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The Hidden Costs of a Universal Basic Income

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The universal basic income (UBI) is gaining popularity as the alternative to the current welfare system. The idea is to give each citizen the same amount of money, no matter if he or she works or not. Therefore, unlike traditional welfare systems, the UBI has no means test, nor willingness-to-work test. Nobody would be then left without a livelihood even if there is no work for him. Doesn’t that sound great?

The problem is that the program must be financed somehow. Let us assume for simplicity that there are 250 million adult Americans and that each of them would receive $1,000 monthly (as presidential candidate Andrew Yang proposes). So we get a total cost of $250 billion monthly and $3 trillion annually. It would amount to about 14 percent of US GDP, or 42 percent of total government spending, or 73 percent of the federal outlays. For comparison, this is more than the total expenditure on health care, defense, and education. And yet we are talking about “just” $12,000 annually (or 19 percent of the median household salary, or 36 percent of the median personal income). Good luck with such an expensive program!

This is why the UBI is a utopian idea. Its introduction would require either a departure from universality (e.g., providing benefits only for young people), or a departure from unconditionality (e.g., the introduction of an income criterion), or reducing payment to small symbolic amounts. Other options include a radical increase in taxes, or implementing "modern monetary theory" and launching the printing press.

The first two options would distort the idea of ​​the program, transforming it into another traditional welfare program. The third scenario would not fulfill the program goals, as it would neither eradicate poverty nor significantly increase social security. And the last two options would have negative overall economic consequences that could lead to the results contrary to the intentions of the program, (e.g., an increase in the unemployment rate as a result of additional tax burden on wages), or a reduction in the amount of real benefits as a result of increased inflation. It means that the implementation of the UBI at a substantial level without incurring significant economic costs is a myth.

This is confirmed by a recent article “Basic income or a single tapering rule? Incentives, inclusiveness and affordability compared for the case of Finland” published by OECD economists on the occasion of an experiment with UBI in Finland (which was not a government program). They estimated that the replacement of the current social benefits system by the UBI in Finland would either be too expensive or would mean insufficient benefits for the most deprived and, consequently, an increase in the share of people below the poverty line from 11.5 to 14.3 percent!

The second economic problem with UBI is the negative impact on the labor supply. Economic analysis clearly suggests that an increase in non-wage income shifts the budget constraint line up and increases the reservation wage, which leads to a reduction in working time. And this is what the previous experiments with negative income tax, a concept similar to the UBI, showed — especially in case of women and youth, which were less attached to the labor market. The results are not surprising given the fact that giving people money for nothing reduces the opportunity cost of not working.

There are ethical issues as well. Supporters of the UBI criticize the welfare state because it allegedly is not good for beneficiaries — this is because one has to sacrifice time and mental resources to receive the benefit. Such an approach turns the matter upside down, or it reflects the ingratitude Thomas Woods talked about in 2018. Helping people temporarily or permanently unable to work is characterized by the UBI supporters as something negative — as something that stigmatizes and constitutes a psychological burden. Yet welfare payments are, in fact, a privilege that the government (through society’s money) provides to needy individuals. (To be clear, I do not praise the government and I’m not a supporter of the welfare state, I’m just pointing out that welfare beneficiaries, well, benefit from welfare.)

Such a perverse perspective is, however, a consequence of the view that UBI should be a right, not a privilege. That is, supporters believe that everyone should have the right to taxpayer-provided income, regardless of their contribution and the possibility of earning on the market. The problem is that someone would have to finance this program, so UBI would still be the privilege of some people at the expense of others. One person’s right to a basic income means that someone else has to pay for it.

The idea of the UBI boils down to breaking the link between income and work, i.e., freeing people from the unpleasant necessity to earn. And here we come across several problems. First thing: who will do the needed, albeit low-paid jobs, since everyone will be emancipated from the yoke of work? Is it possible to eliminate the unpleasantness of work at all or is it just the reality of the temporal world? Will robots take care of our grandmothers? A likely outcome is a significant decline in the overall output of the economy — meaning impoverishment across the board.

Finally, supporters of the UBI claim it increases individual independence. We are told the UBI promises socioeconomic independence by freeing individuals from the tyranny of bureaucrats, bosses, husbands, and the capricious markets (one can see here an echo of utopian socialists). With money in your pocket, work becomes an option. 

But there is a paradox that comes with the promise of socioeconomic independence: someone still must pay the UBI. So the dependence would not disappear — only people would become more dependent on Leviathan. Robert Nisbet writes in The Quest for Community that the desire for a sense of belonging does not disappear — if it cannot be realized within the family, neighborhoods, and regional communities, then the gap will be filled by the nation and centralized state. Are you sure this is what we want? Maybe the UBI is thus not merely a utopia we can’t afford, but it’s actually a dystopia?


Arkadiusz Sieroń

Arkadiusz Sieroń (sieron.arkadiusz@gmail.com) is assistant professor of economics at the Institute of Economic Sciences at the University of Wroclaw, Poland.


Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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