Spoiler Alert: It Ain’t $3 Trillion
the real cost of UBI, simplified
The Big Cost Question
Many people on both sides of the unconditional basic income (UBI) debate are making a big mistake in their math. I was too for a while. It’s all over my earlier articles, and I find myself adding notes to them to explain that I was wrong. Fortunately, acknowledging this mistake only makes the case for a UBI much stronger.
This post is for people who already have a fairly comfortable grasp of the concept of UBI. If you are new to the idea and would like a good primer, you can read this great article by Scott Santens.
A major and recurring complaint about UBI is the cost. A commonly proposed plan for implementing UBI calls for $12K/year per adult and $4K/year per kid. The apparent cost of this program, calculated by simply multiplying the total number of American adults and kids by the benefits they’d receive, would be around $3.2 trillion. If you’re asking me, that would still be worth it, but that’s not the real cost, so it’s irrelevant. The actual up front cost is less than a third of this, at around $900 billion (not including any hypothetical savings and benefits we might reap from having a better system in place).
Scott Santens and Karl Widerquist, both of whom I respect and admire, have written important explanations (click on their names above to see those explanations) of this common misconception. They have opened my eyes, but I must admit that in both cases their arguments and examples didn’t quite fully connect the dots for me in a quick and fundamental way. There was still a little too much going on, distracting me from the main point. And Karl’s original cost estimate paper was academic and complex enough to make my eyes start crossing as I parsed through it.
The cost argument is one I keep getting presented and having to answer, and linking those other articles often doesn’t clear up the confusion, so here’s a new and very simplified example I’ve developed in an attempt to cut right through to the fundamentals of it for anyone who’s trying to make this case. Feedback is highly welcome.
A Simple Example
Let’s say four friends pool resources to put together a tiny UBI group amongst themselves. The numbers that follow are only for the sake of the example and obviously not representative of actual realistic incomes in America.
The participants are Albert, Bianca, Claire, and Dolph. In their world, $4 is enough to scrape by, and they all care enough about each other that they want to ensure all of them are at least scraping by no matter what’s happening in their lives. They decide to pool an equal percentage of their incomes and set up a $4 weekly basic income payment that each would receive, and so the total cost would appear to be $16.
- Albert is unemployed and has $0 income at the moment.
- Bianca has a crappy job and makes $10/week.
- Claire has a good job and a comfortable income of $50/week.
- Dolph is kicking ass, making $100/week.
Since their total combined income is $160 and they need to raise $16 in order to give everybody $4, everybody kicks 10% of their income into the pot to meet that need.
- Albert puts in $0 and gets $4 back, a net benefit for him of $4.
- Bianca puts in $1 and gets $4 back, a net benefit for her of $3.
- Claire puts in $5 and gets $4 back, a net contribution from her of $1.
- Dolph puts in $10 and gets $4 back, a net contribution from him of $6.
The net cost of this program was $7, not $16.
Essentially, Claire and Dolph paid $1 and $6, respectively, to support Albert and Bianca this week while they’re struggling. The resultant incomes of our UBIers were shifted from $0, $10, $50, and $100 to $4, $13, $49, and $94.
$9 of that original $16 they kicked into the pot was just a very temporary loan that went immediately back to the people who had chipped it in, and so it wasn’t really a cost. I could hand you a hundred dollar bill for you to hand it right back to me as many times as we want, and it won’t cost either of us anything but the time we spend doing it.
How it Translates to a Real UBI Program in America
Using the real numbers in our current economy with this principle, we would raise $3.2T up front to pay for the UBI program I mentioned, yes, but we would then instantly get $2.3T back and give it to the very people we had raised it from, and the cost is actually $900B for the full $12K/adult version of UBI.
I think what confuses people at first is that we would even raise the extra money in the first place just to give it back immediately. That initial step of raising more than the actual cost may seem like unnecessary extra effort than just giving the right amount to people to begin with would be (i.e. means-tested targeting, like with a Negative Income Tax (NIT), for which in the example you’d just take $1 and $6 from Claire and Dolph and give $3 and $4 to Albert and Bianca without the initial step of giving $4 to everyone).
But the beauty of the UBI way is that this weird little extra step (it’s just a little computer coding to implement) ensures that everybody starts with their guaranteed minimum income and never has to worry about applying for it, proving they need it, etc. And everybody is instantaneously protected by it if they suddenly get laid off. Plus the end result is exactly the same, in terms of the number of dollars transferred, as with an equivalent NIT. UBI wipes out all the bureaucracy, humiliation, disincentive, stigma, and time-wasting that come with the means-tested types of programs it could replace in the real world (food stamps, housing vouchers, unemployment, etc). Just imagine our 4 characters again trying to implement a system between themselves that behaves more like welfare as we know it. They’d have to have procedures in place for Albert to prove he’s looking for work. They’d have to hire someone and pay that person to monitor Albert and Bianca. That way is simply cruel, wasteful, and unnecessary, even if it doesn’t mean to be.
I hope this understanding takes root and spreads and that we will be able to spend more time debating the rest of the aspects of UBI with the mutually understood premise that the price tag is the net transfer cost, which in this case is $900B, not $3.2T.
Want to read more? Here’s a handy list of links to all my Medium pieces on basic income.