Wednesday, 21 February 2018

Universal Basic Income: The Right Thing to Do?

by Harry Spirit

Universal basic income (UBI) is something that is being increasingly debated by governments, and the concept is gaining considerable momentum. At the World Economic Forum recently held in Davos, its case was argued by the economist Guy Standing, and many developed countries are now trialling it in multiple locations. But, what is UBI, and could it ever work on a large scale?

UBI is a non-means tested payment of cash to all adult citizens, regardless of their financial standing or employment. It replaces all other forms of welfare with one, universal system in which everyone is given a set allowance every month from the government, even, for instance, billionaires. In other words, you are paid for existing. This allowance is usually set just above the poverty line, which in the US currently stands at $12000 (£8500) a year.  By this point, comparisons to communism are not uncommon and cries abound which target the socialist impulses of the left. Nonetheless, this is the biggest issue with UBI: that it is pedaled not for its economic merit, but on ideological grounds. Whilst it may support what you believe in, that point has no standing in an economic argument. And so further analysis, finally, has emerged which looks at the practical implications of the scheme.
A UBI experiment held in Manitoba, Canada, in the 1970’s which gave residents £11,500 a year, found that employment did not fall in the area when the basic income was given, showing how people don’t just simply choose to give up work when given a hand out. Many other studies are now being carried out, with one in Finland giving 2,000 people £500 a month over a 2-year period. Now, finally, economists and nations are looking for the facts surrounding UBI and not just how it fits into their ideology. Whilst it may not be the right thing to do, though it must be remembered that no nation has ever implemented it on a large scale, it would be wrong to not even test its merit, as it has great potential to address some of the worlds most pressing issues.  This includes the advent of artificial intelligence, which will eventually be able to do what most humans do, but better. Research at the Oxford Martin School estimates that over the next 20 years up to 47 per cent of US jobs, around 40 per cent of UK and European jobs and a higher share of jobs in many developing countries including China, could be replaced by machines. Here, one of the biggest political and economic crisis awaits patiently, with little we can do to prevent it. However, we have the ability to prepare, and UBI seems to be one of the most feasible options, hence why some of the world’s greatest minds, who have considerable knowledge in the field, have come out in support of it, including Elon Musk, Mark Zuckerberg and Stephen Hawking.

UBI can also be considered to very entrepreneurial, helping innovation and the sustainable growth of the economy. One of the biggest reasons people shy away from going back to school (further education) or starting a business is that, if it fails, they have no safety net. With UBI, people would have the reassurance that they will be able to survive if it fails, thus stimulating more innovation with the growth of new businesses, and greater fulfilment and productivity in the workforce, with workers being able to educate themselves in something which they are passionate about. Also, with the current welfare system, people often feel trapped by the systems in place which are there to encourage people to get back to work. In many cases, if you get a job and begin to earn more money, your welfare is taken away, and with taxes and transport costs it could be the case that people end up with a net loss. This can be very de-motivational, as working harder won’t always benefit your situation. However, with UBI, it will always be the case that your financial situation is improved with a job, thus encouraging people to get back to work.

Whilst all of this may sound appealing, how is the government expected to pay for it? A UBI paying £73.10 per week for adults of working age (which would be less than 50 percent of what is needed to push someone above the poverty line) that replaced existing benefits would cost £143bn more than existing social security expenditure. Considering our current total budget is just over £800 billion, with a £40 billion fiscal deficit, UBI would cause a significant increase in the size of the budget, and would therefore add to the debt of the nation. Substantial and unpopular tax rises, adding between 3 per cent and 5 per cent on income tax rates, plus the elimination of the personal tax-free allowance, could pay for such a scheme, economists from the IPR have stated. However, tax increases are not popular, and so approving such a budget could prove difficult. The increase in GDP from UBI, which would be mirrored in the tax revenue, could also help pay for it. As there would be a greater redistribution of wealth occurring, from the rich to the poor, the economy would increase more than it typically would. This is because the less well-off would spend proportionately more of the money that they receive, as they have a greater marginal propensity to consume. This consequently increases consumption, a component of aggregate demand, which subsequently increases GDP. The Roosevelt institute projected that a $1000 (£710) basic income a month in the US would grow the economy by 12.56 percent over the course of eight years, which could translate into a much greater tax revenue.

Even if it does succeed in alleviating poverty, it has some very big problems. For example, by removing the pool of coerced labour (assuming some choose to not work at their previously unfulfilling jobs), wages will be driven up to try and encourage people to take said jobs. This will make businesses less competitive as their costs are increased, and our countries exports less desirable. Also, the increased wages will cause prices to rise overall in the economy, thus resulting in inflation. This inflation will make the already small UBI payment to poor families who have no other source of income even smaller, and if it continued, could push them further into poverty than they were before. Increasing the UBI payment to try and combat this would only further increase wages and prices, creating a wage-price spiral. Additionally, who are going to do all of these necessary (and sometimes in the eye of the worker), unfulfilling jobs that are required to make society run? If you didn’t absolutely have to, would you continue doing something you hated? Whilst these jobs may be basic, they must be done, and if there is no one to do them, another crisis arises. The study in Manitoba, Canada, may not have seen an overall decline in the rate of employment, but there were two groups who, as a whole, did choose to not work as much. These groups were new mothers and young men, who just became eligible for the payment. New mothers choosing not to work is understandable. However, young boys choosing not to work is more problematic.  Someone who didn’t necessarily flourish at school, whether as a fault of their own or lack of opportunity, when leaving, begins to get £11,500 a year, is almost expected to not be as motivated to find work. It is at your early years of employment that these people in question find the skills they need in their industry to live on for the rest of their lives. But, if these young men never seize the opportunity to learn these skills, employment is much harder and they could end up unemployed for the rest of their lives. All of this could be the result of a payment given to them at too early an age, when they might have lived a more prosperous life in the future if they had not received it.

Another drawback is that, if the payment is of equal value across all parts of the country, the poorer may be forced to migrate out of urban areas. As it is typically more expensive to live in cities, money will go further in more rural areas. This would then cause more inequality, something UBI was supposed to counter. Also, if the government is responsible for making the payments, does this give them too much leverage? Could populists promise big changes to the UBI system just to get in power? These are all questions that we don’t know the answers to, as it has yet to be implemented on a large scale. Whilst it may not be the right thing for the nation, and could cause crisis and unrest, it could also solve some of the biggest problems in society today, problems which will only exacerbate further in the future. We will only ever know with more tests and research. Whether you believe in UBI in relation to how you politically align yourself is irrelevant. If it works for the economy and accelerates innovation, it is the right thing to do. Look at facts, and not ideology.

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