- [Narrator] In the past three years, the US government has
spent over $5 trillion on COVID relief stimulus on top of regular budgetary spending. In hindsight, most economists acknowledge that this was excessive and probably not implemented
in the best possible way, and I'm not gonna tell you
what's right or wrong there. The world doesn't need another opinion on government spending. But what this did do, if nothing else, is dispel the argument that the government
doesn't have enough money to fund a universal basic income. That $5 trillion was enough to give every working-age American
$1,000 dollars a month for the two years that COVID was seriously impacting business, which is naturally raising questions about if this would have been
a better way to spend it. Indiscriminately giving money to everyone is not as crazy an idea
as you might think, and arguments for a universal basic income are once again making their
way into the mainstream. These proposals offer a
lot of apparent advantages which extend beyond just
it's nice to get free money. Some advocates for a UBI argue that it will do everything from actually cutting down
on government expenditure to revolutionizing the way that we operate our modern economies. We will get to all of that in this video and we will also look
at a lot of the problems with such a scheme, problems that extend beyond
just the obvious issue of who is gonna pay for
all of this free money. So to have an honest discussion about the viability of
a universal basic income we need to as always
answer a few questions. How do advocates of this system propose that countries will pay to give money to all of their citizens? What advantage does a
universal basic income have over traditional welfare systems? And of course, before you start
collecting your free checks, what are the problems
that we should consider before these systems are rolled
out into our own economies? This episode of "Economics Explained" was made possible by public.com. If you are still using
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from another brokerage, depending on the amount. See additional terms and
conditions of this offer by following the link in the description. A universal basic income is
a financial support system that gives money to
everybody in an economy with very few exceptions. Normally, UBI proposals
don't include payments for people under the age of 18 or people who are not not citizens of the country making the payment. Outside of that, everybody gets it, and everybody gets the same
amount, it's universal. If you are a student studying
full time, you get the UBI. If you're a working
professional, you get the UBI. If you're a multi-millionaire,
you get the UBI. Now, as for how much this
universal payment is, that varies. Different proposals in different countries at different times have called for different
amounts of money. But if you look into this topic, you'll probably find
the best known proposal was Andrew Yang's
$1,000-per-month payment, which was the foundation of his unsuccessful 2020
presidential election bid. So let's use that as a working example, but keep in mind that some
policy makers have called for more or less generous
versions of this scheme. Of course, this $1,000-a-month payment will mean different amounts
to different people. The millionaire probably
won't even notice the payment. The working professional
will use this to subsidize their existing income. And to the student, it might make the difference between being able to study
full time with a part-time job versus studying part time
with a full-time job. This natural marginal utility is part of the charm of the UBI model, and it's also part of
the way that it justifies its significant costs. In total, the US normally spends about half a trillion dollars a year on what you would typically
think of as welfare between the federal and state governments. I'm using pre-2020 figures here because obviously with
COVID release stimulus these numbers got a bit wacky. This also excludes Medicare and Medicaid because none of the
major supporters of a UBI are suggesting that it replaces
either of those programs. Now, of that half a trillion dollars, a not insignificant portion went to the administration
of the social services, things like case workers, auditors, contact staff, their managers, and all the other general expenses that go into running an operation
as big as social security. If this was all replaced with a simple automatic
transfer to everybody, most of this overhead
could be made redundant, significantly cutting
down on the expenses. Now, there are three major
problems with this argument. The first is that of simple arithmetic. Yes, the American
government currently spends about half a trillion dollars
a year on social security, and if instead it introduced
a universal basic income it could choose to do away
with all of these programs. But giving $1,000 a month
to all eligible Americans would cost at least $2.5 trillion dollars. This also makes the argument of cutting down on administrative costs a little bit hollow. Even if administrative costs were really at the extreme
high end of some estimates and they could be eliminated entirely, you're cutting out $100 billion only to turn around and
spend an extra $2 trillion by adopting a UBI. The third problem is
with the universalness of a universal basic income, and that is because $1,000 a month is already below the poverty line for a single person household
with no additional income. If a recipient has a
disability, dependent children, or simply lives in a
higher cost-of-living area, this payment becomes extremely inadequate. There are certain problems
with welfare systems in basically every country
in the world that has them, administrative cost has just been the tip of the problematic iceberg. But there is a reason that
countries spend so much on making sure recipients are getting the right amount of money, and that's to make sure recipients get the right amount of money. You don't want people on welfare starving and you also certainly don't want people taking advantage of a system to get more money than they really need without contributing their
fair share to an economy. But moral arguments aside, all this shows is that there
really is no genuine plan for universal basic income that doesn't involve raising more taxes. Most supporters of a UBI do acknowledge that it will need to be paid for with higher taxes across the board, particularly on higher income
earners and businesses. Depending on progressive tax brackets, this is normally proposed in such a way that middle income households don't earn any more or any
less than they would have without the UBI. They might get an extra $12,000 per year, but they will pay an extra
$12,000 a year in taxes because of the required
increase in income tax rates. Of course, below income households, like those that may have been subsidized with traditional welfare systems, very little of the
additional $12,000 in income will be taxed, meaning it does effectively subsidize their household budget. There is certainly nuance to the discussion that needs to be had around taxation to fund a UBI. Some advocates simply say
that it should be funded with taxes levied exclusively
on the extremely wealthy. The most noteworthy proposals include things like a top
marginal tax rate of 70% for people earning over
$10 million a year, or, of course, a wealth tax that takes a
portion of someone's net worth over a certain figure, normally in the tens of millions. The other probably more
reasonable proposal is to remove long-term
capital gains incentives and tax those earnings the same way that any other income would be taxed. Most of the time you
hear about a billionaire selling their company for
some crazy amount of money, they will be paying 15% on that income. If these tax rules were changed, they would be paying 37% on
the majority of those gains. Or, you know, if a 70% tax rate for income over $10 million a year gets passed, they would pay that. Now, the classic counterargument to this is that oppressive taxation will stifle the entrepreneurial spirit and disincentivize investments. Why would anybody risk
starting their own company or making a risky investment if even the best case scenario is them giving a majority of
their income to the government or having their investment
gains slowly taxed away through a wealth tax? On the surface, this
sounds reasonable enough, but really this argument
is about as hollow as the one claiming that
a UBI will justify itself by doing away with expensive
welfare administration. People are going to risk
starting their own companies and making risky investments because the potential
returns are still there no matter how it's taxed. Nobody is gonna pass up
starting a $100 million company because they have to pay 37
or even $70 million in tax instead of 15 million. In any scenario, they are set for life. The only way to totally
disincentivize the profit motive is to have a tax rate of over 100%, which obviously nobody
is seriously proposing. An argument that might be a
little bit more fair, though, is that if taxes are increased enough, wealthy people with the
means to leave the country could just choose to leave the country. Now, this is more difficult
for American citizens because their taxes follow them everywhere unless they renounce their citizenship, but for every other country it's something that should
genuinely be considered. I will give a totally anecdotal example. I'm personally making nowhere
near $10 million per year, but, you know, I have a pretty
successful YouTube channel that is making good money. This means I pay about
45% tax on my income here in Australia, which kind of hurts, especially when I know I could
be doing the work that I do anywhere in the world with
internet and electricity, and most of those places are
gonna have much lower taxes and much lower costs of living. But for now, you know, I
kind of just deal with it. But if I was looking down the
barrel of 70% income taxes, I'll be 100% honest with you guys, I would be one of those scumbags shopping around for a
cheaper country to live in, especially since I could still
remain an Australian citizen. That means Australia would
lose my tax revenue entirely and on this individual scale they would actually be further behind on funding their new expensive UBI. Now, I'm sure the Australian
government doesn't really care about me as an individual, but if enough people do this, and a lot of people already are, it could result in lower net tax revenues despite the higher rate. Capital flight, as this is known, is normally an overblown issue, but remote working has
kind of become a big thing in the past three years. Now lots of people don't
have anything in particular holding them down to a certain location. Could governments around the
world be doing a better job of effectively taxing extremely
wealthy people? Absolutely. At the very least they should be paying the same rate of tax as
working class individuals. But governments also have to realize that people with lots of
money have lots of options and trying to get too much
out of them can backfire. Unfortunately, a UBI would represent such a significant expenditure that the only way to sustainably fund it would be through tax increases
in one form or another that would probably fall
into the too much category for a lot of very wealthy people who are already paying a lot of tax. Raising enough money to
sustainably fund this program would be difficult to say the least, and for the short term it
would most likely involve governments taking on more
debt to bridge the funding gap. That's not necessarily a
problem in and of itself, especially not for the US because it uses the
world's reserve currency, but would it be worth it? What would a UBI do for the economy? It would certainly
increase consumer demand. If everyone had an extra $1,000
in their pocket every month, that's an extra $1,000 that
they could spend at businesses who could pass that $1,000
onto their suppliers, investors or employees. This is the basic idea
of all economic stimulus. More money in the economy
means more consumption, more investment and more employment, all other things being equal. But it also means more inflation, which I'm sure a lot of
you have been thinking the entire time you've
been watching this video. Inflation is honestly the
biggest problem with a UBI, bigger even than the problem
of how to fund the damn thing. Injecting that much money into the economy outside of a major economic downturn is simply going to cause
demand-pull inflation. I made a video on my second channel explaining everything that you
need to know about inflation. So if you're unsure, feel free to pause this video
and go and check that one out. Now, a counterargument
to this inflation problem is that if tax increases
fully offset UBI expenditures, then the government won't
actually be conducting expansionary fiscal policy. They will just have more money coming in and more money going out. Now, if this argument was
true, it would also mean that the stimulus benefits
we explored earlier would be undone because on average everybody wouldn't have an extra $1,000 in their pocket every month, they would have nothing extra. The thing is, though,
this argument isn't true. A UBI would have a stimulating
effect on the economy because while on average the government may not be giving out more money, it is giving more to
lower income households while taking tax money
from wealthier households. If someone making $5 million a year pays an extra $1 million in tax, their lifestyle probably
wouldn't change radically. Chances are they would still
live in a beautiful home, drive whatever car they wanted, travel whenever they had time, and eat out without
thinking twice about it. Likewise, if that same person
got an extra $12,000 a year, it's very unlikely that
their spending decisions would change at all. But for people earning a low salary, these adjustments would
make a big difference. Most people on even good
incomes basically save nothing, which means everything they earn is going to taxes or expenditure. And this is especially true
for people on low incomes. Now, since the UBI would
be structured in such a way as to increase the net income
of people on lower incomes, that would mean that
spending would increase for these households, probably by an amount close to $12,000. So the net aggregate result would be minimal reductions in spending
from high income households accompanied by massive
increases in spending from lower income households, which would put strong upwards
pressure on consumer prices. I know a UBI sounds like one
of those ideas that's so crazy it just might work, but it's probably not. A UBI is often proposed as a solution to the
problems of automation. What are we gonna do in a future when machines do the jobs of
people better than people can? I think what a UBI does do really well is act as a thought
experiment or a case study to address a lot of the big issues that we face in modern advanced economies. Wealth inequality, welfare
systems, global capital mobility, and what we're gonna do when
robots take all of our jobs. We are going to need
answers to these questions. On one extreme, you have the laissez faire,
let them all starve approach, and on the other hand you have the what if we gave everyone
free money approach. Obviously, the real
solution to these issues lies somewhere in between
these two extremes, but that doesn't mean
that there isn't value in thinking about how something
like this could play out. Likewise, I don't think
people like Andrew Yang genuinely believe that
the US would ever adopt his proposed UBI system, but just the fact that he raised the idea in a setting as serious
as a presidential campaign means that a lot of people
have learnt about it and a lot of people might be thinking of toned down alternatives. Nobody can predict the future,
least of all economists, but it's important that we
are always stress testing new ways to make the lives
of economic participants more comfortable, whichever
way the world does go. Now, the best way to make sure that you are as comfortable as possible is by investing for the long term, which is made a lot easier with
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