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Money for Nothing: The Universal Basic Income and Its Many Problems

Updated: Dec 30, 2022

I. Introduction

The Universal Basic Income challenges much more than just existing social security systems – it confronts the very fundament of our society, posing questions related to social responsibility, individual liberty and equality.

The Universal Basic Income (UBI) scheme refers to a program that unconditionally grants each individual within a society a periodic payment that they can spend as they see fit. Most proponents of UBI schemes argue for it to replace existing welfare systems in order to combat bureaucracy and welfare traps. In this sense, the UBI aims to enhance social mobility and personal development, ultimately leading to more employment, reduced poverty and greater social welfare.

As such, one of the intentions of the UBI is to provide more effective support to the

unemployed. To understand how the UBI hopes to achieve this, let us first delve deeper into the economics of social assistance, and examine a case study in Germany. Afterward, we will take a deeper look into the famous Finnish UBI experiment, as well as potential practical and ethical questions faced by policymakers. We will come to understand how a UBI fails to be a viable alternative to existing social welfare (at least without substantial considerations and adjustments). Lastly, it is relevant to examine two income scheme concepts related to the UBI which might prove to be more viable.

II. The Economic Background of Unemployment Benefits

Even when an economy is operating at full capacity, unemployment may still exist in the form of the so-called ‘natural rate of unemployment' (fig.1). This means that workers may be either unwilling or unable to work at a current wage rate, perhaps due to still being on the search for a job (frictional unemployment), or due to not having the right skill set (structural unemployment) – the latter being the most problematic.

Besides improving labour market flexibility and the availability of education, it is up to

policymakers to establish an appropriate safety net to ensure that…

1. …improvements are made to the geographical and occupational mobility of workers

to avoid them falling into long-term unemployment

2. … the long-term unemployed do not become discouraged, abandon the labour force

and become economically inactive dependents for society and the state

This requires a careful balancing act – one does not want to make this safety net ‘too

comfortable’, leading to a greater cost for the taxpayer and discouraging the unemployed from finding work. Instead, one should implement a program that offers a minimum amount in benefits, simply to allow the market to operate more freely.

(Fig. 1)

However, some existing western social security systems following these principles have been criticised for being overly restrictive and even counter-effective. Such concerns, while often made on an ideological rather than practical basis, are not always illegitimate.

III. Problems with Existing Welfare Systems: Germany

Let us take a look at an empirical example of a social security program following the above principles in order to determine possible challenges which a UBI may aim to improve upon. A prime example of market-friendly social security programs are the 2005-implemented ‘Hartz IV’ (read: ‘Hartz Four’) reforms in Germany.

While the ‘Hartz IV’ reforms were undoubtedly aided in their economic impact by the

coinciding boom, they also succeeded based on their own merits: by tightening the access to unemployment benefits, employment was incentivised – according to some estimates, leading to a reduction in unemployment of up to 2.8%.

These reforms allowed only for a ‘sociocultural minimum’ in unemployment benefits, and imposed ‘sanctions’ (i.e. a reduction in benefits) on anyone who did not meet a strict set of conditions, such as attending seminars at job centres and enrolling in skill programs, through which the unemployed were guided towards acquiring the skills employers were looking for.

Still, Hartz IV has become almost infamous within the German political sphere. For example, critics have pointed out that Hartz IV pushes workers into accepting jobs they have no passion for – no matter how poorly paid, uninteresting, uninsured, precarious and/or beneath the worker's qualifications. Any refusal is penalised. Is it then a surprise that workers may find themselves disillusioned with the system? One may also argue that such conditional income schemes foster the development of a ‘working poor’ – as people on welfare face higher marginal tax rates, they lose benefits with every euro earned working.

Considering the aforementioned burdens associated with Hartz IV, is it perhaps warranted to review the way social security systems are built? Would a UBI scheme offer a better alternative? After all, its benefits are unconditional and universal, meaning that recipients do not lose a cent of basic income, even when they start working. Additionally, greater autonomy, security and reduced bureaucracy could perhaps allow for more self-determination when it comes to employment opportunities and skill development.

IV. UBI in Finland – Success or Failure?

To evaluate if a UBI is truly a sensible path towards greater prosperity, it is appropriate to review a past example of its implementation.

Some readers may already be familiar with the Finnish trial: starting January 2017, 2000 randomly picked unemployed citizens across the nation received €560 a month for two years, replacing their unemployment allowance. These recipients were then compared with a control group of 173 000. In the first year of the experiment, no difference occurred between the two groups, whilst in the second year, a small increase in employment of the basic income group could be detected. Additionally, a clear improvement in the welfare of basic income recipients could be observed.

Considering that no direct negative impact could be found, one could argue for the success of the UBI scheme. However, when diving deeper into the findings, it becomes clearer why it is not a superior solution to existing social security programs – otherwise, would Finland not have implemented a UBI scheme by now? Instead, the Finnish finance minister even proclaimed that the Finnish trial meant that the “case [was] closed” for the UBI. Why is that?

One piece of evidence that may be referred to is a research paper by Jouko Verho, Kari Kämäläinen (VATT Institute for Economic Research) and Ohto Kanninen (Labour Institute for Economic Resource), which finds – among other things – that the increase in employment in the second year of the trial coincided with unemployment benefit reforms introduced by the Finnish government in 2018, of which participants of the trial could still have benefited from – therefore, the extent to which the basic income had an effect on employment can be called into question and the validity of the results is undermined. Additionally, the study found that many participants still engaged with ‘bureaucratic’ reemployment services, despite no requirements for them to do so.

As such, financial incentives are likely to have been ineffective in increasing employment (and, if not, only led to a very small increase), and certain ‘bureaucratic’ systems seem to be appreciated by the unemployed and not related to any problems that a UBI could solve (at least not in Finland). Furthermore, it is uncertain whether a UBI would truly cause greater welfare, as examining additional evidence can show:

According to the 2018 OECD survey of the Finnish Economy, implementing a UBI program in Finland would require increasing income taxation by nearly 30%. And – most strikingly – a UBI would actually inadvertently increase poverty, exasperating the socioeconomic issues it claims to solve.

As taken from the OECD survey: “Overall, the basic income scenario increases the Gini coefficient by approximately 0.4 percentage points. The poverty rate increased from 11.4% to 14.1%, and of the 150 000 persons falling below the poverty line, 30 000 are children, and 50 000 early pensioners.”

This counter-intuitive result could be linked to the heavy taxation required to fund the UBI (which, according to the OECD, would also reverse any improvements in work incentives). Additionally, there is a great opportunity cost associated with the UBI, especially when one considers the grandiosity of the funding needed to finance it.

All in all, a UBI built after the Finnish model does not convincingly tackle unemployment,

nor raise welfare, and instead contributes towards rising poverty and inequality levels.

V. Questions Posed by UBI's

There is an arduous amount of practical and even philosophical questions relating to UBI and its implementation which we can delve into – challenging our understanding of responsibility, trust and fairness.

The most drastic change the UBI would mean for our society lies in personal responsibility. As the basic income gives recipients the autonomy to spend their income freely, the responsibility of escaping unemployment and/or poverty is handed entirely to the individual, diminishing any authority the government may have in this regard. For libertarians, this shift from governmental ‘hand-holding’ to personal responsibility might symbolise a step towards a long-awaited dissolution of authoritarianism, for others, it might be a more nuanced discussion.

Let us note that, on the one hand, it is desirable that those who have come into the situation of being in need of such a scheme quickly move out of it to save the taxpayer and the government resources. Following this principle, it seems appropriate that the government (and by extension the taxpayer), on whose payroll the recipient lies, ensures that all recipients – even those few who might intend to exploit taxpayer funds to escape working and contributing towards society – move swiftly and permanently away from being reliant on government benefits.

On the other hand, it is also desirable that the unemployed find suitable jobs that they can do for a long period of time without experiencing frictional unemployment, and in which they find satisfaction – being forced into low-paying, low-satisfaction jobs (such as under Hartz IV) is contributing towards worker disillusionment. This may cause a decline in the overall welfare of society, and perhaps even lead to people leaving the labour force altogether.

A balanced solution is needed in order to maximise social utility, rather than having the pendulum swing too far to either side – which is precisely what the UBI would do. A UBI would replace governmental guidance the unemployed would otherwise have available to them (through skill courses, networking opportunities, informational sessions, etc…). As we have seen from the Finnish trials, the unemployed do appreciate such guidance, through e.g. reemployment programs. They are also necessary for upskilling in order to allow the unemployed to gain jobs with higher wages and higher job satisfaction. As such, the problem at hand is not tackled constructively – it is simply having billions of taxpayer funds thrown at it.

This leads us to the question of which benefits a UBI would actually replace – a discussion which becomes more interesting when considering different groups within society. For example, we may consider pensions, or old-age security: would these programs still be linked to the recipient’s previous income? It only seems fair that individuals receive more if they have also paid more in taxes throughout their life, ergo contributing more towards to common ‘pot’. However, the UBI would not acknowledge this difference in contribution. Equality does not mean equity – different groups – such as pensioners, but also families and the most impoverished – should be entitled to different sums.

Additionally, it might be worth taking a look at the possible effects of inflation. If a UBI

scheme is funded through higher tax rates, this is likely to counteract inflation. Depending on the calibration of the scheme, the tax will affect economic agents to varying degrees. An obvious choice of taxation would be the wealthy, as the consumption habits of the rich are less likely to be impacted by taxation than the poor would. This is because the poor possess a higher marginal propensity to consume – with a view on the impact of the UBI, it is possible that an increase in the consumption of the poor may subsequently increase aggregate demand, creating demand-pull inflation. However, this depends on how consumers use their UBI funds. If they use it on goods and services with perfectly inelastic demand (such as energy), then they are merely covering existing expenses and not contributing towards inflation. But if they spend it on any other goods and services, this might have an inflationary effect.

As we can see, on top of not being very effective, the UBI scheme is far from straightforward, instead, it requires meticulous considerations and discussions.

VI. Alternative but Related Concepts

Before concluding this article, I would like to mention two more ideas akin to UBI schemes.

Firstly, the previously quoted OECD economic survey inspected the impact a program similar to the UK’s ‘Universal Credit’ allowance might have on the Finnish economy – such a scheme would merge and simplify existing benefits whilst targeting lower-income groups. This concept has money reach those who need it most – a far more efficient and fiscally responsible distribution of benefits than a UBI. In a Finnish ‘Universal Credit’ scenario, the Gini coefficient would actually fall by 0.9 percentage points, and 90 000 people would exit poverty, reducing poverty by 1.7%.

Secondly, back in Germany, the liberal democrats have long been proposing a ‘liberal

citizens’ income’ that would summarise an array of social benefits and install a so-called ‘negative income tax’. It is worth explaining the negative income concept in further detail as it is often brought up in the context of UBI schemes. The negative income tax concept was first developed by Milton Friedman in his 1962 book “Capitalism and Freedom”, and can best be explained using an example:

The negative income tax gives its recipients a percentage of the difference between their income and a pre-defined income cut-off (usually the level at which they would normally start paying income tax). For instance, if the income cut-off is set at £800, and the negative income tax percentage is set to £50%, then someone making £400 would receive an additional £200. Someone making £600 would receive an additional £100, and so on.

Though these ideas might improve two very important problems of the UBI, targeting

those who need it most and ensuring fiscal responsibility, the many of the points made in IV and V still apply – though their optimum calibration and their impact on employment incentives are beyond the scope of this article, one should emphasize that more research is needed to determine whether they are truly worth the cost, and if they could perhaps work in tandem with other social security programs.

VII. Conclusion

A UBI scheme would dramatically change the fundament of social security on an economic and philosophical level – and not for the better.

The incredible cost of UBI schemes, the challenge of implementation and the inadvertent contributions towards inequality and poverty as recorded by the OECD should be honed as a warning against UBI income schemes.

Instead, it seems warranted to improve existing market-friendly social security schemes by making training schemes more engaging and accessible to those with a variety of interests, whilst continuing research on the impact of income schemes such as the ‘Universal Credit’ system or the ‘Negative Income Tax’ to better understand their advantages and limitations, in case of perhaps a temporary implementation or a complementary use alongside existing our welfare system.



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