June 21, 2018
A “Universal Basic Income” Costs More Than You Think
According to some media reports, the Universal Basic Income (UBI) party in Finland is coming to an end.
But Professor Olli Kangas, head of the research team at the Finnish social insurance agency, claims that the experiment “is proceeding according to plan and will continue until the end of 2018.” There are no concrete plans to expand the program after that, however.
Finland gained notoriety in 2017 when it launched a UBI program where the government handed out monthlystipends of 560 euros (roughly $670) to 2,000 randomly selected unemployed citizens with no strings attached.
Even though this program is slated to expire by the end of 2018, it’s only a matter of time before other countries replicate Finland’s model.
While policy experimentation should be encouraged, UBI trials are not worth conducting, let alone expanding. Beyond fostering dependency and increasing fiscal burdens, UBIs ultimately reduce the private sector’s ability to accumulate more capital and increase worker productivity — the most reliable ways of reducing poverty.
A Not-so-Revolutionary Idea with Questionable Results
UBIs are not exactly a novel idea, having garnered broad support from intellectuals of all stripes over the years. Even free-market economists such as Milton Friedman argued in favor of UBIs, claiming they would be less costly to implement and maintain than a traditional welfare bureaucracy.
In the late 1960s up until the 1970s, similar programs were implemented in the United States. They were called negative income tax experiments, where workers who earned below a certain threshold received payments from the government instead of paying taxes to the government. Although different from their UBI cousins, they still yielded interesting findings on the effects of basic income models.
In the study The Work Response to a Guaranteed Income: A Survey of Experimental Evidence, economist Gary Burtless found that “the negative income tax plans tested in the experiments were expected to reduce work effort among participants, and they did so.” Additionally, A Comparison of the Labor Supply Findings from the Four Negative Income Tax Experiments demonstrated a consistent trend of workers reducing labor supply when they received negative income tax benefits.
While these employment trends look troubling, there’s something much larger at stake when dealing with UBIs. Any serious discussion about economic growth starts and ends with increasing worker productivity. UBIs are completely detrimental in this regard.
Under normal circumstances in an unhampered market, firms are constantly seeking to increase worker productivity, which benefits individuals who actually show up to work. However, the costs behind a UBI require depriving employers of the resources needed to increase capital accumulation, and thus increase worker productivity. As a result, potential workers receiving government aid are benefiting at the expense of other actual workers who lose opportunities to become more productive. Those workers then receive lower wages than they would have in the absence of the UBI. This siphoning of wealth makes society poorer on net.
Despite the revolutionary branding, negative income taxes and other basic income tax proposals appear to function just like traditional welfare measures that stifle capital accumulation and divert wealth away from productive sectors of the economy.
Another Permanent Government Program
Given the broad scope of UBIs, they will only shift incentives away from productive work to make a living toward politics to sustain a living. Even if they start off with meager stipends, what’s to stop beneficiaries from asking for more generous sums? Politicians would have to raise punitive taxes even further.
Ironically, Milton Friedman understood that there is nothing so permanent as a temporary government program. A UBI would function no differently from the current means testing welfare paradigm and would just add more to ballooning deficits, diverting resources from society’s productive sectors.
The Seen and Unseen
No economic analysis of welfare transfer policies is complete without the farsighted insights of French economist Frédéric Bastiat. Often overlooked in policy discussions, the concept of the “seen and unseen” demonstrates how policies like the UBI can’t solely be judged by their immediate and apparent effects.
When a transfer policy like the UBI is implemented, what is seen is the transfer of money from one sector of the economy to humbler sectors. However, what is not seen is the money that productive sectors of the economy lose out on. Under normal circumstances, this same money would otherwise be allocated towards business expansion and other ventures that increase worker output and worker incomes.
Private Initiative is Still the Best Anti-Poverty Program
If Finland wishes to tackle poverty, it should gravitate towards policies that enhance economic freedom.
A country like Finland is already ranked as one of the freest in the world, placing 26th and 17th in the Heritage Foundation’s Index of Economic Freedom and the Fraser Institute’s Economic Freedom of the World rankings, respectively.
Policymakers in Finland and across the globe should work tirelessly to raise their country’s economic freedom rankings in order to fully reap the benefits of markets. Lowering taxes, reducing barriers to business creation, and facilitating labor freedom all play an integral role in spurring economic growth.