2/21/18

Universal Basic Income: Society's Savior, Pipe Dream, or Expensive Waste?



The concept and potential value of Universal Basic Income has been debated for years. UBI appears on its face to be a relatively simple concept, but in reality it is a drastic change that carries great risk. On either end of the spectrum, UBI could potentially take great strides towards drastically reducing poverty or waste trillions of tax dollars.

What is UBI?

I suppose this might be a good place to start. UBI in its purest form is a set amount of money that a government pays to all of its citizens every month unconditionally. Let's say, for example, that the US decided to implement a $1,000 monthly UBI. That means that every one of the 300+ million US citizens would receive $1,000 per month regardless of economic status or any other factors.

UBI is generally analyzed as a potential replacement for government welfare subsidies. Instead of receiving a certain amount of money based on your income level, number of dependents, employment status, etc., all citizens receive the same flat rate -- no questions asked. 

UBI comes highly recommended by some of modern society's most influential people including Mark Zuckerberg, Elon Musk, Richard Branson, and Stephen Hawking. UBI has also garnered support from past influencers such as Martin Luther King Jr.

UBI In Action

UBI has never really been utilized on a large scale, but several experiments and small scale implementations have been conducted around the world. I recently listened to a Planet Money podcast which explored a UBI pilot currently being conducted in Finland. They also briefly discussed a US pilot conducted during the Nixon administration.

An article recently published on Forbes details the desire of the mayor of Stockton, California, an area which suffers from economic hardship, to implement UBI.

In most pilot cases, UBI is implemented with pilot participants who were already receiving some sort of government assistance. In Finland's experiment, UBI recipients receive slightly less money than they would normally receive in government assistance; however, their benefits do not decrease as their income increases. 

The Finnish government hopes that this will incentivize its citizens to seek and pursue employment opportunities while receiving UBI. The current Finnish government welfare system, similar to many welfare systems, punishes welfare recipients for increasing their incomes by phasing out benefits as certain levels of income are attained. In most cases, the benefits decrease at a more accelerated rate than the recipients' incomes increase.

That means that unless a welfare program recipient has an opportunity to drastically improve their income overnight, which is unlikely in any situation as people generally need to work over a period of time to prove themselves to their employers and improve their income, they're better off at least in the short term receiving the welfare benefits than they would be by working to increase their income. For many people, the decrease in benefits in that short term period creates an unsustainable situation that prevents them from attaining an improved economic situation in the long term.

Simply put, government welfare programs often times incentivize people to not work and punishes people, at least in the short term, for working and earning an income.

Potential Benefits of UBI

People are currently losing their freaking minds over the minimum wage debate. God forbid a company like McDonald's, which makes 1-2 BILLION DOLLARS PER QUARTER, have to pay its workers more than $8 per hour. That's 8 WHOLE McDOUBLES worth of revenue. The company would surely go bankrupt having to spread out this extra cost over its paltry 75 hamburgers it sells per second and 68 million customers it serves per day.

Maybe CEO Steve Easterbrook would have to sell one of his vacation homes to absorb a pay cut from his $15 million salary.

Although I poke fun at the ridiculousness of the minimum wage argument (don't even give me the small business argument unless you want 10 posts strictly on minimum wage), I'm actually not a proponent of a higher minimum wage in large part because I don't think it does enough to move the needle. I also don't think the government should mandate what a business pays its employees, but that's a separate discussion.

UBI could and should be supported by both Republicans and Democrats because it serves many of the fundamental economic interests of both parties and offers many collective societal benefits.

  • The government is not mandating how businesses are run. 

If a business chooses to pay people vastly under their fair market value, they will not attract sustainable talent. If people have the safety net of UBI to hold them over, talented workers will not have to jump at minimum wage jobs simply for survival. If they do work minimum wage jobs, the UBI will help empower them to make that a temporary situation.

  • UBI inspires a natural redistribution of wealth. 

I can't exactly say what I would personally do with a UBI. I'd like to think that I would donate a good portion. Maybe I'm coming from an idealistic view of society, but I think a bunch of people who don't necessarily need the UBI to make ends meet would be inspired to do the same. Even if people are not donating the money, as long as they are spending a majority of the extra income and not saving it, that will fuel the economy and create more jobs and higher paying jobs.

  • UBI creates an incentive to work. 

Currently, welfare pays more than a minimum wage job in 35 states according to a study from the Cato Institute. In Ohio, a person receiving full welfare benefits would need a job that pays $26,200 annually or $12.60 per hour to replace those benefits. That's much easier said than done for someone not currently in the workforce. The penalty of losing welfare subsidies outweighs the benefits of working a job someone first entering or re-entering the workforce without significant job training or experience which creates an incentive not to work.

This is not meant to be construed as anything negative against people receiving welfare rather than joining the workforce. If you could work for $10 per hour or not work for $12,60 per hour, what would you choose? I know the answer for me is simple. Those benefits range from $5.36 per hour in Idaho to $29.13 per hour in Hawaii. With UBI, people will have a safety net of, say, $6 per hour or $12,000 per year on top of whatever salary they are able to make.

  • UBI can be structured to be completely non-discriminatory. 

The current welfare program aids everyone a little bit differently based on their individual situations. A single parent can receive more assistance than a two parent household or simply an individual would receive. That seems fair to me. But under UBI, my proposal is for every single individual to receive the same assistance which is distributed to that person's legal guardian if the individual is under 18.

That means if you are a single mother with three children, you receive 3 times the individual UBI payout. If that same single mother is able to hold down a job paying even $10 per hour, she will be able to allocate the necessary funds towards decent child care, build her skills and income over time, and maybe even be able to one day start saving for her children's education after high school, be it college, trade school, or otherwise. This could be a huge step towards ending or severely limiting generational poverty!

  • All the time, money, and energy spent managing the social welfare programs can be spent on actual self-improvement or rehabilitation programs. 

I've unsuccessfully attempted to nail down exactly how much the government spends not on welfare program benefits themselves but simply on the management of the programs. What I do know is that government bureaucracy is expensive. 

What if we could spend all the time, money, and energy we currently spend to manage the programs on self-improvement programs with a mixture of employees and volunteers leading workshops and individual coaching sessions on topics such as budgeting, parenting, job and skill training, etc? Again, I feel this would go a long way towards ending or severely limiting generational poverty!

  • Crime rates would almost surely decrease. 

This is almost a sub-bullet of the previous point. If everyone has some base to make ends meet or at least get close to that, then crime rates would almost surely decrease. If we have less crime, not only are people generally happier and more comfortable, but we save all the time, money, and energy spent in our criminal court and jail systems that can again be re-invested in true rehabilitation programs.

  • Overall personal health would improve. 

People that are currently not receiving benefits from Medicaid would be more likely to afford healthcare or get a job that provides healthcare. This is not a foolproof solution for universal healthcare, but it gets us closer towards improving our society's healthcare issue. 

Also, people would be more likely to take care of themselves with the extra income by going to the doctor for things they might normally not go for due to financial concerns and health improvement habits such as eating healthier foods and getting gym memberships -- and actually going to the gym!

    Potential Downfalls of UBI

    • Not enough money is re-invested into the economy (spent) or donated. 

    The savings rate in the US is currently somewhere around 5%. That means if the government gives people $1,000 per month, they would spend or donate $950 and save $50. Savings is generally a good thing for individual people but can be a bad thing for the economy as a whole. Every dollar spent is not only spent once but changes hands many, many times. Every dollar saved benefits just one person, the saver. 

    This is not an indictment against saving-- PLEASE save your money beyond simply making ends meet. But from a macro (governmental) level, if that savings rate increase drastically, which we would expect it to increase to some degree, it could eliminate or limit the economic boost we might expect from handing people more money.

    • UBI would be extremely expensive. 

    The current US population is 323 million and grows at a rate of 1-2% per year. An extremely simplistic calculation suggests that a $1,000 monthly UBI would cost nearly $4 TRILLION per year. That's almost the entire 2018 federal budget. This would be partially offset by the current $1 trillion currently being spent on welfare programs, but I'm not sure The Donald is going to be able to magically shit out the extra $3 trillion to cover the gap. Again, this calculation is extremely simplistic, but it is meant to illustrate just how expensive UBI would be. 

    The government would clearly need to make some tax adjustments to cover the deficit. Finding a way to modify the tax code (again) and ensure this doesn't simply cause a short period of hyperinflation is a difficult and risky proposition. Many people argue that UBI should be given with some stipulations such as only distributing UBI to people 18-65 years of age, omitting the top xx% wealthiest Americans from UBI distributions, or other means of a similar mindset.

    • The positive effects would be realized in the long-term which may not be appealing for politicians on 2, 4, and 6 year terms. 

    Giving people money unconditionally when they have never had the experience of handling money will initially have some negative effects. An extreme example of this is that when people win the lottery, more often than not they mismanage the money and wind up being broke again. 

    Were you great at driving a car the first time you got behind the wheel? If you think you were, maybe you should ask your parents who had to be in the car on the way home from the BMV once you passed that permit test! Did you make the shot the first time you ever shot a basketball? Handling money is a skill that must be taught and learned over time.

    •  A completely unconditional UBI replacing all social welfare programs is slightly discriminatory against the most disadvantaged citizens. 

    Although I don't believe that every single person currently receiving disability assistance simply cannot work any job, I understand there are some who are disadvantaged to the point where obtaining and maintaining a job is extremely difficult or impossible. 

    Those people are most likely receiving more social welfare assistance today than a reasonable UBI would allow, and they would not be able to supplement their new, lower assistance with additional income. The government and/or society through charities would need to pick up the slack to help the people who truly need the help.

    Should UBI be Instituted?

    I am a proponent of the implementation of UBI; however, I can't pretend to know enough about the government and its budgets and spending to even begin to figure out how the government would pay for it. If nothing else, I do feel strongly about a few aspects regarding the benefits of UBI that the government could take steps towards today:

    • Social welfare programs should be structured such that people are not punished for earning an income. 

    The UBI threshold should be set much higher than the poverty line and could be structured to phase out more directly with income increases than current welfare programs. For example, let's say that once someone hits 2x the poverty level, or about $24k, their UBI benefits decrease dollar for dollar with post-tax income increases. Assuming a $12k annual UBI, individuals would be at a post-tax income of $36k before fully weening off UBI. Benefits for families and single parents would need to be adjusted to compensate for their dependents so they are compensated accordingly.

    • More social rehabilitation and education programs should be put in place through a combination of volunteers and full time employees. 

    Perhaps there is an opportunity for me to teach welfare recipients and other low-income earners how to manage their money, but I am not currently aware of it if that does in fact exist. Shortcoming often simply signifies a lack of knowledge or education. If someone is constantly eating fast food and living an unhealthy lifestyle, chances are they don't know how to cook, purchase healthy foods, and workout properly. If someone is blowing their money on lottery tickets as a legitimate money making technique and not just for fun, chances are they don't know how to save, invest, and work to build their income. 

    A huge reason for generational poverty is because that's all some people are ever exposed to, and once they leave high school, they don't even have teachers, counselors, or other positive influences to expose them to the rest of the world. Providing more education initiatives would afford the government the ability to provide social welfare dollars unconditionally rather than putting the dollars in pre-determined buckets such as SNAP for food.

    • Social security should be scrapped in favor of UBI. 

    I'll talk about this more in-depth later, but I hate paying into social security. The rate of return I'm going to end up getting on that money is horrendous, and the federal government runs enormous deficits in social security every year. I would rather pay less into social security so that people who need the assistance in retirement receive it, I am free to invest more of my money the way I want to invest it, and I don't need to worry about factoring in social security at the mercy of the government when calculating my retirement numbers. 

    I would be more than willing to simply take a loss on the money I've paid into social security to this point and scrap the whole program although I'm sure someone who has paid into it for 30 or 40 years wouldn't exactly feel the same. Yes, it would be difficult to figure out a foolproof or close to it way to track income from things like retirement account withdrawals and net worth to determine who exactly should receive UBI in retirement, but I believe it can be done.

    We need to find a way for everyone to have access to basic needs and resources. Life is never going to be completely equal or fair, but if we can find a way as a society to afford everyone access to the basics and the opportunity to achieve much, much more if they are able and choose to work relentlessly towards it, then we can take major steps towards eliminating or reducing generational poverty and its associated problems from our society.

    What Do You Think?


    • Are you a proponent of UBI, our current social welfare programs, or some other option? 
    • What additional potential benefits or downfalls can you think of?
    • If you were in charge of improving the overall economic health of our society, what would you implement or modify? 
    Social welfare is something that affects all of us to some degree either directly or indirectly, so let's talk about it!

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