As the gap between the haves and have-nots grows, the concept of Universal Basic Income (UBI) seems very appealing to the populous. In this week’s blog post, I will talk about how the entire concept of UBI is flawed. I will tie some of the ideas back to Adam Smith’s Wealth of Nations (productive and idle labor, rent, profits, wages, etc). Let’s dive in.
First off, what is UBI? According to Investopedia, “Universal Basic income is a system similar to Social Security, in which all citizens of a country receive a set amount of money on a regular basis. This money is typically provided by the government or a similar public organization. This income, provided unconditionally, is given in addition to any income for which a person works. The goal of a basic income system is to allow every person to have a fair chance at an adequate quality of life. It is a way to combat income inequality and ensure that each citizen has enough money on which to live.” In other words, UBI is a system where the government gives you a fixed stipend, which is intended to provide you an adequate quality of life. I aim to show UBI’s detrimental effects is two parts – first, by focusing on how the revenue for UBI is derived; second, the unintended consequences of UBI.
We all know that there is no such thing as a free lunch. So, let’s look at how the government would go about gathering revenue for UBI. The answer is simple: Taxes! On a higher level, the government has two options: either taxing corporations/businesses, or taxing the wealthy. After all, it would be a little counter-intuitive to tax the general public since that’s the population the government is trying to support. Now, politicians might go about preaching how “just” some forms of taxes are over the others. Regardless how an individual or a corporation is taxed, a tax will always be treated the same way. Said differently, a tax will always equate to taking capital away from someone’s hands. It is important to understand that the way the general public spends money is very different that how a corporation spends money. The general public spends money on consumables or usable goods. A corporation (or wealthy individuals), on the other hand, is profit driven. And how is that profit derived? By providing a service or a good that is needed or creates value in the society. In other words, a corporation/business is always trying to create something that’s valuable to the society so as to rack in a profit. The moment society stops valuing a company’s product/service, that company is bound for bankruptcy. In contrast to individual spending habits as discussed above, a corporation spends its capital by investing in building new factories (and hiring productive labor), which would help maximize the sales of its profitable goods. Additionally, a corporation could spend money on research and development, which could help create something even more valuable for the society to advance – such as self driving cars, automation, robotics, artificial intelligence, machine learning, etc. By taxing profit driven corporations, the government is taking money away from those companies. In short, less money will be left over for corporations to re-invest and keep the economy and society from prospering.
Now, I know some of you might be thinking that providing UBI would create a demand for goods and services, which in turn leads to higher sales and greater profits for corporations; It’s a win-win for both the people and the corporations. The truth of the matter is that regardless if the government plans on adding a Value Added Tax (VAT) or just a higher tax on the company’s bottom line, at the end, there is less capital left over for the company to re-invest and generate profit. Additionally, in order to get a higher (absolute value) profit number, companies would increase the prices of goods in each part of the supply chain. This would equate to companies paying higher VAT (which means more money for citizens), and citizens would notice inflation as a result of these taxes. So, would a UBI actually improve an individual’s standard of living than what it currently is? Government would give out a stipend, but the prices of goods have already gone up (as companies compensate for the lost revenue that resulted from VAT), so the individual is back to where he/she started. You can think of revenue, VAT, UBI, and cost of goods as an ongoing loop – higher revenue, results in higher VAT, which results in higher UBI, which results in higher inflation. I want to point out that it is highly likely that UBI would backfire on the populous. While trying to provide a better quality of life, the government would end up increasing the cost of goods all across the board.
Wages, profits, and rent is what decides the prices of goods in an economy. Let’s assume that you are a landlord, and the government started a UBI program, where every citizen gets $1,500 every month. How would you (the landlord) price your rent? Knowing that everyone has an additional $1,500 to spare, you could potentially increase rent by $1,500 per month. The money that was intended to create demand for goods was taken away by you, the landlord. In reality, each and every business/company will try to get a share of that UBI. So, prices of goods and services would rise, causing inflation. This inflation is not supported by wage growth, but rather by UBI (government dependence). This means that in the future, if the government wants to attract more businesses (by removing or reducing taxes), it would not be practicable because everyone in the country depends on the government and those taxes.
I want to emphasize that UBI would also support unproductive (idle) labor. Idle labor is treated as an expense i.e. the labor is not helping a corporation generate profit. That idle labor is supported by the taxes that were taken from corporations. Since it acts as an expense, unproductive labor hinders the economy from prospering. Capital will always find ways to generate maximum profit. This means that if corporations notice that they are able to generate a higher profit in another part of the world that does not have UBI taxes, then capital would flow to that country. Anytime the labor force consumes more than what it can produce, that country is bound to decline. From a country’s standpoint, the country would have to provide financial support to each and every citizen; this would make politicians even more powerful.
Similar to Smith’s concept of bounties, with UBI, the society would technically be taxed twice – once in order to generate revenue for the UBI (which takes away capital from those who are best at allocating capital, addressing society’s’ needs, and generating economic growth), and second with the increased cost of goods/living. Cost of labor (wages) will always be equal to the minimum amount required to sustain an individual/family. So, if there are individuals who can not sustain themselves and get an adequate quality of live, then that goes to show that there are in fact other labors who are actually making ends meet at those same wages. Illegal immigration/labor could lead to an influx of cheap labor, and cause wages for menial jobs to stagnate (or even decline). Overall, it is my humble opinion that if your labor does not generate the wages you need to sustain your standard of living, then you should change the industry in which you work or relocate to a place where your labor is valued more. It is my understanding that humans do not like change, so people would rather vote for someone who could give them a stipend rather than find work where their labor is valued more (and consequently are paid more). Hence, I suspect that UBI is inevitable, but it will not be beneficial for the society.
Hope you learned a little and found this blog post helpful. We talked about Universal Basic Income, and how it is detrimental to the society. As always, you can sign up for our free mailing list here. You can sign up for our paid subscription services here. Like us on our Facebook page here. Thank you!
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