There are three reasons why the price might go up:
demand increases
supply decreases
inflation
Right now, everyone is already consuming these necessities, so if UBI is introduced, demand will not go up. So 1 would not be true.
Supply could go down if enough people stop working. But if this reduces supply of the necessities, there is a strong incentive for people on just UBI to start working again. There is also increasing automation. So I find 2 unlikely.
That leaves 3, inflation. I am not an economist, but as far as I understand this shouldn’t be a significant factor.
Right now, everyone is already consuming these necessities
Uhm, no? I mean, those poor enough who cannot get those necessities are not partecipating in that market. If they suddeng gain the power to do so, you would have an increase in demand.
That leaves 3, inflation. I am not an economist, but as far as I understand this shouldn’t be a significant factor.
I guess it depends on where the money for UBI comes. If you just redistribute the money that is already spent elsewhere, then yes, inflation is not an issue. Instead if you just print bonds to keep up with the extra expenses, then it might become a problem...
Some people do die from poverty, so there we might expect an increase in purchases following UBI.… but this isn’t a big number,and therefore not a big increase, iff we are assuming that ‘necessity’ means food, water, enough shelter that you don’t die.
In fact, UBI might decrease some costs, for example, medicine is often a necessity, and if people choose to get health insurance (or better health insurance) with their new funds, this may have the effect of reducing overall costs (Obamacare is banking on this effect, on a larger scale).
However, UBI might be expected to raise some prices, for example, for apartments, used cars, and other inflexible markets. But remember, most markets like having lots of customers, so if new cars go up in price, the car manufacturers will be happy to make more cars next year to meet demand at the original price—in fact, unless all the car manufacturers collude, they will have to increase production / reduce price in order to stay competitive. Otherwise, one smart company will lower prices while the others don’t and corner the market.
You can see why the most popular goods are likely to be of the mass-market, easy-to-produce-more type. Truffles are not popular, not because they are not delicious (or so I’ve heard), but because they can’t be too popular—there aren’t enough of them. iPhones, McDonald’s, and puppies are popular because they can be enjoyed by anyone with a moderate amount of money. And if those things went up in price, Android, Wendy’s, or Leroy down at the puppy mill would be happy to fill the void.
I would see apartments as being the big worry; if millions of people move out of their parent’s basement, decide they don’t want roommates, or stop living in their cars, then apartments go up in price. But that only means that many of those people will not, after all, be able to move out of their parent’s basement, etc. (and that the rest of us have higher rents).
I agree with everything you say, indeed the increase in demand is only the first movement of market in search for a new equilibrium. Surely at higher prices markets become more attractive, and those which has a lower cost of entry will attract new supplier, and price goes down, and so on. It is difficult to predict a new equilibrium, although I share your view that the main problem is going to be houses.
if this reduces supply of the necessities, there is a strong incentive for people on just UBI to start working again
Technically, there is a danger that the tax rate for the working people may become so high (imagine e.g. 99%) in order to support the UBI, that when a person finds out they are unable to survive on UBI alone, they are screwed anyway.
It may happen to some people sooner than to others because not everyone has the same expenses. For example people with health problems may need to pay extra for medicine. We can get situation where UBI allows you to survive without work if you are healthy, but if you are sick even UBI plus heavily taxed salary will not be enough to survive.
I am not sure how realistic this is… I am just trying to imagine the worst possible scenario (while aware that people are often insufficiently pessimistic at predicting what could go wrong).
EDIT:
It would also be better, I think, if the first dollar gained above UBI is more or less untaxed. Less incentives for gray market. (Otherwise I expect at least 5-10% of population living on UBI + some undocumented income.) Which implies some kind of progressive taxation. (Which has its own bad incentives.)
It would also be better, I think, if the first dollar gained above UBI is more or less untaxed. Less incentives for gray market. (Otherwise I expect at least 5-10% of population living on UBI + some undocumented income.) Which implies some kind of progressive taxation. (Which has its own bad incentives.)
The ideal, at least as I approach it, is the combination of the UBI with a flat tax, wherein the flat tax applies to the UBI as well as all additional income. You use the UBI to offset the flat tax’s regressive tendencies.
This has an additional nicety in that everybody is equally affected by taxation and government spending, so you don’t up with moral hazards where the people voting for stuff aren’t the people who have to pay for it.
The actual research into welfare-maximizing tax systems argues for a UBI plus roughly U-shaped marginal tax rates, i.e. relatively high phaseout rates on the UBI itself, then low but mildly progressive rates for folks making more than the breakeven point. The point, I think, is that this strongly incents folks to become net contributors, since at that point they will be paying lower marginal rates. Your point about whether the UBI should be taxed is interesting. Of course at any given time it’s a wash, but you might be right that taxing the UBI itself (say, depending on tax revenue as a fraction of GNP) is a good institutional choice.
You could just adjust the UBI payout to achieve precisely the same result? Or is there another variable being maximized there relating to, say, household size? (Or is it just psychological?)
The point of taxing the UBI itself (even before earned income enters the picture) is precisely to adjust the amount in a predetermined way—in this case, it’s supposed to be proportional to the fraction of GNP that’s not affected by government taxation, so that, as you put it, “everybody is equally affected by taxation and government spending”. One issue with this is that it may make the UBI too volatile, which is bad as you want it to be as small as possible on average (because redistribution is very costly, even with the best system you can think of).
Taxes would increase to pay for the Universal Basic Income. You could do it using the money we currently spend on welfare, but that includes things like medicare. Either we need to keep that, or we need to give them extra money to pay for medical insurance.
Supply of labor could decrease. This is a necessary consequence of any effort to help the poor. But since we already have a welfare system, it’s just a question of which causes labor to decrease less.
Supply of labor could decrease. This is a necessary consequence of any effort to help the poor. But since we already have a welfare system, it’s just a question of which causes labor to decrease less.
For things like welfare (and almost certainly for UBI, though I doubt there’s enough empirical evidence either way to be sure), yes.
Things like education subsides (assuming they subsidize professionally relevant education rather than just signaling, which admittedly is a somewhat dubious assumption) and the EITC (basically a negative income tax for the working poor in the US) could very well increase the labor supply.
basically a negative income tax for the working poor in the US
That would increase incentive to work for the poor, but decrease the incentive to work hard enough to stop being considered poor. They can’t have the income tax be negative for everyone.
The idea is that you’re taxed on the UBI, as well, so your tax rate remains flat (or flatter than the current system) regardless of your income.
The big divergence is with the way welfare works now, when, depending on state, every dollar you can make, on average, costs you $1.50 in benefits, up to ~$70,000 for a single mother. That is, working makes you actively worse off. (Google “Welfare Cliff” for more information on this phenomenon, if you’re interested.)
One of the big things which happened during Clinton’s administration was a systematic adjustment of welfare cut-off points to reduce the gradient of the various welfare cliffs; this resulted in a labor boom, which coincidentally coincided with the .dot boom. Over time inflation ate away at the gradients, and further adjustments raised the cliff face, and we’re now worse-off than before in that regard.
So you can very much have a system in which the government is providing more welfare and yet people have a stronger incentive to work. That just seems bizarre in our universe, where every increase in welfare actively -destroys- people’s incentive to work, since their receipt of welfare is more or less conditional on their not working.
The simple model would be: everyone needs a certain minimum amount of food. If everyone is getting $300 a month and spending $200 a month on food, and if the price of food suddenly jumps to $300 a month, people will start to spend $300 a month on food. So we’d expect the price of food to increase, so retailers can extract everything they can from customers.
I’m not sure that prices rise because of inflation, so much as inflation being the name we give to the phenomenon of rising prices. I’d be moderately surprised if economists could accurately (and precisely) predict the effects of UBI on inflation.
Also also not an economist, although I took economics classes once.
I had a go at translating the simple model into one of those supply ‘n’ demand scribbles. For parsimony I assumed a straight line for the supply curve. For the demand curve I assumed no one bought more than the subsistence level of food, and that if the price was too high to reach that level, everyone simply bought as much food as they could with a constant budget.
That makes the status quo
and after a universal jump in income to relax everyone’s budget constraint, the non-vertical part of the demand curve rises:
At both times the intersection of S and D determines the equilibrium price. The intersection stays in the same place, so, in this incredibly simplified model, the equilibrium price is unaffected by everyone getting more money.
Being so primitive, this graphical model does not remotely prove that the price would stay the same in real life. But in trying to figure out why the graphical model disagreed with the verbal model, I managed to put my finger on why the two differ, and I think it’s a hole in the verbal model.
The verbal model observes that if people have $300/month, all of the retailers could jack the price of food up to $300/month, and everyone would be compelled to pay that. But that assumes coordination/cooperation/collusion between retailers rather than competition. If every food retailer raised their price to $300/month, any one of those retailers could swoop in and steal the others’ custom by cutting their own price to $299/month. And then another retailer could cut their price to $298/month, and so on. By the obvious inductive argument, the equilibrium price would wind up at the same $200/month it was before.
My main reaction to that graphical model is that it would be surprising if the intersection point was currently exactly on the cusp in the demand curve, unless there was something keeping it there. To the extent that that model works, I’d expect our current situation to have a shorter vertical bit on the demand curve (there are in fact people going hungry), so that the intersection is somewhere in the slopey bit, at lower price than your first picture. Then UBI could bring us to the second picture, where the price has risen, but food is still more widely available than the status quo. (This is one of the directions I was looking at.)
With competition, it seems to me that retailers currently have margins that competition could eat into, but doesn’t. If one of the factors keeping margins above epsilon is the amount of money people are willing to spend, then an increase in that would presumably also increase margins.
I guess I ruled out the possibility that the status-quo intersection was on the slopey bit because then everyone would be going hungry (from the assumptions that everyone were spending $200/month on food and that everyone shared the same subsistence level). However, I don’t have an argument for why the status quo would be on the cusp rather than below it; I just had a hunch which I should (with hindsight) probably have ignored.
Remember that retailers are in competition. If Food Lion raises it’s prices and Aldi does not, then Aldi magically gets more customers. Neither grocery store is motivated to become the High Cost Loser.
it seems to me that retailers currently have margins that competition could eat into, but doesn’t. If one of the factors keeping margins above epsilon is the amount of money people are willing to spend, then an increase in that would presumably also increase margins.
Also consider that retailers do in fact have different prices. Instead of Sainburys raising prices, we might find Sainsburys starting to get edged out by Waitrose. (This feels sketchy to me, especially since it’s least likely to happen in poor areas, and I’m not about to argue for it specifically. But I do want to suggest that prices can rise from factors other than “retailers decide to raise prices”.)
Why would the price of necessities rise?
There are three reasons why the price might go up:
demand increases
supply decreases
inflation
Right now, everyone is already consuming these necessities, so if UBI is introduced, demand will not go up. So 1 would not be true.
Supply could go down if enough people stop working. But if this reduces supply of the necessities, there is a strong incentive for people on just UBI to start working again. There is also increasing automation. So I find 2 unlikely.
That leaves 3, inflation. I am not an economist, but as far as I understand this shouldn’t be a significant factor.
Uhm, no? I mean, those poor enough who cannot get those necessities are not partecipating in that market. If they suddeng gain the power to do so, you would have an increase in demand.
I guess it depends on where the money for UBI comes. If you just redistribute the money that is already spent elsewhere, then yes, inflation is not an issue.
Instead if you just print bonds to keep up with the extra expenses, then it might become a problem...
Some people do die from poverty, so there we might expect an increase in purchases following UBI.… but this isn’t a big number,and therefore not a big increase, iff we are assuming that ‘necessity’ means food, water, enough shelter that you don’t die.
In fact, UBI might decrease some costs, for example, medicine is often a necessity, and if people choose to get health insurance (or better health insurance) with their new funds, this may have the effect of reducing overall costs (Obamacare is banking on this effect, on a larger scale).
However, UBI might be expected to raise some prices, for example, for apartments, used cars, and other inflexible markets. But remember, most markets like having lots of customers, so if new cars go up in price, the car manufacturers will be happy to make more cars next year to meet demand at the original price—in fact, unless all the car manufacturers collude, they will have to increase production / reduce price in order to stay competitive. Otherwise, one smart company will lower prices while the others don’t and corner the market.
You can see why the most popular goods are likely to be of the mass-market, easy-to-produce-more type. Truffles are not popular, not because they are not delicious (or so I’ve heard), but because they can’t be too popular—there aren’t enough of them. iPhones, McDonald’s, and puppies are popular because they can be enjoyed by anyone with a moderate amount of money. And if those things went up in price, Android, Wendy’s, or Leroy down at the puppy mill would be happy to fill the void.
I would see apartments as being the big worry; if millions of people move out of their parent’s basement, decide they don’t want roommates, or stop living in their cars, then apartments go up in price. But that only means that many of those people will not, after all, be able to move out of their parent’s basement, etc. (and that the rest of us have higher rents).
I agree with everything you say, indeed the increase in demand is only the first movement of market in search for a new equilibrium. Surely at higher prices markets become more attractive, and those which has a lower cost of entry will attract new supplier, and price goes down, and so on. It is difficult to predict a new equilibrium, although I share your view that the main problem is going to be houses.
Technically, there is a danger that the tax rate for the working people may become so high (imagine e.g. 99%) in order to support the UBI, that when a person finds out they are unable to survive on UBI alone, they are screwed anyway.
It may happen to some people sooner than to others because not everyone has the same expenses. For example people with health problems may need to pay extra for medicine. We can get situation where UBI allows you to survive without work if you are healthy, but if you are sick even UBI plus heavily taxed salary will not be enough to survive.
I am not sure how realistic this is… I am just trying to imagine the worst possible scenario (while aware that people are often insufficiently pessimistic at predicting what could go wrong).
EDIT:
It would also be better, I think, if the first dollar gained above UBI is more or less untaxed. Less incentives for gray market. (Otherwise I expect at least 5-10% of population living on UBI + some undocumented income.) Which implies some kind of progressive taxation. (Which has its own bad incentives.)
The ideal, at least as I approach it, is the combination of the UBI with a flat tax, wherein the flat tax applies to the UBI as well as all additional income. You use the UBI to offset the flat tax’s regressive tendencies.
This has an additional nicety in that everybody is equally affected by taxation and government spending, so you don’t up with moral hazards where the people voting for stuff aren’t the people who have to pay for it.
The actual research into welfare-maximizing tax systems argues for a UBI plus roughly U-shaped marginal tax rates, i.e. relatively high phaseout rates on the UBI itself, then low but mildly progressive rates for folks making more than the breakeven point. The point, I think, is that this strongly incents folks to become net contributors, since at that point they will be paying lower marginal rates. Your point about whether the UBI should be taxed is interesting. Of course at any given time it’s a wash, but you might be right that taxing the UBI itself (say, depending on tax revenue as a fraction of GNP) is a good institutional choice.
You could just adjust the UBI payout to achieve precisely the same result? Or is there another variable being maximized there relating to, say, household size? (Or is it just psychological?)
The point of taxing the UBI itself (even before earned income enters the picture) is precisely to adjust the amount in a predetermined way—in this case, it’s supposed to be proportional to the fraction of GNP that’s not affected by government taxation, so that, as you put it, “everybody is equally affected by taxation and government spending”. One issue with this is that it may make the UBI too volatile, which is bad as you want it to be as small as possible on average (because redistribution is very costly, even with the best system you can think of).
Taxes would increase to pay for the Universal Basic Income. You could do it using the money we currently spend on welfare, but that includes things like medicare. Either we need to keep that, or we need to give them extra money to pay for medical insurance.
Supply of labor could decrease. This is a necessary consequence of any effort to help the poor. But since we already have a welfare system, it’s just a question of which causes labor to decrease less.
For things like welfare (and almost certainly for UBI, though I doubt there’s enough empirical evidence either way to be sure), yes.
Things like education subsides (assuming they subsidize professionally relevant education rather than just signaling, which admittedly is a somewhat dubious assumption) and the EITC (basically a negative income tax for the working poor in the US) could very well increase the labor supply.
That would increase incentive to work for the poor, but decrease the incentive to work hard enough to stop being considered poor. They can’t have the income tax be negative for everyone.
The idea is that you’re taxed on the UBI, as well, so your tax rate remains flat (or flatter than the current system) regardless of your income.
The big divergence is with the way welfare works now, when, depending on state, every dollar you can make, on average, costs you $1.50 in benefits, up to ~$70,000 for a single mother. That is, working makes you actively worse off. (Google “Welfare Cliff” for more information on this phenomenon, if you’re interested.)
One of the big things which happened during Clinton’s administration was a systematic adjustment of welfare cut-off points to reduce the gradient of the various welfare cliffs; this resulted in a labor boom, which coincidentally coincided with the .dot boom. Over time inflation ate away at the gradients, and further adjustments raised the cliff face, and we’re now worse-off than before in that regard.
So you can very much have a system in which the government is providing more welfare and yet people have a stronger incentive to work. That just seems bizarre in our universe, where every increase in welfare actively -destroys- people’s incentive to work, since their receipt of welfare is more or less conditional on their not working.
Also not an economist.
The simple model would be: everyone needs a certain minimum amount of food. If everyone is getting $300 a month and spending $200 a month on food, and if the price of food suddenly jumps to $300 a month, people will start to spend $300 a month on food. So we’d expect the price of food to increase, so retailers can extract everything they can from customers.
I’m not sure that prices rise because of inflation, so much as inflation being the name we give to the phenomenon of rising prices. I’d be moderately surprised if economists could accurately (and precisely) predict the effects of UBI on inflation.
Also also not an economist, although I took economics classes once.
I had a go at translating the simple model into one of those supply ‘n’ demand scribbles. For parsimony I assumed a straight line for the supply curve. For the demand curve I assumed no one bought more than the subsistence level of food, and that if the price was too high to reach that level, everyone simply bought as much food as they could with a constant budget.
That makes the status quo
and after a universal jump in income to relax everyone’s budget constraint, the non-vertical part of the demand curve rises:
At both times the intersection of S and D determines the equilibrium price. The intersection stays in the same place, so, in this incredibly simplified model, the equilibrium price is unaffected by everyone getting more money.
Being so primitive, this graphical model does not remotely prove that the price would stay the same in real life. But in trying to figure out why the graphical model disagreed with the verbal model, I managed to put my finger on why the two differ, and I think it’s a hole in the verbal model.
The verbal model observes that if people have $300/month, all of the retailers could jack the price of food up to $300/month, and everyone would be compelled to pay that. But that assumes coordination/cooperation/collusion between retailers rather than competition. If every food retailer raised their price to $300/month, any one of those retailers could swoop in and steal the others’ custom by cutting their own price to $299/month. And then another retailer could cut their price to $298/month, and so on. By the obvious inductive argument, the equilibrium price would wind up at the same $200/month it was before.
My main reaction to that graphical model is that it would be surprising if the intersection point was currently exactly on the cusp in the demand curve, unless there was something keeping it there. To the extent that that model works, I’d expect our current situation to have a shorter vertical bit on the demand curve (there are in fact people going hungry), so that the intersection is somewhere in the slopey bit, at lower price than your first picture. Then UBI could bring us to the second picture, where the price has risen, but food is still more widely available than the status quo. (This is one of the directions I was looking at.)
With competition, it seems to me that retailers currently have margins that competition could eat into, but doesn’t. If one of the factors keeping margins above epsilon is the amount of money people are willing to spend, then an increase in that would presumably also increase margins.
I guess I ruled out the possibility that the status-quo intersection was on the slopey bit because then everyone would be going hungry (from the assumptions that everyone were spending $200/month on food and that everyone shared the same subsistence level). However, I don’t have an argument for why the status quo would be on the cusp rather than below it; I just had a hunch which I should (with hindsight) probably have ignored.
Remember that retailers are in competition. If Food Lion raises it’s prices and Aldi does not, then Aldi magically gets more customers. Neither grocery store is motivated to become the High Cost Loser.
I addressed that below:
Also consider that retailers do in fact have different prices. Instead of Sainburys raising prices, we might find Sainsburys starting to get edged out by Waitrose. (This feels sketchy to me, especially since it’s least likely to happen in poor areas, and I’m not about to argue for it specifically. But I do want to suggest that prices can rise from factors other than “retailers decide to raise prices”.)