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Let’s talk about UBI and the relative burden of inflation…

Inflation is a real burden on the global society. An unbalanced and chaotic supply-demand around the globe as a result of Putin's Peace-Keeping Mission and the introduction of a new major global infectious disease have only added to the strain of hard-working Americans. This is an analysis of how UBI would affect people and the economy with respect to inflation.
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The world is seemingly facing one disaster after another. And while some of these may be transient [i.e., Putin’s ‘Peace-Keeping’ Crusade] others are here to stay [i.e., COVID]. To meet the new challenges of our time with respect to increased societal morbidity from the addition of Covid-19 into our world governments must work to update their infrastructures to more technologically advanced systems that lean more on artificial intelligence and automation — and less on human labor. Supply chain need to be simplified with less reliance on major suppliers located far away from their consumers and more reliance on localized suppliers. Energy production must become more efficient and less dependent on labor-intensive and logistically challenging 20th century methods and more reliant on cheaper and less labor-intensive 21st century technologies.

Upgrading to more efficient systems will alleviate supply-demand challenges, however, new technologies and more efficient solutions always leave collateral damage in societies. When cheaper, more efficient, technologies are installed human labor is displaced in the process. The deportation of jobs to China was great for capitalism  — companies were able to buy their products for cheaper and pass the savings along to the American people — allegedly. Government’s solution to the displacement was ‘job retraining’… the theory that people who lost jobs would be able to find new ones. It’s tough to say that was a successful solution if we look at the state of our country today. While many did in fact successfully find new jobs the data shows that these are relatively ineffective answers that leave many people and towns left behind in the cold as cash flows to communities are cut off and cash flow to major corporate entities grows.

The question then becomes ‘what is the solution?’ Current-day Republicans propose we do not need to update to 21st century technologies — and rather that we double down on drilling and supplying ourselves with all our own oil. Also, that immigrants are a big problem in our society and need to be minimized and shipped back to where they came from. Democrats propose we invest in updating our infrastructure technologies and strengthen unions so they can protect themselves from corporate greed.

Both parties solutions deserve some credit for their merit but also have consequences of their own. More domestic oil production would help to alleviate gas prices, however, it’s questionable how much Democrats restricting domestic oil production is really the root cause of this supply-demand problem, as many oil companies are recording record profits [Reference 1 | Reference 2], oil is a complex global market [Refs. 3 | 4 | 5 | 6 | 7 | 8], and it doesn’t necessarily address the challenges that have arisen from the introduction of COVID into our society [Refs. 9 | 10 | 11]. Furthermore, doubling down on oil is a short-sided solution that would have devastating effects on the United State’s long-term economic strength. Democrats are correct in their belief that investment in infrastructure is necessary, will create jobs to build, maintain, and service, and is the right decision for both America’s short- and long-term economic strength; and will have net beneficial effects on inflation — but doesn’t immediately address the problem in real-time; nor the overarching burden of COVID in our day-to-day lives.

UBI is a Universal Basic Investment policy (commonly referred to as Universal Basic Income) is an unconditional cash-based assistance program that serves as an alternative to the welfare [needs-based] assistance program. UBI is a program that provides freedom to all citizens no matter their current economic status, cuts government bureaucracy, enables work, provides equality, and isn’t communism. It’s supported by the world’s top economists like Milton Friedman, Sir Chris Pissarides, Daniel McFadden, Peter Diamond, and Greg Mankiw; the world’s richest people Elon Musk, Mark Zuckerberg, Jeff Bezos, Richard Branson, Stewart Butterfield, Sam Altman, and Bill Gates; and civil rights leaders like Martin Luther King, Jr. and Barack Obama. If enacted today it would immediately alleviate the harsh effects of inflation, especially on those on the lower end of the economic spectrum who are feeling it the most. 

Although UBI is supported as an appropriate policy by the world’s most successful people, top economists, and most notorious civil rights leaders, it still gets left behind in the world of politics. Numerous studies have shown anecdotal benefits of UBI in sampled populations but most people are unaware of it or sometimes believe it’s too good to be true. Other concerns are that it will make people lazy or lead them to crime and/or drug abuse — both of which conflict with data and objective science.

Perhaps the most dominant reason why it hasn’t been enacted yet, though, is the innate natural idea that giving out money will lead to inflation. But, would it? Let’s consider whether or not UBI would cause inflation, and if so, what effects it would have on who.

List of considerations

  • Causes of inflation
  • UBI funding
  • Non-discretionary vs Discretionary spending
  • Income levels:
    • $0 — no or minimal income
    • $13,200 — federal poverty line (1 adult)
    • $15,080 — 40 hrs/wk x 52 wks x federal min. wage
    • $41,535 — median individual income
    • $56,287 — median individual income [full-time]
    • $173,176 — ave. annual wage [top 10% of earners]
    • $343,987 — ave. annual wage [top 5% of earners]
    • $823,763 — ave. annual wage [top 1% of earners]
    • $3,212,486 — ave. annual wage [top 0.1% of earners]

What causes inflation?

Very simply inflation is caused by an imbalance in supply and demand that results in price increases. Any good or service is available in an amount of supply and consumed by an amount of demand. In reality, what drives prices is a tad bit more complicated and really needs to be appreciated on an individual basis — but, common sense writes the rules.

How would UBI be funded?

Most proponents of UBI suggest a VAT (Value-Added Tax) on all goods and services sold in order to fund a UBI. There are roughly 260M U.S. citizens that would qualify for UBI x $13.2k per year = $3.4T per year needed to fund the UBI at a level that meets the poverty line. There is roughly $22T in sales annually in the U.S., which means to fund the UBI 100% it would require a tax on $22T of about 15% on all goods and services.

Under this VAT there would be no real material inflation because there is no artificial creation of capital [i.e., it’s not simply printed and handed out]. However, there is an increase in the price of goods and services via the VAT, which is essentially the same as a sales tax. We’ll look at how this affects earners of different levels below.

Additional considerations include policies that can be implemented or abolished in order to reduce wasted money. Academic studies by Cornell’s School of Public Health recently published found that if we stop allowing for-profit health-related corporations extort us for healthcare services we can save $500B by implementing a healthcare for all system. The implementation of UBI would also mean the abolishment of the welfare system, saving tax payers around $1T per year.

There are hidden costs of poverty and despair that would also be significantly reduced, as well. With a UBI policy societies can expect lower overdose and suicide rates, healthy more productive populations, lower crime rates, reduced domestic abuse, and perhaps nonexistent homelessness. 

Essential vs Discretionary Spending

On microeconomic balance sheets not all essential spending is created equal. Someone living at the poverty line may spend about $13,000 on goods and services deemed essential in the world of accounting, whereas someone living in the top 10% may spend $30,000 on things deemed essential. And in today’s world, those who make $13,000 a year feel they need $13,000 a year to survive; a person making $100,000 a year to survive. Through a macroeconomic lens, a person needs $13,200 to survive — individual wants and desires are different than real world needs.

In our analysis, we consider discretionary income to be anything exceeding the poverty line, $13,200 per year. Therefore, as we evaluate how inflationary forces and the addition of the VAT would affect people at the lower end and at the higher end in terms of purchasing power on essential, and discretionary, goods and services.

Base Income

Let’s take a look at how base incomes would change for people of different income levels if welfare is tossed out and replaced with UBI policy.

Base Income with UBI

As you can see, with a UBI everybody receives the same baseline stimulus. There is no transfer of wealth on an absolute level. Relatively speaking, though, those who need the most help receive a significant relative change in their income. For a person who works full-time 40 hour weeks the UBI stimulus nearly doubles their income from $15,080 to $28,280. 

It’s also worth noting the value of work-hour equivalents. Let’s say that both the worker working at federal minimum wage and a worker making $500,000 per year work 40 hour weeks 52 weeks a year. A work-hour equivalent for the person working minimum wage is $7.25. A work-hour equivalent for someone making $500,000 is $240.38. A UBI policy of $13,200 per year is equivalent to just under 55 hours of work. On the other hand, for a person working full-time on federal minimum wage receives the equivalent of 1,820 hours of work.

Discretionary Income

Let’s take a look at how discretionary incomes would change for people of different income levels if welfare is tossed out and replaced with UBI policy.

Discretionary Income

In this regard we define discretionary income as anything in excess of the Federal Poverty Line. Under our current welfare system a full-time employee making the federal minimum wage has $1,880 discretionary dollars, and the average person in the top 5% has $330,787 discretionary dollars. Under the proposed UBI policy, a full-time worker making the federal minimum wage would have $13,100 of discretionary income after adjusting for a 15% increase in prices, 7x more than in our current system. Top 5% earners would have $342,007 in discretionary income, about 1.03x more.

Revenue from VAT

In calculating revenue collected from the VAT, the tax which would fund the UBI, we take 15% from the $13,200 spent on essentials and then we take 15% from half of the discretionary income.

Revenue From VAT

For somebody who had no income at all and paid $0 under the current system — they would now contribute $1,980 via the VAT.

For full-time workers at federal minimum wage contributes $0 now — would contribute $3,111 through VAT.

The top 1% who pay $0 now would contribute $63,762 under a UBI-VAT policy.

Net Profits

After people have spent $13,200 on necessities and 1/2 of their discretionary income they are left with their net profit (before income tax). 

Net Profit with UBI

For somebody who does absolutely nothing at all they break even with a UBI and don’t net anything.

For a minimum wage full-time worker, they net about $940 in a system without UBI-VAT, and with UBI-VAT they net about $6,550 — a 7x multiple.

For the average earner in the top 5% their net profit only increases by a multiple of about 1.03x — going from $165,394 to $171,004.

Conclusion

It’s clear that while a UBI-VAT policy would increase the price of goods and services by 15%, however, the cost of this is outweighed by the amount of benefit provided by the $13,200 stimulus. This benefit is felt most by those with lower incomes who are struggling to get by. 

The real effect of UBI on a full-time worker at federal minimum wage would be like raising it from $7.25 to $13.60. With UBI, though, the burden is not placed on employers but rather on the spending of discretionary income. The UBI policy removes the burden on small businesses and micro businesses to make sure all citizens can meet poverty levels and provides workers the leverage and security needed to be able to find work that compensates them fairly. And while employers who exploit their workers may find themselves struggling to find and retain employees, employers who treat their employees well will be more likely to find and retain employees for less because the workers feel appreciated and perhaps enjoy the work or believe in what they’re working for.

Do you support the shift from welfare to UBI? Use the comments section below to tell us what you think the pros and cons are for the competing economic philosophies and which one you’d like to see in your community.

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