Would a Universal Basic Income Be Inflationary?

Universal Basic Income (UBI) has garnered much attention in recent years as a potential social policy to alleviate poverty and stimulate economic growth. One of the persistent concerns is the fear that implementing UBI could lead to inflation. However, this article explores the nuances of how UBI can be designed and funded to avoid contributing to inflation, leveraging a variety of fiscal mechanisms.

Understanding Inflation and UBI

Before delving into the specifics, it's essential to understand the relationship between money supply and inflation. Inflation occurs when the demand for goods and services exceeds the supply. Introducing too much money into the system with limited supply can lead to a rapid increase in prices. This is often seen in times of government stimulus spending, where trillions of dollars were injected into the economy to mitigate the impact of the COVID-19 pandemic.

Financing UBI Through Innovative Taxes

A key aspect of making UBI non-inflationary lies in its funding mechanism. One such mechanism gaining traction is the Universal Transaction Tax (UTT). Unlike the current methods of funding, UTT is levied on all financial transactions, thereby redistributing wealth and maintaining a balance in the economy. This tax helps to control inflation because it directly reduces the amount of money in circulation by taxing every transaction. According to experts, this can effectively constrain inflationary pressures without harming economic growth.

The Impact on Different Economic Segments

While UBI aims to provide a safety net, its impact varies across different socio-economic segments. For the poor, the primary concern is their transition from welfare programs to a UBI. In most scenarios, they would see a breakeven effect, ceasing to receive unemployment benefits such as food stamps, ADC, EIC, and HUD section 8. This transition would not necessarily increase their cash flow because the UBI is likely to be modest, and they might stop paying taxes altogether.

For the broader society, UBI introduces a new tax burden, with recipients paying around 10 to 20% in taxes. This shift towards a UBI model means that a significant portion of the new money is recycled through taxes and savings rather than remaining in circulation. In effect, the money supply might not increase as significantly as feared, effectively neutralizing the inflationary pressures.

Fiscal Space and Inflation

The concept of fiscal space highlights the ability of a country to implement expansionary fiscal policy without causing inflation. When a government has sufficient fiscal space, it can introduce policies like UBI without triggering inflationary effects. This is because the government would have the capacity to generate sufficient revenue from innovative taxes without overburdening the economy.

To illustrate, imagine a scenario where a government implements a national sales tax of 20%, but only spends 10% on UBI and saves the other 10%. In this case, the effect on prices would be minimal, and inflation would remain under control. However, if the government continuously runs deficits and prints money, it can indeed lead to inflation.

Alternative Approaches: Job Guarantee vs. UBI

While UBI has its advantages, some argue that a Job Guarantee (JG) can serve as a more effective solution for welfare. A JG ensures that every citizen can work if they choose to, counteracting unemployment's drag on the economy. According to unemployment advocates, it's the responsibility of the Federal government to create jobs, not the private sector.

UBI can be a valuable backstop for individuals in dire circumstances, such as those who are homeless or unable to work due to health issues. For these individuals, UBI can provide a basic level of support. However, it’s important to encourage these individuals to seek work and engage in productive activities.

Conclusion

Universal Basic Income can be a non-inflationary policy when designed and implemented properly. The use of innovative tax mechanisms, such as the Universal Transaction Tax (UTT), helps to maintain a balanced economy and manage inflationary pressures. Additionally, policymakers must leverage the concept of fiscal space to ensure that expansionary policies don't inadvertently lead to inflation.

Ultimately, the implementation of UBI should not be viewed in isolation but as part of a broader strategy to improve economic stability. Alternative approaches, like a Job Guarantee, can complement UBI to address different aspects of economic and social welfare.