Universal Basic Income and cost of things

Dispelling one particular critique of UBI

Universal Basic Income (UBI) has started appearing with increasing regularity in research and experiments all around the world (Finland, India, …Oakland?). Of course, the scheme has both benefits and drawbacks, its proponents and critics, but in the absence of experience from a large-scale long-running UBI program, it is hard to evaluate what would actually happen.

One popular critique is that giving everyone some amount of money would simply raise the floor for prices. Inflation would do the rest and the scheme would quickly cancel itself out.

This critique is actually easy to dispel, and I believe it’s useful to do so, so we can focus on other actual challenges (of which are many). Here we go:

If everyone gets a fixed sum of extra cash, what’s to stop merchants from raising prices? Other merchants. Consider bakeries. They could raise prices, knowing everyone has extra money to pay for bread. However, all it takes is one savvy baker to recognize he or she could raise the prices just a little lower than everyone else, enough for people to start preferring their shop instead of the competition. The baker could increase their market share significantly (open a chain of “cheap” bakeries). But the competition would quickly catch up to the rascal’s plan and lower their prices accordingly. The baker could lower them still a bit more, and so on…

Where would that downward pressure stop? At the point at which there is no point in running the bakery (the profit is too small). Which is the exact same price point as before[0], and doesn’t depend on the purchasing power of the consumers (that is, it’s not tied to how much money people have).

However, in this description I’ve made two important assumptions: that there is enough competition between bakers, and that bread production can be ramped up and down as demand increases. If either of these assumptions is false, the picture becomes less rosy.

Start with competition. If there is only one baker (a monopoly), he or she is always in the position to charge as much as they like (which is typically just below the point at which many people would stop eating bread and switch to something else, say, rice). In this case, introducing UBI would directly lead to price increase, unless the price itself was regulated (as is the case with utilities, which are natural monopolies).

The other assumption is that the production can adapt to the demand. When this is not the case, that is, when the supply is limited, the competition between consumers for a limited number of products, will almost certainly gobble up any extra money people receive. Spectacular example of this is the housing market in Silicon Valley, where an ever increasing number of IT workers with sky-high salaries competes for a very limited amount of housing.

An even better example are tuitions for prestige universities in the US. Since it is not in the universities’ interest to increase number of students, increasing the money supply for the prospective students with student loans meant that students were now able to pay more for the same thing and that universities could simply increase the tuition fee[1]. Increasing the money supply to students via UBI would have the same effect.

Coming back to validity of the critique that UBI would simply result in price increases, we can see that it rests on the question of whether people spend more money for commodity products, or on limited-supply products or monopolies.

The recent stats from US Bureau of Labor Statistics[2] show that roughly a third of the expenses are housing related. To me, this shows that those in very skewed housing markets (like Silicon Valley, New York, or London) might see price increases due to UBI, but for the most people (that live in healthier housing markets) the housing cost shouldn’t be affected. Other costs are related to more commoditized goods and services so they should be even less affected.

This doesn’t mean that Universal Basic Income is definitely a net benefit for society. There are many other issues to examine, challenges to be sorted out, and the jury will be out on its effects for a long time.

But at least we’ve got one out of the way.

[0] Actually, it could be even lower. If UBI replaces minimum wage, workers may decide they’re willing to work for a little less, thereby reducing the cost of bread. I’m not an economist, statistician, or a social scientist so I will not venture into discussion on whether that’d be a good thing overall.

[1] That’s not to say student loans weren’t beneficial overall. It may very well be that the system allowed more students to attend the universities as not all schools’ prices hiked (and not nearly by the same amount as the top ones), and allowed more middle-class and poorer students the opportunity. I know too little about the matter to draw any conclusions either way.

[2] I imagine stats for other western countries would show qualitatively similar amounts.