I recently led a roundtable discussion on basic income at National Chengchi University (NCCU), which was attended by students from various countries. The participants vigorously debated whether a basic income would result in inflation, with some parties worrying that the greater spending power will push up the demand for goods and, in turn, prices. The increased prices could possibly erode much of the spending power from a basic income.
To confirm whether these worries were justified, I reached out to three experts on basic income (BI), co-editors of the Ethics and Economics of a Basic Income Guarantee, to see what the research says about basic income and inflation.
It turns out: it depends.
Overall, the scholars agreed that there could be some areas where prices are pushed up, but that it would depend on how the BI is implemented.
Knowledge about the topic is limited since none of the BI research has looked at inflation, nor have the experiments been long enough to get a true idea of the BI’s effect on prices.
Dr. Steven Pressmen, former professor of Economics and Finance at Monmouth University, said this means economists “therefore must fall back on theory to answer the question about the inflationary consequences of a BIG (basic income guarantee).”
Dr. Michael Lewis, associate professor at Silberman School of Social Work at Hunter College, added that “multiple variables affect inflation”: if government spending is reduced in some area after a basic income is introduced, there would be a simultaneous push-and-pull effect on inflation.
Pressman also said that the outcome of a basic income on inflation will be based on “the overall condition of the economy and how a BIG is financed.”
According to Pressman, there are several potential scenarios that could play out.
If the economy is near full employment, then a BI would likely “push up prices rather than employment.” Also, since much of the gains in income from a BI would go to people in poverty and “people with low income tend to spend any extra income that they get,” then total spending will increase along with inflation.
On the supply side, Pressman said there are two important factors: taxation and labor.
If a basic income is financed by sales tax or value added tax (VAT), then this will increase prices and inflation. Second, if BI gives employees more leverage to increase wages, firms may “try to pass along these costs to consumers in the form of higher prices,” Pressman said.
On the other hand, Pressman said that financing a BI is paid for by reducing other government spending means “there should be little or no inflationary impact of a BIG.”
Dr. Karl Widerquist, co-chair of BIEN and associate professor at Georgetown University SFS-Qatar, said that Denmark’s economy demonstrates that spending on welfare such as basic income should not lead to inflation “taking away all those workers’ gains.”
“There is nothing special about Basic Income spending. It is not any more likely to cause inflation than any other spending,” Widerquist said. “It is not any more difficult to use taxes and borrowing to counteract inflationary pressure caused by Basic Income spending than it is to counteract inflationary pressure caused by military spending or any other kind of spending.”
Regardless, some inflation may not be such a bad thing for the economy, according to Pressman. He pointed to the Japanese deflationary spiral in the 1990s as to why some inflation may help an economy.
For policymakers considering a basic income, it may be useful to think about adjusting the BI benefit depending on economic conditions.
“It also may (make) sense to think about a variable BIG — one that increases as unemployment rises and falls as the economy gets closer and closer to full employment. This too will reduce the inflationary impact of any BIG program,” Pressman said.
Although more research needs to be done, it appears a basic income is unlikely to contribute to inflation in a substantial way because there are so many factors that influence prices.
“Policy matters, and sensible fiscal and monetary policies can ensure that more egalitarian social policies are consistent with low inflation,” Widerquist said.
About the relationship between the deflationary role of technology and the inflationary role of basic income, I suggest you to read this very interesting approach https://medium.com/emergent-culture/an-exciting-new-idea-in-basic-income-b1b7bf622845#.corqlso99
Both a basic income and an individual tapering income for adult citizens increase bargaining power. The counter-cyclical nature of a tapering income automatically achieves the same effect without manipulation of the stipend amount. A fixed basic income will be absorbed into wage levels over time, permanently setting a policy for using tax dollars to subsidize business payrolls, unlike a tapering income that disappears with higher incomes. Wages will be depressed by either a permanent basic income or tapering income depending on the amount of additional taxes needed to fund the proposition. Funding a permanent basic income may require significantly higher tax levels than a tapering income when the stipend amount is the same. This wage depression resembles inflation. Since economic cycles of nations and individuals vary, lowering the stipend during a national boom may harm individuals who are in an economic slump (like being unemployed).
A new or higher indirect tax (like VAT or sales tax) may have a greater effect on the poor (depending on what is taxed) because a greater portion of a low wage worker’s salary goes to consumption rather than savings. A higher direct tax (like progressive income tax) may be less intrusive on low wage workers. Replacing income taxes and sales taxes with an indirect flat tax on all economic transactions divvied out to states, provinces, cantons (that includes all financial transactions many of which are currently not taxed) would be the least intrusive on all productive workers and productive businesses and significantly save tax collection processing costs for government, taxpayers, employees and employers.
 APT Tax | Youtube
 Intraday Liquidity Flows | FRBNY | 2012
Surely a good government could simply regulate so as not to allow business to profit from the fact that people have more spending power. Business must only be allowed to maintain a reasonable profit margin or we will end up back where we started.
Generally speaking I think it should work itself out without too many problems. With any spending or new supply of money there will be supply and demand economics and growth, which can lead to inflation.
*Here are just a few things I would suggest…
*Regulate inflation and price gouging with the tax system, closing some loopholes and making cost of living adjustments similar the way they do as social security. Plus maybe legislate inflation cap limits on rent, utility, food, transportation, clothing & the like… (necessary essentials)
*I would even consider seizing the fed & making it a publicly owned system.. Plus at least for now I would keep interest rates low during this period of deflation/stagnation.
*We could also start consumer & basic income unions to represent, negotiate, and lobby on our behalf. Labor unions would also be a plus right now too.
*I would also encourage savings, debt reduction, investments, ontrapranurialship & starting a business.
*I would also encourage education on budgeting, financial management, wealth building & savings and retirement planning.
*Competition is usually good for the consumer & I might consider busting up some of the global monopolies & cartels.
This is just to name a few Ideas.
Is there any source/links to any finding on how a UBI will effect inflation/deflation?? thnx
I am surprised that there appears not to have been any economic modelling of the inflationary effects of a UBI (or even better, of different types of UBI). I am attracted to the idea, but worry that the benefit (especially for low income people) would progressively be eroded by inflation. Standard market economics would suggest this is indeed a potential risk. After all, this is one of the key areas where government subsidies (eg first home buyer subsidies) have faced challenges, by seeing prices inflate to erode (or more than erode) the benefit of the subsidy.
The suggestions that have been made that the problem could be fixed by regulating prices and/or business tend to highlight the potential problem rather than point it its resolution. There needs to be more debate on this risk among proponents of UBI.
The question I have is the reverse, does inflation or pricing of services and goods to the lowest incomes devalue benefits/Minimum Wage/Basic Income faster than they can be adjusted.
Price increases on the financial year this coming year, will not be adjusted if they are above the CPI until the following financial year. So unless a basic income adjusts when essential services and goods are increased near immediately, a person will fall below the basic income. Which would be the relative poverty line for the country. Assuming basic income would cover the essentials either by providing the service or goods as free at the point of service like health, or via a transfer of funds to somebody like housing benefit, or to an individual for transport, utilities, food and household goods.
This question is relevant because the rate of price inflation for some time has been increasing at a greater increment than benefits or MW. As mentioned elsewhere many times, the price increase of housing went from 8 or 9% of Minimum Wage to nearly 50% of Minimum Wage over thirty years. The person on a MW wage therefore was facing a decrease in standard of living in the UK.