What is universal basic income (UBI) ?
Universal basic income would be a deposit from the governing body to all adult citizens with no restrictions on who receives the payments. This idea has recently been popularised by Andrew Yang during his 2020 presidential run and during his current run for mayor. Many other big names in the corporate world like Larry Page, Elon Musk and Bill Gates have also shown support for UBI.
Why is it gaining popularity
Due to increasing wealth inequality in the U.S and globally, many solutions are being proposed in order to fix this growing issue. Some more extreme than others. Congress members like Alexandria Ocasio-Cortez are the new symbol for the progressive anti-capitalist movements. Arguing dismantling or changing the current capitalist systems may be the most effective way with dealing with inequality.
Completely deconstructing the American ideologies of capitalism, and the free market with a move to a more state-controlled market, would almost indefinitely lead to a reduction in inequality, but at what cost? It would completely change the way the U.S functions and the mechanisms that society operates in, and many would argue not in a pleasurable way. However, politicians recognise this issue and do not want to change the capitalist system, which many hold close to their hearts.
This is where Universal Basic Income comes in, some believe Universal basic income could be the solution to reduce inequality within a capitalist society.
Why would Universal basic income work?
The large and fast-growing wealth gap in the U.S as well as globally can be explained with Thomas Piketty’s r > g hypothesis. Where ‘r’ is the return on wealth and ‘g’ is the economic growth rate. Since the rich own most of the world’s capital, their wealth will grow faster leading to greater wealth inequality. The solution: enable the bottom quintiles the ability to save and invest into capital. Universal basic income would enable this.
To explain how well this would work you will need to understand the concept of marginal propensity to consume or MPC or marginal propensity to save MPS. MPC measure how likely you are to spend any additional disposable(spendable) income you receive. To calculate this you take the amount you spent out of the extra money received divided by The total additional money received. For example, if you receive an extra 1,000 dollar bonus and spend 500 and save the other 500 you would have an MPC of 0.5. MPS is just the opposite of MPC.
Andrew Yang proposes $1,000 every month to all U.S adult citizens. In the bottom quintile of wealth, MPC is thought to be around 0.55 at the moment due to the current economic environment, but will likely be closer to 0.2 when normality returns. That means close to 800 dollars would be saved each month. If all this money was invested into the stock market each month, with no previous savings by the time someone turns 40 they will have savings worth up to $424,615.05 and by the time they’re 60, they will have $1,696,769.00. This is calculated using the average return over the last 20 years of the S&P 500. Adjusted for inflation that would be worth $470,715.8 in today’s money by the time your 60.
With the average wealth being $102,700 you can see why this idea is enticing, it would enable low income families to build a wealth not achievable before.
Why is it needed ?
Technology is advancing rapidly, as well as globalisation where countries like China provide cheaper manufacturing and are actively reconstructing supply chains. Roughly 5 million manufacturing jobs have been lost in the U.S due to these factors. Many of these jobs in areas where people can’t relocate to work, leading to a large number of workers leaving the workforce. Driving down the labour participation rate. For an economy to be working at maximum capacity and also for standards of living to increase, the labour participation rate must be as high as possible. the labour participation rate has been decreasing over the past 20 years.
source: U.S. Bereau of Labour Statistics
UBI could allow people to relocate to find employment after being made unemployed due to technological advancements. In Bangladesh, Farmers were paid the equivalent of $11.5 to migrate as some were too cautious to migrate during what they call the “lean season”. This is when Farmers earned very little and had very little food. The government program incentivised them to migrate. In the case of UBI, UBI would increase the mobility of human capital which could help boost economic growth as well as standards of living for the people who migrate to find better work, which UBI helps allow.
The case against Universal basic income.
The cost is definitely a deterrent especially on a national level. Andrew Yang’s proposal of 1,000 dollars to every American adult Citizen would cost 2.8 trillion a year. That is 60 percent of the Federal budget.
To pay for the cost of UBI Andrew Yang suggests
-Raising VAT to 10 percent
-Cap removal on social security payroll tax
-New Carbon tax
-increased financial transaction tax
-increase in capital gain tax
As stated by Freedom-dividend.com would raise $1.59 trillion. However, the application of something like increasing VAT and even potentially carbon tax could lead to unintended consequences. For example, consumption could decrease due to the raised prices of goods, leading to lower revenue for stores (this would primarily depend on the elasticity of the good or service). Firms could leave and decide to produce in countries with cheaper labour and less strict carbon regulation, however, the list of these countries is diminishing quickly. UBI could lead to a loss in jobs and decrease the labour participation rate further, especially in low-income areas where they don’t have the resources to switch industries or occupation. For example, a recently unemployed factory worker will unlikely have the resources or the money to retrain and become an engineer.
Meritocracy
Another argument against UBI especially in the U.S is it goes against the meritocracy that the free market strives off of. The implementation of UBI could seem like a handout too many. What did you do to earn it? There is a fine line to be struck between people leaching off the government and the government building a strong safety net. The argument of meritocracy is somewhat flawed because the population in the bottom quintiles of wealth do not have the same opportunity in order to gain the “merit” required to become wealthy. UBI is a way to enable citizens who have been disadvantaged by the current systems to pull themselves back up and be a valuable participant in the capitalist market.
Universal… why ?
A valid point against state UBI to be made is why should it be universal. There is a need in the U.S. for a sizeable, calculated change to save workers from technological/ structural unemployment and hysteresis (where workers give up) even so why does someone making $200,000 a year need $1000 a month. New York City which is the third most expensive city in terms of a living wage, has a living wage of $98,240. So why would someone who earns above this need an extra 1,000 a month? 34.1 % of Americans who are working earn above 100,000. Eliminating them from a form of “universal” basic income would drastically reduce the price.
Conclusion
A form of universal basic income should be explored as there is very few solutions to the silent crisis happening in jobs that are being lost due to automation and an increase in globalisation. A more restricted version of UBI could be a more radical change that liberals have been looking for but also playd into the capitalist system the fiscal right adore . UBI could be the future in sustaining a dying middle class in the U.S.
That all being said Is the current political climate to polarised to even have a discussion about UBI?