What Is Universal Basic Income? | Personal Finance


During the 2020 Democratic presidential primary race, candidate Andrew Yang proposed sending $1,000 each month to all U.S. citizens age 18 and older. Dubbed a Freedom Dividend, his idea garnered him devoted supporters although the concept itself isn’t new.


The Freedom Dividend is a form of universal basic income, commonly called UBI. The idea of UBI has been promoted as far back as 1795 in the writings of Thomas Paine. However, with the COVID-19 pandemic leaving millions unemployed for much of 2020, the idea of guaranteed income has become more appealing in recent times.

Those who support UBI say it’s an easy way to distribute aid to vulnerable populations. Others worry such a system would be costly and discourage workers from finding jobs. Opinions vary, but several countries are already experimenting with UBI systems and reportedly finding success.

What Is UBI?

The concept of UBI is simple. “It’s a check from the government every month to everyone with absolutely no justification,” says Wayne Winegarden, senior fellow in business and economics at the Pacific Research Institute, a free market think tank based in San Francisco. In other words, it is money distributed by the government to everyone, regardless of their income or need.

One of the early UBI proposals came from Paine, an advocate for American independence who may be best known for publishing the pamphlet “Common Sense” in 1776. Two decades later, he published another pamphlet, entitled “Agrarian Justice,” suggesting European leaders create a national fund. From this fund, Paine recommended giving every person 15 pounds sterling once they reached the age of 21 and then 10 pounds each year after age 50.

While Paine was looking for a way to compensate people who had no land, modern UBI proposals are generally focused on alleviating poverty and providing economic security. They are often envisioned as a simple replacement for current forms of public assistance such as the Supplemental Nutrition Assistance Program, commonly known as food stamps.

Advocates Say UBI Is Efficient and Effective

A key benefit of a UBI system is its simplicity. “It’s a quick, effective way to get dollars into the hands of individuals,” says Jill Shah, president of the Shah Family Foundation, which is currently running a UBI pilot program in Chelsea, Massachusetts.

Providing direct payments to everyone eliminates the bureaucracy associated with current assistance programs. There is no need for the government to spend time and money reviewing applications and monitoring benefits. UBI also ensures no one falls through the cracks, and it removes the stigma of receiving public assistance.

Beyond that, providing a UBI may boost entrepreneurship as people feel comfortable starting a business or switching jobs. “It creates a safety net that allows people to go from job to job and back to education,” says Charles Clark, a professor of economics at the Tobin College of Business at St. John’s University in New York City.

Some Worry About Cost, Discouraging Work

However, others have concerns that UBI could negatively impact the workforce. “I understand fully the sentiment behind promotion of UBI, yet I also think that there are many unintended consequences that would be realized,” says Peter C. Earle, an economist with the American Institute for Economic Research.

Earle points to the vast differences in the cost of living across the country. Depending on the size of a payment, UBI could allow people in some parts of the country to live comfortably without working. That may lead firms to migrate from low-cost regions to high-cost areas to find labor. Doing so could increase costs – and prices – for everyone.

In addition to job and inflationary concerns, Earle thinks its inevitable that UBI would become a political football as people jockey to adjust payments for factors such as a person’s income or an area’s cost of living. “More jobs and stable prices would do everything that UBI seeks to, without the risks elucidated previously,” Earle says.

There is also the question of why the government should provide payments to those with enough wealth to support themselves. While Winegarden sees value in UBI as a simplified means of distributing public assistance, he says it doesn’t make sense to provide payments to those who don’t require income support.

“If the (government) paid every household in the U.S. – all 128 million – just $1,000 a month, the total bill would be $1.5 trillion, which is nearly 35% of the current federal budget,” Winegarden says.

UBI vs. Negative Income Tax

While UBI is currently garnering the most attention, negative income tax is another method proposed to help alleviate poverty in the country. Introduced in 1962 by Milton Friedman, a professor at the University of Chicago, it called for the federal government to pay out cash, through the income tax system, to those in lower income brackets.

By making these negative tax payments, it was believed the government could reach more people than the current assistance programs, reduce expenses and complexity and eliminate the disincentive to work posed by a high tax rate. There were a number of experiments involving negative income tax in the 1960s-1970s, most notably in New Jersey. However, the concept never took hold.

“There is inherent waste in taking in money and turning around and sending it back,” Winegarden says. That may be one reason why UBI proposals are so attractive to some people, since they eliminate much of the bureaucracy associated with administering government programs.

Examples of UBI in Action

Currently, no country offers all its residents UBI, but there are examples of the concept in action. Alaska has long distributed checks each year to its residents from a fund created with oil revenues. In Brazil, the city of Marica has been making regular payments to 42,000 of its residents since 2013. And in Ireland, parents receive 140 euros per month for each child younger than age 16.

With the COVID-19 pandemic driving up unemployment and job insecurity, some have renewed their calls for a nationwide UBI. “A few years ago, I would have said never, but now I’m not so sure,” Earle says.

In Chelsea, the first monthly payments of $200 to $400 from the Shah Family Foundation program went out to 2,000 participants late last year. While it’s still early, Shah says the initial data has been encouraging. There is no indication that the cash is discouraging people from working, and positive impacts have been seen in the area of food insecurity. “One of the things we think we’ll see is that it will spur on the local economy,” Shah says.

Even after the pandemic passes, there may be a case for UBI. “Wages have been stagnant for 30 years,” according to Clark, who has studied UBI proposals extensively and was part of a project exploring the issue for the Irish government. With the exception of women with children, providing money to supplement these wages isn’t likely to discourage people from working. “It’s an argument people make, but there is no evidence,” Clark says.


Leave A Reply

Your email address will not be published.