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UBI and Inflation: An American Case Study

UBI and Inflation: An American Case Study

Although universal basic income might be an admirable goal, it is an unachievable policy (in the United States), putting more pressure on inflation.

Author

Traditionally a contemporary concept amongst the Left, Universal Basic Income (UBI) has recently become well-known amongst the American people. Currently, various UBI programs are being tried in parts of California, Colorado, Florida, Georgia, Illinois, Louisiana, New Jersey, and New York. Former 2020 presidential hopeful Andrew Yang brought mainstream attention towards UBI in the United States, campaigning for a monthly universal basic income of $1,000 for all American citizens. Yang’s plan is thorough and provides the proper setting for analysis of UBI.  

           If Yang’s plan were to be passed by the United States Congress, every American from Bill Gates to West Virginia coal miners would be entitled to $1,000 per month, or $12,000 a year. To offset the cost of the UBI plan, Yang is advocating for a VAT tax, increased taxes on the highest earners, and a carbon tax. Yang projects $800-$900 billion in new revenue from economic growth resulting from UBI. 

The cost of the program is calculated to be extraordinary. Yang’s tax and UBI proposal would levy a net cost of -$1.482 trillion. To afford Yang’s plan, other financing options would have to be explored. These options include cutting existing government programs, raising taxes, borrowing more money, or printing more money. 

Cutting government spending

The first possible way to finance UBI is by cutting current government retirement programs. American employees have paid taxes on their paychecks for social security and Medicare throughout their entire working careers. They have been ensured they would be entitled to these programs when they retire or reach the mandatory age. Despite the high costs required to finance these programs, they are immensely popular amongst the American people. While Yang’s plan promises UBI on top of social security benefits, some spending must be scrapped to afford the -$1.482 trillion net cost of the program. Given the popularity of American retirement programs, cutting them would result in a widespread backlash amongst the American people. Under Yang’s plan, welfare recipients would have the option to either keep their existing benefits or choose UBI. Since UBI is a no strings attached payment, the government will have no ability to enforce that it is spent for required items such as food, healthcare, and childcare. This is a risky proposition, given that drug use is higher amongst welfare recipients than the average American. If the terms of Yang’s UBI plan are to be enforced, UBI will be added as another welfare program, given existing welfare programs will not be canceled.

Raising Taxes

Raising taxes on the rich has been a rallying cry of left-wing Americans in recent years. But taxing the wealthiest Americans ultimately results in less consumer spending, counterintuitive to a goal of Yang’s UBI plan. Yang argues that UBI will genuinely improve the livelihood of America’s poorest residents, while he simultaneously argues for a VAT tax on purchases from larger companies. When VAT taxes are levied, job security can come into question. In addition, raising taxes is always an immensely unpopular proposition when it is proposed to the American people. A majority of Americans already feel that they pay too much in income taxes. Significant opposition and the costs associated with raising taxes for a UBI plan would force the American government to pursue other, dangerous financing options.

Printing money

One way in which the United States government finances its spending is through the use of the money printing press. The “print more money” argument, in general, is illogical, especially when applied to financing UBI. At the core of the coronavirus pandemic, the United States passed extensive economic stimulus to “stimulate” the American economy. In 2020, the Fed partook in actions which brought about the printing of more money, increasing the possibility of rampant inflation. This has seemingly been the case, as the latest CPI numbers increased by an astounding 8.3%, near a four-decade high. Printing more dollars for the purposes of UBI will increase inflation further. 

Borrowing

Throughout the past few decades, American spending projects have been financed by borrowing. A likely scenario is that UBI would be financed through borrowing, the same way American COVID relief bills were funded. While unpopular, in recent years, American politicians have run up a budget deficit in the trillions, reaching an astonishing $3.13 trillion in 2020. In 2021, the United States allocated 5% of its total federal spending to paying the interest on its debts, for a total of $352.3 billion. As a reference point, the United States allocated $234.3 billion to pay for Veterans Benefits and Services. Is UBI important enough to accumulate more debt and interest, when 5% of the yearly federal budget is already used to pay interest accumulated on debt?

Conclusion

Undoubtedly, inflation is a significant issue facing the American public. For a nation that religiously relies on car travel and fossil fuel production, coronavirus spending and the energy price increase exacerbated by the Russia-Ukraine war has been disastrous for the economy. The cost of food and other essential goods will continue to rise, providing an additional cost on the average American. During this inflationary crisis, with nearly 15% of Americans living in poverty, inflation has caused significant suffering for the American people. While supporters argue that UBI will alleviate these pains, further spending will aid further inflation as American spending bills have done in recent years. As a result, Yang’s UBI plan does not make sense from an economic perspective, given its propensity for increasing inflation. 

Author

  • UBI and Inflation: An American Case Study

    Kyle Fowler is an American university student pursuing a business degree at Indiana University in Bloomington, Indiana, United States. He is passionate about discussions surrounding fiscal policy, monetary policy, and individual choice. Kyle is the spring 2022 intern with the Austrian Economics Center.

The views expressed on austriancenter.com are not necessarily those of the Austrian Economics Center.

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