Is Universal Basic Income the future?
Back when we did our article on Automation taking over, we promised a separate piece on Universal Basic Income. Well, here it is!
Imagine a state where the Government covered your cost of living. What would you do? Would you would you still go to work? Go back to school? Not work at all? This concept is called a universal basic income or UBI - probably the most ambitious social policy of the modern world.
Universal basic income is gaining momentum around the world and a growing number of countries are considering UBI as an alternative to welfare schemes. UK, Germany, France, India, Netherlands, Kenya, Sweden, Canada, Finland, and the USA have already started providing a fixed amount of money to its citizens in few of their states to examine the effect it will have if this economic policy is implemented for everyone in their country.
Finland is probably the most famous example giving its citizens an amount of Euro 560, no questions asked.
What is the need for Universal Basic Income (UBI)?
According to Forbes, one of the core reasons due to which we would soon have to opt for UBI are the job losses created due to the acceleration in the field of automation and Artificial Intelligence.
If you look around, self-checkout screens and self-driving cars are the next big thing. Elon Musk in an interview once said that UBI is inevitable. Eventually, there will be very few tasks that a human can do better than robots. Tesla's factory is testament to this fact.
Why the controversy then?
Right now people can't really agree on what universal basic income is or should be. Some want to use it to eliminate welfare. Others want it as a free extra for existing programs, or even want it to be so high that work itself becomes optional.
Let's look at the most basic form of UBI - enough money to be above the poverty line. The money would not be taxed [ less work for Galactic Advisors :( ] and you do whatever you want with it. In this scenario UBI is a way of transferring the wealth of a society while still keeping the free market intact.
But if we hand out free money will people just spend it on booze and stop working?
A 2013 study by the World Bank specifically examined if poor people waste their handouts on tobacco and alcohol if they receive it in the form of cash
The clear answer, no they don't. Universal basic income test runs done in Canada in the 1970s showed that around 1% of the recipients stopped working, mostly to take care of their kids. On average people reduced their working hours by less than 10%.
The extra time was used to achieve goals like going back to school or looking for better jobs
Finland reported a spike in health conditions and happiness level based on the Euro 560 experiment. However, unemployment levels remained the same.
Uganda granted 382 dollars to 535 people saw an increase in the number of new businesses.
Andrew Yang ran in the US primaries based on his promise for UBI. Andrew Yang had promised that if he becomes the president of America then he would provide a grant of 1000 dollars to every American adult but unfortunately, he lost the presidential race and the only two people left in the race are Joe Biden and Donald Trump.
The issue with a "Universal" Basic Income
A negative argument frequently brought on the table whenever UBI is being discussed is, it would be of no use to the super-rich class since it would be a very negligible amount to them and thus providing UBI to them will be like handing a 100 dollar bill to Bill Gates.
And that is the fundamental issue with UBI. People cannot agree on what it is. This was beautifully captured by the below video from Kurzgesagt – In a Nutshell
Why then do we need "Universal" Basic Income
Suppose a bar is set like only the poorest 20% will receive a Universal Basic Income. What if you fall in the 21% category. Now there's motivation to actually be poorer. This is why we need an absolute Universal Basic Income.
This has traditionally been the problem with Welfare schemes. Imagine a benefit of $1,000 each month. In a lot of programs if you earn a single dollar extra the whole thing is taken away. If you take a job, that's paying $1200 you might not only lose your benefits, but because of your taxes and another costs like transportation You might end up having less money than before. So if you actively try to better your situation, and your total income is not improving or even a shrinking. Welfare can create a ceiling that traps people in poverty and rewards passive behavior.
The Inflation Conundrum
Another often cited issue with Universal Basic Income is inflation. Some people also argue that when UBI would be implemented it would have no effect because ultimately it would spike up the inflation and everything would be just the way it was.
However, Since the money is not being created by magic or printers it needs to be transferred from somewhere. It's more of a shift of funds than the creation of new ones
Hence; no inflation.
Then how do you fund UBI?
There's no right answer here because the world is too diverse. How well-off the country is, what the local values are, Are things like high taxes or cutting the defence budget politically acceptable or not? How much welfare state is already in place and is it effective?
The easiest way to pay for a UBI is to end all welfare and use the free funds to finance it. Not only would this make a number of government agencies disappear, which in itself saves money, it would also eliminate a lot of bureaucracy. On the other hand cutting them could leave many people worse off than before.
The second way - higher taxes especially for the very wealthy. Bernie Sanders would support this. In the US for example there's been a lot of economic growth but most of the benefits from it have gone to the richest few percent. The wealth gap is rapidly widening and many argue that it might be time to distribute the spoils more evenly to preserve the social peace.
There could be taxes on financial transactions, capital, land value, carbon, or even robots.
According to a recent study a UBI of $1,000 per month in the US could actually grow the GDP by 12% over eight years because it would enable poor people to spend more and increase overall demand. Another study found that an extra dollar provided to wage earners would add about 1.21 dollars to the national economy while, a dollar provided to the high income earners would add only 39 cents. UBI will not only incite a positive curve in the GDP but also provide strong leverage to the needy people to demand better working conditions.
Universal Basic Income and India
Now, let's take an example of a developing nation like India, where this scheme was tested in Madhya Pradesh and 20 villages were undertaken for observation out of which only 8 villages were provided with a UBI and the rest 12 were taken as a control group. The results were outstanding, the family savings tripled in those 8 villages, the sanitation in those villages improved. Poverty and the government's spending on health care facilities reduced, the children started spending more time with their families and there was a drastic improvement in the nutrition level of those individuals.
The SDF party in Sikkim had promised a similar policy but it lost the elections in Sikkim so that's a what-if situation.
Esther Duflo and Abhijit Banerjee analyze the concept of UBI in India in their book, Good Economics for Hard Time (excerpt below) :
In developing countries, where lots of people are at risk of finding themselves destitute from time to time and where the safety nets, however imperfect, that exist in rich countries (emergency rooms, shelters, food banks) are missing, the value of having an assured fall back option like UBI could be enormous, both in dealing with bad luck and in making it easier to try something new.
Poor use of land is a major source of misallocation in India, is probably responsible for a significant loss of economic growth. If UBI alleviated the need to stick to your land at all costs, it would reduce this misallocation. It may also reduce labor misallocation by making it more palatable for the landed to sell their land and move to where there are better labor market opportunities.
India, however, does not have anything like UBI right now. The current scheme proposed by the government applies only to farmers and is nowhere near a living. The Minimum Income Guarantee proposed by the opposition is more akin to the negative income tax credit. The plan is that it should be targeted to the poor, and progressively taxed away as incomes grow.
In fact, very few countries have anything like a UBI, which is guaranteed to everyone and is not taxed away. If they have anything, they have transfers targeted to the poor that can be conditional or unconditional. But targeting the right people in the developing world tends to be especially difficult because most people work in agriculture or in tiny firms, and it is almost impossible for the government to know how much they are earning, which makes it very hard to isolate the poor and target them with the extra income.
The alternative to targeting is self-targeting; India’s National Rural Employment Guarantee Act (NREGA) is the largest of these self-targeted programs (and perhaps some sort of model for the Federal Job Guarantee that has been proposed in the US). Every rural family is entitled to 100 days of work per year at the official minimum wage, which is higher in most places than the actual wage. There is no screening except that there is the requirement to work, usually in construction sites, which screens out anybody who has something better to do than standing in the sun for eight hours a day.
The program is popular with the poor, so popular that the government decided not to fight with it head-on after they won the election, despite having campaigned against it. One advantage of a workfare program like NREGA is that it substitutes, at least partly, for a minimum wage in places minimum wage cannot be enforced. Workers can use the NREGA wage to bargain with private sector employers, and there is evidence that they do. Moreover, one study found that private employment actually went up even though salaries went up: by colluding to pay too little, employers were actually reducing the number of jobs, perhaps because some people were unable or unwilling to work for very little money.
We strongly recommend reading their whole argument regarding UBI which is available here.