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Can Income Be Universal and Basic? - Outside View by Nitin Gregory

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Can Income Be Universal and Basic?
Jun 21, 2016

What would happen if the tax receipts of the government were used to provide a cash subsidy to all citizens? No questions, no proof of income or assets - just a cash installment every month.

The idea, proposed long ago, has found supporters in famous free-market economists like Milton Freidman. It is called universal basic income (UBI).

Switzerland had a referendum on UBI this month. It did not pass, but the idea has been discussed at length in the media. Many connect the idea with how robots are leading to a jobless economy - and so a minimum income is increasingly necessary.

But let us take a quick detour...to a small island with three inhabitants. Mr A catches two fish every day. Mr B does not catch any. However, Mr G ensures the catch of the day is redistributed to Mr B. Sound fair?

This is an oversimplification, but it will help us understand the pros and cons as we move ahead.

Freedom of choice

One of the key arguments in favor of UBI is that it provides a safety net. A basic living standard would be guaranteed. People could stop worrying about survival and indulge in their interests and passions.

What's the difference between the UBI and the current welfare state? The outlay to achieve the 'minimum' standard is very large - in excess of the current funding allotted to public welfare projects. Arguments that the UBI would replace all other forms of welfare do not account for reduced employment on the government rolls. The UBI would have to be provided to a large workforce that is currently involved in the administration of welfare.

An increase in tax rates is inevitable. Can we afford this freedom?

Now, Mr B on the island decides to become an artist. He draws pictures and symbols on the sand and trees. These pictures do not add to the economic output of the island. Will Mr A and Mr G be comfortable with this situation?

Another argument in favor of UBI is that the government is too paternalistic. The welfare machinery prescribes what support the citizens require. A direct cash income instead would not only be more efficient, it would allow people to decide what proportion of food, medical services, or entertainment they require. What about use of UBI for undesirable activities such as drugs or alcohol?

Helicopter money

One of the economic arguments against the UBI (apart from affordability) is the prospect of inflation. A UBI would increase domestic consumption of basics such as food, health services, and entertainment. It would be a great short-term boost to the economy.

But it would mean an increase in demand without any supply changes, which would lead to inflation. Now all of a sudden the monthly cash installment is not enough. Would you peg the UBI to inflation? Would it result in an unending spiral of rising prices?

Entitlement

The strongest argument against the UBI is the sense of entitlement. During a recession when the productive economy is not generating enough tax, funding for UBI would be constrained. Any attempts to reduce the amount of cash subsidy would be met with fierce resistance. I expect there would be demands to increase the UBI during periods of distress to help ease the conditions during a recession.

The UBI is pitched as a simple solution. The simplicity masks complex questions. Some of these unanswered questions are - who defines the minimum standard to be guaranteed? How do we account for different living costs in different regions? Do we include children to ensure that large families are not disadvantaged?

Free market theory believes that governments are not the best judges of capital allocation. The UBI, of course, is merely government allocation of capital to charity on your behalf.

This column is authored by Nitin Gregory. Nitin, who graduated from IIM-Calcutta, is currently pursuing a finance role with an automotive major. He has a deep interest in Macroeconomics and pens a blog at Gregonomics.

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