overcome. For some people, the idea that others receive money without doing anything for it does not sit right. There is a fear that less well-off people specifically do not know how to handle money, and will in turn go on and waste it on useless things. Coming back to the pilot in California, it showed that participants spent their money similarly to others who were not part of the program. In the end, only 2% of the money was spent on alcohol and drugs. (Sreenivasan, 2021) Again, this is not to say that this pilot will be representative for an entire population, however, claims that ‘poor people do not know how to handle money’ seem to be ill-supported by experimental findings.

To conclude, it is difficult to assess whether or not a large-scale UBI program would be feasible. It makes sense not to fully commit to a UBI program without having the assurance that it will have the desired effect, therefore it is of utmost importance that governments worldwide start experimenting more and more on larger scales. Previous experiments have shown that the potential is there, the question is which government dares to take a step into the unknown and truly find out what a UBI can do.

21-02-2023

 

References

Bidadanure, J. U. (2019). The Political Theory of Universal Basic Income. Annual Review of Political Science, 22(1), 481–501. https://doi.org/10.1146/annurev-polisci-050317-070954

Gross Domestic Product | U.S. Bureau of Economic Analysis (BEA). (2022). https://www.bea.gov/data/gdp/gross-domestic-product

What Is UBI | Stanford Basic Income Lab. (2023) https://basicincome.stanford.edu/about/what-is-ubi/

Sreenivasan, H. (2021). Stockton, CA gave residents a UBI - here’s what happened. PBS NewsHour. https://www.pbs.org/newshour/show/stockton-ca-gave-residents-a-guaranteed-income-heres-what-happened

Wilson, N., & McDaid, S. (2021). The mental health effects of a Universal Basic Income: A synthesis of the evidence from previous pilots. Social Science &Amp; Medicine, 287, 114374. https://doi.org/10.1016/j.socscimed.2021.114374