How Universal Basic Income Can Worsen Wealth Inequality, and Potential Fixes
Without balancing the budget, giving people money could make the wealth inequality worse from its already unacceptably high levels
Universal Basic Income (UBI) is a proposal to address multiple social and economic problems plaguing modern societies. The main advantage of the UBI concept is that the money is paid in cash and comes with no strings attached on who receives it or how they can spend it. Unlike traditional welfare schemes that require means-testing to determine eligibility, everyone qualifies for UBI to do whatever they wish to do with the money.
Neither policy formulation nor its implementation can ever be perfect in terms of its effectiveness, efficiency and fairness. The UBI will be no different with its owns challenges. The fears of negative consequences are plenty. Some feel that giving free money will make people lazy or encourage them to stop working. None of these concerns have basis in strong empirical evidence, however. Some pilot studies (e.g., done in Finland) suggests no such outcome. In fact, while the Finland work reported that no “revolutionary” outcome in terms of employability from giving away free cash, it improved recipients’ mental health. Since the free cash helps people meet their essential needs without significant worry or stress, they have more ‘brain energy’ to spend on productive uses for improving/upskilling themselves rather than stressing out where their next meal will come from.
Nonetheless, the whole UBI program will require loads of money. For example, paying each citizen (or say resident) in the USA $15,000 every year will require $15 billion for every million people. So, serving 260 million (adult population of the USA) under UBI will require nearly $4 trillion every year. So, the obvious question is: do we have to pay for it? If so, who is going to pay for it and how are we going to collect it?
The purpose of this blog is not to discuss the socioeconomic implications of UBI at individual or micro-level. The blog rather presents a possible macroeconomic impact that will intensify the socioeconomic disparities, an undesirable outcome the policy aiming to rectify the very issue. The rest of the blog explores some of the macroeconomic consequences and potential ways of fixing them to make UBI work better.
Why can we just print the money?
Some suggests that government has authority to create money without balancing the budget. The basic tenet of Modern Monetary Theory (MMT) is that the government deficit does not matter, as advocated by Stephanie Kelton in her quite popular book “Deficit Myth”. According to the author, the Federal Reserve, on behalf of the US government, can print unlimited amount of money and give it to the government for free to spend as the policy makers wish. In fact, even if the Fed charged an interest rate, that should not be a problem. The Fed is legally obligated to return the interest earned back to the government, which essentially makes the impact of any interest rate meaningless. So, $4 trillion can readily come from simply printing money without raising taxes. While this is practically true and I also strongly support unlimited spending — especially for building physical infrastructure and renewable energy systems — I disagree that there are no negative consequences.
One common criticism is risks of hyperinflation. I partially agree with the critics, who point out several concerns (e.g. trade imbalance), including the fact that large amounts of money in a society will lead to inflation. We are already aware of the on-going inflation problem partly driven by stimulus money. The stimulus boosted the demand when the supply was already under pressure from many constraints, leading to a classic supply-demand mismatch. Imagine what would happen if every more money was injected into the economy as stimulus checks every year.
Nevertheless, the critical point is where all that money will accumulate once people start spending it. For example the pandemic and resulting stimulus has worsened the wealth and income equality in the USA, and the central banks’ loose monetary policy to be partly blamed for it. So, the follow up question should be why that is the case. How did giving people money exacerbate a social evil that many such welfare schemes try to eliminate?
Where money trickles up the ‘food’ chain
In my opinion, the issue is not how much money people receive, where the funding comes from, where people spend it, or even whether it leads to (temporary) hyperinflation. It is how many will ultimately receive (and accumulate) it after it travels (trickles) throughout the economy once people start spending it.
Our production and consumption economic structure has embedded inequality. The major cause of wealth inequality is huge disparities in control or ownership over means of production, assets, and the governance. For example, while between 60–80% of the households have some equity in housing and car assets, many lack other form of assets. A minority (less than 10% of the richest families) own nearly 85% of overall equities. Although the exact information on the ownership distribution is unclear, 50 families own 1.3% of the USA landmass. There are about 6.1 million employer firms that employ about 135 million private sector employees, with over 70% working in service sector. This means that not many own a business/farm/factory that can produce physical “stuff”. You can draw your own imagination about Big Pharma, Big Agro, and all those big corporations.
Whenever people spend money by consuming things, the money travels along the supply chain and reaches the owners of the system that produced those goods/services or controllers who receive the maximum profit from the sell. Unless the government is running surplus or deficit, the money can neither be created or destroyed. It can only move from one hand (spender) to another (receiver). Now, imagine that the wealth inequality that the circulating such large quantities of money from UBI would create.
So, the issue with UBI is not the magnitude of the money supply itself, but rather how to manage the overall flow of money to prevent the whole UBI initiative from becoming counter-productive. Therefore, fiscal balancing is necessary to prevent wealth inequality and someone must pay for UBI— either now or in future. Running large deficits eternally is unsustainable. Taxation is one of the ways of keeping printed money in circulation to avoid any excessive, stagnant concentration in among a few wealthy individuals.
The tax rates must be set in such a way that the remaining deficits in UBI funds can be collected via income taxation. Of course, the additional taxation will also be required to fund regular government spending. However, the avoided expenses from eliminating many existing social welfare schemes, such as social security, pensions, will moderate the overall financial impact of UBI. During initial years, the government may run large deficits to avoid sudden impacts from new tax systems, but the overall tax collection must match the spending.
In addition, we need to reform the tax code, rebalance the production-consumption inequity, and accept certain abuses of UBI.
1. Simplify the income tax code
Since the savings from terminating the existing social programs will not be enough to fund UBI, additional taxes from incomes may become necessary. For that, the current tax code needs to be reformed (or scrapped entirely) first and revised into something so simple that a child with basic arithmetic understanding can file the tax return. This is an extremely important fix to ensure that any spending does not get accumulated in the hands of few.
One way to achieve it is to simply account all earnings by person, irrespective of the nature (salary vs capital gains) and impose a flat (or graded) tax rates on the total income without any reductions. It means remove all deductions and exceptions no matter how logical or important they seem from an economic or social perspective. If there is a deduction available, someone, who can hire expensive experts and consultant, will always find a way to use it and reduce their tax burden, or people will start lobbying for more deductions to suit their own person agenda. Therefore, no exceptions should be granted to anyone. Reducing complexities of tax code will also keep the bureaucracy costs to a minimum. The same principles of simplicity must also be adopted for designing and collection ecosystem service tax.
2. Fixing production, governance, and ownership imbalances
People must be empowered to own means of production, such as farmland, electricity, data, knowledge, and whatever can be used to generate material and intellectual wealth. Decentralization of power (rooftop solar, community farming) are some of the ways people can regain the control over production, thereby ensuring that the money stays within the local community. Open sourcing of knowledge platforms and software applications as well as cryptocurrency are such initiatives to balance the scale in favor of people from big corporations. In fact, the concept decentralized autonomous organization (DAO) is becoming increasingly popular.
3. Accepting some drawbacks and abuses
Giving free cash to everyone will feel unfair to some who think their hard work is getting devalued by people who are getting paid without work. Some recipients might even do drugs or play casinos. Therefore, it seems logical for such skeptics to expect some form of means-testing requirements before the government issues UBI checks.
While the concerns are valid, any restrictions will only increase bureaucratic and admin costs, which could be even higher than the money “wasted” on drugs/lottery in absence of any restrictions. Also, these restrictions are susceptible to political ideologies since the politicians, for obvious reasons, may want to keep some people out based on racial, religious, gender, or some other criteria. Though digital technologies will minimize such misuse, some people will find a way to take advantage of it. Therefore, “free for all and do whatever you want” is an essential evil of UBI needs to be accepted.
The purpose here was not to support or oppose the program, rather to explore some potential downsides as well associated fixes to reduce the risks of unintended consequences. UBI is an excellent initiative to restore balance within the society. In fact, I would prefer if it replaced many other welfare schemes altogether. I believe that a single national-level program that directly transfers sufficient money into people’s accounts can be a far more efficient approach to social welfare and to eliminate significant bureaucratic costs.
The optimal solution will always be a mix of everything and none of the above fixes will alone address the current levels of inequality, they would slow down or prevent it from getting worse. And in the long run, it is possible that the overall wealth distribution falls within an acceptable levels of inequality while continuing the UBI program.
Most of this content is based on my own reading of the secondary material (books, blogs, videos, course material) while in college or at work and discussing with (equally crazy) friends over the past 11 years. A couple of points were based on the arguments by some participants in an online meetup on Meetup.com. The recording of the discussion is available here.