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Universal Basic Income: What Is It And How Does it Work?

Andrew Dehan7-Minute Read
June 02, 2021

If you've been paying attention to economic news, you may have heard the terms universal basic income, guaranteed income or unconditional cash income. These terms all refer to the same idea: a social welfare program to create a safety net and base level of income for individuals.

But what exactly is this idea and where did it come from? Here we'll define universal basic income and talk about its history. We'll cover the events that have brought it back into the conversation now.

Different countries and pilot programs are currently running with universal basic income or similar programs. We’ll cover these programs, then wrap up the article comparing the reasoning for and against universal basic income.

Let's get started.

What Is Universal Basic Income?

Put simply, universal basic income, or UBI, is a program sponsored by the government where citizens receive the same base-level income. The idea is that everyone unconditionally receives the same payment on a regular basis, preventing a situation where people are left without income. This can come from the federal government or can be a program at the state or local level. 

You may be familiar with several programs like UBI and not know it. Many countries offer a basic income for children. Pensions are also very similar to UBI, but with the difference being they come from specific employers and aren't equally distributed among citizens.

An idea like UBI is the negative income tax. Both ideas seek to alleviate poverty and drive spending by freeing up capital. With UBI, everyone pays income tax and everyone receives a basic income. With negative income tax, those with low income don't pay income tax. They instead receive a payment in the form of a tax benefit.

These ideas may seem novel, but they’ve been around for almost as long as we’ve had currency.

History Of Universal Basic Income

While it may seem like UBI is a new idea, the truth is it isn't. In fact, one of the earliest examples of UBI dates back almost 2,000 years ago, when an emperor of Rome personally gave an income to every citizen who applied for it. 

Programs and ideas geared toward social welfare are woven into the fabric of America. Thomas Paine, one of America's founding fathers and starters of the American Revolution, proposed a similar idea to UBI.

Paine's idea was to provide a social safety net to eliminate poverty. He argued that the U.S. should raise an inheritance land tax to fund disability and old-age pensions. This was almost 150 years before Social Security was signed into law by President Franklin D. Roosevelt in 1935.

Towards the end of Martin Luther King Jr.'s life, he began an intense fight against poverty. He argued that the federal government had failed to address poverty directly. According to King, the government's efforts to indirectly address poverty never got to the root of the issue.

In his last book before he was assassinated – “Where Do We Go From Here: Chaos or Community?” – King wrote, "The problem indicates that our emphasis must be twofold. We must create full employment or we must create incomes. People must be made consumers by one method or the other."

Nearly 60 years later, we're still struggling with problems of poverty and wealth inequity. These problems are only increasing in size with new technological and societal shifts. UBI is an idea that could be part of the solution to tackling these issues.

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Why UBI Is Being Talked About Now

While economists like Milton Friedman were talking about UBI decades ago, we're talking about it now mostly because of European politics and American business leaders considering it. In 2016, Switzerland had a national referendum on basic income, which failed to pass, but its presence was covered internationally and sparked conversation across the globe. 

American tech leaders, such as Elon Musk and Mark Zuckerberg, have had public conversations around UBI and how it may be necessary in the future.

Businessman Andrew Yang ran for President in 2020 with UBI as his core campaign idea and is currently running for mayor of New York City on the same platform. His idea is referred to as the Freedom Dividend and comes in the form of a $1,000 monthly cash transfer.

The rationale each of these business leaders has applied to UBI is that it will become necessary with increases in automation and artificial intelligence. Already, many jobs are being eliminated by automation. 

UBI would provide a minimum income so that those losing their jobs could use that money to be trained or educated for other work. Proponents see UBI as a possible solution to maintaining an able labor market. 

While UBI was a part of the conversation leading up to 2020, it has been thrust more into the limelight due to the COVID-19 pandemic. During the pandemic, many Americans have received stimulus checks as well as extended unemployment payments.

These consistent cash transfers have turned UBI from an idea to a reality. Because they’ve become familiar with payments from the government, more citizens view UBI as not all that different from stimulus money.

But are there any places running basic income experiments? How do we know what monthly payments of cash could do to our economy? Let's talk about that.

Who’s Using UBI Right Now?

Yes, there are economic security projects that have experimented or are experimenting with basic income programs and other projects.

Alaska has one of the biggest examples of basic income in the form of the Alaska Permanent Fund. This fund was established in 1976 when the Alaskan government diverted 25% of the money earned from oil revenues to a fund for future generations.

It's managed by a state-owned corporation and pays out an annual dividend, usually around $900. In 2008, Governor Sarah Palin signed a bill to have a cash payment of $1,200 sent to every eligible Alaskan.

Another American example that has gained some coverage is the Stockton Economic Empowerment Demonstration (SEED), launched in Stockton, California in 2019. This experiment gave a $500 monthly payment to 125 random Stockton residents over two years.

The payment came with no strings attached. Many Silicon Valley investors and organizations funded the program. A recent report gave positive results, stating that participants in the program gained full-time employment at twice the rate of non-recipients, and were less anxious and depressed.

In Hudson, New York, HudsonUP was launched in 2020. This program is similar to the Stockton model. Organizations have pooled money to give a $500 monthly payment to 25 residents over a 5-year timespan. They will be compared against 50 residents in a control group who did not receive the payment.

Oakland, California has also announced what it's calling a universal basic income program. While billed as universal, it's geared towards low-income families of color, giving them a minimum income of $500 per month.

By restricting it to low-income families of color, the program is trying to focus on who needs the money most. White families in Oakland make three times as much money on average as non-white families.

Many basic income pilots and longer-standing programs have been launched in Spain, India, Israel, Wales, Sierra Leone and more. However, many of these programs have focused on specific members of the population, such as farmers, low-income workers or those impacted by COVID-19.

Our neighbor to the north, Canada, had a guaranteed minimum income pilot in the Ontario cities of Hamilton, Thunder Bay and Lindsay, which started in 2017. Finland also launched a UBI trial in 2017. Both the Canadians and the Finnish canceled the programs the following year. 

GiveDirectly is an American nonprofit that is trying to end extreme poverty in Kenya, Rwanda and Uganda through a 12-year basic income program that launched in 2016. In 2017, GiveDirectly started distributing money to residents in Rose City, Texas after Hurricane Harvey.

Reasons For And Against UBI

There are many reasons for and against UBI. Let's break down what the main arguments are.

Reasons For UBI

  • Promotes equality: With UBI, everyone has the same basic income safety net. It recognizes the economic contribution of unpaid labor, such as caring for children.
  • Prepares economy for the future: As mentioned earlier, automation and artificial intelligence threaten a lot of jobs. UBI could provide people with the opportunity to go back to school or receive further training.
  • Ending benefits based on means: A shift toward UBI would coincide with a shift in benefits based on where you work. It would reduce the bureaucracy of the current employment benefits system. It could lead a shift towards greater health care and education standards nationally.

Reasons Against UBI

  • Disincentivizes work: With a basic income, a common argument is that fewer people will be in the labor, therefore decreasing motivation to take lower prestige, lower paying jobs.
  • Doesn't channel money to those who need it most: UBI gives money to everyone, including the wealthiest. To pay for UBI, governments may have to eliminate benefits like food stamps or social security, targeted to the people who need them.
  • It's bad for the economy: Governments would likely borrow – increasing the national debt - and possibly raise taxes. Also, cross-country UBI could lead to rising prices since companies would know consumers have more money to spend. All of this has a chance of slowing the economy.

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The Bottom Line

As you can see, there are a lot of opinions and theories about what UBI could do to our economy. It could help people meet their basic needs, increase well-being and encourage people to startup their own businesses. But, on the flipside, it could cause inflation and slow the economy.

Andrew Dehan

Andrew Dehan is a professional writer who writes about real estate and homeownership. He is also a published poet, musician and nature-lover. He lives in metro Detroit with his wife, daughter and dogs.