Universal Basic Income Isn't Perfect - It's a Necessity Because of the Future of Work

The Roosevelt Institute recently did a study, which is being quoted everywhere, that claims that a $12,000 per annum Universal Basic Income (UBI) would increase the GDP by 12.56% above baseline over the course of 8 years. After which, the economy would return to baseline. Of course the part that no one mentions is that this transfer payment is DEBT-FINANCED by the US Government. Using the same model, when taxes were used to pay for the UBI there was no effect. So they adapted the model to account for distributional effects but they made no similar adjustment to the investment impact because the only impact they examined was marginal impact of consumption and not the impact on investment.

So let me get this straight, if the US Government borrows a ton of money and gives it to people to spend then the economy will be stimulated… I’m shocked! ANY program where the government borrows that much money will project to stimulate the economy. Whether it is a tax cut for the rich (because these days only about 49% of the population pays taxes… so by definition) or a huge infrastructure program or a huge energy program or a huge defense program. Money into the system creates GDP. One can debate its effectiveness, but I am not interested in that. The point here is that proponents of UBI need to stop citing this study. There is no way that a UBI program will be done in this country with debt financing… zero chance.

UBI will need to figure out how to represent itself. Here are some key questions for UBI, that if we can all embrace these suggested answers it will go a long way to keeping the story focused and making it palatable for people who oppose UBI.

  1. Is it inherently stimulative (no)?
  2. Is it redistrubution (yes)?
  3. Is it a possible answer for a world where the future or work is in doubt (yes)?
  4. Does it attempt to achieve some basic societal goals of food, clothing and shelter for all people (yes)?
  5. Is it possible that UBI has a negative impact on GDP (yes)?
  6. Does it matter if UBI may negatively impact the GDP if it achieves the societal goals and we have growth due to technology (no)?
  7. Should we consider UBI, like food stamps, which can only be used for the intended purposes? (no)
  8. Does UBI have knock on psychological positive effects (unknown)?

Let’s tackle a few of these points, starting with #1. In the Roosvelt institute study, the stimulative effect was due to the borrowing not the concept of UBI, so we should stop quoting GDP stimulus ASAP. Now, if UBI through redistrubtion is considered there are merits to both sides of the argument and I doubt that our models are sensitive enough to discern a positive or negative effect. First, if the wealthy are saving their money and NOT deploying it productively via their capital investments, then taking wealth from them in order to give it to the poor makes brilliant sense. The poor will use it to buy good which would increase GDP thru consumption. However the evidence here is probably the opposite. Which means that this capital has had a knock on effect of stimulating more GDP growth than the likely effect of purchases of food, clothing and shelter. On top of that, there is no certainty that money for the poor will always be used productively. We have an opoid problem, gambling and other non-productive uses of UBI that should be concerning. If a portion of the UBI floats into unproductive spending then GDP takes a second hit. One hit from the negative redistrubution of capital and a second from unproductive expenditures. All in, I think UBI would be fortunate io breakeven on GDP impact. Thus we should avoid suggesting it is stimulative since that likely only hurts credibility.

#2 Is it redistribution? Of course it is. UBI should embrace this concept, especially in light of the huge increases in income inequality around the globe.

 

This is a disgusting graph. The World should be ashamed to allow this to happen. But, but, but, we have three choices when it comes to redistrubtion. Don’t do it, do it partially or do it completely. There is an argument for don’t do it. It is as follows. The overall wealth of the world has increased dramatically and thus the percentage of people living in poverty has fallen dramatically. So there is a robust argument that we should continue to allow the capital to flow to the wealthy, allow them to grow global GDP and allow trickle down improvements to the poor. It has worked as you can see in the chart below showing the numer of people living in poverty (using a few different definitions of poverty).

 

But it has not worked fast enough for many, which is what humanitarians argue. They may be right, I can’t be certain. Which leads us to our second choice, partial redistribution. Allow capital to flow and the rich to get richer (because it creates growth that we ALL can participate in), but let’s take a portion, enough to buy the poor up to the poverty line for starters. Covering food, clothing and shelter. Essentially trying to have our cake and eating it too. Leave the majority of the capital where it has proven to be productive but earn the societal good of eradicating poverty. Sounds good, but not likely to be that simple. Taking a meaningful portion of capital from the wealthy allocators will have a leveraged downside effect to the economy. We simply cannot know how negative it will be. We have already discussed the challenge of maximizing the UBI towards 100% productive usage of food, clothing and shelter. Failure to achieve 100% productive UBI usage reducing the value to GDP commensurately. Our final choice is complete redistrubtion, which is both impractical and ineffective and not worth writing more than a sentence about. Humans crave power and will always try to achieve, thus we will have income inequality. The point of this entire discussion is that we need to try to find the optimal amount of redistrubtion.

#3 the reason that ForHumanity supports UBI is because we anticipate machines replacing most human input into work. In a world where the available jobs are substantially fewer than the number of people, we must create a society that supports all of its members with the basic necessities, otherwise anarchy and revolution become the only choice. As much as humans crave power, they crave survival more. They will do what it takes to survive, even if that includes setting aside civil society. Is UBI the only answer to a world with far fewer jobs than people? ForHumanity remains open to other suggestions.

#4 UBI can target transfer payments to individual to cover food, clothing and shelter. To be honest, that should be good enough. It is a wonderful goal for a society to insure that all citizens have the basic necessities of life. To eradicate hunger and to eradicate homelessness should be priorities which is hardly debatable. It only becomes a debate when two things happen. Government gets involved to “administer” the goal and when those with the wealth are taxed for it. One way to begin the discussion is with the latter. Silicon Valley billionaires can advocate for the power of UBI, but they ought to volunteer their own wealth to pay for it, in the same breath. Until they do, it will remain an elusive goal. With respect to government, it becomes a political tool. “How to implement”, “fund for administration”, “who gets what and where and when”. When you examine Social Security, it had a similar mission and altruistic goal and now it is a political nightmare. Attempting to pass the most logical of adjustments like, raising the qualification age (associated with the unanticipated rise in life expectancy), is impossible simply because politics get in the way. So to attempt to deal with the political ramifications, I tried to tackle some political reform as well, see the link.

Universal Basic Income — A Working Road Map
As I recently discussed, there are a number of challenges to making Universal Basic Income (UBI) a real solution…medium.com

I approached UBI as a transfer payment offered in exachange for a 5 year commitment to government services that would be required by all citizens between the age of 18 and 30. The brief version of the theory is that would “justify” the payment for life to the UBI detractors who worry that money for “free” is a bad idea for a variety of reasons. Second, this substantially helps to pay for UBI by lowering the cost of running the government on all levels. In the end, government is needed to administer the policy and politics will make it difficult to implement well.

#5 Could UBI have a negative impact on GDP? I believe that it would. Based on the reduction of poverty argument already presented. While I am certain that a large percentage of the UBI payment would be consumed specifically for food, clothing and shelter, those are all consumption items and provided a 1 for 1 impact on GDP. Whereas, capital, treated as investment capital can be leveraged into investments that result in the expasion of profit and wealth. I’ll give you an example. If I have $1000 and buy $1000 of food taken from a wealthy individual out of her $1000 of savings. I am fed and the food companies and grocery stores have an additional $1000. The wealthy individual has $1000 less of savings and therefore made $1000 less investment in something. Wealthy individual invests $1000 in a widget company, which pays an employee $800 and invests $200 in equipment to sell more goods and services, such that the company produces $2000 worth of product, then our investment has grown wealth, far more than our transfer payment is capable. This is the argument of capitalism and the numbers have borne out the argument.

#6 Does it matter if the economy is negatively impacted. Well that depends, has automation and AI increased GDP by more? How negative is the impact? Remember, we have earned a series of societal goods by implementing our UBI payment, especially if the future of work leaves us with many who require their UBI to survive. We also may create enough wealth to achieve our goals. This is more a question of timing than anything else. But a small hit to GDP is worth it for the good that UBI can do.

#7 — Should UBI be portioned out, similar to FoodStamps (SNAP) in order to prevent misuse. Covered in the article below, misues of Food Stamps has generally been considered a fallacy. The vast majority of the program works effectively (less than 2% fraud rate) and has been used for food. While it is not unreasonable to believe that misuse might increase when a UBI payment is larger, the concern may not be great enough to merit forced participation. This also helps to avoid a large bureaucracy designed to policy the implentation of the policy, which is probably more valuable.

The Very Short History of Food Stamp Fraud in America
The reform of the United States' approximately $1 trillion in welfare programs is a perpetual subject for lawmakers to…time.com

#8 Does UBI have knock on psychological positive economic effects? Here I think there is some possibility. There are many studies being done now, in microcosm to try to identify the effects. But I am afraid that the “in microcosm” and the non-permanent basis of all of these studies is highly distortive. Most of these people are working while receiving the payment. In essence, when UBI is the only choice, people will react very differently. When the future of work means limited job opportunities for people, reactions will be different. I suggest that we temper the “UBI makes everyone feel great” feedback. UBI is a necessity, for a future where work is scarce and people may struggle to meet the basic necessities of life.

UBI may be a great next step in our system of basic welfare. It may represent the best way for the wealthy to support the world around them and insure that the basic necessities of life are available to all. But I caution proponents of UBI to avoid over reaching with the “merits” of UBI, in the end, I think it damages the credibility of a potentially necessary program.