Universal Basic Income: The Way to Fix Welfare

In 1962, leading libertarian economist Milton Friedman published Capitalism and Freedom, a treatise on the value of free markets for a liberal and open society. In it, he attacked the Federal Reserve, consumer protection, occupational licensure, and many other forms of government intervention in the economy. However, far from what one would expect from a hardline libertarian economist, Friedman proposed not that the system of welfare be abolished, but rather called for its replacement with a Universal Basic Income.

A Universal Basic Income (UBI) gives every citizen an unconditional cash transfer each month of enough money to cover basic food, housing and clothing. By contrast, our current welfare system relies heavily on means-testing, giving people a set amount of money that decreases as their income increases as well as conditional transfers and vouchers like SNAP, which is limited to certain uses. While a UBI was proposed by President Nixon and passed the House of Representatives in 1969, it ultimately failed in the Senate, and no serious proposals have been made since. However, due to the changing times and skewed incentives of our current welfare system, it is time for the United States to reconsider the option.

Historically, welfare programs have been designed as a social safety net with the goal of encouraging a swift return to the workforce for the unemployed. Unemployment insurance only pays for 26 weeks’ worth of wages, after which point people are expected to find a job. However, what happens when the jobs have disappeared? New technology invented during the Industrial Revolution allowed the millions of people working on farms to flock to the cities. Soon after, low-skill manufacturing jobs sprung up and absorbed the influx of workers. Improvements in robotics and automation eventually caused employment in manufacturing to decline even as output continued to increase. These displaced workers generally moved into the low-skill services industry where they currently reside. However, self-driving cars threaten to replace up to 3.4 million low-skill jobs and it is easy to imagine that food services and other fields might be soon to follow. So, what should happen to millions of low-skill workers who exist in a society that no longer employs them for living wages? This predicament demands a complete restructuring of society, and it starts with a UBI.

John Maynard Keynes once noted that eventually, as the productivity of the worker continued to increase, the work-week would shrink to as low as 15 hours per week to provide for a sufficient living. However, our current free market without a UBI will never allow the work-week to shrink down enough. Raising the minimum wage would not sufficiently address this problem. Raising the minimum wage to the point where people would no longer have to work as much will price many of them out of the market since low skill work will not be worth as much as the wages. Without unconditional cash transfers, workers are forced to make a choice: find a job or starve. This is really not much of a choice at all.

However, when millions of people face this same choice, the competition drives down wages. Since 1970, productivity has increased at over twice the rate as wages. As low-wage jobs are made irrelevant, the bargaining power of workers falls – and so do their wages. It is very hard to retrain workers for high-skill jobs. Not everyone has the aptitude or ability to become a doctor or engineer. A UBI works to combat this issue. By giving workers basic living standards, the choice is no longer between working and starving. As a result, workers would have greater ability to negotiate with employers. Moreover, with the additional income, workers would increase their leisure time, decreasing the length of the work-week and supplementing the lost income with this subsidy. This again drives up wages, and the higher wages attract some of the workers back into the workforce. The end result is equilibrium wages that are relatively higher than they were before.

A UBI also presents a multitude of social benefits. First, because it would allow people to work significantly fewer hours, parents will have much more opportunity to spend time with their kids and play a more active role in their lives. Even parents working multiple jobs for low pay will now have greater opportunity. A study in the Community Work and Family Journal finds that having a parent work the evening shift has as big of a negative effect on a child’s academic development as has poverty. A UBI allows more parents to work less, meaning more kids doing well in school and being better prepared for our future high-skill economy. Additionally, government programs such as SNAP that provide conditional transfers don’t offer the flexibility afforded by a UBI. One cannot buy education with food stamps.

UBI is not without its fair share of critics. Many people argue that a UBI will disincentivize work. If the benefits are high enough, critics argue, nobody will work at all and there will be no tax base with which to fund this program. Basically, since people can theoretically survive without working, they just won’t. However, there are a couple of reasons that this argument falls flat. First, the system of welfare in the status quo actually disincentivizes work. Since benefits are means-tested, earning more money reduces welfare compensation. This means that each additional dollar earned is really worth much less, and is, therefore, less of an incentive to work. Under a UBI, the benefits don’t decrease, so working people get to keep every additional dollar they earn. Second, people also will likely want to find purpose in their life; therefore, even given no incentives to work, they will likely search out productive opportunities, even if they are only volunteer.

Self-driving cars threaten to replace up to 3.4 million low-skill jobs and it is easy to imagine that food services and other fields might be soon to follow. So, what should happen to millions of low-skill workers who exist in a society that no longer employs them for living wages? This predicament demands a complete restructuring of society, and it starts with a UBI.

Conservative opponents also argue that this program would be unreasonably expensive. Giving everyone a check will require a massive increase in taxes, which unfairly confiscates the property of hardworking people. Yet this criticism ignores the fact that this money will be spent almost immediately in the economy. This will lead to an overall increase in economic demand as the demand for essential goods increases. Furthermore, we know that our economy has the ability to produce more than it currently does, as evidenced by the government funding farmers to leave their fields fallow. Rich people, as rich as they are, can only eat so much bread. Rather than fund farms to not grow food, we should give poor people money and have them actually buy the food. This increased economic activity would likely put more cash in the hands of everyone.

Liberal critics argue that conditional transfers don’t allow the government to direct funds in a socially optimal direction. They say that without SNAP, there is no way to ensure that the money is spent on food. However, this trades off against the potential to use this money for investment in education or business. In this case, it is more important that we allow people to invest in their futures than paternalize them and ensure the money is spent on food. At the end of the day, the government, after providing people the means to procure food, does not have an obligation to ensure that people follow through. It is likely that people want to ensure the best life for themselves and their children, and will, therefore, spend the money in ways that will actually benefit them. Also, in order to make the funding conditional, the government must hire bureaucrats to manage the fund. The money that could be going into the hands of those who need it will instead be going to fund redundant government workers who would be more productive working in other parts of the economy.

Lastly, critics argue that this could drive up inflation. The amount of inflation caused by a UBI depends on its implementation. The UBI could also be another tool of government to manage inflation in the economy. Instead of the Federal Reserve modifying the money supply via open market operations, Congress can increase or decrease the level of the UBI, and in conjunction with the Fed, manage the optimal level of inflation in the economy. This way, the government can always ensure that inflation never gets too high, but it gives the government an additional tool to make sure the economy is functioning optimally.

The world continues to move forward, and technology continues to develop. Eventually, our economy will require less and less human involvement as robotics continues to replace jobs people were historically required to do. Society must now decide how we are to adapt to these changes. A UBI is a great start.

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