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Radford Neal
72

UBI financed by taxes wouldn't cause the supply of goods to increase (as I suggest, secondary effects could well result in a decrease in supply of goods).  But it causes the consumption of goods by higher-income people to decrease (they have to pay more money in taxes that they would otherwise have spent on themselves).  So there are more goods available for the lower-income people.

You seem to be assuming that there are two completely separate economies, one for the poor and one for the rich, so any more money for the poor will just result in "poor goods" being bid up in price.  But the rich and poor actually consume many of the same goods, and those goods that are mainly consumed by the poor are usually produced using resources that could also be used to produce goods for the rich, so any effects of the sort you seem to be thinking about are likely to be quite small.

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by Gordon Seidoh Worley
1 min read
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734

5

For both AI and non-AI related reasons, many people are interested in Universal Basic Income (UBI). My suspicion is that UBI that is actually universal across an economy won't work due to a combination of inflation and rent seeking.

This feels like basic economics: you increase the supply of money to buy things with UBI, and this eats up the available supply of demanded goods. So for a few months UBI might help people out who otherwise have no income, but then everything would rise in price to where UBI is the cost of being broke. Compare the way you could make an $X a month income but still be homeless because it's less than the minimum needed to afford even the cheapest housing available.

Most defenses I see of UBI address nearly every objection to UBI but this one, and this seems like a glaring hole. As best I can tell this inflation argument makes UBI a nonstarter.

Am I right, or are there good arguments for why UBI would not fail to meet its goals due to inflation and rent seeking?

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Apportionment has been described by scholars as "an absurd requirement, almost always impossible or else so perverse in effect that no democracy, indeed no rational government, could adopt it"

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Can UBI overcome inflation and rent seeking?
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Radford Neal

145

I think the usual assumption is that UBI is financed by an increase in taxes (which means for people with more than a certain amount of other income, they come out behind when you subtract the extra taxes they pay from the UBI they receive).  If so, there is no direct effect on inflation - some people get more money, some get less.  There is a less direct effect in that there may be less incentive for people to work (and hence produce goods), as well as some administrative cost, but this is true for numerous other government programs as well.  There's nothing special about UBI, except maybe quantitatively.

Another possibility is that UBI is financed by just printing money. This will certainly result in higher inflation than would otherwise obtain.  But many governments print money for other reasons, so again, this is at most quantitatively different from the current situation. When the economy is expanding, one should be able to print a certain amount of money while keeping inflation at zero, since more money is needed to facilitate transactions in a bigger economy. The flaw here is quantitative: a UBI financed in this way wouldn't be very large.

Printing money to finance UBI was a basic tenant of the "Social Credit" ideology due to Major Douglas, most prominant in the 1930s.

None of this says that UBI is either morally or practically justified. But it isn't infeasible for the reason you give.

[-]Gordon Seidoh Worley
20

Let's consider the case where UBI is created from taxes. The poorest people now receiving at least $X a year. Why would this cause the supply of goods to increase? Wouldn't everything just go up in price by $X in aggregate so that all the additional money at the low end is captured leaving everyone just where they are now, and only curtail marginal luxury spending of high earners?

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7Radford Neal
UBI financed by taxes wouldn't cause the supply of goods to increase (as I suggest, secondary effects could well result in a decrease in supply of goods).  But it causes the consumption of goods by higher-income people to decrease (they have to pay more money in taxes that they would otherwise have spent on themselves).  So there are more goods available for the lower-income people. You seem to be assuming that there are two completely separate economies, one for the poor and one for the rich, so any more money for the poor will just result in "poor goods" being bid up in price.  But the rich and poor actually consume many of the same goods, and those goods that are mainly consumed by the poor are usually produced using resources that could also be used to produce goods for the rich, so any effects of the sort you seem to be thinking about are likely to be quite small.
1Jiao Bu
I don't think higher income people are spending as much %% of their money on goods and services, so everyday goods and services may not be protected as much from the "printing money" effect.  Much of the shift in those prices comes from the increased spending power on the bottom margin, as the rich already have all the food and such they want anyway. If you're already using that money to invest in stocks, then UBI probably inflates basic good prices (as it gives the lower income brackets more money and additionally reduces the labor supply to make them, as we saw in 2020 it might not take much to shake that out of balance).  So it's inflationary on labor.  It seems inflationary on markets as the mid-end will buy stocks (again, see 2020), so we get higher interest rates, which again prices the lower end consumers out of the market for houses, cars, and such.  My guess is this further destroys anyone in the middle.
1Radford Neal
The poor in countries where UBI is being considered are not currently starving. So increased spending on food would take the form of buying higher-quality food. The resources for making higher-quality food can also be used for many other goods and services, bought by rich and poor alike. That includes investment goods, bought indirectly by the rich through stock purchases.  UBI could lead to a shift of resources from investment to current consumption, as resources are shifted from the well-off to the poor. This has economic effects, but is not clearly either good or bad. Other things being equal, this would increase interest rates, which is again neither good nor bad of itself.  However, you seem to be assuming the opposite - that UBI would lead to higher investment in stocks (presumably by the middle class?). That would reduce interest rates, not increase them. (I'm referring here to real interest rates, after accounting for inflation. Nominal interest rates could go anywhere, depending on what the central bank decides to do.) Whether UBI harms the middle class would depend on whether they benefit on net, after accounting for the higher taxes, which could of course be levied in various ways on various groups. Of course, a sufficiently large UBI would destroy the entire economy, as the incentive to work is destroyed, and any productive activity is heavily taxed to oblivion. But the argument in this post applies to even a small UBI, purporting to show that it would actually make the poor worse off. It wouldn't, unless you hypothesize long-term speculative effects like "changing the culture of poor people to value hard work less", which could exist, but apply to numerous other government programs as much or more.
3Kaj_Sotala
Doesn't this argument also apply to any form of social security or monetary wealth redistribution whatsoever and e.g. imply that giving people an unemployment benefit of X dollars would give them zero benefit compared to a counterfactual world where they got 0 dollars?
4Ben
The "universal" part of UBI is an important difference. If you print money to give to only one person then that won't be inflationary, but the more beneficiaries there are the more inflation will cut into the gains they each individually experience. So unemployment benefit, by hitting a smaller number of people, has less of this. I think it is plausible that introducing UBI would make certain goods go up in price. For example rents right at the bottom of the market might go up (because landlords know the tenants can pay it), but they might go down at the top (due to the raised taxes cutting into rent budgets of the rich). That would feel exactly the same as inflation to the people effected, although I suppose technically it would not be inflation if the hit at the top balanced it on average. This would increase the supply of "poor person" goods, because the poor can afford more of them, so more will be manufactured. (Inflation is a weird one because every person experiences a different inflation rate, depending on how the prices of the goods they buy are changing. The headline rate is some kind of average, which for many people might not be very close to their reality.)
7Kaj_Sotala
That is true, but note that relative to the current day, a UBI (at least in the form of the UBI schemes I'm most familiar with) would also only go to a relatively limited number of people. For people already earning a decent income, their taxation would be increased to eliminate the gain from the UBI; and a lot of the people who would income-wise be in a position where their UBI wouldn't just be taxed out, are already on some form of social security that might be paying them the same as the UBI or more. (More, because the sum for the UBI would be chosen on the assumption that it would provide an income that was enough to make by but was still meager enough to incentivize work; whereas people who are e.g. on a disability pension because they are genuinely incapable of working and can't be incentivized into it are thought to deserve more than just the bare basic minimum for living.) I haven't seen anyone run the numbers on this, and it of course also depends on the details of the exact scheme, but I guess that the number of people whose income would increase due to getting a UBI would be smaller than the number of people who are already getting the same amount or more through some other form of social security. There's also the consideration that there might be some people who'd like to quit their jobs, which currently pay them more than a UBI would, but are afraid to do that because they're concerned that they couldn't find another job or qualify for social security if they did. But with a UBI and a guaranteed income they would be more willing to quit, even if it meant a cut in their overall income. So there are some people who might move from medium-income to low-income, and have overall less money. Probably not a huge fraction but still something that would somewhat counterbalance the "inflationary on the lowest incomes" effect.
[-]Brendan Long
20

You could also take this further and finance a large UBI by printing money, and this would cause (more) inflation, but if you model it out it ends up doing the same sort of transfer from richer people to poorer people as progressive tax financing (people with more money are "taxed" more by inflation).

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4Error
Does this really hold? I'd expect inflation to cost richer people more purchasing power on an absolute scale (because they have more cash to devalue), but less as a percentage of same (because that cash is a smaller proportion of their net worth).
2Brendan Long
You're right, and I hadn't thought of that. I think you'd still get the overall effect of a real transfer from richer to poorer people, but the way the tax falls on specific people would be different based on how much money they save and whether they save it in the form of dollars, plus whether they get paid in dollars.
[-]Yanling Guo
10

I fully agree with Radford, while all others also made some good points. My question is: why does UBI have to be paid out as dollar, and not e.g. in form of coupons for say, e-books? The cost for producing one more copy of ebook is almost zero, so you can even finance it by printing money and the price won’t go up, as the quantity varies with demand.

You could even do it on a larger scale: you give everyone a special card with certain amount which can only be used at vendors who agree to keep price constant. For instance, if strawberry sellers have plenty s... (read more)

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3Gordon Seidoh Worley
I think you're right that, for many goods, it would be better if we did goods rather than money transfers, similar to how we have SNAP/food stamps, Medicaid/Medicare, etc. programs today. This is because, having been poor myself at times and been around poor people, many people are stuck in poverty not because they want to be but because they have trouble managing money effectively, such that cash transfers would be less effective at improving quality of life than goods transfers. Yes, this is reasoning from anecdata, but I've seen it enough to think it's an important aspect of policy design for wealth transfers. That said, UBI would serve a somewhat different purpose and in theory subsibdize people who today manage their money fine, but in the future may not have a source of income due to automation from AI.
2Viliam
I imagine that would create a black market where people sell food stamps (with discount) for cash, which they can then freely spend on alcohol.
2Gordon Seidoh Worley
We used to avoid this problem by having special stores that distributed government food programs, but for a variety of reasons people didn't like it (higher labor costs born directly by the government, stigma of going to the government food store, eating generic food ("government cheese")), however this helps deal with the blackmarket problem if you, personally, have to show up to get the food you are owed, and then have literal food to barter with. I'm not saying we can completely stop economic activity. What I am saying is that there's a lot of benefit to providing tools to help people enforce rules on themselves that they would endorse in hindsight but have trouble enforcing on themselves in the short term due to issues like poor impulse control that are causally upstream of poverty for many.
1Yanling Guo
Yes, the special card I suggested is like food stamps (I guess with food stamps you can also choose between different foods and are not bound to a particular food) or Medicare (where you can also choose I guess), only the card idea is slightly more oriented to the supply side (a flat supply curve is the premise), while ultimately the consumers also benefit. I guess in many aspects I‘m also a poor person, but I haven’t yet found the time to really think about it, because I really doubt if things would be any different if I would be a bit richer. I certainly don’t starve, in fact I‘m thinking about putting up a foundation to give something back to the society, because in Germany you can also put up a foundation with little capital. My idea also has something to do with AI, but not with UBI. I think labor division is great, but also has side effects: people in different jobs tend to be alienated and fragile, a lawyer doesn’t really understand a nurse, losing a good paid job often makes the person suddenly doubt on her worthiness although it’s still the same person. With AI I could generate lots of contents to help people navigate the life. For example, if someone looks for food, I can show them where to find the food cheaper, how to assess the nutritional value of the food, and how the food is made. If you have made the food yourself one time, you can more appreciate the time and effort by the producer, I think. By no means should everyone make all his own food, that’s contra-productive, but they should have the possibility to know how things they depend on daily are made, that gives them more confidence, and sometimes someone may even find a new endeavor, (I know there are some former chemists who became chefs and teach molecular cooking). The users can also network, discuss new ideas, get together for a project or put up a new company. The general idea is that now things can be produced cheaper due to scale effect, so we need new demand, including new idea. If someo

123

Due to money neutrality[1], increases in the supply of money that's in circulation (either because the government is printing money to fund UBI or, to a lesser extent, because they are taxing ultra-rich people, whose wealth generally has a lower velocity than that of the lower-income recipients that save a smaller percentage of their income) do not modify real variables, such as real GDP.

This means that the total supply of goods and services in a country does not change, and the increase in people's disposable income and thus capacity to buy is, on the whole, captured entirely by inflation and rent-seeking. Note that rent alone does not go up by exactly the value of the UBI, but since other goods and services increase in price as well, the total real effect is zero. Of course, many answers have already mentioned that the rent-seeking part can be addressed (at least in part) by Land Value Taxes (LVT).

While LVT seems to me like a good idea on the whole, it still has some serious implementation issues. Firstly, on the federal level, it is almost certainly a non-income direct tax and thus covered by Article I, Section 9, Clause 4 of the Constitution, which requires apportionment among the states[2] (and it's likely not covered by the 16th Amendment, which generates a exemption from this). Secondly, there are other practical problems, such as accurately assessing the value of (unimproved) land separately from whatever is built on top of it. Moreover, most Georgists support a tax rate of below 100%, which would reduce but not eliminate land rent-seeking. There are other arguments that have been brought against LVT, of course, but they don't ultimately seem to hold up, in my view.

Of course, there is also the additional issue that land is not the only area in which sustained economic rent-seeking happens. What makes land easier to tackle in this regard, at least conceptually, is that, in practice, it is almost perfectly inelastic, so taxation of it does not generate productivity-destroying Deadweight Loss the way any other non-Pigouvian taxes do. Other areas in which we have rent-seeking likely do not benefit from the same feature, so taxation would need to be implemented very carefully, so as to generate the roughly estimated the social benefit and thus socially desirable quantity of some area of the economy.

In any case, even though the aggregate real effect of UBI would be approximately zero, this does not mean that there would not be people who benefit. On the contrary, it seems sensible to expect lower-income consumers to benefit the most: for illustrative purposes, an extreme example is someone who starts of with a disposable income of $0. They cannot buy anything at the beginning, but if they receive $2k in UBI, let's say, they can now afford more goods and services than before, even if those goods and services get more expensive. Less extremely, a hypothetical scenario in which each citizen/resident has the same consumption demand curves and receives the same lump sum of money from the government simply results in the value of money decreasing by a factor of , so the total value stays the same, but it is more evenly distributed (poorer people get richer in real terms and richer people get poorer in real terms).

This doesn't quite match reality because rich people and poor people do have measurable differences in consumption preferences and demand curves. But I think we have good reason to suspect that the overall effects generated by this are small and should not change our conclusion (that UBI generally has a progressive aspect) too much.

  1. ^

    Which is basically correct in the medium-to-long-term

  2. ^

    Apportionment has been described by scholars as "an absurd requirement, almost always impossible or else so perverse in effect that no democracy, indeed no rational government, could adopt it"

[-]Gordon Seidoh Worley
20

I think this explains what I was concerned about with UBI. The aggregate effects will be zero, but combined with you and others pointing out that it's a wealth transfer from the wealthiest (whether this happens directly or indirectly), UBI may reasonably give people at the bottom of the market sufficient money to become participants.

I think my concerns about rent seeking tanking UBI are perhaps separate from whether UBI can work in theory, although in practice I'm still quite suspicious that rent seeking will prevent UBI from achieving its desired effects.

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1Jiao Bu
>UBI may reasonably give people at the bottom of the market sufficient money to become participants. The incentive is still going to drive a businessperson to come up with a way to take that money from those people (as it is now).  So the rent seeking could expand to include something like slum-lording trailer parks in areas which are even further from possible employment, potentially locking those residents into a radius where no one around does anything but pot and video games. Meanwhile, since there is more money available to the middle classes, can't I just sell/rent them a house with more bells and whistles?  Maybe they're discerning customers with an extra thousand dollars, so we build the house on 16" centers again instead of 20" and sell them their new, wonderful, higher-quality lifestyle.  Or maybe we just put a thousand dollar countertop on the same crummy house. Or is something more fundamentally changed by UBI in the basic system underlying rent-seeking and inflation (in essence, the dynamics of capitalism)?  To me, rent-seeking is only a specific incarnation of that greater dynamic of exploiting whatever source of income you can by whatever advantage you have within the system to take money from whoever can and will give it to you, and not as distinct as people make it out to be.  The only thing UBI fundamentally changes in this equation is who can render funds, and how much they can render.

Viliam

4-2

First, UBI is not a magical solution to all humanity's problems ever. For example, it won't cure malaria. Also, what happens if we adopt UBI and literally every single human on this planet decides to quit their job and do nothing (before things get fully automated)? Then we will starve and die.

So, expecting UBI to magically solve everything would be wrong. It is also be wrong to reject UBI just because it is unable to magically solve everything. Things that solve some problems and do not solve other problems can still be improvements.

*

The allocation of money determines not just how much stuff is produced, but also which stuff is produced. It is true that UBI will not result in more stuff being produced. But it may result in different stuff being produced. Fewer yachts, more anti-malaria nets? That would be the most optimistic result, but maybe something like that. I mean, if the people who need the anti-malaria nets get the UBI, they may spend a part of money on that, and a part on something else.

Worrying about the rent makes sense. But consider that one of the reasons why rents are so high is that people need to live close to well-paying jobs. Yes, a part of UBI will get captured by the rent-seekers (unless it is financed by a Georgist reform), but the power of the rent-seekers will be somehow reduced by the fact that people are now under smaller pressure to live at the most expensive locations. No idea what would be the new balance, but it doesn't seem obvious to me that it would be the same as the old balance.

Shortly, your analysis is missing the part where people with UBI would be allowed to make different choices than they make now. If you get extra X dollars, and someone increases your rent by X dollars... yes, one possible choice is to stay. But another possible choice (that you didn't previously have) is to leave and take the X dollars with you. So people will probably split between these two options.

Brendan Long

40

A UBI in the US might cause what you're suggesting, since there tend to be more restrictions on needs vs wants. i.e. no one will stop you from building a superyacht if you want, but there's a lot of artificial barriers to building cheap apartments. So if you shift demand from things rich people want to things poor people want, you might get a lot of the money transferred to the owners of the last few cheap apartments that were allowed to be built.

This seems like more of an argument against that kind of law that outlaws anything that rich people don't want though, not an argument against UBI.

[-]Gordon Seidoh Worley
20

I think my concerns hold even if it's easy to build things. Like suppose there are 100 people and 100 houses. Houses have normally distributed annual costs between $100 and $1000. Before UBI, people have annual income of between $100 and $1000, so in theory everyone can occupy a house (and in this simplified example, assume no one needs anything else).

Then we introduce UBI of $50 a year. It seems to me that all annual housing costs should increase by $50 to capture the free money rather than allow it to be spent on anything else.

This is a very simplified example, but I think it's worth figuring out how UBI can do anything other than simply cause inflation.

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5Brendan Long
An important piece of this is that shifting the relative distribution of money also shifts the distribution of real resources. So absent legal restrictions, if more people have money they want to spend on housing, you should expect more housing to be built, not just for the existing supply to get more expensive (and in exchange, you should expect less of whatever the people paying for the UBI want produced; regardless of whether they pay via taxes or inflation).
5Radford Neal
Once you've assumed that housing is all that people need or want, and the supply of housing is fixed, then clearly nothing of importance can possibly change. So I think the example is over-simplified.

Dagon

20

Is this a generalized argument about all redistribution schemes?  

UBI doesn't fix everything, but inflation doesn't do as much harm to the impoverished as it does to the cash-heavy.  In fact, it's a form of redistribution in itself.  So a near-zero-starting UBI recipient does see some of their UBI purchasing power reduced, it's still better than without UBI.  The well-off are taxed more than they receive in UBI, either via actual taxes or inflation.

If you raise someone's cash position from 0 to nonzero, then no percentage reduction brings it back to 0.  

As to the rent-seeking (aka "poor people make poor money decisions"), it's probably not solvable, but having UBI be non-attachable (future payments not assignable or collectable for debts, and excluded from bankruptcy proceedings) makes it a little harder for legible systems to take it away.  Private corruption and human trafficking probably don't get solved by UBI, but they're probably not made worse.

[-]Gordon Seidoh Worley
20

All redistribution schemes would seem to have some risk of this problem, but it seems like a bigger problem if the redistribution is universal. Like if we redistribute wealth to 1% of the population probably not much will happen. If we do it to 10% I suspect we'd see moderate inflation. If we do it to 100% we'll see a lot. In fact we saw exactly this in the US with COVID subsidy payments, as best I can tell.

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Jiao Bu

1-3

If I am a lending shark, I will lend more predatorily to people under a UBI regime, even if that income is protected.  It changes the risk management calculations towards "they now have more ways to figure out a way to pay before going bankrupt" and "after bankruptcy pool of money I can extract is higher."  Again, maybe you've technically protected UBI, but I can surely garnish wages in either case, pressuring them to give me as much as they can.  People can miraculously make money appear when you squeeze them, and now I know there's more there to squeeze them for in every case.

People with protected savings often raid that.  I will count on the "raid the IRA" effect, but with people for whom that money wasn't earned, and they don't culturally have the tendency to want to protect it.  And anyway, you can only file bankruptcy once in seven years, and I can get more blood in the interim.  In essence, I'll redo all my risk management calculations on how far I press this because now you have two choices, you're either going to be dirt poor -- nothing but UBI and quit your job and live in the gutter, or else you're going to "magically make some money happen" to get me off your back.

My guess is this dynamic screws over people just above the poorest, and deep into the middle.

Look, I personally find all that distasteful.  I won't even buy Altria stock.  But I expect a flourishing of those businesses in a UBI regime, and they will prey upon many who UBI is trying to help.  That and the increased inflation, I think the middle poor and the lower middle classes will get really screwed by the whole thing in the end.  Basically the people who work and struggle, whom UBI most wishes to help.

Kind of adjacent:  Add in investment scams targeting the undereducated, and lots of toys to decorate trailers.  I would expect Sony, Nintendo, etc stock to go up (GME, LOL), and Altria as well due to the additional pot sales.  The "Video games and drugs" class will expand fast, because UBI will not likely be enough to do anything actually interesting.

I think it's a step that has to happen and will happen.  The writing is probably on the wall that we're going to enter a very redistributive regime in the USA.  But I am not optimistic about it until we're at near Star Trek levels of Universal Wealth.

1

Dave Lindbergh

10

I'm not sure where you get the assumption that a UBI is funded by printing money. Most proposals I've seen are funded by taxation. The UBI proposed by Charles Murray (in https://www.amazon.com/Our-Hands-Replace-Welfare-State/dp/0844742236 ) is entirely funded by existing welfare and social spending (by redirecting them to a UBI). 

[-]Gordon Seidoh Worley
20

I'm not assuming money printing or increasing the money supply in general, only increasing the supply of money that recipients have access to.

Money printing seems like one, probably especially bad, way to create UBI, but other options seem better.

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[-]khafra
30

Land Value Tax would solve this.

(Sort of--funding UBI from a 100% LVT would solve it for the case of literal rent seeking, because if landlords increased the rent, that additional money would be taxed back into the UBI pool. To make it a general solution, you'd have to identify all instances of rent-seeking, and tax the underlying asset with a metaphorical 100% LVT).

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[-]Gordon Seidoh Worley
22

In that case UBI seems like a bad policy in isolation, as it seems like it may only be effective if rent seeking is effectively curtailed.

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[-]Gunnar_Zarncke
34

Sure, people/companies adjust to the presence of UBI, but it does change the shape of the supply/demand landscape. It doesn't create money out of thin air, but it influences low income differently from high income and it changes incentives to earn. I think it's not easy to predict the aggregate effect.

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[-]David Gross
20

If UBI is implemented as a form of wealth redistribution -- in other words if a progressive tax fully funds the UBI payouts -- then the money supply inflation problem goes away, no? At least on the economy-wide scale.

I guess there is still the problem that at the bottom of the income scale there is now more money chasing e.g. a stickily-fixed supply of low-income housing, so the prices of such goods are likely to rise. But might some of the people who used to compete for that stock of housing also now be UBI-boosted into setting their sights on higher-quality housing and no longer be part of that competitive pool? Maybe it evens out.

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[-]Gordon Seidoh Worley
20

I think the problem you are describing at the bottom of the market is why I expect UBI not to work, because it will fail to do enough to subsidize demand to move anyone up in the market, resulting in a "wealth" transfer that only serves to reduce average purchasing power.

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