UBI: More Complicated and Riskier Than It Seems

Milton Ezrati

Chief Economist

With the Democratic Party now in charge of the House of Representatives, Americans will almost certainly begin to hear more about the concept of a universal basic income (UBI) – the idea that the government would give each person a minimum monthly sum regardless of circumstances or need. The popularity of UBI and UBI-like schemes has ebbed and flowed over the years, boosted by remarkably diverse proponents from free-market economists like Milton Freeman to socialist politicians and even President Lyndon Johnson.  Today, proponents include the left side of the Democratic Party, some libertarian thinkers, and several celebrity business people in Silicon Valley and elsewhere, including Mark Zuckerberg, Elon Musk, and Sir Richard Branson. Though the idea definitely has a strong surface appeal, the scheme nonetheless carries significant drawbacks of which all should be aware.

Proponents of UBI have used a number of arguments to advance the scheme.  The left of the political spectrum, not surprisingly, has emphasized its ability to reduce poverty.  Several of these people have made straightforward calculations from government statistics to show that a generous stipend of $3,000 a month for each adult in the country would cut the nation’s poverty rate in half.  A stipend of $250 a month for each child would reduce child poverty some 40 percent. UBI, proponents have also claimed that it would break the cycle of dependency among the disadvantaged, giving them time and money at last to seek the training and higher education they need to climb the economic ladder. Libertarians boost the scheme as a way to simplify the complexity of programs presently aimed at the disadvantaged and also minimizing government interference in people’s lives.  Some of the tech executives see it as a bulwark against the revolution that will become increasingly likely as artificial intelligence (AI) creates widespread joblessness.  Some of the more starry-eyed among them Silicon Valley billionaires add that UBI would help bring on a cultural revolution by allowing people time from toil to “contemplate the meaning of life.”

A broader perspective raises serious questions. First, there is the consideration of cost, (the dreary intruder on all dreams.) The most quoted schemes today would, according to Commerce Department calculations, cost the federal government between $2 and 4 trillion a year, amounting to about a 50 percent increase in current federal outlays or more than 10 percent of last year’s gross domestic product (GDP). Such a draw on the economy would markedly burden taxpayers and increase government debt with all the associated economic ills. At the same time, such a huge draw on federal financial resources would also preclude other government priorities, such as infrastructure refurbishment, including the building of hospitals and the construction of affordable housing. Both effects would undermine productive incentives and otherwise constrain both public and private investment in the economy. Economic activity and growth potentials would suffer accordingly, not the least because UBI payouts would do little to invest in the future except to the extent that recipients might use the funds for education and training.

Some, especially libertarian boosters, dismiss such concerns claiming that UBI could simply substitute for all other entitlements programs, including unemployment and disability insurance as well as Social Security, Medicare, and Medicaid. These entitlements presently demand huge outlays, more than half the budget, in fact, and so from an accounting standpoint could probably answer a UBI financing need.  But whatever this solution’s accounting virtues, it nonetheless ignores certain other facts of life.  Such a substitution would certainly encounter political resistance.  Because UBI would have a broad distribution, using it to substitute for welfare and other entitlements aimed at the poor would constitute a transfer from those in need to everyone, many of who are quite comfortable.   In the same way, using UBI as a substitute for Social Security and Medicare would constitute a partial transfer from the old to the young, and using it as a substitute for disability insurance would constitute a partial transfer from the disabled to the able-bodied.  Such considerations, once widely understood, might well dissolve the recent rise in public support for UBI.

The vulnerabilities of the disadvantaged also upset easy calculations in UBI’s favor. Welfare includes demands such as drug tests and home visits because its recipients often have trouble managing their lives, much less their finances. The predominance of payday loan operations in poor neighborhoods, along with furniture leasing outlets and the like, speaks not only to the cash-short nature of residents but also to their susceptibility to hucksters. Noteworthy in this regard are Census Bureau statistics that estimate how 11 million American adults barely have basic literacy skills and some 30 million have difficulty completing basic financial forms. Without the guidance and strictures of present arrangements, many less fortunate recipients of these stipends would find themselves either bilked out of them or would spend them too quickly. Surely, even dyed-in-the-wool libertarians would balk at telling financial incompetents who have spent their monthly allowance too fast to tighten their collective belts and await the next check. And keeping guidance and support in place would otherwise retain the government intrusion libertarians abhor and add to costs.

If these considerations were not sufficient reason to question the wisdom of a UBI scheme, the evidence from various trials is not especially encouraging. A Bureau of Labor Statistics study of people on unemployment discovered, for instance, that they spent more time in front of the television and sleeping than upgrading their working skills much less contemplating the meaning of life. A similar study on disability recipients revealed similar patterns. Statistics from earlier federal pilot programs on negative income tax, a variant of UBI, are equally discouraging. Between 1968 and 1980, Washington made four controlled trials of negative income tax, involving thousands of people across six states. Hours of work desired by all recipients fell some 9 percent below to those, not in the program. They fell some 20 percent for married women and 25 percent among single women heads of household.  Desired work among single men fell some 43 percent below non-recipients. If those receiving the negative income tax lost their job, the spell of unemployment lasted two months longer on average than with non-recipients and 12 months longer for married women.

Against all this contrary evidence, the UBI idea nonetheless has attracted followers. Perhaps it is because proponents in their sincere desire to help others habitually fail to think about the larger economic and social picture. Different proponents have perhaps a political agenda that in this case wants millions more dependent on government. The Silicon Valley billionaires may separately recall how their youthful drive impelled them to innovate and ultimately displace older ways and older firms. Perhaps in UBI, they see something that will dull such drive in today’s youth, making it less likely to do to them what they did to others. Whatever the motivations — selfless, selfish, or simply confused — these proponents press their dubious solution despite the clearly negative practical repercussions as well as risk to people’s self-worth and pride implicit in severing the ties between work and income. Certainly, the picture on UBI invites all to consider other ways to meet today’s social and economic challenges.