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Universal Basic Income


Universal Basic Income

Written by: Hoo Chi Yang


Introduction

What if everyone is given an unconditional sum of money, without any means-testing or requirements, such that they are free to spend it on anything? That is the idea of a Universal Basic Income (UBI), an economic welfare policy that has gained traction in recent years. The objective of UBI is to provide everyone with an income floor that would lift every citizen above the poverty line. While advocates call for it to replace current welfare systems, critics believed that sustainable UBI is inadequate and adequate UBI is economically infeasible. This article explores and discusses the common arguments against UBI by relating it to the evidence of its effects in poorer and richer countries, gathered from data obtained from several past pilot studies in America, Africa, Asia, Latin America and Europe.


Poverty Line & the State of Current Welfare systems

Defining the poverty line varies across countries and is dependent on the country’s varying selling prices of commodities. The solution hence, for poverty line estimates is for it to be adjusted for Purchasing Power Parity exchange rates. The World Bank (2016) gave an estimate of the International Absolute Poverty Line as $1.90. This number is estimated to measure all people against a set standard. However, this set standard is only accurate for people in the Least-Developed countries and not the minimum that people need, in developed countries to live by each day. Hence, many criticisms against this metric cite this large disconnect between international and national poverty line.

Data from Human Development Reports from the United Nations show that in the Democratic Republic of Congo, there are 76.6% of people in the country that are living below the poverty line of $1.90 compared to 1.2% of Americans in America. National poverty lines however are different as according to America’s poverty line estimates, the threshold for a single American under 65 was an annual income of US$15,600 (Health and Human Services Department, 2019). Klasen.S (2013) also found this discrepancy between national and international poverty rates, mentioning that if the foundations behind the international poverty line are true, Tajikistan and Tanzania should have the same poverty line, but Tajikistan is three times higher in PPP dollars compared to Tanzania. As the definition of the poverty line varies between countries, UBI programs should account for variations between countries and their stage of development. In analysing the effectiveness of the policy, countries of different development stages should be analysed separately as the policy though might be economically feasible for one country, might not be for another.


Taking America as a perspective, gauging from current population estimates, there are roughly 329 million American citizens. Assuming every American is given a $1,000 per month or $12,000 per year, it would cost the government $3.9 trillion dollars annually to sustain. In FY 2018, total spending on 80-plus federal welfare programmes are estimated to cost the government a figure of $1.03 trillion dollars (Sessions.J, n.d.). For UBI to be sustained, it would take up 20% of America’s GDP of $20.5 trillion in 2018 or close to the entire federal expenditure of $4.109 trillion. UBI is expensive, but is it worth it? After all, classical economic theory suggests that subsidies create deadweight losses and hence income transfers should make the market more efficient, assuming that recipients use income transfers to consume. This assumption not an unreasonable one since the poor generally have a higher propensity for consumption.


Leisure, Temptation Goods, Social Goods

A point of debate against UBI is the question of how beneficiaries would use the money obtained from Income-transfers. The goal of social welfare programs is to ensure that people in need would use them in appropriate meaningful ways that would support their basic needs. Critics questioned that if without government intervention, would beneficiaries use income-transfers to purchase temptation goods such as alcohol, cigarettes or even drugs, thus causing more harm than good for society?


Several pilot studies concluded unanimously, that the “lazy poor” is merely just a stereotype and many studies do not find a correlation between income-transfers and an increase in demand in temptation goods. Public Services International (PSI) using data collected in Madhya-Pradesh, India, Malawi & Kenya, concluded that people in poor countries are more likely to spend them on healthcare, education or entrepreneurship (world-psi, 2019.) There are even some studies that have shown that on average, cash transfers reduce demand for temptation goods in Latin America, Asia and Africa. (World Bank, n.d.). Among 44 estimates from 19 studies examined by Evans, D. K., & Popova, A. (2014) from the World Bank, 82% of estimates concluded a negative relationship between cash-transfers and temptation goods, providing strong evidence that transfers do not increase the demand for these goods.


Despite overwhelming evidence refuting these concerns, they are not unfounded however. Classical economics theory states that people tend towards immediate payoff compared to future returns. Self-control problems are often rampant in low-income developing countries. For example, Banerjee and Duflo (2007) found that low-income farmers have difficulty saving a small amount of money upfront to afford fertilizers to be used later. However, this assumption comes with an important caveat of uncertainty. White & Basu (2016) in the study of Peru, found that with lesser frequent payments, households purchased more alcohol and sweets. It could therefore be hypothesised that with longer schedule between cash transfers, increasing doubt and uncertainty led to increases in the consumption of temptation goods. As discussed above, data has shown the contrary, especially if it comes from cash transfers by the government, which is considered a guaranteed reliable inflow of income. Thus, proven theoretically and empirically UBI should not increase the demand for temptation goods.


Labour Productivity

If cash transfers do not lead to increased demand of temptation goods, surely it would lead to a fall in labour participation rates. Income-transfers might encourage people to work less and encourage citizens to be more reliant on the government. Classical economic models on the labour supply market tells us that as income increases, the labour supply decreases as the income effect may become negative as people prefer leisure to work, despite the increases in wages. With leisure usually considered to be a normal good, an increase in non-work income should therefore cause an increased demand for leisure. (Becker, 1965). What does empirical data have to show?


For low income countries such as Madhya Pradesh and India, as mentioned above, a majority of UBI recipients invest their transfers in livestock and engaged in entrepreneurship. In medium developed countries such as Brazil, conditional cash transfers schemes such as “Bolsa Familia” provides payments for poor families with vaccinated school age children and have seen a reduction in child labour and poverty levels. For developed countries such as Canada and America, data also shown reduced labour participation rates. Supporting data from the Mincome experiment showed that labour market effort decreased by 1% for men, 3% for married women and 5% for unmarried women, however these findings are considered statistically insignificant and no real-world conclusion can be drawn from those results due to the sample size (world-psi, 2019). The town of Dauphin had seen a decrease of 11.3% in labour participation, with disproportionately large numbers coming from young and single households (world-psi, 2019).


While quantitative data support the theory that UBI decreases labour participation rates, qualitative analysis concluded that people left work for reasons such as caring responsibilities, disabilities and to pursue further education. Results from New Jersey also showed similar results to Dauphin, with falls in labour participation, citing similar reasons such as caring responsibilities and re-entering education (world-psi, 2019). Extra time not working is spent on social goods, such as caring for their elderly relatives or children, or productivity-improving activities such as going back to school which could contribute to a more productive workforce. These qualitative data challenges the classical economic assumption stating that time not spent working, is spent on leisure, and that the assumption ignores any possibilities that people can engage in activities that produce positive societal externalities or engage in trainings which can increase labour productivity. Looking at labour participation rates may not reveal the whole picture and it is also important to also study the changes on GDP growth.


GDP & Maslow’s Hierarchy of Needs


A philosophical argument presented by Karl Marx stated that it is necessary that objects should be representative of the worker’s labour and that work should be purposeful and should distil the best part of us. This can lead to more efficient labour productivity as universal basic income allows for people opportunities to take time off to upgrade their skills or look for better jobs that suits them, as their immediate basic needs are taken care of.


Self-actualization theory states that men are motivated to fulfil their innate potential in life and doing so is only possible once basic and psychological needs are met. A good indicator for human capital is IQ. Many contemporary studies have shown strong correlation between IQ and National growth. The study conducted by Burhan, Nik Ahmad Sufian, et al. (2014), shown consistency with intellectual class theory advocated by Rindermann and Thompson (2011) and Rindermann et al. (2009), by showing strong evidence that people with high IQ have the most relevant impact on economic growth. However, the study also concluded that an increasing life satisfaction reduces the desire for better performance and hence diminishing the effect with IQ on GDP which is consistent with the predictions of Maslow Hierarchy of needs (Burhan, et al, 2014). Hence, the study concluded that while increased levels of human capital showed greater GDP growth with people in the upper percentile of IQ contributing the most to economic growth, it is also shown to have diminishing returns.


Towards the Future & Automation

(source: The Economist, n.d.)


As the fourth Industrial revolution is currently ongoing, there is no doubt that the ever-widening wealth disparity will only grow larger. Gary Becker, a Nobel prize winning economist argued that all crimes are economic and all criminals are rational, in his paper, “Crime and Punishment: An Economic Approach” showing us the evidence between wealth disparity and crime rates (The Economist, n.d.). His argument is based on the premise that criminals are a utility-maximising agents and would conduct cost-benefit analysis if the pay-out from crimes are worth the risks. Larger wealth disparity often correlates with increasing crime rates as the payoff of the risks involved in crimes and stealing from the rich grow larger and larger. Without any welfare programs in place to bridge that gap, it could result in societal instability and a decreased quality of life for its citizens.


With the increased efficiency of production through the invention of AI, the increased abundance should give us the means to fund the Universal basic income program. Though UBI certainly has its drawbacks and certainly is in its infancy stages of development and adoption, there is no doubt that it may be a possible policy to be explored. While the rich may not like the idea of higher taxes to support UBI, it could very well be necessary as even the rich may benefit from the positive externalities from a safer environment.


References

Becker, Gary (1965) “A theory of the allocation of time,'' Economic Journal 75(299): 493-517.


Burhan, N. A. S., Mohamad, M. R., Kurniawan, Y., & Sidek, A. H. (2014). National intelligence, basic human needs, and their effect on economic growth. Intelligence, 44, 103-111.


Burhan, N. A. S., Mohamad, M. R., Kurniawan, Y., & Sidek, A. H. (2014). The impact of low, average, and high IQ on economic growth and technological progress: Do all individuals contribute equally? Intelligence, 46, 1-8.


Evans, D. K., & Popova, A. (2014). Cash transfers and temptation goods: a review of global evidence. The World Bank.


Human Development Reports. (n.d.). Retrieved from http://hdr.undp.org/en/countries/profiles/COD.


Health and Human Services Department (2019). Annual Update of the HHS Poverty Guidelines. Retrieved January 13, 2020, from https://www.federalregister.gov/documents/2019/02/01/2019-00621/annual-update-of-the-hhs-poverty-guidelines.


Klasen, S. (2013), "Is it time for a new international poverty measure?", in Development Co-operation Report 2013: Ending Poverty, OECD Publishing, Paris, https://doi.org/10.1787/dcr-2013-6-en.


Maslow, A. H. (1970). Motivation and personality. 1954 (3rd ed.). New York: Harper and Row, Inc.


The World Bank (2016). Principles and Practice in Measuring Global Poverty. Retrieved January 13, 2020, from https://www.worldbank.org/en/news/feature/2016/01/13/principles-and-practice-in-measuring-global-poverty.


Rindermann, H., Sailer, S., & Thompson, J. (2009). The impact of smart fractions, cognitive ability of politicians and average competence of peoples on social development. Talent Development & Excellence, 1, 3–25.


Rindermann, H., & Thompson, J. (2011). Cognitive capitalism: The effect of cognitive ability on wealth, as mediated through scientific achievement and economic freedom. Psychological Science, 22, 754–763.


The Economist. (n.d.).The stark relationship between income inequality and crime. Retrieved from https://www.economist.com/graphic-detail/2018/06/07/the-stark-relationship-between-income-inequality-and-crime


Sessions. J (n.d.). CRS Report: Welfare Spending The Largest Item In The Federal Budget. Retrieved on January 13 2020 from https://www.budget.senate.gov/imo/media/doc/CRS%20Report%20-%20Welfare%20Spending%20The%20Largest%20Item%20In%20The%20Federal%20Budget.pdf


World Bank (n.d.). Cash Transfers and Temptation Goods. Retrieved from https://www.worldbank.org/en/research/dime/brief/Cash-Transfers-and-Temptation-Goods.

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