Universal Basic Income: Debunking the Scaremongering

Studies into the idea of a universal basic income (UBI) have recently gained visible traction in academia and much more prominence in the media, following the introduction of pilot schemes in Finland and California. Scotland is also set to see trials in two Labour-run areas, following the party’s establishment of a new working group to look into its viability. As well as these examples, Namibia has considered the introduction of UBI, the Netherlands will be holding an experiment on UBI this year, Brazil continues to hold trials (it has been on the cards since the 1980s), 10,000 people have signed up in support of basic income in Canada, and India’s 2016-2017 Economic Survey has identified that the Indian Government believe UBI is a better approach to reducing poverty than current state benefits. In light of this, this blog post explores why UBI is gaining support from policy strategists, governments and entrepreneurs alike, and whether it could be a viable solution to some of the big issues of our time.

Image: Denis Balibouse/ Reuters

Contrary to what it may seem, UBI is certainly not new. The idea has been floated since around the 1970s following negative income tax experiments in the US and Canada, and when a Canadian town first decided to investigate the idea between the years 1974-79. While many of these original investigations were forgotten, they laid the foundations for what was to come. Original experiments presented positive findings: many of those originally living off of tight-ruled welfare benefits found that UBI presented an opportunity for them to train or find part-time work whilst still receiving a guaranteed income which enabled them to get by. Note, the current benefits system works by disqualifying those from benefits once they take work, often leaving individuals worse off financially and thus creating a disincentive to find work. Despite early traction, changing governments brought an end to most pilot schemes.

With the increased role of artificial intelligence, many see UBI as a security measure against resulting unemployment. Indeed, there is now a widespread willingness to see the theory underpinning UBI reflected in practice. Recent pilot schemes in Finland and California have meant that largely a priori ideas are now being applied empirically. Nevertheless, fundamental issues remain. The question of whether UBI is a viable solution to the current highly administrative and overly bureaucratic welfare system is highly debated. Those who criticise the notion note that a) it would cause a significant decrease in the motivation to work thus having negative economic consequences, b) to fund the scheme would require tax increases which would cause greater inequality, and c) that individuals may manage their UBI very poorly by spending it on negative externalities (cigarettes, drugs etc.) Each of these will now be discussed and debunked.

Point A is fundamentally flawed. Jennifer Blanke, Chief Economist at the World Economic Forum reported that “The trick with the UBI is to set it high enough to bring everyone to a given income level, but low enough that it doesn’t distort decisions to work or invest”.  Whilst this requires a good amount of research, this is not impossible. Furthermore, UBI could be seen as encouraging employment as people would no longer have to work jobs that they feel forced to accept in order to pay the bills. Knowing that they have an income to fall back on, more time will be spent searching for meaningful jobs that align with people’s values and ideals. Entrepreneurship is encouraged as those wanting to start their own business rely on personal savings to do so as unemployment benefits are not given to those seeking to start a business. Those previously unable to finance this option will, through UBI, have the financial means to start their own businesses which would otherwise not be possible. For example, there exists a minimum bar to entry relating to business start-ups. If an individual has only a small amount of capital, it makes entrepreneurship near impossible, yet UBI, in offering a constant form of income, negates this. UBI also encourages employment in so far as it adds to an individual’s sense of stability, and making things such as childcare and transport more accessible (Harris, 2016). UBI is thus more likely to incentivise employment than to dis-incentivise it.

Point B is also a fairly negligible response to the UBI’s introduction. If there was an overhaul of the current welfare system and consequent moves towards an UBI system, not only would finances previously allocated to the out-dated, highly bureaucratic benefits system be utilised but taxes on negative externalities, i.e. pollution, could be increased as well as increasing tax on extreme wealth. The latter is key to increasing equality, not inequality. Furthermore, Research for the Institute for Social and Economic Research at the University of Essex (June, 2016) shows that a basic income of £60 a week could be paid for by reducing the income tax personal allowance, increasing the rate of income tax by just 3%, and revising national insurance contribution regulations, and would not need additional public expenditure (Torry, 2017). Therefore, to argue that the scheme is too expensive and would increase inequality, is trivial, at best.

Lastly, point C, that individuals may use their UBI poorly, is no more applicable to UBI than to any other form of welfare. In fact, the notion that there will be an abuse of cash transfers is unfounded. Recent research, undertaken by Stanford University and The World Bank, discovered that this is not the case and that the opposite may, in fact, be true. The research was based on an examination of 19 case studies, each assessing the impact of cash transfers on expenditures of tobacco and alcohol. The outcome: none of the 19 studies found that cash grants increase tobacco and alcohol consumption. In reality, many found that they lead to a reduction. Reasons for this could surround the ‘Flypaper Effect’- i.e. that resulting from when a dollar of exogenous grants-in-aid results in significantly greater public spending than an equivalent dollar of citizen income. Essentially, money sticks where it hits, like a fly to paper (Inman, 2009). To view the research paper, click here

By debunking the critiques of UBI, it is clear to see why many academics and policy makers are calling for further research into its introduction. As it gains traction across the globe, it is not an unsound analysis to argue that it is a very viable alternative to the UK’s current highly bureaucratic and failing welfare system. It may very well incentivise work, allow increased personal freedom to pursue employment more aligned with an individual’s values, encourage entrepreneurship and enable individuals to afford childcare arrangements and means of transport. Nonetheless, we will have to wait and see whether an increase in trial programmes, leads to a concrete change in policy.

 

Evans, D. and Popova, A. (2017) ‘Cash Transfers and Temptation Goods’, Economic Development and Cultural Change, 65(2).

Inman, R. (2009) The New Palgrave Dictionary of Economics, Online Edition: Palgrave Macmillan.

Torry, M. (2016) An Evaluation of a Strictly Revenue Neutral Citizen’s Income Scheme: Institute for Social and Economic Research: EUROMOD Working Paper Series.

Torry, M. (2017) ‘Universal Basic Income Can Help Battle Inequality’, The Guardian, 3rd February.

Valero, J. (2016) ‘Universal Basic Income Debate Gains Traction in the EU’, EURACTIV, 21st September.

 

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