Universal Basic Income: An Economic “Destabilizer”

As an addendum to yesterday’s article concerning the Job Guarantee versus the UBI, I’d like to clarify a couple of points concerning the inflationary aspects of a UBI and its inability to discipline inflation. In yesterday’s article I chose to address the potential wage-price spiral effects caused by a UBI, because the point that all income maintenance programs such as a UBI only increase aggregate demand has already been hammered into the ground. However, today I will address this point from a different angle, hopefully providing some clarity to the layman.

A UBI increases aggregate demand because more dollars are placed into the hands of consumers above that which they already earn. The problem arises when that demand eventually causes the price level to rise. When it does, the value of the UBI erodes, requiring an increase in the size of the UBI, which then will only increase the price level again. Therefore, we can see that a UBI has no real mechanism to discipline inflation. But further, a UBI is not an automatic stabilizer for the economy, which is something an economy requires. Let’s explore what an automatic stabilizer is and how it functions.

People believe that welfare, food stamps and unemployment insurance are programs designed to help the poor and unfortunate. They are not. That belief is the product of politicians redefining these programs with the intent to create an issue where no issue really exists. In other words, they purposefully mislead the public for political gain – votes. The macroeconomic intent of welfare, food stamps and unemployment insurance is not to help the less fortunate, but rather, to help the entire economy avoid a major collapse in aggregate demand. Hence, welfare, food stamps and unemployment insurance are automatic stabilizers for the economy and most nations employ automatic stabilizers.

An automatic stabilizer provides a floor through which aggregate demand cannot fall. If we look back to the great depression era, we can understand this point. Should the economy stall or experience a downturn, without an automatic stabilizer there is nothing preventing a large collapse in consumer spending. Spending can go into a free fall and when it does, unemployment can rise dramatically. Welfare, food stamp and unemployment insurance payments provide a means to maintain some level of demand preventing that free fall. Let us consider everyone’s favorite program that they either love to hate or love: food stamps.

When recipients of food stamps spend these dollars on food, those dollars in turn pay labor. Labor in turn goes out and spends their paycheck buying clothing, food, gasoline, toothpaste and a myriad of goods and services. Let us now assume that food stamps do not exist. Without food stamps, grocery stores would experience a severe contraction in spending and so, lay off workers to stop the fall of income. When those workers are laid off they lose their income and so, stop buying clothing, gasoline, toothpaste and a myriad of goods and services. In turn, clothing stores, gas stations and other businesses experience a severe contraction in spending and so, lay off workers to stop the fall of income. Like a virus, the spending contraction spreads across the economy, unemployment rises dramatically and a recession or depression occurs. Food stamps obstruct that condition. In conjunction with welfare and unemployment claims, the economy has some stability. Thus, we aren’t subsidizing moochers. Such a ridiculous statement is the product of political nonsense. We are, in fact, preventing those not receiving food stamp, welfare and unemployment assistance from becoming unemployed. In other words, the “moochers” are ensuring that you, the responsible hard worker has a better chance of not ending up in unemployment lines. So, we understand (hopefully) the stabilizer part, but what about the “automatic” part?

When the economy stalls, job creation halts. Some businesses begin to shed jobs at this point. In other words, lay off workers. These workers then apply for food stamp, welfare and unemployment assistance. So, more people are now receiving assistance from these programs. That increase in recipients and resulting payments causes the federal deficit to automatically increase.

So then, we understand the concept of automatic stabilizers and we also understand that it is dangerous to intentionally cut food stamps, welfare and unemployment insurance, especially in a downturn. By cutting these programs in, say, a recession, you will only deepen the recession.

Returning now to the UBI, we can understand with a little more thought about the concept, that it is not an automatic stabilizer. While it does increase aggregate demand, it is not a stabilizer, because it provides a guaranteed payment to everyone regardless of their income level. For a UBI to act as an automatic stabilizer, the amount provided would have to be progressive with the poorest receiving more than the richest. Because of the guarantee of equal payments regardless of the person’s income level and the inflationary potential of a standalone UBI, it is, in fact, the antithesis of an automatic stabilizer; it is an economic destabilizer. For these reasons and those mentioned in my article yesterday, I cannot support a standalone UBI as a solution for any economy. A federal Job Guarantee, on the other hand, is an automatic stabilizer and is superior to the stabilization effects provided by welfare, food stamps and unemployment insurance. This is not to say that I would eliminate such programs, but rather, only that a Job Guarantee is superior, because the federal deficit automatically increases and decreases at just the right amount to guarantee a situation of full employment. Furthermore, a Job Guarantee is an inflation disciplinary mechanism, superior to the current specious NAIRU concept of disciplining inflation by casting workers into a state of involuntary unemployment which nations employ today.

I hope this explanation provides further clarity to yesterday’s article and to my position on the subject.