UBI increases inflation – boosts aggregate demand and constricts the labor supply

Here we confront the key, perhaps fundamental, concern with such large-scale government programs: namely, does the structure of the economy produce the needed real goods and services that those UBI benefits are destined to purchase? In other words, even if UBI does not threaten solvency, is the enormous expenditure on the program warranted? What are the real macroeconomic effects of passing UBI and will it ensure a minimum standard of living for all? In my view the answer to these questions is “no” due to some perverse and unintended program effects. Since collecting taxes is a separate operation from spending, it is appropriate to consider gross (rather than net) expenditures first. I consider the impact of taxes and other reductions in government expenditure below. If the program is implemented as an “add-on,” rather than a replacement for existing government programs, spending on UBI could be as high as 20–35% of GDP annually (Tcherneva 2017). UBI would be an enormous fiscal impulse by any measure. The worry is not that it would compromise the government’s budget, but that the expenditure represents vast purchasing power and command over real resources, equivalent to a fifth or more of the US economy. Would the economy produce the needed additional output to satisfy this new demand? If not, how would the resulting real resources be distributed and priced, in order to soak up the additional purchasing power? If output does not adjust sufficiently, the program would prove to be inflationary. Worse, according to UBI advocates, we should expect a sizable fall in labor supply. One of the presumed benefits of the grant is that it empowers the recipients to refuse poorly paid or otherwise “bad” jobs. If UBI advocates (e.g., Standing 2011) are correct and there is a mass exodus from precarious working arrangements, the inflationary effect of the grant would be exacerbated. Once the value of the grant drops, recipients at the bottom of the income distribution will be once again compelled to work. And if the economy continues to provide poorly paid and precarious work arrangement, they will not be “liberated” from their “bad jobs.” Worse still, the grant may accelerate the Uberization of jobs since it represents a large subsidy to firms. Why should an employer offer a living wage, if the government has “promised” to do so via UBI?