By TJ Roberts | United States
The concept of a Universal Basic Income (UBI) comes up as a potential alternative to the modern welfare state. What people don’t consider, however, are the consequences of such a system. A UBI is a system in which the state provides a certain income for all people within the polity. Also known as a Negative Income Tax, a UBI requires a heavily progressive form of taxation. All adults within a polity receive this payment regardless of their wealth and their employment status.
Many proponents see UBI as a means of securing people’s basic needs. In addition, they see this as far more efficient than the current system. This, according to a UBI proponent, alters the incentives toward a more productive incentive structure in the economy. Finally, advocates of a UBI claim that it allows for people to survive after automation eliminates the job market. While on the face level, these arguments all seem to have a point, but some basic economic analysis can show that UBI is fundamentally flawed. This article will first outline the arguments one may find in favor of a UBI. It will then refute the arguments. In addition, it will offer some other problems to a UBI.
Why People Support UBI
People support UBI for many reasons. The most frequent reason that people cite is that it guarantees people a certain quality of life. To these advocates, not all individuals are capable of finding employment, so society must provide for these individuals. In addition to the unemployed, a UBI is claimed to help the underemployed. In essence, a UBI is a living wage for everyone.
Another case that some fiscal conservatives and libertarians make in favor of a UBI is that it is more efficient than the current welfare state. With a UBI, there is no massive bureaucracy to determine who needs what. You receive the same living income as every other person. This drastically lowers administrative costs.
Another case that fiscal conservatives and libertarians make is that a UBI readjusts the incentive structures of society. Since everyone is guaranteed this money with no strings attached, says the UBI advocate, there is no poverty trap that encourages people to work less so that they do not lose their payments. This means that the UBI would replace all currently existing social welfare programs and would allow for commodities such as health insurance to be handled entirely by the private market.
Finally, advocates of a UBI claim that it is the only logical means of continuing human existence in the age of automation. People fear that AI and new technology will make low-level employment obsolete, and will, therefore, knock so many people out of work that they will not be able to afford to live without a UBI.
Why the UBI is Wrong
These arguments, however, all fall when one considers economic theory and empirical reality. To start, a UBI would not adequately guarantee that everyone receives an adequate quality of life. This is because a UBI would lead to overwhelming price inflation. If everyone is guaranteed a living income, then more people will be able to consume products. Because more people can afford more goods and services, businesses will be inclined to increase prices whereas this surge in the number of willing customers is an external stimulus to the economy caused by outside intervention.
If a landlord knows that their clients are now receiving a monthly check, the landlord then has an incentive to increase rent to take advantage of the new wealth. As prices rise, people become less capable of providing for themselves, so they spend less. When people spend less, businesses will decrease production, which leads to businesses having to lay off workers. These newly unemployed workers then lose the ability to spend as much as they did when they had a job. This leads to an endless cycle of increasing prices and decreasing employment.
To add insult to injury, since the money supply is increasing, the money becomes less capable of holding value. The value of the dollar would tank under this system. This inflationary trap would compound, ending in a society in which most people are jobless, most businesses can’t afford to produce, and those who are employed have a money that is so worthless that they cannot afford anything. Such an inflationary policy overturns all the progress the market has achieved for this world.
Right now, the needs of more people are being met than ever before around the world, and no UBI caused this. Rather, it is decreasing prices that has allowed for the cost of living to drop in such a way that extreme poverty is disappearing from this world. Our World in Data illustrates this point beautifully in this slideshow. Declining prices are benefiting the worst off especially; the countries with the highest poverty rates are currently experiencing the fastest growth rates. A UBI and the inevitable price increases that follow would only harm this progress. We need more production, not redistribution.
We Cannot Afford a UBI
In terms of efficiency, while a UBI admittedly leads to cheaper administrative costs, the nominal costs make a UBI far more expensive than the status quo. Suppose the US implemented a plan that guarantees a living salary to all adults based on the cost of living in their area. According to MIT, the average living wage in the United States is $15.12 per hour. According to the US Census Bureau, there are 247,813,910 adults living in the United States. If one does the math, the cost of providing this basic income to every adult in the United States is $7,793,648,343,936 per year (this does not account for inflation and administrative costs). This is nearly $8 trillion. Given that the US spent $4.094 trillion dollars in Fiscal Year 2018, The United States would have to end every government program and more than double taxes in order to pay for this program alone.
UBI Perpetuates Poverty
While UBI may seem to eliminate the poverty trap, this is not the case. First, consider the inflationary effects of a UBI. If prices increase so dramatically that goods become unaffordable, then poverty increases. Also, the UBI does eliminate the incentive not to work that some means-tested welfare programs do have, but it also has negative incentives of its own. UBI gives businesses an incentive to slash wages.
If everyone working for a business is guaranteed a living salary, then businesses feel empowered to slash wages and keep the profits. UBI is just another form of corporate welfare. It allows for businesses to outsource the cost of having employees to the taxpayers. This makes it more likely for people to be content with what they are receiving from their guaranteed income and not pursue work at all.
In Defense of Automation
Automation is happening. But this is a good thing. Automation does not cause unemployment. Rather, it frees people to pursue other forms of work that individuals are more passionate about. The entire purpose of work is to satisfy humanity’s endless wants and needs. Since people are still poor in this world, it is clear that there are inefficiencies in the status quo. Automation allows for labor to become far more efficient. In the same way that the strides in efficiency that humanity accomplished in the industrial revolution of the 18th and 19th centuries did not eliminate the ability of regular people to find work, so too the automation revolution of the 21st century will not eliminate the need for work. Rather, it provides even more opportunities.
This is not to say that everyone will keep the jobs that they have right now. Some people will lose their jobs as automation makes the labor more efficient. But let’s consider what happens to people who lose their jobs due to automation. First of all, no one starved to death as a result of the milkman becoming obsolete in the late 20th century. People that worked as a milkman simply found other means of employment. They adapted to their times. They moved to new jobs that met consumer demand and often made these workers more prosperous
Automation Creates Jobs
But let us consider why someone would lose their job to automation. Resources are finite, but human desires are virtually unlimited. While at the face level, someone might lose their job in one area, that is because the consumer demand is being met more easily through automated processes that decrease prices and the cost of production. Automation brings prices down. This is why the cost of living has dropped so significantly that most Americans can afford something as complex as a smartphone. If people can produce more for less, prices go down.
When prices go down, consumers spend less on what they buy. When consumers spend less, they have more money. This allows for consumers to buy even more products. Since consumers can buy more, businesses have to produce more. This means that businesses need to hire more people in order to produce. Automation does not directly cause unemployment. Rather, it makes it easier for displaced workers to find new work.
Automation Creates Entrepreneurship
Another benefit of automation is that as prices go down and people become capable of affording more, people have more resources which allows them to engage in entrepreneurship. As people develop new industries (some of these industries will come directly from automation), new employees will be needed. As technology grows, the ability to acquire the means of learning new skills that improve your standing on the job market (take Skill Share as an example of this).
Automation enriches the labor force, allows for workers to find new and better jobs, allows workers to learn how to boost their resume, and brings new innovation that will create more prosperity at a lower price which especially benefits the poor. Automation does not justify a UBI. Rather, it shows why we need to avoid a UBI by any means necessary: the price increases caused by a UBI will offset the gains in human prosperity automation is causing.
How a UBI Takes Your Power Away
The greatest harm that a UBI causes is that it rips power away from the common person in the market. In a system with a UBI, people are capable of ignoring the law of supply and demand and pursue their own interests without regard for its marketability and at the detriment of those pursuing profitable work. Once again, someone has to pay for the UBI. If person X chooses to create products that they are passionate about but no one else is willing to buy, they still get the UBI and other people are forced into subsidizing their illegitimate industry.
In a truly unhampered market, person X would realize that their entrepreneurial effort is yielding no fruit and would therefore adjust their strategy to meet consumer demand. Under a UBI, the incentive to do this greatly diminishes. This is another proof that UBI is another form of corporate welfare. There is no sense in propping up industries that consumers do not want. Doing so only encourages behavior that sucks resources away from those who have an eye for what people desire. This is theft from the market and from all of us.
The Road to Hell is Paved With Good Intentions
On the surface level, Universal Basic Income comes across as an alternative to the welfare state that would make the world a more productive and prosperous place. But when one considers basic economic theory, UBI collapses under its own weight. UBI increases prices, decreases wages, and decreases productivity. This system undos the progress we have made in eliminating world poverty and causes runaway inflation that would make the current living standard unaffordable.
This article was originally published in LIFE.
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