The last two years have unearthed a lot of economic issues in Canada that many were unaware of. It has shown that our health care system is ill-equipped in a lot of ways. It has also begun to show some potential issues with how fiscal and monetary policies are implemented in Canada. One solution that has been thrown around is to implement universal basic income (UBI).
Universal basic income has continued to increase in popularity and gain support from more prominent politicians. However, there are many potential negative consequences to implementing UBI. This is exactly what we want to delve into today.
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Why Universal Basic Income
Before looking at why universal basic income won’t work, let’s understand why proponents of UBI are pushing for it. We would like to think that the championing of UBI comes from a place of compassion for others and a desire to see the economy thrive. However, the basic premise of handing out money as the answer to that may be misguided.
The idea is that implementing a guaranteed basic monthly income will lift millions out of poverty, create more jobs, and grow the economy. And, it will grow the economy by more than it costs. UBI will do all of this without creating outsized inflation or disincentives to work.
Sounds great, right? All of us don’t want people to live in poverty, and we would all love to see the economy grow in a healthy way with more jobs created.
If you want more information in the affirmative for UBI you can check out UBIworks.ca.
UBIworks.ca lists eight ways they believe that a Universal Basic Income could be paid for, without increasing income tax.
- Land Value Tax
- Corporate and Economic Activity Pay More
- High Income Earners Pay More
- Reduce Current Government Expenditures
- Tax Environmental Degradation/Use of Commons
- Micro Tax
- A Federal Compromise Plan
- Gross Cost Financing With No Debt, No Program Cuts, Using Collection of Taxes.
All of the above eight suggestions they make could likely have severe negative consequences including reduced incentive for businesses to take risks, business closures, tax fraud, capital flight, and many more. We would encourage you all to read their list of potential solutions and do some research as to how that would affect Canadians.
With all the potential benefits there are several points of caution.
Consequences of Universal Basic Income
It would be great if the implementation of a universal basic income only had benefits, however, that is likely not the case. Below we outline several negative consequences to UBI implementation that could vary in their severity.
The difference in Living Standard
The idea with universal basic income is that it is supposed to cover the necessities; food and shelter, right? Well, what about the internet? How about some form of transportation? A phone? What about people living in different parts of Canada?
If you live in rural areas your cost of living is minimal relative to someone living in Toronto. In some rural areas, $2,000 a month could quite easily be enough to cover rent, food, insurance, electricity, phone, internet, and maybe some transportation. In Toronto? $2,000 might not even cover rent.
Furthermore, universal basic income isn’t means-tested, hence, universal. Does that mean it will be based on per individual, or per household? What about common-law vs. married couples? Do they receive the same amount? Or what about roommates? It’s very common to have two or sometimes four young adults living together. There are also a lot more young adults choosing to live at home until their late 20’s or even 30’s. Giving each of them a universal basic income when they might not even have much in the way of expenses doesn’t seem to encourage them to find a job or start a career.
Universal Basic Income Disincentivizes Contribution
The beginnings of this point were brought up above. If I know that I can sit around and be unproductive and still get enough money to live, why would I go look for a job? Why would I go work a job that barely pays me more than UBI when I don’t enjoy it?
This is what we saw during the COVID lockdowns. Businesses that were lucky, were finally able to reopen their doors after months of forced lockdowns. However, they were met with a workforce that was unwilling to return to work. There were many stories of lower-income employees choosing to stay home, collect CERB, and not participate in the workforce.
We are always told that we should do what we love. However, often what a person loves to do and what we are really good at do not overlap. We live in Canada and a lot of people love hockey and play quite regularly. Being a realist, the chance that someone makes it to the NHL is very low. It is just not what everyone is the best at and it would not pay the bills for many people if they pursued it. However, if they were guaranteed to have their basic necessities covered, there is a lot less of an incentive for them to do what they have a natural aptitude and gifting for. Maybe they pick up a job working two days a week, relying on UBI, and just pursue their NHL dream.
Implementing a UBI could see a lot of talent go to waste. People will follow trends and want to occupy themselves with whatever activity is most enjoyable. Everyone has their natural talent. It might be in math, but because that isn’t “popular”, they might not want to pursue it. People with natural giftings for teaching, or fixing things, might not want to pursue them because they don’t enjoy it and don’t need to rely on that gift to provide an income.
Financial and Personal Responsibility
Implementing a universal basic income will discourage financial and personal responsibility. The risk that millions of people take to start a business or quit a job, etc., is greatly diminished if UBI is implemented.
When people start a business they are taking a risk that the business fails and that they are left with nothing. If the business is successful there is great reward and payoff. If UBI is implemented there isn’t that risk and the same motivation to see it through at all costs and succeed. Furthermore, often when you ask those that are successful in life, their failures or the times when they hit rock bottom are their greatest learning experiences. UBI diminishes that motivator.
There is the argument to be made that it will also spur on people who normally wouldn’t take a risk to do just that. They don’t have to be afraid of being left with nothing, so they may be more inclined to take a leap of faith.
There is also no need to increase your financial literacy or understanding. Your income is guaranteed no matter how unwise you are with what you are given.
Universal Basic Income Causes Inflation
If you have been reading our content for any amount of time, you have likely heard us talk about inflation. With the current economic landscape, inflation will likely be a recurring topic for the foreseeable future.
The implementation of universal basic income will likely add to the inflationary tailwinds. As we have already mentioned, UBI will shrink the number of people that want to participate in the workforce or the number of hours they put in.
In order for businesses to incentivize people to fill positions, they will have to raise wages drastically. Although that sounds good to the employee, it will cause the price of everything to increase propotionaly. Businesses still need to make a margin so the increased labor cost will be pushed on to the end consumer. Rising prices are the least UBI will do. Worst case scenario, it causes business to shut their doors.
Furthermore, if the government starts printing money to sustain universal basic income, we then will experience even more inflation. The result will be the same as it was with CERB and the helicopter money that was handed out in 2020 and 2021. Click here for our thoughts on helicopter money.
Conclusion
You don’t have to take our word for it. There was an experiment done by the federal government in America between 1968 and 1980. The experiment was called “Negative Income Tax”. It consisted of four random, controlled trials across six states designed to test the negative income tax.
It was similar to what universal basic income proponents are proposing today. A minimum income, which phases out as earnings increase. The results were glaringly obvious and not surprising.
Evaluations found that the experiment resulted in reduced desired hours of work by 9% for husbands, 20% for wives, and a staggering 25% for single female heads of families. That’s not it, even more shocking is the reduction in hours worked by single males who were not heads of households, which dropped by 43%!
Those in the experiment who lost their job were unemployed for significantly longer than their counterparts not in the experiment. Husbands for two months longer, wives for almost a year, and single people were unemployed for months longer yet.
Proponents of UBI will argue that it will only work if UBI replaces all other welfare programs. However, this brings up new issues. Mainly the fact that UBI would be distributed to all people while welfare and social security programs are only paid out to those who need it. Essentially, it would take from those who need it and give it to those who don’t.
One alternative would be to increase the basic personal amount. The basic personal amount is a non-refundable tax credit given to every Canadian that essentially means you pay no income tax if your income is below a certain level. This would allow those in lower tax brackets to pay less tax or even no tax at all. It would encourage work rather than discourage work and directly benefit those who need it most. Do you want to know what’s crazy? One of UBIworks.ca’s potential solutions is to eliminate the federal and provincial basic personal amounts! Insanity!
Let us know your thoughts in the comments below! Did you learn anything new? Do you think implementing a UBI type system would be good?
Sources:
https://thelibertarianrepublic.com/reasons-universal-basic-income/
https://fee.org/articles/universal-basic-income-has-been-tried-before-it-didn-t-work/
