Learn 100% online from anywhere in the world. Enroll today!

Universal Basic Income (UBI)

An agreed-upon minimum income given to an individual to cover the the basic cost of living

What is a Universal Basic Income (UBI)?

While it does not yet exist as a practical reality in the United States, the concept of a universal basic income – or UBI – is similar to the concept of minimum wage. Each individual receives an agreed-upon minimum income (basic income) with the intent that the income allows a person to afford the basic cost of living while maintaining some semblance of financial security or independence.

 

Universal Basic Income

 

The key difference (besides the fact that UBI is theoretical) is the fact that the government would pay each individual a universal basic income instead of ensuring that the individual’s job paid him or her a minimum income.

 

Summary

  • Universal Basic Income (UBI) is a suggested system that would provide individuals a minimum income to help prevent destitution and to help eliminate glaring economic disparities.
  • Some suggestions recommend that a UBI is paid to every individual making up to a set amount of income (e.g., $50,000 annually), whether they are employed or not. Other proposals recommend that a UBI is given only to individuals who’ve lost a job – or more specifically, individuals who lose their job to automation.
  • The primary argument against, or drawback to, a universal basic income system is the potential for it to cause runaway inflation, which would ultimately raise the cost of living. 

 

How a Universal Basic Income System Would Work

Because universal basic income is a proposed theory – one suggested to both help individuals afford the cost of living without a lifetime of debt and to help curb global economic inequality – several possible different approaches might be taken when it comes to putting a UBI into effect.

Ultimately, a country’s government sends a universal basic income to individuals, either by check or as a direct deposit into a person’s bank account. Some UBI plans include sending a payment to every person regardless of their employment status. Other proposed plans would only send a payment to unemployed individuals.

It’s important to note that the concept of UBI was first proposed in response to the suggestion that, in the near future, many people are going to lose jobs as robotic/artificial intelligence (AI) technology becomes more widely used. Sir Richard Branson (founder of Virgin Group) and Elon Musk (the name behind Tesla) both believe that mass automation is inevitable and that the institution of a universal basic income is the only way people will be able to survive.

The main issue surrounding a UBI is how it would be funded. Some plans recommend taxation of the world’s wealthiest. Facebook co-founder, Chris Hughes, and author of the 2018 book, “Fair Shot,” wrote that employed individuals in the U.S., as well as anyone responsible for the care of someone else, should receive a minimum of $500 per month, provided they make $50,000 or less each year. Taxing the wealthiest 1% in the U.S. would be used to cover the cost.

 

Drawbacks of a Universal Basic Income

A UBI system is still a theoretical approach, one that comes with good intentions and noble goals. Still, widespread financial equality and independence offer the potential to cause some serious economic issues.

One major issue with a universal basic income, raised by those who oppose such a practice, is inflation. It’s easy to see how the institution of a UBI may fuel inflation.

If every individual is granted an unconditional income from the government, then there is money to be spent. Providing massive amounts of money to virtually every individual in the country translates to a massively expanded money supply. It means that there is a higher demand for goods and services that manufacturers and retailers produce and sell.

The law of supply and demand dictates that, as demand pressure increases on producers and retailers, they must increase prices on the available supply of goods and services to avoid being overwhelmed by the increased demand. That is inflation.

If the end result of a UBI turns out to be uncontrolled inflation, then the cost of living continues to increase. It would necessitate an increase in the level of universal basic income provided to all citizens or allowing the standard of living for UBI recipients to decline, as they are able to purchase fewer goods and services with the amount of UBI they receive.

Unless something can be done to manage the situation, there would just be a vicious circle created of higher UBI leading to increased prices, leading to a necessary increase in the UBI amount, leading to still higher prices… you get the idea.

 

Related Readings

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

  • Annual Income
  • Full Time Equivalent (FTE)
  • National Average Wage Index (NAWI)
  • Taxable Income

FMVA certification program

Advance your career in investment banking, private equity, FP&A, treasury, corporate development and other areas of corporate finance.

Get certified as a financial analyst with CFI’s FMVA® Program.