The UBI Fairytale

The quest for a universal basic income (UBI) has been a staple of many an election campaign. A monthly cheque to every citizen to offset the cost of living. From Andrew Yang’s bid for the US presidency to the founders of Twitter and Facebook, UBI has become an incredibly popular sentiment. Though the exact details may vary from how much people receive to who can receive it, the rough concept of every citizen of a nation receiving a basic payment in order to pay their living expenses sounds appealing on a superficial glance, but upon a deeper inspection, the grotesque nature of such a policy is revealed. In their casual disregard for any of its implications, UBI advocates overlook with malice just how devastating such a policy would be to implement. Its costs, not purely measured by the expense of payments but also by the damage inflicted upon a domestic economy would be astronomical.

As is the nature of any such policy, any fiscally conservative individual raises the point “how will we pay for it?” Like most government programs, taxes are the most likely explanation. However, the year-on-year costs are staggering. Let’s adopt Andrew Yang’s policy as a model: $1000 every month to every citizen over 18 amounts to $12000 annually. Going by the Australian Electoral Commission’s estimate, this policy would cost the Australian taxpayer 204 billion dollars each year. That is almost half of the 2021-2022 government budget and over half of the revenue. Assuming a break-even budget, this would leave a little over 292 billion to fund infrastructure, roads, education, healthcare, existing social security, defense, and the state governments.

Apart from the disastrous costs, if UBI was voted in tomorrow, it would only serve to worsen existing economic damage from the pandemic. With a rise in the available funds of consumers, demand will rise for almost all consumer goods. Furthermore, from food to clothing, people will have surplus funds to splash on goods they do not need. This will most certainly cause prices to rise, hurting low-income earners in the process, even more than what the current inflation scenario is. The gains from this newfound income will be eaten by the rise in the cost of living. Thus, those living on the margins are further subjected to the ordeal of making ends meet as low-income earners spend far more of their household budget on essentials such as food and consumables. In turn, the rise in the price of these goods would make them ever more reliant on government assistance for survival.

Not only will prices rise, but the productivity of the nation may fall. Advocates for UBI both argue that this is true and untrue. Some argue that the increase in income will increase spending and thus increase demand. Others argue that UBI would have the opposite effect and support the policy as the decrease in growth would be better for the environment and the creation of a more sustainable economy.

The idea that UBI would decrease productivity is backed up by conventional economic thought. An increase in income may cause workers to prioritize leisure over work and thus the labor market participation will fall. Regardless of the validity of this assumption, if the productivity of the nation falls the output would not increase, no matter the increase in demand. Those that earn a comfortable existence now, have a low mortgage or own their own home would now decrease their working hours. Now this from the perspective of the individual is great – it gives people the freedom to do as they desire, not as they must. But if they were to decrease their hours, knowing that the income is covered, then overall productivity will fall resulting in less output. A fall in supply coupled with an increase in demand would result in increasing prices.

Furthermore, an increase in taxes (which would almost certainly be introduced to pay for UBI) would further push worker productivity down. And as income increases, higher-income workers would see no incentive to work more than they currently do for which the labor supply for high earners decreases. With $12000 of extra cash annually they would be strongly incentivized to cut their hours to pay less in taxes. Low-income earners may also withdraw from labor markets, but not to the same degree. That the low earners would have their basic needs met will be offset in the rise in prices for goods wherefrom the extent that they will be better off under UBI is dubious. Or as Michael Tanner put it “Any program that provides income without linking it to work will discourage work to some extent.”

With so much against the policy, it only comes naturally for someone to ask: why does it still exist? For which I lay the blame squarely on politics. It is easy to overlook the problems with a policy if it buys votes. It is easy to promise someone “the government is here to help. Here, have some money.” As a society we are preoccupied with spending, the costs are dammed. We fixate on the fantasy of the solution ignoring the problematic realities. Politicians supporting UBI, regardless as to whether they care about their constituents or not, perpetuate a damaging belief. UBI is political virtue signaling at its most insidious, promising a better life to those who desperately want one, only to deprive them of their most basic necessities. I cannot stand for such a policy. And neither should you.