• Amy Tan

CMI Explains: The Case for UBI

Few subjects animate political debate and controversy as much as that of the Universal Basic Income. Commentators on both the right and left are united by their lack of ideological consensus on this most hotly contested topic, and as the fourth industrial revolution continues apace, the discourse around it is only going to get hotter.


What is a UBI? Simply understood, it is a form of state welfare payment characterised by several factors, but it can be summed up simply in a sentence.


It is cash paid in regular amounts to all individual people unconditionally.


Critics often seek to caricature the policy proposal by labelling it ‘free money’, implying that it would be ruinously expensive. Strictly speaking, they would be right in the current political environment, but there are colossal changes in the world economy which are afoot. The coming decades, it is argued, will be characterised by the increasingly rapid acceleration of two economic trends; automation and globalisation.


These two trends have already precipitated a populist political backlash, as structural unemployment and zones of apparently irrecoverable economic deprivation have arisen like a rash across Europe. Those most at risk of such deprivation are more often than not those who find themselves in the occupations most likely to be outsourced, or made redundant by technological innovation.


This concern is hardly new, as John Maynard Keynes, in his Economic Possibilities for our Grandchildren, wrote that “Our children are being afflicted with a new disease, namely, technological unemployment”. This fear becomes more imminent now however, as the pace of change is accelerating. Political malaise is more tangible than ever, and people are looking to solutions which lie beyond the status quo. A recent PwC paper on this topic found that by the late 2020s, almost 20% of all existing jobs could be automated.


Evidently such economic change will absolutely have positive effects in spurring growth and further innovation, but there is no denying that great numbers of people will be left behind. From the proceeds of this growth and innovation, a sovereign wealth fund or a windfall tax could be established to fund a new kind of welfare system which is more appropriate for the 21st century.


Enter the UBI. A UBI has the potential to streamline the provision of welfare and improve the autonomy and incentives of people. Allowing financially strained people to spend money as they see fit stimulates bottom-up market solutions to their deprivation and cuts down the bureaucratic red tape which presently characterises the modern welfare state. This would pull resources away from rent-seeking and into wealth creation, and even encourage people to do socially beneficial tasks which they could not otherwise do, such as care for the elderly for instance.


The booms and busts which characterise modern economies could theoretically be ameliorated by such a policy, without requiring such a highly technical and discretionary macroeconomic policy as we have today.


While this solution may sound ideal, many would contend that it sounds a touch too good to be true, asserting that such a policy would turn people into ineffective, unproductive workers, with the unconditionality of the UBI supposedly destroying the incentive to work, at the same time as its funding bankrupts the government.


Yet on the contrary, there is rising evidence in the form of UBI trials across the globe which suggest that this is not the case. From Finland to Kenya, the findings have been similarly positive. Recipients report fewer health problems, lower anxiety levels, increased participation in the labour market, improved housing conditions, sanitation, levels of schooling reduced food poverty, less impulsive and frivolous spending – the list goes on. What's more is that not a single UBI pilot scheme conducted so far has seen substantially reduced labour market participation.


And finally, what of its cost? Paid for out of present tax revenue, and introduced alongside current welfare measures, there is no doubt that funding a UBI through these means would be incredibly expensive and pose a massive opportunity cost. But there are alternative ways to finance this policy, which in many ways can be considered a preemptive way to actually boost growth and productivity without being affected by market volatilities.


A Sovereign Wealth Fund could be established, a state owned investment which pools funds derived from the state’s resources. Nobel Prize winning economist James Meade has called for such a thing in the UK, and they have proven highly successful in other nations such as Norway and Singapore. Alternatively, another income stream to support a UBI could come from capital taxation, as has been proposed in the last few years by senior economists at the IMF. The idea of there being a windfall tax on the profits of highly automated industries has also been floated. There are many ways to finance a UBI which go beyond existing streams of government revenue, and these alternative ways have been proven mathematically feasible, in some of the relevant literature at least.


The concept of a UBI has been around for a very long time – having been first endorsed back in 1792 by Thomas Paine – and it does not seem like its appeal will be on the wane anytime soon. Similar proposals such as ‘Universal Basic Services’ and ‘Negative Income Tax’ exist, but these haven’t seemed to receive the same amount of attention, perhaps due to their necessary nuance. Perhaps that's why the concept of a UBI seems to have a monopoly on the literature; it acts as a simple solution to a seemingly impossible problem, which may actually work against all odds in the face of continuous economic evolution.