Gabriel Frank-McPheter, Stanford University
This past Democracy Day, Stanford students filled Dinkelspiel Auditorium to hear from Andrew Yang, a man perhaps best known for his call for a universal basic income. Since his 2020 presidential run, this once obscure idea has now become quite popular. For the first time in American history, direct cash payments were issued to the population at large as a form of economic stimulus during the pandemic. Existing basic income schemes such as those in Alaska and Kenya have received considerable attention. Cities from Birmingham to Los Angeles have begun to implement variations of basic income pilots as well. Overall, these pilots have shown promising economic results, yet are limited in their scope and scalability. As a result, the potential impacts of a national universal basic income in the United States are still unclear, making larger-scale basic income programs a needed next step.
Admittedly, many pilots that have been put in place have shown the potential to alleviate poverty and substantially improve well-being. For over 40 years, the Alaska Permanent Fund has distributed oil revenues to citizens in cash payments averaging $1,600. Research from the University of Alaska Anchorage suggests that these payments have lifted 15,000 to 25,000 residents out of poverty annually. Intuitively, this shouldn’t be that surprising: If you give people money, there will be less people in poverty, ceteris paribus. So, calls for an even larger UBI—such as Yang’s proposed $12,000 annually—could have an even greater impact on poverty reduction. Beyond just poverty alleviation, evidence from a pilot program in Canada found that basic income reduced anxiety, depression, and mental health crises, slashing hospitalizations by 8.5%. The reason why makes sense: By providing a financial safety net, basic income can reduce financial stress, allow individuals to take some time off from work for mental health, or even cover therapy costs. These positive effects on well-being are just some of many; extensive literature has been produced detailing a plethora of benefits from the many basic income pilots launched across the globe, a promising sign for basic income’s future.
Figure 1: Poverty Reduction in Alaska with Basic Income
However, these pilots’ small sample sizes make their effects difficult to compare to larger populations, where inflation is more likely to kick in. For a small sample size of a few hundred participants, increased income does not have a serious effect on the market. However, if every single consumer in a large city, state, or nation is receiving that basic income, then consumer demand would substantially increase. Basic economic theory tells us that this would cause demand-pull inflation: Inflation would increase as businesses raise prices in response to increased demand. Thus, gains in income from the program could be partially or entirely offset by increases in prices. Of course, there are dozens of other factors that could complicate inflationary effects. For example, with greater base incomes, people may start more small businesses, increasing supply in markets and thus putting downward pressure on inflation. Furthermore, many households may opt to save or invest some of their basic income, which would put less upward pressure on inflation than if all that money was spent on consumption; it’s difficult to say what society’s marginal propensity to consume would be under a universal basic income scheme. So, it’s no surprise that different models have produced wildly different predictions for the macroeconomic effects of a wide-scale universal basic income. The true inflationary effects of universal basic income can therefore only be better understood if more large cities and states take the risk of implementing large-scale basic income programs to provide data for observational studies.
To further complicate matters, the various methods proposed to fund large-scale basic income programs all have unique and, in some cases, ambiguous economic impacts. Some, like Yang, have proposed paying for basic income in part by cutting spending for existing welfare programs that would be replaced by universal basic income. Research from the OECD suggests that this would do little to lift welfare recipients out of poverty. Because existing welfare programs are meant to lift individuals above the poverty line, setting a universal basic income equal to the poverty line and replacing welfare programs with it means welfare recipients would simply see their means-tested food stamps or housing vouchers replaced with direct cash. Even when replacing welfare, some taxation scheme would still be necessary to fund basic income as well. Yang has proposed a value-added tax, but some literature suggests that this tax would be regressive, falling disproportionately on the poorest of society who spend an outsized share of income on consumption. Others have proposed a wealth tax, but some research finds that wealth taxes have been ineffective in Europe as a result of capital flight and tax loopholes. In short, it’s not clear how universal basic income would be funded or what the ramifications of that funding on the economy would be.
So, what is the next step for universal basic income? Well, it’s unlikely that small-scale pilots, particularly those only targeted at certain demographics, will provide much new evidence in support of or against larger-scale universal basic income programs. So, at some point, lawmakers are going to have to bite the bullet—large cities like Los Angeles or New York, or even entire states, will have to implement wide-scale universal basic income programs to get a better sense of its true effects. Researchers can then leverage the econometric tools at their disposal to examine macroeconomic effects such as inflation and compare programs with different taxation and funding methods to find the most effective means of financing. Even then, there would still be many unanswered questions and decades more research needed before one could confidently conclude a national universal basic income would be unambiguously beneficial. So, we may not be ready for Yang’s Freedom Dividend just yet, but it’s time for universal basic income pilots to fly to new heights of wide-scale implementation. Only then can we know basic income’s true economic cost or be able to realize its full economic potential.