Unboxing Universal Basic Income

YASH RAJWANSHI – FEBRUARY 25TH, 2020

EDITORS: ALEX CHENG & ANDREAS MAASS

Background

Andrew Yang, a former 2020 Democratic presidential candidate, started his campaign with the proposal of “the Freedom Dividend.” This policy, which guaranteed every American adult a basic income of $1,000 every month, gained traction with the general public quickly. Yang’s flagship proposal is more commonly referred to as universal basic income (UBI), or just basic income. As Yang describes it, UBI is a “type of social security that guarantees a certain amount of money to every citizen within a given governed population, without having to pass a test or fulfill a work requirement.” The key difference between UBI and other welfare programs is the final descriptor—that the money is given with no strings attached. Traditional non-cash income programs tend to have work requirements, and, as recently as 2018, there has been a new push by Republicans for even more. The lack of these requirements differentiates UBI, and is a key reason why Yang believes it will have a revolutionary impact on the US economy. To thoroughly understand the Freedom Dividend proposal and the effects of UBIs in general, it is crucial to look at arguments on each side of the discussion, and analyze their applicability the context of past economic experiments.

The Argument for UBI

Yang’s campaign website provides a concise list of reasons to support UBI. The most convincing argument relies on the predicted effects of automation on US jobs within the coming decades. As Yang claims, “since 2000, technology has replaced the jobs of four million American manufacturing workers and decimated communities throughout the Midwest.” Even more surprisingly, experts predict that, within the next 12 years, one out of four Americans will lose their job to technology. Yang’s go-to example for the adverse effect of automation is truck driving, the most common job in 29 out of the 50 states. Drivers alone account for 3.5 million jobs, and the supporting infrastructure, which includes truck stops and motels, accounts for an even higher number. These jobs are predicted to soon be replaced with fewer, high-skill programming positions as the push for autonomous driving grows in the US. Yang argues that the Freedom Dividend will become a necessary and crucial part of society throughout this period of automation and transformation.

Emerging evidence suggests that a UBI program would have positive effects on the workforce and help soften the adverse effects of automation. There are multiple interesting shifts in human capital that may follow a basic income being implemented in the US. First, research shows that financial insurance tends to have a significant impact on the decision-making of individuals. UBI would ensure that taking a financial risk, such as attending night classes or buying a more expensive computer, will not lead to immediate poverty. This “income floor,” funded by the government, can lead to more people taking these developmental, calculated risks. Through this method, former members of the now automated labor force may be able to pivot from their past careers into more advanced technological fields, and grow in interdisciplinary ways that will ensure high employability. Essentially, the financial security provided by an UBI would enable and motivate members of the workforce to retrain and join emerging labor markets. Furthermore, under UBI framework, individuals may be incentivized to find jobs they actually find interesting– a rare scenario within work requirement-based welfare programs. Rather than finding a job just for the sake of receiving welfare benefits, citizens have the financial backing to explore more rewarding careers. This may lead to higher employee happiness and, consequently, an increase in overall company productivity. As a result, some argue that UBI is projected to help workers with automated jobs to reenter the workforce in a productive manner. Yang argues that automation will marginalize these people from the next economic era; the “Freedom Dividend” would involve them in the 21st century economy.     

Another key argument for UBI is the effect it will have on the growth of the economy. Proponents of UBI claim that putting money in the hands of every American will create an economic multiplier, and permanently grow the economy. Evidence from past case studies and economic predictions seems to support this assertion. A 2017 report by the Roosevelt Foundation used the Levy Institute macroeconometric model to demonstrate that an unconditional cash assistance program of $1,000 for all adults annually would expand the economy by 12.56 percent over the baseline after eight years. The study shows that, in addition to a rise in aggregate demand, a $1,000 UBI would likely cause an increase in output, employment, labor force participation, prices, and wages. Various studies of cash transfer programs in other countries demonstrate that economic growth ultimately also trickles up? to other aspects of welfare programs. The “Mincome” Experiment in Manitoba, Canada, where an experimental basic income project was tested almost 40 years ago, showed that the population receiving a basic income had an 8.5 percent reduction in hospital visits, with fewer incidents of work-related injuries, and fewer emergency room visits from accidents and injuries. Additionally, the population experienced lower psychiatric hospitalization, which is an indicator of higher overall mental health. Another example, the GiveDirectly™ program, created cash transfer methods for poor households in Kenya, and showed positive effects in nutrition-based spending and overall assets for these households. This also correlated to overall healthier lifestyles and less hospital visitation. With this information, the benefits of UBI seems to be substantiated by strong empirical evidence and a number of logical macroeconomic predictions. That being said, the studies are smaller-scale than anything that would be implemented in the United States. They also are focused primarily in under-developed markets with lower wage floors. For that reason, many critics maintain that UBI in the US may not be a foolproof idea or work in a similar manner as the smaller scale sample in Kenya.

Too Good to be True?

The main arguments among opponents of UBI can be roughly categorized into four key areas: the negative effect on the workforce, the misuse of income, the inability to pay for it, and the resulting increase in prices. Beginning with the negative effect on the workforce, many claim that an influx of $12,000 of annual income would incentivize employees to not work, or to work for a shorter time during an average day. With a quarter of households in America making less than $25,000 in yearly wages, people believe the influx of cash would sap the incentive to work for families under the poverty line. Although the rhetorical argument makes logical sense, and appears to be very popular, empirical evidence from past programs indicates the contrary. A report by MIT and Harvard researchers from September 2016 showed that, after aggregating evidence from randomized evaluations of seven government cash transfer programs, there was no systematic evidence of an impact on work behavior. More specifically, the report showed that the only two groups that had decreases in work hours for an average week were mothers of young children and high school students. In that sense, although the implementation of UBI could very well lead to lower work responsibility for these two demographics, it may still represent a net good for society. To add another dimension, theoretical calculations show that in situations where income levels are so low that subsistence considerations are important, UBI would have minimal effect on the labor supply. Additionally, for individuals below the level of subsistence, the utility gains from UBI that pushes them above the subsistence level are high. Thus, the UBI program may make more sense and have more benefits to society in a developing economy, whereas a developed economy may face a more detrimental effect on labor supply than anticipated. Under this pretense, UBI may make more utilitarian sense in developing countries.

The next key argument presented by critics is that income will be misused by its poorest recipients. Often influenced by social rhetoric, the idea that low income individuals will spend a basic income on “temptation goods,” such as alcohol and tobacco, has been repeatedly disproved by empirical data. In fact, as a report from the University of Chicago concluded, “on average cash transfers have a significant negative effect on total expenditures on temptation goods, equal to -0.18 standard deviations. A growing number of studies therefore indicate that concerns about the use of cash transfers for alcohol and tobacco are unfounded.” The economic theory behind decreased consumption of alcohol and tobacco after UBI supports this empirical data. Alcohol and tobacco are subject to strong substitution effects. In other words, if the consumer has the economic ability to purchase goods and services that replace alcohol and tobacco, they are likely to spend more money on these alternate goods than the “temptation goods.” These alternate goods and services can include higher education and health-based expenditures such as nutritional meals.

Another consideration against UBI is how the state will pay for the $4.3 trillion program. Yang’s proposal for funding the Freedom Dividend includes the reduction of some current welfare programs and a Value Added Tax (VAT). Essentially, Yang argues that a monthly income of $1,000 would be more beneficial to many welfare recipients than the United States’ current programs. Thus, he would offer those on welfare the opportunity to choose between their current welfare programs and UBI, predicting that the vast majority will elect for the cash influx. This shift is projected to save nearly $500 billion in revenue for the government. The second arm of this funding plan is a VAT, which has been implemented in more than 140 countries worldwide, including every other economically advanced nation, and is projected to generate between $100 and $200 billion for the US in annual revenue. Essentially, the VAT taxes the value that each member of a product’s supply chain adds to the final cost of the product. As a result, the VAT is deemed a highly effective method of redistributing wealth, as it taxes corporations at every step of their involvement in a product. Finally, the economic growth that the UBI is predicted to foster will lead to a general increase in sales tax revenue and income tax revenue for the federal government. This tax revenue will be the final piece in UBI funding and account for $800 to $900 billion. Putting these funds together, the money is in the budget for this type of federal expenditure, but it definitely puts a significant stress on other welfare programs and would likely lead to the eradication of many of them.

The final argument to consider is the inflationary effects of this policy. A fundamental concept here is the separation between production and income. Economists argue that income is earned by people because they are essentially selling their labor on the labor market as a contribution to the production of goods and services for the economy. Increases in income that aren’t directly related to correlating increases in production tend to result in higher prices so the two sides of the equation can balance. For this reason, many argue that income and economical production can’t be separated without dispatching macroeconomic effects for the whole country. In this case, the particular concern is that UBI will increase the inflation rate, which would lead to workers’ wages being valued even lower than in a pre-UBI world. Interestingly, if the participation in the workforce actually decreases, this inflation would be compounded and be even more detrimental for the country. 

A secondary concern here is that the funding mechanism for Yang’s proposal is a VAT, as explained above. Traditionally, the majority of the tax burden from VATs are placed on the consumers, as the corporations will just add their tax burden to the price of the product. This tax would generally be regressive as it would disproportionately target those with lower incomes. Moreover, those with lower incomes will have more price inelastic demand for goods that face price increases as a result of the VAT. Therefore, the majority of the tax burden will fall on these low-income individuals. Thus, the implementation of it may lead to requests for more intensive government-funded welfare programs, effectively defeating the purpose of the UBI.

So, is it a Good Idea?

Here’s the bottom line: evidence indicates that UBI will foster job creation and economic development.  Andrew Yang suggests that it is the economic policy of the future. But a program of this scale has never been implemented before, and especially in a country as economically developed in the US. There is still not enough research to conclusively understand whether the idea would be beneficial for the country, but the potential does seem promising. If it works as intended, UBI would lift dozens of millions of individuals out of poverty, and simultaneously foster economic growth for the United States. A post-automation society will likely require a drastic transformation of the US economy. Despite Yang’s campaign officially being suspended, the questions he raised about a post-automation economy are legitimate. Bringing universal basic income into the discourse of mainstream politics will be valuable for years to come.

Featured Image Source: NBC News
Disclaimer: The views published in this journal are those of the individual authors or speakers and do not necessarily reflect the position or policy of Berkeley Economic Review staff, the Undergraduate Economics Association, the UC Berkeley Economics Department and faculty,  or the University of California, Berkeley in general.

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