Tuesday, January 17, 2017

Why a Universal Basic Income Will Not Reduce Poverty

universal basic income, free market, economics, capitalism, entrepreneurship

A major policy proposition that is gaining traction throughout the globe is the Universal Basic Income or UBI. The people of Switzerland recently voted down a proposal for a UBI, however, the people of Ontario, Canada will experience firsthand life with a basic income as they begin trials this year. The prevailing theory behind basic income is that it would replace all other forms of welfare and instead, provide a minimum income for all, irrelevant of wages or otherwise employment.

This is very attractive for people on the left, as they tend to see it as a way to eradicate poverty. In their view, this would increase overall happiness as the “working poor” could focus on improving their skills and education levels rather than working numerous part-time jobs just to get by. And children born to these families wouldn’t have to worry about when they are going to get their next meal which they believe would help improve their GPA’s in school and overall quality of life.

Still, others on the right would contend that a UBI would be preferable to our current welfare system since it would relatively eliminate fraud and waste. They argue that a minimum income would inherently reduce the need for dozens of bureaucracies within the federal government, thereby reducing the power and scope of the government itself. Even libertarian favorites F.A. Hayek and Milton Friedman were for a basic income of sorts. So how dare I challenge two Nobel laureates on the necessity for a minimum income?

Notwithstanding Friedman and Hayek (although they didn’t really support a basic income in this context) my contention is that any form of a universal income is just a unicorn. Not only is the concept wholly unsustainable in the long run, but would also create vastly more wealth inequality and would have the ultimate effect of making the poorest amongst us poorer over time. Despite the well-intentioned nature of the supporters of a guaranteed income, you simply cannot circumvent the laws of supply and demand and expect a positive outcome.

It sounds like a wild claim, but allow me to explain why further wealth inequality is the inevitable result given a minimum income. As mentioned above, most believe that the only way a guaranteed income can be even remotely feasible is if that income replaced all other federal welfare programs. That means getting rid of programs like Medicaid, SNAP (food stamps) housing assistance, etc. Some of the most conservative studies found that the average low-income family qualifies for roughly $17,000 in annual benefits per year. Some studies have that figure much higher, at around $30,000. And when you factor in state level perks, that number could rise even further.

Now, there are many problems that we run into even before we can establish such a policy. First, the size of the bureaucracy alone to render these payments would be a complete nightmare. That aside, the basic income would have to be tiered based on family size to have a considerable impact. But, let’s assume for simplicity that only individuals over the age of 21, irrelevant of how many children they have, all get the same amount of benefits. If we were to base this income on the 2015 U.S. Census Bureau poverty threshold, the UBI would be a $12,331 annual benefit for roughly 230 million people. That equates to roughly $2.8 trillion annually. To put things into perspective, that accounts for virtually all of federal revenue for 2015, and that’s assuming a benefit far lower than what one on government assistance is currently receiving in total benefits.

So we see already that there are problems with sustainability with the guaranteed income. It would be unreasonable to expect federal receipts to increase significantly given a UBI, which would ultimately force the federal government to borrow much of the money needed just to fund the government. And we also see how the poor may be worse off as a result. But that is not even the worst part. Who is likely to benefit the most from a universal income? Well, it certainly isn’t the poor as can be seen above. Is it the rich? Maybe it’s the middle class? To answer this question, one must analyze how prices react to a change in income levels.

The entire proposition seems to be predicated on this notion that prices are somewhat static and that arbitrarily raising the incomes of hundreds of millions of people would have a net zero effect on pricing in general. But whether they like it or not, resources remain scarce despite income levels. The extra production of goods necessary to accommodate an increased demand doesn’t just simply appear out of thin air. Firms have to ramp up production to accommodate the demand, which thereby increases price levels until the new supply levels are sufficient to meet the demand. This means that prices will undoubtedly settle higher than current levels, thereby reducing the purchasing power the minimum income can provide.

And this is where we would see wealth inequality expand. As we’ve already shown, a single mother of two working part-time at the minimum wage is likely to lose benefits with a guaranteed income, which already diminishes her purchasing power. But we also have to factor in the hundreds of millions of middle-income families (people who don’t need the extra income) that now have a greater purchasing power as a result of the minimum income. Their consumption power alone would force prices to increase, thereby further reducing the purchasing power of the dollars that single-mother holds.

And who benefits the most in all of this? You guessed it, the wealthy. First, most people in the lower and middle-income brackets tend to pay down their debt with any extra income they receive. That debt is owned, usually, by large financial firms. Also, when individuals have higher incomes, they tend to take on additional debt. They tend to upgrade their lifestyle via buying a new home, new car, boat, etc. Historically, the higher one’s income, the more likely they are to take on more debt since they can afford to do so. Those who stand to benefit the most from this added consumption (at least financially) are of course the wealthy. Sure, the economy as a whole would likely benefit from the increased activity, thereby creating more opportunities where they otherwise wouldn’t have existed prior. But the majority of the wealth created would be seen at the top, not the bottom as suggested by UBI supporters.

At the end of the day, there is no magic wand that any government can wave to eradicate poverty. I know we all want to believe that such things are possible, but if history is a precursor, such attempts have only led to mass inequality and more poverty.

The best, most efficient way to reduce poverty comes from creating wealth in society, not from redistributing it. Maximizing liberty, reducing barriers to prosperity and incentivizing entrepreneurialism have always been the bedrock of wealth creation.

It is literally what turned on the lights throughout the world. We should be seeking more creative ways to generate wealth, not reanalyzing the refurbished redistributionist policies that failed past generations.

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  • Micah Hayek

    A good read on an important topic. A few points I want to argue. You state the beurocracy would be vast. Without a doubt, BUT it would be replacing multiple beurocracies each of similar or more vastness. So the relative change in that would be an excellent improvement. Another statement you made ‘it would be unreasonable to expect federal receipts to increase’. This statement I am very surprised you made as this is quite contrary to some central arguments for UBI. The UBI proposition would remove many dis-incentives low income individuals have to work. I have personally experienced this and it is well recorded that in the current system if people work more they lose benefits thus they don’t work/work less because essentially they will be taxed 100% of the increased income. Millions would be able to go to work and not be punished with a UBI. Last you argue the price of goods would raise. Consumers are already consuming the essential goods at likely similar rates as they would with a UBI and you yourself contended that they would have more welfare income currently.
    You may have not been as well read or analyzed on those topics as you should have been but thank goodness you conclude the way you do.

    • J. Matthew Bennett

      Hi Micah. Thank you for the comment. It’s true that many federal bureaucracies would be replaced by a UBI, but the majority of the Leviathan that is the federal government are regulatory bureaucracies as well as law enforcement and defense. These bureaus would still exist under a UBI, and the issue of funding would be questionable.

      Why do you suppose federal receipts would increase under a UBI? There wouldn’t necessarily exist a higher propensity to consume in the aggregate, unless we would be injecting a plethora of new dollars into the system. And even then, in the long run, inflation would decimate any short term gains in revenues. I think an argument as to how a UBI would create growth would have to be made in order for federal receipts to increase, specifically as they relate to Hauser’s Law.

      You are right to identify the perverse incentives to work that many currently experience who receive government assistance. But, the UBI doesn’t really remove the disincentives to work. If anything, it creates a disincentive to work in and of itself. Under current proposals, and even the one I discuss in the article of a baseline wage at or near the poverty line, three qualifying individuals in one household (roughly $37k in total) can live quite comfortably without having to work at all (at least temporarily before price inflation kills the UBI value). It’s true that many would take advantage of the UBI though, and likely get a job. But, we must also question whether or not they would take the time and make the necessary investments into themselves to get a higher paying job or start a business, or simply settle with something that pays a decent hourly wage since they have the UBI to supplement their income. Given the fact that the vast majority tend to settle for something less than their true value, we can only imagine a UBI would exacerbate the degree of settling we would see.

      In regard to the price of goods, I can see why you would conclude that when it comes to certain goods like groceries and gasoline that prices wouldn’t be expected to rise as consumption wouldn’t necessarily increase. But, you are only considering how a change in consumption affects pricing, and not how a change in incomes affects prices. Remember, prices are determined based upon a consumer’s willingness to purchase the product at a given price. If consumer’s in general have more dollars, then it is suffice to say they would be more willing to spend those extra dollars on those goods they demand. This is generally how inflation goes. Putting more dollars into the hands of the middle class may not necessarily increase how much they consume, but it certainly increases the price which they are willing to purchase goods at. And this is why the poor would tend to lose in value with a UBI, since they are not only losing in real terms when considering the lost assistance they would sacrifice in lieu of a UBI, but also because there would be more people willing to spend more money for the same goods than before.

      As a general rule of thumb, it is never a good idea to believe that prices on anything are not subject to change. Prices are not static, they are ever-changing in accordance to many factors. But I thank you again for the comment, and please stay tuned for more articles.

  • Stephen Stillwell

    By addressing the “prevailing theory behind basic income” you can pretty much choose characteristics that produce poor outcomes.

    With few exceptions BI schemes considered are limited to single state welfare distributions, none of which can hope to provide the benefits sought, simply because arguments for BI are for human rights, dignity, and enfranchisement, and only a global structure can address global concerns.

    If instead you consider providing each adult human on the planet with a trust account containing a Share of the economy, and require sovereign debt to be funded only from these trust accounts, then each will receive an equal share of the interest paid on global sovereign debt.

    This will create a structure to provide a tiny sustainable basic income globally without changing anything else, except the commercial availability of sovereign debt for investment, which certainly isn’t anyone’s right.

    If each adult human may go to their local bank, claim a Share for deposit, sign their social contract, the bank buys sovereign debt with the Share, and the human gets an interest payment each month, there isn’t much bureaurocracy involved.

    With such a structure in place, there will be sufficient credit available at a fixed sustainable rate, below that of sustainable growth, distributed according to population, to provide opportunities for each.

    As economic activity increases, spurred by the displacement of a couple hundred trillion dollars currently funding sovereign debt, sovereigns may increase their debt for infrastructure, reserve cash, or simply to increase the BI, as the market demands.

    Thanks for your kind indulgence

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