As US presidential candidate Andrew Yang continues to outperform expectations, his signature policy proposal, the Freedom Dividend or Universal Basic Income (UBI), is receiving increased scrutiny. Some of the criticisms are well warranted, while others are misconceptions based on a flawed understanding of how basic income would operate.
The following addresses some of the primary misconceptions regarding Yang’s plan.
UBI is too expensive
The cost issue is one of the most persistent misconceptions about basic income.
A basic income system would have a built-in clawback through the tax system. In Yang’s case, a portion of the clawback comes through the opt-in system that would substitute cash-like welfare programs for the Freedom Dividend, such as food assistance. However, most of the burden of the clawback would be on the wealthiest families who would pay more in taxes than they could receive from basic income
As I have noted previously, the UBI clawback can be both direct and indirect. For example, the Affordable Care Act (ACA) requires families to pay back some or all of their healthcare subsidies at the end of the year if their yearly income exceeds a certain amount. A UBI system can similarly create a phase-out in the income tax system.
Considering Yang’s Freedom Dividend is opt-in, it is likely that many wealthy families would not opt to receive the dividend anyway.
Indirect clawback mechanisms could include Yang’s proposed Value Added Tax (VAT). The VAT is effectively a national sales tax, meaning even lower-income people would pay back a portion of their basic income depending on how much they spend their dividend on taxed goods.
Yang has said he would exclude many essential items from the VAT, though. Calculations show the VAT combined with UBI would have a net positive effect on purchasing power for low-income individuals.
Any taxes paid on the UBI would be used for the following year’s dividend, meaning much of the money is repeatedly recycled through the system. The additional amount that is redistributed to lower-income families is called the “net cost” or real cost of basic income. The net cost is the amount the government would actually redistribute every year under UBI.
Factoring the clawback, the real cost of basic income to the government would be approximately $539 billion annually, according to Georgetown Professor Karl Widerquist. This is less than 25 percent of existing entitlement spending.
UBI would have the same cost as a Negative Income Tax (NIT) when factoring the clawback, but the sticker price of the gross cost creates a false impression of a higher cost for UBI. NIT is not universal — it only provides the subsidy to those who qualify, making the cost appear lower than UBI. When I asked Yang whether he would support NIT to avoid the cost misconception, he said NIT would be a step in the right direction.
UBI would cause inflation
The inflation misconception has been around for many years, but it has become more convincingly debunked since I first wrote about it nearly three years ago.
It is essential to note that Yang’s plan is redistributing existing cash, not printing new cash. For every dollar spent, there must be a dollar taxed first, which would offset inflationary pressures.
As Karl Widerquist noted, basic income is no different than other welfare programs in terms of increasing demand for goods. Denmark has one of the most generous welfare states in the world, but they also consistently experience a low and stable inflation rate below two percent.
In the United States, food assistance, which can be freely spent like cash on most food items, has not produced inflation in food prices. On the contrary, research from the London School of Economics shows in states with higher take-up of food stamp assistance, prices have dropped and there is greater product variety relative to those areas with lower food assistance take-up. This is because suppliers respond to increased demand with more competition entering the market.
Thus, the guaranteed demand from basic income could generate higher levels of competition that brings down costs for low-income people.
In Alaska, which has a small Universal Basic Income funded by oil revenues, inflation has been lower than the U.S. average since the program started. Other research in Mexico demonstrates that directly giving cash does not produce inflation.
Since the United States is a globalized market, any short term demand spike creates an economic profit that is resolved by increased production, bringing the price down in the long-run.
In fact, the United States is experiencing unusually low levels of inflation. Contributing factors could include the Amazon.com effect, automation, immigration, and global trade. Basic income would not change these underlying factors keeping a hold on inflation.
The main area where there could be meaningful inflation in the medium term is the cost of rent because there is a fixed supply of land.
Basic income could empower more people to move and find other options. Renters would have a better bargaining position with their landlord if they had a guaranteed dividend than if they are desperately clinging to their job.
In the long-run, greater purchasing power from low-income people should induce more homebuilding and open up a greater share of unoccupied housing. That said, the high cost of rent exists now in many areas and should be addressed as a separate policy issue.
Nonetheless, it is unlikely that any inflation from UBI could completely wipe out the improved purchasing power from the dividend, let alone make people worse off.
UBI would cause laziness
The problem of laziness is one of the most thoroughly debunked misconceptions about UBI. Among those who closely study cash transfers, many no longer consider labor participation an interesting research question because the results consistently show no effect. Those who have read the relevant research and are still convinced that basic income causes laziness will likely never be persuaded otherwise.
As I reported in 2016, “The Overseas Development Institute just released the largest meta-analysis of cash transfer programs ever, spanning 15 years of data and 165 studies. The main takeaway is that studies show a consistent reduction in poverty measures. Perhaps an even more important conclusion is that most evidence showed an increase in work participation after receiving the basic income.”
Many specific examples from across the developmental spectrum corroborate the conclusion that basic income would not meaningfully reduce work. In Finland’s basic income experiment, there was no negative effect on work. Iran’s generous basic income did not reduce overall work but did cause some young people to substitute their time for more schooling. In Alaska, their partial basic income did not reduce overall work. On the contrary, Alaska’s basic income increased part-time work due to the increased demand generated by a basic income.
With a permanent basic income, there is reason to believe that a healthier and more productive labor market will emerge. For example, the Finland experiment showed basic income recipients were happier and more trusting overall. Many polls indicate that individuals would use the basic income to gain additional skills, spend time with family, volunteer, and engage in freelancing.
If the poor are no longer clinging to a job for survival, they can more freely find a job where they can be the most productive. They will also have more bargaining power to demand better working environments.
Most importantly, basic income would allow greater time and mental energy to be focused on the most important job in society: caregiving. Volunteering and caregiving provide enormous economic and societal benefits that are not recorded in GDP because they are typically unpaid.
Basic income gives people the right to say no to exploitation. But the most revolutionary aspect of UBI is that it finally gives everyone the opportunity to yes to their passions.
There is a fear that a disproportionate part of Universal Basic Income would be paid to housing. Under current circumstances, a large portion of the income is paid to rent. A person UK in 2019, if receiving benefits only, in many cases is paying over fifty percent of their income for housing. If UBI was to come into effect, it is possible the same problem would occur. On the minimum wage in the UK (currently £8.21 per hour), over 43 percent of the income of a person living in a city will go to renting a single room.
If UBI becomes a transfer of funds from everybody in the economy to the landlords in the economy, then it cannot be progressive. These landlords are not particularly in need or poor. Therefore, the campaign for UBI must be approached keeping in mind where that income ends up.
Looking at rent rises in the last 29 years, one can see that that inflation between 1989 and 2019 makes everything roughly two and half times more expensive. So, anything that is £1 will be £2.50 today. Another way to put it is that £1 in 1989 is equal to £2.50 today. In the same time, the lowest wage rose from about £3.00 to £8.21 and tax on the minimum full-time wage decreases from twelve percent to five percent.
The biggest difference is rent. In terms of rent, £1 is equal to £10.50, or what was a £50 per calendar month is now £550.00 pcm. In buying terms, the lowest-priced homes cost about £35,000 in 1989 or six times the minimum wage annual income. In 2019, the average price of a two-bedroom flat varies widely. However, it is not uncommon to see a two-bedroom flat priced at £200,000 or twelve times the minimum wage. This would indicate that buying a house takes a similar trajectory as rent. In 1989, a person could have obtained a secure home, and put aside some money that comprises the state pension. If the property prices and rent had not risen and had stayed at about 9 percent of minimum income wages today, then this would be the case too. Even If there was a shortage of housing, they would have been able to initiate a build via a housing association or even through their own income.
Table 1 Wage falls as rent rises
|| Annual Rent
||Annual Disposable Income (after rent, tax and national insurance)
||% of Minimum Wage for rent (After Tax and NI)
||% of Minimum Wage paid for tax factoring in tax free allowance
However, the rent and property price rise that took place meant that each time the minimum wage was raised (in line with inflation) to keep somebody at the same standard of living on minimum wage, the rent rise took a larger and larger portion of their income. In the beginning, the rent rise takes 25 percent of their pay rise, then taking about 50% of their pay rise, and in many years is a 100 percent or near 100 percent. In a few cases, it was more than 100 percent.
Since the minimum wage increase to keep up with inflation and they are handing over above the calculated inflation for rent to their landlords, they are no longer gaining the additional money to stay at the same standard of living. Their wage is dropping and their ability to save and prepare for the future is dropping. For example, in 1989, for every £1 a person gives 9 percent or 9p to rent. In 2019, for every £2.50 roughly equal to £1 then, a person gives £1.07 to their landlord or 43 percent.
If we look at rent increment per year and pay increment per year, taking the actual rises in the minimum wage from government records, and factoring the rent rise equally distributed over the full twenty-nine years. In order to get from a monthly rent of £50pcm to £550pcm. If equally distribute, then from about 1990 to 1999, the pay rise would have been higher than the rent rise. Some years all of the pay rise is transferred to the landlord.
In 1990, about a quarter of the pay rise is a transfer to the landlord. In 1999, 2008, 2011, 2012, 2014 and 2019, the full pay rise is transferred to the landlord. In most other years about 40 percent to 98 percent is transferred to the landlord except for five years.
For rent to rise from 9 percent to 43 percent of the minimum wage, the rent must have risen in some years higher than their pay rises. This would have been reflected differently in different accommodations. However, everybody who was renting would have observed the change at some point. In the following example, the rent rise is assumed to be equally distributed across the years, to show how the rent could have moved from £40pcm to £550pcm.
What about tax, during the same period the tax goes from 12 percent of the minimum wage to about 5 percent. Comparing tax and rent, the tax amount starts out higher than rent. By 1992 tax and rent are about equal outgoings, and then slowly rent increases tenfold, and tax decreases to about half the share it was in 1989. The rent doubles tax in 1998, trebles in the early 2000s and by 2015 it is ten times the rent, as an annual outgoing for a person on the minimum wage.
Disposable income moves in the reverse direction. In 1990, a person on minimum wage has almost ten times the disposable income than they pay on rent. Disposable income after rent, tax, and national insurance contributions are £4,658.75, while rent is £480 per year. In 1996 it is six times, in 2002 it is four times and so on. By 2018 it is less than 1.5 times, and if the trend continues by 2022, rent will be higher than disposable income.
If house prices and all other items had increased in-line with inflation and the minimum wage pay rise was the same, then a person would have the potential of savings to purchase a home or build a home with about half their accumulated life’s income. When they sold that home, they would regain the total value, less depreciation of the same home.
Table 2 shows a scenario of house prices had not risen.
|| Monthly rent went from £40 to 550pcm in 29 years.
||Annual Tax for the year
|| Annual Rent (12 Months)
||After RENT and Tax, NI per year
||% of Minimum Wage for Rent (After Tax and NI)
||% of Minimum Wage paid for tax factoring in tax free allowance
However, they would not have been able to set aside enough money to raise one or two children. The calculation for a child would be half the cost of living between age 0 to age 18, at half the cost of an adult. However, testing of goods and services for children are actually coming to a price of roughly half the cost of living, as they are assumed to have done in the past.
So, to reiterate, the minimum wage over a lifetime will not deliver to either a one- or two-income household, the returns for a home, investment in education to give higher wage opportunity, and a pension or putting aside money first to have children, plus the cost of bringing up children. Therefore, there is no choice for people on the minimum wage but to look for further state support. However, the truth of the matter much denied is, who is taking the subsidy, the person on minimum wage or precarious jobs, the end customers that are being given a lower price based on a low wage. The landlord is taking 43 percent of the income in real terms whether sourced in benefits or wage, or the hiring organizations who are saving a larger percentage of their budget for others who are paid more. Finally, that subsidy goes to shareholders whether it ends up mostly in the pocket of a small set of people, or a retirement fund which funds a large set of people. What is clear, people on minimum wage should not be blamed or made to feel guilty because of their poverty.
And the Universal Basic Income is an idea that can only be realized if each of the key areas of expense for a human being to live takes a reasonable proportion of the income. Otherwise, Universal Basic Income is just a guaranteed income for landlords today and maybe another industry tomorrow, and will fail to supply the basic set of goods and services it is designed to guarantee.
Sources of data
||Minimum Wage 1999 to 2013 Ref  https://www.theguardian.com/news/datablog/2013/oct/01/uk-minimum-wage-history-in-numbers
||National Insurance 1999 to 2019 Ref  https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/709420/Table-a4.pdf
||Income Tax – Personal Tax Allowance and Reliefs, 1990 to 2019  https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/709412/Table-a1.pdf
||There are data gaps in the Rent to Income Ratio, the most Signiant of which are explained below
||The starting rent in 1990 of 40pcm is derived from my own personal experience of renting a double room in a shared house. I remember at the time I chose a room that I could be comfortable in, and did not choose the cheapest room. I was moving from a room with relatives, where I paid £30pcm. The common room price in loot the listings paper which was the main source for finding lettings at the time was 30pcm to 50pcm, I believe that the bills were not included. The rent in 2019 was derived from a search for a double room on a website. There are many rooms that are priced over today’s rent of £550, which seem to be most rooms. However, through many searches of different websites, I can see that it is a common rent for a room in that area. This data could be improved by searching through archived copies of listings papers for the time. There are many rooms advertised at about £200 more than the rent I have quoted in some cities.
||From starting rent to today’s rent, I am estimating a % increase year on year, equally distributed. This would end up with today’s rent. For future rent, I am taking the same % increase forward for a further twenty years
||Minimum Wage: When referring to minimum wage, I am always assuming the full adult minimum wage and not the minimum wage for young adults
||Minimum Wage in 1990 to 1998
I have real data from .gov site and from the guardian site from 1999. This is the year the minimum wage came into effect. Prior to this I have a sketchy memory of my take home pay in 1990. Therefore, the start salary £3.00 per hour is pure guess and would be slightly lower if I calculated using the future trend. Tracing back this goes to about £2.70. I feel that this would not be accurate as my take home pay would have been lower.
||Future Minimum Wage 2019 to 2039
If I estimate a year on year % increase to take me from £3 to £8.20. The % increase is about 3.5% year on year. I am then using this for future years.
||Minimum Wage 1999 to 2019
Data from tables on .gov websites and guardian websites. This data does not take into account which month the change came into effect and assumes a full year at the minimum wage increment for the year. This data could be improved.
||If the rent year is 1990. The tax is calculated using figures for 1990, and the calculation is done against the full year from 1990 till today, therefore this data does not use the previous tax year for the last three months of the financial year. This would mean that tax would be slightly lower than shown here. Tax Personal Allowance, and all other calculations involving tax, including salary after tax also ignore the financial year change over. Therefore, this data could be improved. The overall trend of rent rises outstripping pay rises would not change.
||National Insurance NI for 1990 to 1998 has been put at zero, because of confusion about the rules at the time. However, I believe it to be quite low for the minimum wage because of the exemptions for low wage at the time. This data could therefore be improved.
I was recently asked whether the statement “Thomas Paine was a proponent of Universal Basic Income” is true. Although that statement is slightly controversial, it is true. Let me explain:
- Universal Basic Income (UBI) is a contested concept. Different people within the UBI movement use the term differently. The policy Paine advocates in “Agrarian Justice” fits most of the popular definitions of UBI but not narrowest one.
- The received definition of UBI (used by the Basic Income Earth Network (BIEN) and the U.S. Basic Income Guarantee Network (USBIG)) includes five characteristics: a regular, individual, universal, and unconditional cash payment. Paine’s policy is only a regular payment for people who live beyond 50. So, it is a bit of a judgment call whether it fits BIEN’s definition. But the BIEN definition has usually been understood to imply that the income is life-long, and some leaders of BIEN have expressed interest in clarifying that it should be lifelong. For these reasons, you might hear someone denying that Paine supported UBI, but to say that would be to apply the narrowest definition of UBI as if it were the only definition in popular use today, and it would be inaccurate to do so.
- The difference between the policy Paine advocated and the narrowest definition of UBI is small and almost a technicality compared to the similarities. Therefore, it is often not worth the time and effort to explain the difference between Paine’s policy and the narrowest definition of UBI.
- The only missing characteristic of the narrowest definition of UBI is that the income should be life-long. In that sense, Andrew Yang’s proposal also fails to meet the narrowest definition of UBI.
- The oldest-know proposal that fits the narrowest definition of UBI was written by a man named Thomas Spence, who was writing a sympathetic response to Paine—showing a way to take the idea a little farther. Paine, as far as I know, never responded to that proposal. He might well have viewed it positively.
- Many people who are widely accepted as leading advocates of UBI not necessarily advocate it under the narrowest definition of it. Martin Luther King and Milton Friedman are prominent examples.
- Paine is almost universally recognized as a founder of the UBI movement even by people who prefer the version the narrow definition.
- The size of the payments that Paine suggested were very large for the time. The initial payment of 15 pounds that people were supposed to receive when they came of age, Paine argued, would be enough for them to by land and become farmers, thereby achieving two central goals of many members of the UBI movement: to compensate people for the fact that wealthy people own all the resources and to give them the power to say no to unacceptable employment offers.
- Paine supported the policy he described in Agrarian Justice for the same reasons that more radical UBI proponents support UBI. His use of these arguments implies that he would be sympathetic to proposals convert his idea to life-long income.
- Therefore, if he were alive today, Paine would be recognized not only as a UBI supporter, but as one of the more radical UBI supporters. It is accurate to say he’s a UBI supporter, and even inaccurate to suggest otherwise without explaining the technicality of that suggestion.
I wasn’t planning to write about the British elections until a friend asked. I’m not confident that I’m right about my conclusions, but here are some disjointed thoughts in no particular order.
1. I hate the parallels between US & UK politics: You get Thatcher-Major. We get Reagan-Bush I. We get Clinton. You get Blair. We get Bush II. Blair does double duty as the British Bush II. You get a group of mendacious, xenophobic, nationalist leaders. We get Trump.
2. Labour’s loss wasn’t just Brexit. It wasn’t just Corbyn. It wasn’t just the party moving to the left. Some of those might have been positive for Labour. It was very complex. The best strategy from here and the right thing to do from here aren’t obvious. I don’t know what’s best. I think a hasty decision would be a mistake.
3. The election only shows a limited amount about people’s Brexit. The 43.6% who voted Conservative were at least comfortable with Brexit, and many Brexit supporters probably voted for other parties as well. So, support is probably still about half the population–depending on what Brexit deal is in question.
4. Brexit was a great opportunity for democracy if people hadn’t made it about who beats who. It appears to be a voting paradox: a majority for Brexit, a majority against any possible Brexit deal, and a majority against no-deal Brexit. It would have been a great opportunity to discuss voting-paradoxes, and to use rank-choice voting to see if there was something we could call a majority preference. Even Corbyn didn’t suggest going that far in his effort to find a middle ground and to use democracy to resolve the impasse.
5. The recent election, like every US & UK election shows what’s wrong with first-past-the-post voting. The rules were in place long before the election. I wish people had talked more about changing them before the election. Some US states are doing that now. It could be a significant step toward real democracy in the USA. But getting the money out of politics is the biggest thing we need to transition to democracy. Maybe not as big a problem in the UK
6. But a significant portion of Brexit support was xenophobia, auslander raus thinking. I don’t know whether trying to be a voice of reason like this would have sold.
7. Nationalism is a much bigger trend right now than just the US-UK parallel (e.g. Brazil, India, Russia, Turkey, Philippines, etc.). All nationalists have to be opposed until they’re defeated. They are not for the nation. Nations prosper when they work together. Nationalist leaders prosper when they make their people afraid. Not when their people thrive. Leaders who do not put humanity first, do not really care about any religious, ethnic, or national group no matter how much they say their putting them first. Those leaders put themselves first.
8. I wish I could enjoy being in the opposition more than I do. I find it hard to take heart as part of a group of billions of underdogs opposing this worldwide trend. I don’t know what works. But I know that nationalist and especially mendacious leaders have consistently failed to deliver in the long run. Leaders who don’t use fact-based reasoning, can’t get the outcomes they want. We don’t know how much damage they’ll do before their failure becomes obvious and how much of that damage will be irreversible. But they will fail eventually. That will be an opportunity. And that’s a reason for optimism.
X. Perhaps, my active support for the Universal Basic Income (UBI) movement keeps me optimistic. UBI is still far from the centers of power, but after watching it stagnate for a long time, I’ve watched it gather strength for more than 20 years. I’ve enjoyed all of the little victories of that movement whether mainstream politics was getting better or worse at the time. So, I guess the lesson is that a good way to keep your morale up is to have something you’re working on that is making progress however small.
Credit Picture CC(Paul Domenick)
A series of articles concerning the role which basic income (BI) could play in the fight against unfree labour in now on openDemocracy.
The introduction by Neil Howard sets the tone for the debate: even though many thinks that coercion by evildoers is the main cause for modern day slavery and human trafficking, this is not the case. Exploited workers often consent to their situation because is their only option to make ends meet. The question arises: “if we really want to end ‘modern slavery’, and indeed if we’re serious about protecting people from all forms of exploitation, then why not simply ensure that everyone always has a minimum amount of money in their pocket such that they can say no to bad work?” Which is exactly what Universal Basic Income advocates maintain.
The debate starts with an article by Guy Standing, “Basic income and the three varieties of freedom”, libertarian, liberal, and republican freedom. As “freedom costs money”, the impact of the introduction of a Basic Income is greater than its monetary value. Guy Standing explains that the BI works by changing structurally the society in which it is implemented, ant its “emancipatory value is greater… than the money value”.
Simon Binrbaun and Jurgen De Wispeleare, with “The power to walk away: is basic income a bridge too far?”, are concerned with whether basic income really enhances workers’ freedom or not. Their point is that the rationale of BI as an instrument of freedom is clear, as it would endow workers with more contractual power, but when the proposal is faced with reality, some concerns arise. Firstly, the monetary amounts provided with UBI under current proposals seems insufficient to give workers true exit power from their job. Secondly, even if workers were to opt out from a job, the structure of the job market is such that it allows for horizontal but not vertical transfer. And thirdly, it remains to be seen how employers would react to more contractual power from their employees, having them the possibility to use automation as a substitute for human workforce.
Karl Widerquist’s article, “End the threat of economic destitution now”, focuses on how
“UBI is not something for nothing. It is the just compensation for all the one-sided rules of property and property regulations that society imposes on individuals.” Because governments enforce property rights systems that block many from accessing naturals resources, poverty and destitution are not the result of personal choices, but of the lack of freedom implied in this allocation of resources. UBI would thus acts as “… the just compensation for all the one-sided rules of property and property regulations society inherently imposes on individuals”.
Ana Cecilia Dinerstein, with “Basic Income bows to the master”, accuses basic income of just confirming the domination of money over our lives. The elephant in the room, she says, is the lack of a discourse about money per se. Pointing her finger not at the lack of money nor at its unfair distribution, she states that the problem is human dependence on money; one that cannot be solved with UBI. UBI, in her view, “will contribute to the perpetuation and subordination of humans to money”, and it wouldn’t bring dignity to people, as it would only assure material subsistence.
“Feminist politics and a case for basic income”, by Kathi WeeksandCameron Thibos, considers the potential for UBI to fix the severance of work and wages.
“Wages do not compensate workers, and especially women, for most of the work they do. A basic income could change that.” Inspired by the Wages for Housework movement in the 1970s, the authors discuss of how much of the activities people (and especially women) have to perform are not remunerated. UBI can be the right tool to enhance freedom in the household and in society as a whole.
In “Basic income can transform women’s lives”, Renana Jhabvalaexplores the result of basic income pilots in India. Starting from a small study in Delhi to the one of Madhya Pradesh, with eleven thousands taking part, we learn how the Self Employed Women’s Association (SEWA), a women’s trade union, became one of the earliest advocates of basic income in India. This happened because the introduction of UBI brought on positive welfare effects, an increase in equity, and generally economic growth effects.
“Our pilots showed that basic income has the power to transform the lives of whole families, and especially those of women. Now it is time for India to take the next step and make basic income a reality for all.”
More information at:
“Universal basic income, a way though the storm?”, openDemocracy, September 16, 2019.
In this 30 minute podcast, the possibility of introducing an Universal Basic Income (UBI) in Ireland is analyzed, if it were introduced in a ten-year timespan. Lúí Smyth, representing the activist group Basic Income Ireland, talks about reasons to implement basic income, and how it could affect life in Ireland. Ian Golding, an economist, Oxford University professor and a regular Financial Times contributor, also features on the podcast, with his view on basic income and its relation to the Irish tax structure.
More information at:
“Could a €200-per-week basic income make Irish people happier – and more motivated?“, thejournal.ie, July 24th 2019