UBI is a solution for… what problem exactly?

The idea of Unconditional (or Universal) Basic Income is slowly, painfully slowly creeping into the mainstream. What hinders its popularization and adoption, in my humble opinion, is a total mess of the way its supporters make their case. Some just “know” that we need UBI and frame it as a basic human right (it isn’t). Some point to the robots of the future (self-driving trucks, etc) leaving people unable to earn their living.

Some simply want to save the planet through the carbon tax, some hate paying rent and want their land value tax. And then there are yours crypto-currency fans in a search for their killer app.

In other words, if it is not completely crazy, it is not that convincing either. Including the robots/automation case for UBI -- even if many people agree that the robots would eventually put everyone out of work, we don’t know when and how it will happen -- then why we are being asked to start spending trillions on that now?²

All that makes UBI look like a solution in the search for a problem. And, yet, we need it. We need UBI badly and we need it yesterday (40 years ago, specifically), because…

UBI is all about inequality

Or, rather, UBI is a way to lower the after-tax income inequality. And why we need less of the inequality? Here is why:

How the inequality was changing over time

The chart shows how income inequality was changing since the early 20th century. It is noisy, but the trend is clear. We can see it decreasing steadily until the 1970s. Then something happened, something big -- big enough to break the past trend and to make the inequality raising fast ever since.³

Here is how the last half a century looked for different segments of the US population:

The rise of income inequality

If we choose 1980 as the starting point, we see real incomes of 95% of Americans are falling behind the average, behind the economy growing as a whole. Also, of all production capacity that the US economy added in the past 50 years the bottom half of Americans saw none of it. They leave with the same economy they had in 1970.

Most Americans don’t live in one of the richest countries in the world. They have no visibility to the mountains of wealth they help to create. From their perspective, that wealth disappears as in a black hole, as if it was never produced in the first place. That means most Americans have no idea how rich their country is -- how rich they actually are!⁶

The good news is that all that wealth, which most Americans are oblivious to, does, in fact, get created. And it is not being eaten by a black hole either. And it can be recovered, for most Americans, through income redistribution.

Yes, the good ole “take from the rich and give to the poor”, also known as progressive income tax. Something we have been doing for more than a century since the Great War. Only with most Americans being poor, we need a much steeper progression scale, and that’s where UBI can help.

A steeper progression scale means raising taxes on the rich, which we can always do. But it also requires to lower taxes on the bottom end -- and how exactly we can achieve that if the rates at the bottom are already close to 0%? Well, we go negative! And that’s what UBI is, a variety of the Negative Income Tax.

So now that we know how to reverse the rise in inequality over the past few decades, let’s estimate how much most Americans could benefit from it.

The experiment

Imagine that we implemented UBI back in the 1970s (and we came close to do just that) and freeze the inequality at its 1970s level (and we had plenty of the inequality back then, we just don’t want more).

Now let’s estimate how that would affect the average Joe’s income, a.k.a. the median income -- half Americans are making less than our guy, the other half is making more. First, let’s estimate just the effect of lower inequality, everything else being equal.

The direct effect of lower inequality

Let’s start with this chart below.

It shows two lines, both start at 100% in 1975. The BLUE line shows how the median income changed over time, in real terms (“real” means adjusted for inflation). The RED line shows the change in real GDP.

The two lines to diverge due to the rise in inequality and nothing else. Therefore, if the inequality stayed frozen all this time, the median income change would track that of GDP. And since both lines start at 100%, we can simply assume that the RED line shows how the median income would rise with UBI.

Over that 40-year time span, the RED line added 150%, and the BLUE line added 22%. Now -- remember? -- currently, the median income is around $31,000/year. So in today’s dollars, it was 22% less in 1975:

$31,000 / 1.22 = $25,400

And if it had raised by 150%, it would no sit at:

$25,400 * 2.5 = $63,500

$31,000 to $63,500 annually -- that how the median income jumps by going back to the income distribution we had back in the 1970s.⁴

But wait, there is more. Time to look at…

GDP multiplicators

And, again, let start with a chart, this time it plots the real GDP over a much longer time span:

Is you can see, over reasonably long time GDP grows exponentially, as do many other things about human society. Recently though, the growth was kinda sluggish (they even invented a fancy term for it, secular stagnation). And I would propose that the rise in inequality is to blame, for multiple reasons.

First, the rich people tend to spend a smaller share of their income -- they save more. But savings do NOT equal investment, as they used to. The real investment goes into expanding production capacity, but with most people left with little disposable income, we already can produce more than we can sell. So we end up with a savings glut (as they call it) in search for investments, blowing dot.com, or subprime, or whatever bubble they can. Not good for GDP growth (actually, too much saving and too little spending is a telltale sign of an economy going through a depression).

Second, the economy is gradually retooling itself from mass-producing consumer goods to building super-yachts, hand-made to individual projects. And while the economy can get very efficient at the former, it is a different story when it comes to the latter. Lower productivity, not good for GDP growth.

Then there are social effects of the rise in inequality -- lower social mobility, lower labor participation rates, higher prison population, lower birth rates, the opioid epidemic, causing Boeing 737 Max worth of overdose deaths every day -- all these things can’t be good for GDP. As one would imagine.

Going back to the average Joe, then -- not only they would see their income lifted because the wealth we produce would be distributed more equally. But with lower inequality, the total amount of wealth we create would also rise.

By how much? -- well, it’s more like an educated guess territory, but if we look at historical rates (I extrapolated it with the red line on the chart above), the US GDP should be pushing $30 trillion now.

And once we factor that, our guy’s income would be getting close to $100,000/year, or a 223% rise from, again, $31,000/year they make now.

And that is what the full potential of UBI looks like.

Which should make everyone wonder…

… why we are talking about the Green New Deal, about replacing Obamacare with Medicare4All, about anything else, while pointedly ignoring this little elephant in the room?⁵