Implementation of a ‘Universal Basic Income’ Program Would be a Disaster

Member Group : Gregory Archetto

UBI is an unconditional cash payment to all citizens regardless of wealth or employment status and without requirements or stipulations. It is seen by proponents as a novel approach to ending poverty and inequality.

Not surprisingly, most of the supporters are young people and Democrats. These are two groups that have worked assiduously to remain ignorant of economics and the negative ramifications of poorly thought out legislation.Their argument is: If government — through these payments — can eliminate the specter of homelessness, poverty, and the insecurity that such conditions create, people’s physical and mental well being will increase. The assumption is that people will be able to focus on higher pursuits and all will be sweetness and light.

Detractors state that such a program will have similar effects as other welfare programs, i.e., directing resources to people who don’t need them, increasing dependency, clobbering the taxpayer and disincentivizing work.

Additionally, with $21 trillion in debt, we can hardly afford another welfare program. While I happen to agree with that assessment, I think that any conclusions based on experiments using limited sample sizes, which is what all studies of UBI have consisted of thus far, will not be reflective of what an actual UBI policy would do.

For example, in Finland — and a smattering of other countries — principalities and cities are currently experimenting with UBI using sample populations limited by age, employment status, and other factors, hardly “universal.” So far no definitive results have been gleaned on UBI’s efficacy, but in today’s millennial parlance, let me “save you a click.”

In order to fully appreciate how UBI would work, you need to look at what it’s implementation would do to an entire economy, not just a fraction of it.

If everyone suddenly had an extra $10K a year, and everyone knew that everyone had an extra $10K a year, prices would go up and inflation would rise, thus negating the perceived gains of such a program.

Think of it this way. If you walk into a store right now, the price of any product is based on the maximum amount of money it can command in exchange for it in relation to the number of customers needed to pay that price and keep it moving off the shelves at a predictable pace. In other words, supply and demand. However, this is based on the fact that the shop owner has no way of knowing the wealth level of every customer that walks into his store.

Now, if Scrooge McDuck waddled in, the shop owner could assume his wealth, deduce that he could afford to pay more, and try to raise the prices on the fly. However, that would be tough because prices are usually clearly marked. But generally, that price is set using the knowledge that any single customer that walks in at any given time has a wealth baseline of $0 and an upper bound of, say, $112 billion.

But, if you add in the knowledge that everybody that walks into your store, because of UBI, now has a wealth baseline of X+$10K, don’t you think that shop owner would charge more for his products? He knows you can afford a higher price now.

These price rises would then have reverberations throughout the economy. As prices went up, wages would need to follow, which would make prices go even higher in an upward inflationary spiral. This is essentially Milton Friedman’s “helicopter money” analogy.

It’s the same reason why, if you as an American (or westerner for that matter) have ever visited a market in a third-world country, the shopkeepers immediately jack up the prices because they know you can afford to pay more. You might as well be wearing golden robes and a diamond tiara.

UBI is a subsidy, plain and simple, and if we’ve learned anything about subsidies, it’s that whenever you subsidize anything, you invariably raise its price, because you’ve lowered the cost to the consumer, and thus increased demand. If a Rube Goldberg machine is defined as something intentionally designed to perform a simple task in an indirect and over-complicated manner, then he’d award the concept of UBI a gold medal were he alive today.

In the end, the simplest solution is usually the right one; just leave the money in the pockets of the people who earned it to begin with rather than conjure up new-fangled ways to redistribute it once you’ve taken it from them. They know better than you how to allocate it.

Greg Archetto was a foreign affairs officer at the Bureau of Political Military Affairs, US Department of State and a former security assistance officer at the Defense Security Cooperation Agency, Office of the Secretary of Defense. He was also foreign policy advisor to Sen. Rand Paul (R-Ky.). Follow him on Twitter: @GregArchetto