Lesson 10:

What is Universal Basic Income?

Lesson 10:

What is Universal Basic Income?

Like so many of these abstract economic terms Universal Basic Income (UBI) has a number of definitions and variants. This lesson will take you through these different ideas, continuing to a summary of both sides of this controversial policy. We will then look at what the implications could be in financial markets.

What’s in a name?

UBI is sometimes known as:

–  Citizen’s basic income

–  Basic income guarantee

–  Basic living stipend

–  Guaranteed annual income

–  Unconditional basic income

–  Negative income tax

UBI can be seen as the umbrella term for a whole range of policies, that though differ in some ways (indeed some very crucial ways), give every adult citizen of a defined area, regardless of wealth or income some sort of recurring monthly stipend from the government to cover basic living costs.

Let’s take a look at a few definitions:

Universal Basic Income consists of a periodic cash allowance given to all citizens, without means test to provide them with a standard of living above the poverty line.

Stanford University

 Universal basic income (UBI)—defined as a transfer that is provided universally, unconditionally, and in cash.

World Bank

Universal basic income (UBI) is an approach to income security that guarantees every individual in a political community (be it a nation or a subnational unit such as a state, province, or municipality) an unconditional and sufficient income to meet their basic needs, such as food, shelter, clothing, transportation, and the other necessities of life.

Oxford Bibliographies 

The above definitions give a good overall view and the phrase itself can also be broken

down helpfully:

– Universal – everyone (individual not household) gets a cash payment (not vouchers credits, or in kind) regardless of employment, income, wealth, status within the defined area (usually, but not always, a country). It is unconditional.

– Basic – the payment is designed to meet fundamental basic needs of life above a specific poverty level. It is designed to cover food, rent, clothing and transportation.

– Income – the payment is recurring, predictable and is completely separate from social insurance or social security provision such as disability insurance, accident insurance, unemployment insurance etc.

Why is UBI a hot topic these days?

The idea of UBI is first thought to come from the English lawyer and humanist Sir Thomas Moore over 500 years ago in his novel “Utopia” (1526). Ten years later, a friend of Moore’s wrote to the Mayor of Bruges arguing for an unconditional payment to the poor so that “no one should die of hunger”.

Fast forward to more recently and there have been a huge number of proponents, from across the political spectrum, within business and academia that all favour some sort of UBI. Below is just a sample of notable people who have expressed support for UBI:

– Martin Luther King Jr.

– Milton Friedman

– Stephen Hawking

– Tim Berners-Lee

– Pope Francis

– Henry Paulson

– Elon Musk

– Bill Gates

– Jeff Bezos

– Mark Zuckerberg

– Bill Gross

– Thomas Picketty

– George P. Schultz

This small sample, from physicists to technology leaders, from religious leaders to former US Treasury Secretaries demonstrates that this is not a left vs right political argument. Which makes it all the more fascinating, and indeed all the more probable for its proponents that this idea’s time has finally come.

Why now? There are a number of different reasons. Inequality has grown tremendously in the past decade with significantly reduced social mobility. In some countries the top 1% richest people own or control 50% of the wealth. This gap is not politically sustainable while so many people suffer from poor health, nutrition, poor housing or live paycheque to paycheque. For many, this is a real social justice issue. The current system is just not working well at all for the disadvantaged.

Furthermore, UBI aims to create essentially a level playing field where equality of opportunity trumps equality of outcome. UBI is meant to be a starting position and is designed to protect the most vulnerable while not having any discriminatory repercussions.

Additionally, with the rise and the fear of robots replacing many jobs the UBI argument has taken hold. Finally, with QE and bailouts for failed firms now the norm since the financial crisis many are asking why firms are helped in such a way, but people are not.

Arguments For and Against

The below graphic from TheBalance.com neatly sums up the pros and cons:

 

UBI makes people explicitly dependent on the government. This comes with economic, social and political costs. Economically, such programmes are currently deemed unaffordable and if done via QE are argued to be inflationary. Yet proponents argue the cost is worth it and UBI offers a real way out of poverty and increased living standards and productivity as people can train to work in a career they enjoy and can afford to be selective about their career choices.

Does it actually work?

While there have been many trials and studies it is almost impossible to understand UBI and its implications without actually doing it wholesale. There have been forms of UBI in Iran, Alaska, and now during the pandemic in Spain. But none come close to a full implementation where everyone one within a country receives UBI.

There is also huge debate on whether it should totally replace social security or be in addition to it. And how does it affect the pension system? And people’s incentives to actually work? Will prices just adjust to reflect the new income thereby cancelling out the additional income from UBI? In that case will their need to be price controls? Is it fair the wealthy receive it?

There are still may debates to be had before it is implemented anywhere but the idea is certainly not going away anytime soon.

UBI and Financial Markets

From a market perspective UBI is another program that takes for granted government finances. The cost of such a programme would be astronomical without serious reform to the social security and pension system or would certainly need to be financed by either debt or balance sheet expansion (or a combination of debt monetisation by a central bank). For the US if we assume there are 200mio adults who will be paid a UBI of USD30,000 per year then the cost would be USD6 trillion which amounts to 29% of US GDP. Indeed, during the last election one of UBI’s main proponents Andrew Yang of the Democratic party proposed an annually amount of approximately USD12,000 a year which would barely cover basic costs if that.

These are huge numbers.

For markets such huge numbers will create worries that the currency will be debased and that the printing presses will have to be turned on in order to afford this. And inflation really starts and the UBI has to be increased, then the printing presses will also have to increase. Markets will also worry about productivity and the lack of shame created by UBI of not having a job in addition to all the debt created. Can an economy survive if nobody needs to work? Perhaps, but only when AI and robotics take over vast swathes of the economy and isn’t happening quite yet.

In sum, UBI is a hugely popular idea across the political spectrum. But there are huge concerns about the economic costs and philosophical implications. The process of enacting it also means that in any significant form it looks a long way off. But the debate is not going away.

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What is Universal Basic Income?
Like so many of these abstract economic terms Universal Basic Income (UBI) has a number of definitions and variants. This lesson will take you through these different ideas, continuing to a summary of both sides of this controversial policy. We will then look at what the implications could be in financial markets.
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