- Need for Universal Basic Income
- Funding, pros and cons
- Current scenario and the future outlook
‘A basic income is a periodic cash payment unconditionally delivered to all on an individual basis, without means test or work requirement’- Basic Income Earth Network (BEIN).
In simple terms, Universal Basic Income (UBI) or Basic Income is a provision for a stipulated amount of money to all citizens in a country, irrespective of their employment and income status. The main purpose is to promote equality among all and diminish poverty. BEIN lists the following principles for UBI:
- Universal - is received by all citizens
- Cash payment - the payment is in cash and not in kind
- Individual - the income needs to be paid to each individual rather than to a household
- Periodic - the payment has to be at regular intervals, commonly it is on a monthly basis
- Unconditional - the beneficiary may or may not demonstrate a willingness to work
Although minimum income or guaranteed income as concepts have existed for long, these were mainly limited to unemployed citizens. The recent surge in the UBI movement can be accounted to the rising automation and the fear of human jobs being displaced by robots. Moreover, robot to workers ratio has been rising across the globe with South Korea leading the world at 6.31 robots per 100 workers (graph below). The problem is not just restricted to the manufacturing sector. It is estimated that 99% of the insurance underwriter jobs are also at risk. There is a risk to farm labourers, construction labourers, fast-food cooks and truck drivers for losing their jobs, which stand at 97%, 88%, 97% and 79%, respectively (Source: Futurism, LLC). It is further anticipated that in 120 years all human jobs would be automated.
How would then governments fund UBI for it to work?
The funding of UBI can vary from country to country based on the economic, political and social factors. However, the most widely accepted model works on the principle of eliminating welfare programs, increasing the supply of money and simultaneously raising the taxes. As everyone would receive an unconditional cash amount, the need for an establishment for welfare programs would minimise and the cost saved could be used to fund UBI. The proponents of UBI further stress that an increased and a flat VAT rate on goods and services produced should be levied to increase the tax revenue along with high-income taxes for people employed and earning more than others. In fact, carbon tax, which is being imposed at an increasing rate and then distributed as dividends to citizens is gaining popularity. This would serve the dual-purpose, the reduction of carbon emissions and the contribution to the UBI. Additionally, quantitative easing (printing more money) may not cause hyperinflation if money is being brought back to the government directly through taxes rather than on the central bank’s intervention.
Pros and cons of the UBI
There are two schools of thoughts on the UBI, one is in the favour and the other is against its implementation. Advocates of UBI primarily believe in its potential to deal with poverty. When a minimum income is provided to all for the fulfilment of their basic needs, people could focus more on the quality of jobs in order to improve their standards of living. They would not accept jobs that exploit them through low wages and minimal or no growth, rather will wait for quality jobs matching their skills. Higher wages in return could lead to better mental and physical health and, in turn, reduce the crime rate.
It would also bridge the gap between the rich and the poor. People with higher income would be taxed at a much higher rate including their UBI and thus, rich would not increase their fortunes. This would further imply greater acceptance of an individual with otherwise limited means in a society, thus reducing the social inequalities. Everyone in this model would have access to financial independence and technical know-how.
Currently, several welfare programs are managed by governments for the provision of health, employment, housing, etc. These are complicated not only in their structure but for the recipients as well. Distributing cash is much simpler and removes the layer of bureaucracy involved in administering these benefits, causing a delay in most cases, especially in third world countries. The government’s expenditure on these welfare programs can instead be distributed as UBI, thus minimising the bureaucracy.
However, there are others who continuously debate that provision of UBI would make people laid-back and they will lose incentive for jobs as their basic needs would be met through a cash distribution system. They would largely become dependent on free income and will not be motivated enough to acquire competitive skills.
In addition, to fund the UBI either money supply would rise or tax rates would increase. In both cases, it will ultimately result in high inflation. Retailers and manufacturers would transfer higher tax to customers through the final price. Simultaneously, on the demand side, people’s purchasing power will increase which again will push up the prices. The affordability would eventually decrease and thus might not lead to improved standards of living.
And most importantly, the distribution of UBI is a costly process. For instance, it would cost the US government $3.8 trillion per year to provide a basic income of $12,000 to over 300 million Americans (Source: Bridgewater Associates). The figure is more than 75% of the federal budget and almost 100% of the US tax revenue. Thus, its implementation is not easy and by no means affordable.
Where do UBI stand today and what the future holds?
Mark Zuckerberg, Elon Musk and Richard Branson, a few of the big names in the tech space advocate the UBI program and believe it can be the only solution for the AI (artificial intelligence) and a robotic ruled world in the future. Few countries have already run the pilot UBI programs to understand its dynamics. For example, Finland began a UBI plan in early 2017, it randomly selected 2000 unemployed people and distributed €560 tax-free ($632) per month. This was to continue for a span of two years. Thereafter, the plan was to include a set of employed people as well, but the government discontinued it to try other welfare schemes like Universal Credit.
The results of the Finnish UBI program were released this month and it was observed that although recipients were definitely happier and well off, it did not improve their employment conditions, thus the fundamental assumption that the basic security will lead to exploration of better jobs did not hold true. However, it is also true that the scale and the duration of the project were too small to judge UBI in its entirety.
Furthermore, there is Alaska, which through its Alaska Permanent Fund (established in 1976) collect oil and mineral revenues and distributes an annual dividend to its citizens. The annual amount keeps varying as per other budgetary requirements but this has been dispersed continuously since 1982. If we consider Alaska’s example to analyse the impact of UBI, it has been observed that part-time jobs increased by 17% in the country with no impact on permanent jobs. The most positive finding is that the extra cash received has not demotivated people to work and employment has not decreased.
Additionally, contrary to the popular belief that UBI is expensive, it is in fact not the case if we consider the cost saved on various welfare programs and returns generated through taxes. The main flaw being the double counting of net contributors of UBI. So, when UBI is distributed, people who earn more actually return the UBI in terms of higher taxes, thus their cost should not be included in the estimation of costs for UBI. Thus, as per Karl Widerquist, a famous economist, in order to fund $12,000 on a yearly basis for Americans, the government will require an additional $539 billion a year on the net basis than the gross amount of over $3 trillion (assuming UBI is taxed and is accumulated as a fund and is used for distribution).
Countries are free to make variations in the UBI model or choose alternative welfare programs, but they cannot ignore the fact that massive unemployment will persist and they must be prepared accordingly. This is precisely the reason why Sikkim could be the first state in India to launch a UBI program. Sikkim Democratic Front has made it a part of their election manifesto for the upcoming elections. UBI is gaining momentum and pilot projects have been announced or are in the planning phase in countries like Canada, Netherlands, Switzerland, New Zealand, etc. Hence, now is the time to do more experiments and analyse their results to safeguard the human future against machines.