Why a Universal Basic Income (UBI) Is a Risky Idea

On June 5, 2016, 77% of Swiss voters rejected a citizen initiative to introduce a universal basic income (UBI) in a national referendum. The proposed sums were 2,500 Swiss francs (about $2,600) per month for every adult citizen and 625 Swiss francs (about $650) per month for every child. From the very beginning, it was clear that the initiative was doomed to failure. First, Switzerland does not have the problem of high unemployment. According to the World Bank, its employment-to-population ratio was 65% in 2014. In May 2016, its unemployment rate was 3.3%. Second, Switzerland is one of the richest states in the world. In a 2015 wealth per capita ranking by market research firm New World Wealth, it ranks first with $285,100 per capita, followed by Australia ($204,400), the US ($150,600), the UK ($147,600) and Sweden ($146,000).

What was then the point of initiating the referendum? One of the main goals was to draw more public attention to the risk new technologies could pose to some professions in the near future. The more work digitization progresses, the more people will end up unemployed, claim supporters of a UBI. In their opinion, it is an excellent alternative to unemployment benefits in this situation. However, there are some strong arguments against it.

1. A basic income scheme would be very costly and harmful to the worse-off. If the US decided to provide a basic income to its 300+ million population, it would cost over $3 trillion per year. Every citizen would receive $10,000 per year under 2 conditions: (1) Taxes should be raised so much that the tax share of GDP would increase from the current 26% to 35%. (2) All other welfare programmes worth $1.2 trillion should be cancelled except for health care. Paradoxically, the replacement of welfare spending with a more expensive basic income scheme would actually increase poverty and social inequality. A fixed income of $10,000 would widen the wage gap even more: the financial situation of people with a lower income would get even worse as the better-off would also be eligible for the state grant.

2. A basic income could force some countries to close their borders and to introduce state support quotas. Countries which could afford to implement basic income schemes would inevitably attract a lot of economic migrants. Intensified migration could jeopardize the stability of a financial system. In order to avoid it, some governments would introduce strict entry procedures which would significantly limit the number of newcomers. The entry would be denied not only to migrants who would like to take advantage of a basic income scheme but also to some highly-skilled migrants who could contribute a lot to a state budget. Some governments would also be creating legal obstacles for some citizens to access state support. This would lead to a division between first-class and second-class citizens, which would cause a lot of social tensions and eventually socio-economic problems with serious financial consequences.

3. A basic income could establish unemployment as the new normal. Sam Altman, President of Y Combinator, a startup accelerator which is testing a basic income scheme in Oakland, California, believes that “[…] technological improvements should generate an abundance of resources and the cost of living should fall dramatically”. If these assumptions turn out to be true, there is no guarantee that there will be enough interest in making the best use of available resources. Financial comfort could actually discourage a lot of people from actively looking for a job or taking entrepreneurial challenges. Why to work hard if you don’t need to? Some people could even start thinking of a basic income as their basic right. Needless to say, it would severely hinder economic growth.

References:  [1] Dylan Matthews, Vox / [2] Melody Hahm, YAHOO! Finance / [3] World Bank / [4] Trading Economics / [5] The Economist / [6] Megan McArdle, Bloomberg View / [7] Sam Altman, Y Combinator