A UBI is an inflationary disaster.

UBI can be funded through money printing, deficit spending or by revenue from taxes. In the first case, the base money supply will increase. The risk with this case is raising inflation. As long as inflation is under control, money printing can help in many other issues (such as alleviating national debt or increasing comparative advantage of country in the trade) in a manner that is fair to everyone. The following sections will elaborate more on the benefits that money printing can provide.

The government will issue the notes to fund the UBI program in deficit spending. This case resembles transferring money from the wealthy (local or foreign) to the middle class and poor. However, the lower and middle class become endebted to the wealthy and their debt must be paid at a later time. Deficit spending may also cause inflation, as lower-income households tend to spend a higher percentage of household income. This method is not preferable, as raising money through debt issuing is not sustainable in the long run.

Funding UBI with tax income is also transferring money from the wealthy to the middle class and poor, except this time the money will not be paid back. UBI can be funded through land/location value tax (LVT), value-added tax (VAT) or income tax. Some have also suggested the use of Robot-tax, which penalizes industries for the use of automation instead of human labor [10]. To punish industries for technological advancements, however, is irrational. This will reduce the comparative advantage of local industries. The disadvantage with income tax is that raising taxes on the wealthy usually hinders economic growth. Between the suggested taxation methods, the VAT seems the best option, as the program is funded by the individuals who spend the most, and it encourages people to save. Here and through the rest of the paper, we assume UBI is funded by money printing. The author believes other methods will decrease or eradicate the purpose of implementing UBI in the first place.

In theory, printing money and increasing the money supply causes inflation. Many leading world economies such as Japan and the Europe Union currently suffer from a deflationary environment. Japan has struggled to introduce inflation into the economy for a couple of years. Even massive monetary easing and asset purchasing do not seem to work efficiently. Such an environment also more or less exists through the Europe Union. Many reasons cause these advanced economies to face a deflationary environment. From them one can mention demographics and reduction of births, wealth disparity, lack of spending, lagging in wage growth, increase in national and domestic debt, low manufacturing costs due to automation, the rise of the Internet and e-commerce, increase in competition, electronic banking, close loop inflation control by the Federal Reserve in the US and other central banks around the world, long-lasting low inflation environment and low inflation expectations, the 2008 financial crisis, etc. Many of these forces do not seem to go away in the foreseeable future.

Money in the hands of the wealthy tends to increase the price of financial assets, whereas money in the hands of the middle class will drive spending on common goods and will cause inflation. The traditional monetary easing and asset purchasing are not the most effective ways to produce inflation. The radical measures implemented by central banks around the world to increase economic productivity and inflation seems not to work anymore. Inflation in security prices was already caused by decreasing the interest rate to their lower bound. The inflation in the bond market keeps the interest rates low, which makes the window of potential further cut the interest rates narrow. These methods increase the monetary supply; at the same time, however, wealth disparity also increases. Corporations and the wealthy benefit the most from such methods. UBI, on the other hand, increases the money supply and at the same time decreases wealth disparity. The spending driven by the middle class will cause rise in prices.

UBI has failed in many cases solely due to an uncontrolled money supply to the middle class, which produced hyperinflation. The catch here is that UBI should not be controlled by the executive branch of government. In the case of democracy, it is quite logical to assume each candidate will promise higher UBI rates to gain more votes. This will produce a vicious cycle ending with hyperinflation. UBI should be under the control of an independent entity, such as the Federal Reserve in the United States. That entity will control the money supply and amount of UBI based on projections of inflation. UBI will be an extra tool of the Federal Reserve which can directly target inflation and wealth disparity.

As an example assume the target inflation to be two percent and country’s inflation rate sustainably runs below the target. Eq. 2 gives an estimation for the UBI rate to be paid to achieve the target inflation. After running the program for certain amount of time (for example three months), the inflation rate shall be reassessed. If running below or above the target range, the rate can be readjusted accordingly. UBI rate eventually goes to zero if the inflation rate sustainably runs above the target range. UBI works best in a deflationary environment, not in an inflationary one. It is best suited for developed countries with deflationary or low inflation environment. In such countries, not only inflation to be avoided, but the central banks are pushing to raise inflation to a healthy level. For developing countries often with higher inflation rates, UBI can cause disastrous effects.

Some have suggested that UBI can be implemented for the currency inflation [11, 12]. The UBI is not good to compensate for inflation, as it is itself an inducer of inflation. In this case, more inflation would cause increase in UBI rates, which makes the inflation problem worse. Also, the amount one loses due to inflation is proportional to his/her cash holding, so people with more cash should receive more basic income, which does not seem rational.