This article was originally published by Conner McEleney at The Mises Institute.
Many progressives, such as Robert Reich and Kyle Kulinski, argue that the economy needs a universal basic income (UBI) to fix it. Their argument stems from the idea that UBI has no serious flaws, that many studies show success, and that it’s the moral thing to do.
An example that these progressives would cite would be the Denver UBI experiment. The study had three groups of people. Group A had $1,000 per month, and Group B had $6,500 for the first month; the other months were $500. Group C had $50 a month. The study concluded that giving money improved their overall well-being.
As the saying goes, it’s too good to be true; the results alone are exaggerated by UBI proponents. The actual results show that in Group A, which received a total of $12,000 in a year, 44 percent of them are housed. Meanwhile, Group C received $600 in the year, and 43 percent were housed. Even though Group A has 20 times the value of Group C, both had similar results.
Ironically, the study was not universal because it denied participants who were “having severe and unaddressed mental health or substance use issues.” As a result, the findings are cherry-picked because they removed people who could make the results look bad.
Even if the study were accurate, the results would be different if applied by the government. One of the biggest potential differences we would see from UBI on a more permanent basis is what Milton Friedman called the permanent income hypothesis. The hypothesis states that “consumers base their spending decisions on their average long-term income rather than their current income.”
An example would be a person receiving a gift of a few hundred dollars from a birthday party. That person would go on to save it or splurge it on an expensive product. However, this money would not change their spending habits for an average week because they knew the birthday money was temporary compared to a raise in a job.
Therefore, it is reasonable to assume that people would act differently if UBI were permanent compared to case studies in which it was temporary. In the case studies, all participants knew the money was temporary. As a result, they will try to ration the money differently because of a different mindset.
Another problem with UBI as a government program would be funding. The funding for the case study was not from tax dollars; it came from private donations. Based on the book Cooperation and Coercion: How Busybodies Became Busybullies and What that Means for Economics and Politics by Antony Davies and James R. Harrigan, people respond to actions differently if the ideas came from cooperation or coercion. In the case studies, the people who funded the operations did so because they were happy to cooperate.
However, if UBI becomes a government program, it would be through taxation. Taxes are not cooperative actions, but rather they are coercive actions. As a result, taxes would change the economic activity of the area more than the case studies would ever do.
After all, people do leave areas because of taxes. An example would be Illinois. An article from the Illinois Policy Institute using IRS data found that “nearly 56,000 people and over $6 billion in income left in 2023.” Besides moving, economists Christina and David Romer published a study in the American Economic Association, finding that a $1 tax on GDP has caused a $3 decrease in GDP. Not only that, a working paper in the CBO found that labor bears 70 percent of the corporate tax burden.
Taxes to fund UBI would require a massive tax increase as a government program. According to the founder of CBPP, Robert Greenstein, it would cost $3 trillion a year, assuming it goes to 300 million people and provides $10,000. Greenstein put into context the tax dollars needed to fund this program: “The figure equals more than three-fourths of the entire yearly federal budget — and double the entire budget outside Social Security, Medicare, defense, and interest payments. It’s also equal to close to 100 percent of all tax revenue the federal government collects.”
Even though proponents of UBI will try to argue that it will help people by giving them free money. However, as Milton Friedman once said, “There’s no such thing as a free lunch.”
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