Why universal basic income (UBI) can't work

by Rudd-O published 2016/05/25 15:29:00 GMT+0, last modified 2016-05-25T16:22:14+00:00
Belief in basic income is becoming increasingly popular. What advocates of basic income do not get is that the math doesn't work out.

Basic income is the belief that it would be good or desirable for the people d.b.a. "government" take some money from some segment of the population A ("the rich", where the richer one is, the more is taken) and unconditionally give an equal share of that money directly to everyone, whether they work or not — much like a salary earned just for existing, or an allowance given by a parent to his/her children.

Basic income is similar in spirit, but different in implementation from, the negative income tax — the belief that it would be good or desirable, if people whose income is below a certain threshold got enough money from people d.b.a "government" to reach the threshold, while everyone else be forced to pay for that expense.

As with any socialist redistribution idea, two of the key questions that must be answered is how much money needs to be taken and given, and how sustainable the proposal will be.  We'll talk about that in this post.

How good can we make basic income look, before we take it to task?

I will start by steel-manning the idea before I criticize it, making the case better for the basic income theory than it would ordinarily be.

For that purpose, I will stipulate that "the government" doing the taking and the giving costs exactly $0 — that is, that the whole process of taking and giving is done by a perfectly efficient entity that charges no money and takes no time.  So, overhead costs are zero.

Furthermore, I will stipulate that inflation for the next century is exactly zero percent, so that the entity does not need to increase the money it takes and gives with the passage of time; while this is as unrealistic as the first stipulation, it helps simplify the math and it also bolsters the sustainability of basic income.

Third and finally, I will assume that executing on the basic income theory is not immoral.  As voluntaryist, I believe it is immoral, but if I am going to give the idea a complete skewering, I must give the statist idea the best opportunity to shine.

Can basic income be made sustainable?

Having said that, it's time to ask ourselves: how can we make the basic income proposal sustainable?  By sustainable, we mean that the passage of time won't lead to a situation where everyone is broke and / or forced to work until they die, and that the perfectly efficient "government" never runs a deficit (that is, never gives out money it doesn't have).

We can pick any numbers we like, but let's make some common-sense assumptions:

  • low-risk, prudent return on investment is 5%
  • the desired basic income is $20.000 / year — everyone gets $20.000 every year from our magical "government", plus whatever they make working on their own

Given these common sense numbers, you can probably tell that $20.000 is roughly what you can expect to make, year over year, from a capital of $1.000.000, without depleting the capital (remember, sustainability).

In other words: to provide Random Citizen X with $20K/yr of sustainable passive income, there must be $1M worth of capital somewhere doing hard work to the tune of 5%/yr.  Trying to provide $20K/yr out of less than $1M of capital is unsustainable. If $20K is the basic passive income we want people to have, then $1M is the basic net worth we want to set aside per-person for the purposes of producing this basic income. While it is true that net payers (into the basic income scheme) could work to make up for that lack of passive income, they would have to work and keep paying until they die, so that scenario fails our sustainability criteria set above.  Any less than $1M of capital per basic income recipient, and our magical expense-free "government" would necessarily have to take from someone who is working for more than $20K/yr, thus actively preventing that person from accomplishing the capital needed for their own level of basic income.

Let me restate that more bluntly: to get a sustainable $20K/yr golden egg, you need a $1M golden goose.  Smaller goose, proportionally smaller egg.  Taking an egg bigger than the goose can sustain eventually kills the goose (spends the capital completely).

Note that it is not relevant whether it is our magical "government" that takes and then sets the capital aside in an investment fund, or whether this "government" takes $20K a year from the individual who himself set $1M aside for investment — the only thing that matters is that the capital actually exists somewhere (sort of earmarked for Random Citizen X), and that the capital isn't being devoured faster than its yield.

You can probably tell by now, that we should care very much that the capital is never devoured.  Why?  Because, under a basic income scheme, anyone who doesn't already have $1M of capital set aside with their name on it (to provide their basic passive income) is under water.

Can you afford to put your neighbor's oxygen mask before yours?

In a manner similar to the passenger of an airplane that gets depressurized, a person working full time to generate an active $100K income may look like someone with oxygen to spare, but that is merely an illusion.  This person is not breathing comfortably from a sustainable supply of oxygen.  This person is desperately anaerobic, lungs on fire, scrambling to get that $1M mask of capital on — a horrendously difficult task that would still take a decade to accomplish, even if that person had zero expenses.  If you account for taxes and expenses, that $1M mask would take a lifetime to get on.

Now, imagine someone else.  This person already has $2M invested, and he is pulling in $40K/yr of passive income out of that investment.  This person clearly has some oxygen to spare.  But anyone with less than $1M invested — this is not someone whose oxygen is up for grabs.  Taking this person's capital to fund others' basic income creates the classic game of hot potato: nobody ever gets their oxygen masks on — everyone on that plane is hella busy, ripping masks off each others' faces, sucking the very breath out of each others' lungs, always one gasp away from catastrophe.

That is how we arrive at the obvious conclusion:

Until you can afford to fund your own passive income, you can't afford to fund someone else's passive income.  You can set the magic threshold to whatever you like — $1K/yr, $6K/yr, $20K/yr — the reasoning is the same: You must get your own mask on first; you must allow others to get their own masks on first.  Only then do you cease to be part of the problem that basic income is trying to solve, and only then can you start being part of the solution.

Who can afford to fund other people's basic income?

Now, a quick look at the numbers shows that very few people are in a position where they can afford their own passive income, even for a number as measly as $20K a year.  And, out of that group of people, the subset of people that can fund both their own passive income and someone else's passive income is even smaller!  (Note for those who did not know it: the net worth distribution in society forms a 1/n power law).  The vast majority of people never actually amass the necessary capital for their own basic income even having worked their entire lifetimes... let alone capital for other people's basic income.

And this, my friends, is how we know basic income can never be sustainable.