- [Narrator] In the past three years,
the US government has spent over $5 trillion
on COVID relief stimulus
on top of regular budgetary spending.
In hindsight, most economists acknowledge
that this was excessive
and probably not implemented in the best possible way,
and I'm not gonna tell you what's right or wrong there.
The world doesn't need another opinion
on government spending.
But what this did do, if nothing else,
is dispel the argument
that the government doesn't have enough money
to fund a universal basic income.
That $5 trillion was enough to give
every working-age American $1,000 dollars a month
for the two years that COVID
was seriously impacting business,
which is naturally raising questions
about if this would have been a better way to spend it.
Indiscriminately giving money to everyone
is not as crazy an idea as you might think,
and arguments for a universal basic income
are once again making their way into the mainstream.
These proposals offer a lot of apparent advantages
which extend beyond just it's nice to get free money.
Some advocates for a UBI
argue that it will do everything
from actually cutting down on government expenditure
to revolutionizing the way that we operate
our modern economies.
We will get to all of that in this video
and we will also look at a lot of the problems
with such a scheme,
problems that extend beyond just the obvious issue
of who is gonna pay for all of this free money.
So to have an honest discussion
about the viability of a universal basic income
we need to as always answer a few questions.
How do advocates of this system propose
that countries will pay to give money
to all of their citizens?
What advantage does a universal basic income have
over traditional welfare systems?
And of course, before you start collecting your free checks,
what are the problems that we should consider
before these systems are rolled out into our own economies?
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A universal basic income is a financial support system
that gives money to everybody in an economy
with very few exceptions.
Normally, UBI proposals don't include payments
for people under the age of 18
or people who are not not citizens
of the country making the payment.
Outside of that, everybody gets it,
and everybody gets the same amount, it's universal.
If you are a student studying full time, you get the UBI.
If you're a working professional, you get the UBI.
If you're a multi-millionaire, you get the UBI.
Now, as for how much this universal payment is, that varies.
Different proposals in different countries
at different times
have called for different amounts of money.
But if you look into this topic,
you'll probably find the best known proposal
was Andrew Yang's $1,000-per-month payment,
which was the foundation
of his unsuccessful 2020 presidential election bid.
So let's use that as a working example,
but keep in mind that some policy makers have called
for more or less generous versions of this scheme.
Of course, this $1,000-a-month payment
will mean different amounts to different people.
The millionaire probably won't even notice the payment.
The working professional will use this to subsidize
their existing income.
And to the student,
it might make the difference
between being able to study full time with a part-time job
versus studying part time with a full-time job.
This natural marginal utility
is part of the charm of the UBI model,
and it's also part of the way that it justifies
its significant costs.
In total, the US normally spends
about half a trillion dollars a year
on what you would typically think of as welfare
between the federal and state governments.
I'm using pre-2020 figures here
because obviously with COVID release stimulus
these numbers got a bit wacky.
This also excludes Medicare and Medicaid
because none of the major supporters of a UBI
are suggesting that it replaces either of those programs.
Now, of that half a trillion dollars,
a not insignificant portion went
to the administration of the social services,
things like case workers, auditors,
contact staff, their managers,
and all the other general expenses
that go into running an operation as big as social security.
If this was all replaced
with a simple automatic transfer to everybody,
most of this overhead could be made redundant,
significantly cutting down on the expenses.
Now, there are three major problems with this argument.
The first is that of simple arithmetic.
Yes, the American government currently spends
about half a trillion dollars a year on social security,
and if instead it introduced a universal basic income
it could choose to do away with all of these programs.
But giving $1,000 a month to all eligible Americans
would cost at least $2.5 trillion dollars.
This also makes the argument
of cutting down on administrative costs
a little bit hollow.
Even if administrative costs
were really at the extreme high end of some estimates
and they could be eliminated entirely,
you're cutting out $100 billion
only to turn around and spend an extra $2 trillion
by adopting a UBI.
The third problem is with the universalness
of a universal basic income,
and that is because $1,000 a month
is already below the poverty line
for a single person household with no additional income.
If a recipient has a disability, dependent children,
or simply lives in a higher cost-of-living area,
this payment becomes extremely inadequate.
There are certain problems with welfare systems
in basically every country in the world that has them,
administrative cost has just been the tip
of the problematic iceberg.
But there is a reason that countries spend so much
on making sure recipients
are getting the right amount of money,
and that's to make sure recipients
get the right amount of money.
You don't want people on welfare starving
and you also certainly don't want people
taking advantage of a system
to get more money than they really need
without contributing their fair share to an economy.
But moral arguments aside,
all this shows is that there really is no genuine plan
for universal basic income
that doesn't involve raising more taxes.
Most supporters of a UBI do acknowledge
that it will need to be paid for
with higher taxes across the board,
particularly on higher income earners and businesses.
Depending on progressive tax brackets,
this is normally proposed in such a way
that middle income households
don't earn any more or any less than they would have
without the UBI.
They might get an extra $12,000 per year,
but they will pay an extra $12,000 a year in taxes
because of the required increase in income tax rates.
Of course, below income households,
like those that may have been subsidized
with traditional welfare systems,
very little of the additional $12,000 in income
will be taxed,
meaning it does effectively subsidize
their household budget.
There is certainly nuance
to the discussion that needs to be had
around taxation to fund a UBI.
Some advocates simply say that it should be funded
with taxes levied exclusively on the extremely wealthy.
The most noteworthy proposals
include things like a top marginal tax rate of 70%
for people earning over $10 million a year,
or, of course,
a wealth tax that takes a portion of someone's net worth
over a certain figure,
normally in the tens of millions.
The other probably more reasonable proposal
is to remove long-term capital gains incentives
and tax those earnings the same way
that any other income would be taxed.
Most of the time you hear about a billionaire
selling their company for some crazy amount of money,
they will be paying 15% on that income.
If these tax rules were changed,
they would be paying 37% on the majority of those gains.
Or, you know, if a 70% tax rate for income
over $10 million a year gets passed,
they would pay that.
Now, the classic counterargument to this
is that oppressive taxation
will stifle the entrepreneurial spirit
and disincentivize investments.
Why would anybody risk starting their own company
or making a risky investment
if even the best case scenario
is them giving a majority of their income to the government
or having their investment gains slowly taxed away
through a wealth tax?
On the surface, this sounds reasonable enough,
but really this argument is about as hollow
as the one claiming that a UBI will justify itself
by doing away with expensive welfare administration.
People are going to risk starting their own companies
and making risky investments
because the potential returns are still there
no matter how it's taxed.
Nobody is gonna pass up starting a $100 million company
because they have to pay 37 or even $70 million in tax
instead of 15 million.
In any scenario, they are set for life.
The only way to totally disincentivize the profit motive
is to have a tax rate of over 100%,
which obviously nobody is seriously proposing.
An argument that might be a little bit more fair, though,
is that if taxes are increased enough,
wealthy people with the means to leave the country
could just choose to leave the country.
Now, this is more difficult for American citizens
because their taxes follow them everywhere
unless they renounce their citizenship,
but for every other country
it's something that should genuinely be considered.
I will give a totally anecdotal example.
I'm personally making nowhere near $10 million per year,
but, you know, I have a pretty successful YouTube channel
that is making good money.
This means I pay about 45% tax on my income
here in Australia,
which kind of hurts,
especially when I know I could be doing the work that I do
anywhere in the world with internet and electricity,
and most of those places are gonna have much lower taxes
and much lower costs of living.
But for now, you know, I kind of just deal with it.
But if I was looking down the barrel of 70% income taxes,
I'll be 100% honest with you guys,
I would be one of those scumbags
shopping around for a cheaper country to live in,
especially since I could still remain an Australian citizen.
That means Australia would lose my tax revenue entirely
and on this individual scale
they would actually be further behind
on funding their new expensive UBI.
Now, I'm sure the Australian government doesn't really care
about me as an individual,
but if enough people do this,
and a lot of people already are,
it could result in lower net tax revenues
despite the higher rate.
Capital flight, as this is known,
is normally an overblown issue,
but remote working has kind of become a big thing
in the past three years.
Now lots of people don't have anything in particular
holding them down to a certain location.
Could governments around the world be doing a better job
of effectively taxing extremely wealthy people? Absolutely.
At the very least they should be paying
the same rate of tax as working class individuals.
But governments also have to realize
that people with lots of money have lots of options
and trying to get too much out of them can backfire.
Unfortunately, a UBI would represent
such a significant expenditure
that the only way to sustainably fund it
would be through tax increases in one form or another
that would probably fall into the too much category
for a lot of very wealthy people
who are already paying a lot of tax.
Raising enough money to sustainably fund this program
would be difficult to say the least,
and for the short term it would most likely involve
governments taking on more debt to bridge the funding gap.
That's not necessarily a problem in and of itself,
especially not for the US
because it uses the world's reserve currency,
but would it be worth it?
What would a UBI do for the economy?
It would certainly increase consumer demand.
If everyone had an extra $1,000 in their pocket every month,
that's an extra $1,000 that they could spend at businesses
who could pass that $1,000 onto their suppliers,
investors or employees.
This is the basic idea of all economic stimulus.
More money in the economy means more consumption,
more investment and more employment,
all other things being equal.
But it also means more inflation,
which I'm sure a lot of you have been thinking
the entire time you've been watching this video.
Inflation is honestly the biggest problem with a UBI,
bigger even than the problem of how to fund the damn thing.
Injecting that much money into the economy
outside of a major economic downturn
is simply going to cause demand-pull inflation.
I made a video on my second channel
explaining everything that you need to know about inflation.
So if you're unsure,
feel free to pause this video and go and check that one out.
Now, a counterargument to this inflation problem
is that if tax increases fully offset UBI expenditures,
then the government won't actually be conducting
expansionary fiscal policy.
They will just have more money coming in
and more money going out.
Now, if this argument was true, it would also mean
that the stimulus benefits we explored earlier
would be undone because on average
everybody wouldn't have an extra $1,000
in their pocket every month,
they would have nothing extra.
The thing is, though, this argument isn't true.
A UBI would have a stimulating effect on the economy
because while on average the government
may not be giving out more money,
it is giving more to lower income households
while taking tax money from wealthier households.
If someone making $5 million a year
pays an extra $1 million in tax,
their lifestyle probably wouldn't change radically.
Chances are they would still live in a beautiful home,
drive whatever car they wanted,
travel whenever they had time,
and eat out without thinking twice about it.
Likewise, if that same person got an extra $12,000 a year,
it's very unlikely that their spending decisions
would change at all.
But for people earning a low salary,
these adjustments would make a big difference.
Most people on even good incomes basically save nothing,
which means everything they earn
is going to taxes or expenditure.
And this is especially true for people on low incomes.
Now, since the UBI would be structured in such a way
as to increase the net income of people on lower incomes,
that would mean that spending would increase
for these households,
probably by an amount close to $12,000.
So the net aggregate result would be
minimal reductions in spending from high income households
accompanied by massive increases in spending
from lower income households,
which would put strong upwards pressure on consumer prices.
I know a UBI sounds like one of those ideas that's so crazy
it just might work,
but it's probably not.
A UBI is often proposed
as a solution to the problems of automation.
What are we gonna do in a future
when machines do the jobs of people better than people can?
I think what a UBI does do really well
is act as a thought experiment or a case study
to address a lot of the big issues
that we face in modern advanced economies.
Wealth inequality, welfare systems, global capital mobility,
and what we're gonna do when robots take all of our jobs.
We are going to need answers to these questions.
On one extreme,
you have the laissez faire, let them all starve approach,
and on the other hand you have
the what if we gave everyone free money approach.
Obviously, the real solution to these issues
lies somewhere in between these two extremes,
but that doesn't mean that there isn't value
in thinking about how something like this could play out.
Likewise, I don't think people like Andrew Yang
genuinely believe that the US would ever adopt
his proposed UBI system,
but just the fact that he raised the idea
in a setting as serious as a presidential campaign
means that a lot of people have learnt about it
and a lot of people might be thinking
of toned down alternatives.
Nobody can predict the future, least of all economists,
but it's important that we are always stress testing
new ways to make the lives of economic participants
more comfortable, whichever way the world does go.
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