JARRELL: Universal Basic Income

Universal Basic Income (UBI), a variant of socialism, seeks income equality. In typical UBI programs, the federal government sends out regular checks to everyone regardless of their earnings or employment.

The idea is gaining traction in the United States.

Specific UBI proposals vary.  Franklin Roosevelt proposed a “Second Bill of Rights” in 1944 which included the “right to a useful and remunerative job.” Bernie Sanders’ more recent version guarantees a job with training, benefits and wages of at least $15 an hour to all who want it.  Andrew Yang, another 2020 presidential contender, proposes a “Freedom Dividend” of $1000 a month to all Americans between the ages of 18 and 64 to combat what he calls the devastating effects of automation on human-held jobs. Economists Stephanie Kelton and Darrick Hamilton at The New School, and the left-leaning Levy Economics Institute at Bard College, advocate a jobs guarantee program “to eliminate working poverty and involuntary unemployment.”

UBI’s income equality may sound fair and equitable, but it is both misguided and unsustainable.  First, it is misguided because, once the goal of income equality is reached, whether your income has gone up or down, the incentive to work and take risks to achieve greater income wanes.    Further, most individuals move in and out of various income brackets as they move through their careers, due either to necessity (e.g. to care for children or elderly parents) or choice (e.g., to go to school to learn a trade).  Given this fluidity, how does one determine the “ideal” level of UBI and who should determine it?  Does it increase with the CPI, skills, experience, or age? The details are mind-boggling.

Second, UBI is inherently unsustainable.  Those advocating UBI display a frighteningly naive misunderstanding about its source of funding, namely profits from the private economy.   There are two main issues. One, even under the most generous of assumptions, there simply isn’t enough private wealth in the U.S. economy to finance even the most basic UBI.  Two, and most importantly, once UBI is implemented, even this level of private profit funding would evaporate.  Why? Because every dollar of government spending comes from profits generated by private industry.  Those profits result from a company offering a product that customers voluntarily choose to buy for a price that more than covers the costs incurred to design, produce, advertise, deliver and service that product. This is the essence economic freedom, the manifestation of the freedoms guaranteed by the Constitution and Bill of Rights.

In fact, until the mandated premium for Affordable Care, there was no instance where U.S. citizens were forced to buy something.

For every dollar of profits taken by the government in the form of taxes, some is used up in the bureaucracy of collecting and spending those monies. As a result, only a fraction of that dollar remains to be spent on UBI or any other program.   At the end of that fiscal period, when the government has spent all the tax revenues, it has nothing left. Unlike private industry, the government is not self-financing.  It has to come back to private industry to collect taxes all over again to finance next year’s spending.

What about government borrowing and debt, you may ask.  It turns out that all government spending, including borrowing and refinancing, is enabled by private industry profits: no one would invest in a U.S. government bond if they did not have confidence that they would be repaid.  It is the productivity of the U.S. economy that generates the profits that enables the government to borrow, pay interest, and refinance its debt.  Again, the government does not produce its own financing.  It depends entirely on the profits generated by private industry.

What would private industry have done with that dollar of profits had it not been taxed away?  It would have reinvested it into the people and assets that generated the products and services that created the profits in the first place. Those assets-in-place create earnings not just this year but for several years to come, the present value of which is likely an additional two or three dollars of wealth. So for every dollar of profits taken as taxes to pay for UBI, society has given up three or four dollars of economic wealth that would have supported the very families that UBI claims to support, but at lesser amounts, and with less economic freedom.

UBI is a fundamentally flawed idea — claims that it could work as described are misleading at best, and outright fraud and deception at worst. It is “feel-good” legislation that would be an unmitigated disaster for the economy.

Sherry Jarrell is an Associate Teaching Professor of Finance and Economics at the Fox School of Business at Temple University.