Discussing inflation and UBI...

 So....I get this a lot. Probably the biggest objection to UBI I've been hearing recently hasn't actually been about affordability. It has been about inflation. People just assume if you give people a UBI the price of everything will go up. And of course, while there is a grain of truth to this, it's mostly nonsense, and here's why.

The causes of inflation

According to business insider, there are six major causes of inflation:

1) Demand pull - More demand = prices go up

2) Cost push - Higher costs to make stuff = prices go up

3) Increased money supply - More money in the system = prices go up

4) Devaluation - Currency worth less = prices go up

5) Rising wages - higher wages = prices go up

6) Policies and regulations - More regulations = cost of doing business can go up

If we really want, we can simplify this further for the sake of discussion. Devaluation of currency isn't relevant to UBI, and in a sense increased money supply is the closest worry to that. And of course rising wages and policies and regulations are basically just forms of cost push regulations. The costs of making stuff goes up, so that leads to inflation.

So for the sake of discussion, let's focus on the following three things, as they are the most relevant to UBI discussions.

Increase in the money supply

Demand pull inflation

Cost push inflation

Increase in the money supply: the elephant in the room

So, there seems to be some misunderstanding about UBI in the sense that when people think about UBI, they think of helicopter money. Like we're just dumping tons of money into the economy that otherwise doesn't exist, and that in doing so, it causes an inflationary effect as it devalues the value of our currency, and the prices go up to meet the limited demand for goods. To put things simply, if there's $10 trillion in the economy, burgers might cost $5. If you increase that to $20 trillion while having the same amount of burgers, well, the burger might end up being $10. So by doubling the money supply for a fixed number of goods, you might double the prices.

Of course, UBI is NOT THAT. UBI is income redistribution. For every dollar put into the system via UBI, there is a dollar taken from somewhere else, at least in MY plan. This is why I am so picky with UBI plans that I try to insist on funding UBI from a balanced budget. I'm not trying to inject unsourced cash into the economy. I take roughly 1/5 of the cost of UBI from existing spending in other social services, and the other 4/5 come from taxes on existing sources of income. 

So if there's only $15 trillion in the economy, the amount of money that will exist after I implement UBI is still $15 trillion. I just took money away from some sources and gave them to other sources. I might eliminate food stamps and give that poor person a UBI instead. I might tax middle class families for a significant portion of the UBI only to give it back to them in UBI. My UBI is really just a glorified negative income tax, where people at the bottom get a guaranteed safety net and then people, as they work, face increased tax burden where they pay back their UBI over time. The break even point under my plan comes out to around $70k or so for an individual, or anywhere from $100k to $200k for the average household, depending on the makeup of that household. 

Demand pull inflation: but won't a more equitable level of income equality lead to an increase in demand?

I mean, yes, it technically will. Poor people spend their money, middle class people save it, the rich invest it. So poor and middle class people will spend more in the economy causing relatively small increases in aggregate demand. 

Now...is this a bad thing? No. It really depends on how much. SOME inflation is good in the sense that it shows that people are willing to spend and buy things, and spending and buying things will grow the economy. And you know what? The same kinds of inflation need not happen just from a UBI. A minimum wage increase could cause a similar increase in demand. I mean if we really want no inflation, that's bad, because that means people have no money to spend and are poor as crap, and a huge problem with our monetary policy since the 1980s has been, outside of our current crisis, that we have been too inflation conscious. We have been spooked by inflation due to the 1970s stagflation that we overcompensated in ways that made normal americans poorer and more squeezed at work. So by increasing their money, we make them better off and more able to demand goods and services, but that could have a small inflationary effect. What matters is how much? 2% inflation might be too low. 5-6% might be excessive. Maybe we should aim for 3% or so. It also depends on what things people demand.

 Everyone who makes this argument is thinking first and foremost about rent going up, as if landlords are evil people with mustaches that they play with as they think of arbitrarily raising rent by $1000 a month if we give them a UBI. But....as we already discussed, the money supply isnt changed, and that extra $1000 might come at the expense of existing social services or tax breaks or increased taxes. So not everyone will just magically have $1000 a month. And since housing is a good people need regardless, the odds of aggregate demand of rent going up isn't that high. I mean, you might have that 1-2% of homeless people seeking to afford apartments now, and maybe a few would seek to upgrade their housing a bit, but mostly...demand should remain the same. It seems to be a relatively inelastic good people need and demand is gonna be high regardless. And let's be honest, we discussed the housing market already in previous articles. The vast majority of housing pricing is determined sheerly by supply and demand. Banks run at a very low profit margin of 1%, and while landlords have a higher 13% or so profit margin, they still only make in net a couple hundred dollars per apartment, and can only live comfortable if they own several, if not dozens of properties. The vast majority of housing costs are just...what the costs are.

I know the socialists who make this argument will think I'm defending landlords here, but let's break down their ideology a bit to see where they're coming from. They tend to adopt the so called labor theory of value, claiming that all value of things comes from, and belongs to, those who work. Landlords do not acquire money via working per se, but ownership. They own properties and rent them out to others. And they think of them as parasites, extracting surplus value from workers in an unjust way. They believe that landlords existing is unjust, and that they can just arbitrarily increase their prices at a whim to force people to pay more.

Except...as we discussed, they only make a couple hundred dollars in profit. While we can discuss the idea of landlords essentially being the scalpers of housing, they cant just arbitrarily raise prices by $500 one day. In doing so they will lose tenants, who would instead seek housing elsewhere. Housing is a tricky subject that deserves more study and potentially more solutions that go beyond merely implementing a UBI (I think the idea of creating more public housing is a good thing for example, as well as a targeted land value tax), but let's be honest, if the overall SUPPLY OF MONEY remains THE SAME, and the DEMAND FOR HOUSING remains THE SAME, then why would rent go up? 

[EDIT: Actually I researched this further after some debate, and I would like to elaborate on this. Yes, UBI may raise rents a little bit. However, it would likely do so the way the minimum wage raises rent. Essentially, while UBI does not increase the money supply and would be offset by higher taxes and reduced government services otherwise, the mere redistribution of income to the poor may cause some people to seek to improve their housing situation, which could encourage people to demand more housing. Two people who currently rent together might decide to rent separate apartments if their financial situation improves too much, and this could cause demand pull inflation. Still, the effects of this remain to be seen given UBI IS offset by these other factors. I would still expect the effect to be a net positive overall, with more being able to afford SOME housing situation, so I could see homelessness going down. I just felt a need to offer this correction. I do want to reiterate the actual cause of inflation here would be from the demand side. It wouldn't be landlords gauging just because. It would be because more demand strains the housing market which is already limited in supply, which would drive prices up until a new equilibrium is reached.]

Instead, what people need to worry about with inflation is in some of the same kinds of consumer goods and services we're seeing inflation in right now. Stuff like hotels, because people might wanna go on more vacations (that said housing in touristy areas MIGHT actually go up). Or electronics, looking at you, people who wanna buy graphics cards or a new PS5 or Xbox Series X. You know, luxury goods. That's probably where most of the demand would happen. Even then, I don't think that would be as crazy as they are right now. I mean there are real silicon shortages in the supply chain leading to the increases in those prices, so that's actually a COST PUSH form of inflation. And on the demand side, the big problem is all that crypto mining. Internet funny money is ruining PC gaming. There I said it. Screw crypto, screw "bitcoin" and "blockchain" and all of that nonsense. That's the problem. And while we would have increased demand for that stuff in a world with UBI, you might have $300 GPUs cost $350 or $400...not $300 GPUs costing $800 like they do now. 

So...let's be honest. Is a world like that worth it? If poverty is eliminated and median household income increases by like 20-30%, sure. We might see fewer yachts, but more people demanding luxury goods. Most forms of essential goods would likely remain the same as demand is gonna be high regardless. 

Nobody wants to work anymore: Cost push inflation

So, now to address the real elephant in the room, which we see often about UBI, and that is the idea of cost push inflation. It's not JUST the fact that there is higher demand from people having more money, it's that input might go down from fewer people working, and higher costs to things like wages.

First, let's address wages. Okay, so many of these leftists are often pushing for higher wages. The same ones who scream about inflation, are also the ones pushing for a $15, or even a $20-25 minimum wage these days. That would cause inflation in and of itself. So once again, let's get over ourselves and not forget that any left wing approach to helping people would lead to inflation. It would lead to more demand on the consumer side, as discussed above, but it would also lead to higher costs for businesses. 

But, in practice, the bark is more than its bite. I always used to make this argument about the minimum wage, if the minimum wage doubled, and prices of stuff raised by only 20%, because keep in mind wages are only one of many factors that goes into the costs of production, ignoring the costs of raw resources and renting out space for things, and taxes, etc. so let's not act like if you double minimum wage prices will double. No, just like before you might see a mild inflationary spike followed by a return to normal. And if implemented reasonably over time, you wouldn't see much of a spike at all. But yeah, generally speaking, the majority of people would have MORE money overall in practice, even after this form of inflation.

Now, one thing that would need to be addressed is reduced work effort. HOWEVER, this yet another reason I only support a UBI around the poverty line. The purpose of UBI is to give people the ability to say no, but as I've said in previous articles, I try to be pragmatic with recognizing the limits of my anti work ambitions. Obviously we have labor needs in society that need to be met, and while I understand UBI should make work more voluntary, I only support that freedom insofar as its sustainable by society. So...if we implement a UBI and 50% of the labor force quits overnight, that's bad. 

But...it probably won't come to that. Looking at the overwhelming majority of UBI oriented studies that have studied labor force participation, they often record little to no reductions in work. Because a true UBI near the poverty line isn't really enough for people to be comfortable and fulfilled. maybe the most work shy among us, the autistic anti work part time dog walkers of the world might decide to work a bit less, but most people like their stuff. They like their xboxes and their vacations and eating out and blah blah blah. So they're going to continue to work. I think in the 1970s the NIT studies at the time only recorded mild work reductions, mostly among housewives, single moms, and high school/college kids? And those are reductions that would largely be acceptable in society. They were the equivalent of shifting to a system in which European style vacations were the norm in America. So definitely sustainable.

 Here's the thing. If I offer you $1 to quit your job, would you take it? Probably not. If I offer you $1000, would you? Probably no, you probably make more than that in a month. What about $10k? Eh....you might on the spot, but would you stop seeking employment to live on $10k? Probably not. $20k? Maybe. $50k? Odds are you would. That said, the labor force participation reaction to UBI depends on the amount, and if UBI is high enough to satisfy all human needs without working. And here's the thing...most people, given an amount around $13k, probably wouldnt stop working. Maybe some would reduce hours. maybe some would quit if they're secondary earners, but all in all, the demand isn't gonna be a whole lot based on studies I've seen. You need a much higher UBI to actually discourage work effort in a meaningful way harmful to society.

And honestly, if it does happen, it just means that UBI is that high. Alternatively the fed could raise interest rates to halt new job creation, which would raise unemployment, leading to the end of inflation. So there are ways to deal with it.

Conclusion

I know I've written a lot here. And since your average reader is likely to be a leftist, since they're the ones who throw these inflation arguments around in a cynical fashion because they seem to hate markets in general and believe that nothing under capitalism will ever work because capitalism is evil, a lot of those probably isn't super relevant. But that's my most detailed answer I can give about UBI and inflation.

In terms of money supply, since the money supply is the same, inflation will not happen.

Redistributing money from the top to the bottom and middle might cause an increase in demand for goods and services, but I don't see rent being massively effected. Landlords can't just arbitrarily raise prices and expect to get more money. They exist in a market too and have to deal with competition which would keep prices in check. And it's not like demand for housing would massively increase, since people demand housing anyway. Since it's a basic need. And it's not like we have a massive housing shortage in this country as a whole. 

Most increased demand would likely go into more luxury type goods and services, as people would spend extra money on more luxuries, like vacations and xboxes. So, expect those prices to go up. 

On the demand pull side, a decrease in the supply of labor could cause pressure on wages, which could raise prices.

However, between the demand pull and cost push, let's not forget one major factor. It's really a matter of degree. To some extent, more demand is the result of people having more money, and higher wages is the result of workers having more bargaining power. Lefties are going to be for those things. Since the alternative is having higher unemployment, and lower wages, in order to reduce inflation.

We have this thing called the phillips curve in this country, and while supply constraints can break it, generally speaking, unemployment and inflation are inversely related. And lower inflation means higher unemployment, less worker bargaining power, and more poverty. If the left worries about UBI and inflation, these concerns are largely unfounded, because the inflation we would see from UBI is identical to the inflation that would occur from workers having more bargaining power, and having more money to spend. Obviously there comes a time where workers demand money that isn't there, causing prices to raise, causing demand for more raises, which causes prices to rise, leading to a wage price spiral, but assuming no such spiral occurs, then everything is fine. UBI is fine, within the constraints of this economic model. It's all a matter of degree. And while UBI might cause mild work disincentives, they can also be controlled within this model

That said, in implementing UBI, here are my recommendations

1) UBI is funded in a balanced budget way. No helicopter money, no stimulus out of nowhere. UBI is funded from tax increases and/or spending cuts elsewhere. 

2) The amount of UBI is kept close to the poverty line. This would do several things. It would alleviate poverty without increasing aggregate demand too much, and it would not discourage work effort too much.

UBI ultimately comes down to implementation. A bad implementation could be disastrous, but a good implementation won't cause any more inflation than any other left wing policies in society. If you're for labor unions, and strikes, and workers having more money, those things are inflationary too. And they too can go too far and be disastrous in terms of inflation. But...I don't see leftists complaining about those things. No, they only crap on UBI for reasons. But seriously though. Assuming a UBI is implemented well, it won't cause any more disruption in terms of inflation than any other social safety net, or any other labor oriented improvement to workers' lives. 

And while a true hardcore leftist might argue for universal basic services instead, that has a lot of downsides outside of the scope of this article that I've addressed in the past, so I'm not gonna open that can of worms here. 

What can of worms I WILL open is other leftist criticisms in relation to UBI that are directly related to the inflation question. For example, leftists love to scream UBI would destroy/reduce "welfare", but this is a good thing assuming people aren't made worse off in the process. Reducing existing welfare programs is how we stop UBI from being inflationary. We dont give poor people $300 in food stamps, but instead $300 in UBI. Yes, one replaces the other. That's not a problem. Leftists often scream we need UBI on top of welfare, but that would just be more inflationary, by increases aggregate demand, or increasing the money supply if paid for out of nowhere.

Leftists also impose unreasonable stipulations for funding a UBI, often calling for amounts well in excess of what I would. I advocate for a UBI of $1100 a month, or more broadly $1000-1250 a month. Leftists often make demands of $2000-3000 a month. But...if we did that...the labor response would be disastrous, it would be insanely expensive and rely on helicopter money to accomplish, or tax rates so high that it would implode the economy. Keep in mind the higher the amount the UBI the more inflation there is. Because it will increase demand, while decreasing worker output by discouraging work to too great of a degree. So there would be more demand for dwindling amounts of goods. So maybe if a leftist got their way, yeah, their UBI would destroy the economy through inflation. But that's because these leftists seem completely economic illiterate and seem to support dropping tons of helicopter money on people in ways that would implode the economy. 

But a decently designed UBI would not do that. A UBI of around $1100 a month funded via taxes and spending cuts would likely provide enough balance to greatly improve peoples' lives without destroying the economy and causing massive inflation. Which is why I support the UBI I do.