Modern Solutions: What is Universal Basic Income?
Updated: Oct 25, 2020
Universal basic income, or UBI, is a payment made by the government to all adult individuals of a country to allow people to meet their basic needs; it is not means tested and is called by some as “social security for all”. It may be considered a radical idea, but it is not a new one. In fact, it dates back as far as the 18th century when American Revolutionary Thomas Paine proposed the “Citizen Dividend”.
Proponents of UBI have existed throughout history on both sides of the political spectrum, from libertarian economist Milton Friedman to civil rights activist Dr Martin Luther King. Recently it has made a return to the national conversation by former Democratic Presidential Candidate Andrew Yang, who proposed “The Freedom Dividend”, in which every American adult citizen receives $1,000 a month. UBI has also gained traction from the COVID-19 induced global recession and has been proposed as a way to address the issues of poverty, low wage work and provide economic support to the unemployed.
Considered a long-shot candidate, Yang’s central campaign idea of UBI resonated with enough voters to form a strong electoral base.
There are a number of different models of UBI that have been crafted by various economists on both sides of the political spectrum. Those who are libertarian economists believe it is a way to simplify the welfare system and minimise the size of government, in which each welfare recipient receives the same payment through a negative income tax. It is argued this will reduce the size of government bureaucracy, increase government efficiency and cost less than existing programs. This model of UBI is therefore not universal but replaces the current welfare system.
However, more radical proponents suggest UBI acts as a means of transitioning society from a market economy to a utopian communist society in which wage labour is eliminated. The idea is that if everyone receives a UBI payment and their basic needs are met, then people will be less pressured to do unrewarding work and will pursue careers that have a lower wage but provide more rewarding work. Eventually, unrewarding work would be automated and the wage for desirable work will fall to zero because people are willing to do it for free. In the long-term, wage labour will not exist and people will voluntarily carry out work that is rewarding. Goods and services will be allocated by the community according to people’s need.
The return of UBI to the national conversation, as spearheaded by Andrew Yang in the United States, is a result of growing concerns of automation in Organisation for Economic Co-operation and Development (OECD) economies and its permanent impact on structural unemployment. This will make numerous jobs obsolete leaving many unemployed and impoverished. A 2013 study by Oxford University concluded that around 47% of American jobs are at high risk of being automated and similarly the Committee for Economic Development of Australia found that around 40% of Australian jobs are at a high risk of being automated in the next 10 to 15 years. Consequently, if this comes to fruition, economies will never reach full employment and the “gig economy” will become the new norm where many people will be in lower paid and less secure work with little labour protections. This will exacerbate economic inequality and potentially de-stabilise society by skewing too many resources and opportunities into the hands of fewer people.
In Australia, the rate of underemployment (those who are employed but are not being offered as many hours as they desire) has been on the rise over the last 40 years. Before the COVID-19 induced recession this sat at 8.2% for the general population but almost 20% for those aged 15 to 24 years.
Underemployment is the highest for those aged 15-24. Overall underemployment during the -19-induced recession is now 11.7% Source: ABS
However, while Andrew Yang believes a UBI won’t entirely fix the problem, it is definitely part of the solution. He argues a UBI will help the structurally unemployed, whose jobs became obsolete, to meet their basic needs and not fall below the poverty line. It will supplement people’s low-wage work and also recognise the value of unpaid domestic labour disproportionately performed by women, most notably caring roles. A basic income will also remove the stigma of receiving welfare payments given its universal nature and will provide recipients the economic freedom to spend the money how they like without having to worry about periodic government means testing.
To see how a UBI system would work in developed countries like Australia there have been trials in several other countries, most notably in Finland where the largest study was conducted by Helsinki University. For two years between 2017 and 2018, the Finnish government gave 560 Euros (AUD$923) per month to 2,000 participants. The conclusions reached by the study provided arguments for and against the payment. While it did not increase incentives for recipients to seek work, it did not disincentivise either but rather improved their financial security, autonomy and overall wellbeing compared to the control group who received the standard government unemployment payment. The recipients were more likely to do voluntary unpaid work and in fact, worked an average six days more per year.
Many may not know that the state of Alaska has had a successful UBI-like system since 1982. Known as the Alaska’s Permanent Dividend Fund, USD$1,000-2,000 is paid to each individual, including children, from the profits earned by the state’s government owned oil, gas and mineral reserves.
Alaska deposits 25% of all state generated mining profits into the its Dividend Fund. However, payments have recently fallen due to a slowdown in oil production.
However, it is important to note that UBI experiments like the one in Finland were on a small scale and the success of Alaska’s system is predicated on the government’s ability to earn profits from state owned industry that does not exist in many OECD countries like Australia, where its resources sector is privately owned. Additionally, Alaska’s system is a yearly payment, not a monthly cheque that supporters of UBI propose. This is where the critics of UBI suggest a program on a national scale is impractical and not fiscally sustainable if governments were to provide monthly payments that people could live on.
A UBI program will not come cheap and could potentially put additional pressure on the federal budget that is already being constrained by an ageing population requiring a higher level of aged care and National Disability Insurance Scheme spending. The Australian National University’s Crawford School of Public Policy estimates that a UBI model in its purest form, as a universal program, would cost the federal government an additional $360 billion a year, with marginal tax rates as high as 80%. However, it is important to note that in the “Golden Age of Capitalism”, during the post-war period, booming economies like America had marginal tax rates above 90%.
A UBI program could be more affordable if a more libertarian model was adopted that replaced the current welfare system. However, to alleviate concerns that this would hurt those it is trying to help the most, monthly payments would have to be equal to or greater than the current benefits provided to recipients. This inspired Andrew Yang’s proposal to issue the option for people to receive their current payments or opt into the UBI program.
However, it is also argued that a UBI program will in fact pay for itself. Lower income households have a higher propensity to spend meaning they are more likely to spend the extra dollar they earn to cover their necessities than a higher income household. Therefore, the spending of people’s UBI payments will generate more economic activity as the multiplier effect of additional consumption will flow through various sectors of the economy. Greater economic activity and growth will in turn flow through to the federal government in the form of additional tax receipts, thus making it easier to afford such a program. Furthermore, with more access to cash, people can take better care of themselves, so homelessness, crime rates and their associated costs are expected to fall.
Critics believe a UBI program that is enough for people to live off will disincentivise work, particularly lower-income workers, which will reduce the supply of labour and consequently decrease economic output, living standards and the ability for governments to sustain a basic income in the long-term.
Perhaps the biggest criticism drawn from UBI is the idea that has made many people talk about it; whether automation will permanently displace many workers. In the past, industrialisation and technological change has not led to widespread job destruction but rather created new opportunities and changed the skills required for jobs. The OECD criticise the “doom and gloom” studies on the effects of automation for having methodological problems and concludes that the real number of workers who will be displaced by technological change is closer to 9%. If this is true, then rather than adopting a program like UBI, governments could use public funds to invest in education to train workers for future jobs.
The pessimistic predictions of automation may not be true, but the conversation about a universal basic income is important in considering how the welfare state should support the vulnerable, especially during these difficult economic times. Without a robust welfare system, proponents of UBI warn us of the long-term consequences of rising economic inequality, but also highlight the potential benefits of providing sufficient economic support to the most vulnerable Australians through eradicating poverty. For many unemployed Australians, the government’s coronavirus supplements have been “financially lifesaving”. However, it will take several years for the Australian economy to recover, as there is currently one job for every 13 people. This may be the opportunity to increase certain welfare payments such as JobSeeker to a more liveable wage given the current lack of economic opportunity for many Australians. If Rutger Bregman’s words are anything to go by, “poverty is not a lack of character, but a lack of cash”.
Dutch historian Rutger Bregman is a strong supporter of UBI and became famous for criticising the wealthy for tax evasion at the Davos Conference in 2019.
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