Will basic income cause inflation?

by Tyler Prochazka | Nov 7, 2016 | Opinion

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.