This article examines the theoretical background, practical application and long-term viability of universal basic income (UBI) through logical analysis and historical evidence. In an era marked by unprecedented technological advancements, rising wealth inequality, and the looming threat of job displacement from technological advancements (AI), UBI has emerged as a bold and controversial policy proposal. UBI refers to a form of social security which provides regular and uniform cash payment to people, without means testing or the requirement to work. Proponents argue that it offers a revolutionary solution to the cycle of poverty and inequality by redistributing wealth and ensuring a minimum standard of living for all. However, critics question its economic feasibility, potential to disincentivize work, and suitability across diverse economies. This analysis aims to determine whether it can be a practical and sustainable tool for fostering economic equity in the modern world.

Inequality today is primarily driven by wealth inequality, where assets are concentrated in a small elite, leaving much of the population relatively financially insecure. Currently, a growing number of workers compete for jobs in a labour market where opportunities are increasingly influenced by a small, asset-rich elite. The imbalance in labour supply and demand suppresses wages, reducing workers’ purchasing power and limiting access to essential goods and services.  

Economic instability theories establish a causation between extreme wealth inequality with weakened consumer demand and reduced long-term growth (Piketty, 2014). In highly unequal economies, financial resources concentrate among the wealthy, who save rather than spend (Dynan et al., 2004). UBI counteracts this by redistributing income toward lower-income individuals, increasing consumption, and reducing inequality-driven economic stagnation.

Economic disparities are exacerbated as asset owners generates passive income through rent and investments, while ordinary workers transfer earning to landlords and creditors. Ultimately, wealth inequality perpetuates a self-reinforcing cycle that further concentrates wealth at the top.

  UBI’s economic foundation is framed within a post-Keynesian perspective, viewing the policy as a tool to combat economic instability, unemployment and inequality by stimulating demand and promoting financial security. 

  Post-Keynesian economists emphasise the importance of Aggregate Demand in driving economic growth and maintaining stability. UBI operates as a direct fiscal stimulus by increasing disposable income, particularly for low-income individuals who have a high marginal propensity to consume. As a result, consumption rises, stabilising Real GDP growth and reducing the risk of demand-side recessions, as theorised by Keynesian multipliers (Bregman, 2017). Moreover, the Harrod-Domar growth model suggests that economic growth is driven by savings and investment. By reducing financial strain, UBI allows low-income individuals to save more, increasing the pool of investable funds. If these funds are directed toward productive capital formation, the economy benefits from higher investment-driven growth, as predicted by the model (Domar, 1946).

  Overall, the increased aggregate demand will reduce unemployment as more workers are hired in the production of goods and services. More importantly, the induced monetary security enables workers to escape exploitative and precarious jobs without the fear of losing financial stability. It further encourages people to pursue education, training and entrepreneurial ventures, increasing the mobility and resilience of labour markets. 

Behavioural economics, as explored by Mullainathan and Shafir (2013), shows that financial scarcity imposes a cognitive burden on the poor, limiting their ability to plan for the future. This ‘scarcity mindset’ leads to short-term decision-making that traps individuals in poverty. UBI alleviates this burden by providing a predictable income stream, enabling recipients to make long-term investments in education, skills, and entrepreneurship.

However, UBI also attracts criticisms on its viability and side-effects. Worries of inflation risk form a strong argument against the policy. Monetarists suggest that excessive money supply growth relative to output leads to inflation. UBI, by raising demand, could increase price levels if supply remains constrained. However, if funded through taxation, the policy acts as a simultaneous monetary withdrawal, offsetting inflationary pressures. Additionally, in economies with high spare capacity, businesses can scale up production in response to demand, minimising inflationary risks. In this scenario, the benefits of UBI are retained without generating significant inflation. However, as an increased proportion of spending falls on general consumer goods, this eventually puts strong upward pressure on their prices, potentially neutralising the increased income. If labour supply were to also decrease because of UBI, we might further receive significant inflationary pressure from increased costs. However, a country with high productivity and spare capacity may be immune from this effect as business can easily scale up production in response of the demand.  

Moreover, aggressive taxation towards the upper class and corporations could produce severe backlashes. There has been evidence in the literature that higher corporate tax rate leads to reduced innovator incentives and discourages risk-taking. A study comparing firms exposed to similar economic conditions found that tax increases led to a 67% reduction in patents, along with decline in research and development (R&D) expenditures (Mukherjee et al., 2017). As a result, the economy may experience decline in long-run economic growth and limited job opportunities, neutralising the proposed benefits of UBI. High tax burden also promotes the phenomena of ‘capital flight’ and ‘brain drain’, where assets, capital and individuals flow out of a country, leading to reduced investment, net tax revenue and quality of labour (Petersen, 2003). Consequently, nations currently with a high tax rate may find it difficult to fund UBI without hindering growth and productive capacity. 

Nevertheless, UBI has been successfully implemented in many pilot programs throughout the last decade. A project that granted unconditional monthly income grants to individuals in Madhya Pradesh (India) generated statistically significant improvements in debt reduction, education, and nutrition. Greater financial security empowered communities to negotiate better wages and working conditions against exploitative employers. In addition, an extensive study in Kenya signalled that a lump sum cash aid produced greater benefits than a monthly payment. The key difference was lump-sum recipients started 19% more enterprises with 80% high revenues on average. This is evident to the theory that people are trapped in poverty by a lack of capital for transformative investments they would need to vault them into higher income. Some monthly income recipients also emulated this with a ‘rotating savings club’ that converted their payments in a lump sum for an individual within the community. The display of creativity and unity shows that those in poverty does not necessarily lack the vision and determination to succeed, therefore being able to UBI effectively as an opportunity to break out of the poverty cycle. Therefore, there is a strong case for UBI to be proposed in developing countries with the intention to eliminate poverty. 

However, contrasting results were produced in a study in America during 2020-2023, which involved 3000 families in Dallas, Texas and Chicago, Illinois (Vivalt et al., 2024). Constant surveys on income, spending pattern and living standards disclosed that full UBI recipients earn 1500 USD less than control group on average, while also working 1.3-1.4 hour less work. The extra time were spent mainly in leisure activities, compared to an emphasis on education and enterprise demonstrated by the Kenyans. Counterintuitively, the net worth of UBI recipients were on average 1000 USD lower while attaining 36,000 USD in total, tax free. This difference illustrates the ineffectiveness of the policy in the setting of an advanced economy. The result also refutes the idea that poverty can be solved through simple cash injections. Individuals must possess basic financial literacy, as well as the willingness to change their circumstances. Nevertheless, recipients were able to spend more on basic needs, rent and healthcare. Most importantly, UBI did not lead to a hypothesised significant decline in labour supply, dismissing concerns about inflation.

Furthermore, UBI provides a crucial long-term benefit if it were introduced as a substitute for the current welfare system. Traditional welfare programs involve means testing, paperwork, and administrative hurdles, leading to inefficiencies and delays in support distribution. For instance, up to 30% of welfare spending goes toward administrative costs instead of direct aid in the US (Moffitt, 2016). The administrative demand for UBI is relatively low, thus reducing costs and ensuring direct support. A counterargument, however, is that UBI would cost more than the current welfare system. A basic income for all American citizens would cost approximately 2.5 Trillion USD, which is much higher than the current 461 Billion budget. Even if governments manage to acquire the funds through taxation, the program is unlikely to be sustainable in the long run. The nuance is that both the welfare system and administrative costs are projected to expand astronomically as automation threatens mass job displacement. In that scenario, UBI may indeed turn out to be cheaper than the existing welfare system. 

While UBI is not a perfect solution to poverty, it consistently provides a financial safety net and enhances welfare systems. Its success depends on economic context, funding strategies, and policy design. Empirical evidence suggests that UBI is most effective in developing economies where financial barriers limit opportunities. However, impacts varied in advanced economies based on recipient behaviour. Ultimately, UBI remains a promising—though not universally viable—tool against inequality in the 21st century.

Bibliography:

Bregman, R., 2017. Utopia for Realists: And How We Can Get There. Bloomsbury Publishing.

Domar, E.D., 1946. Capital expansion, rate of growth, and employment. Econometrica, Journal of the Econometric Society, 14(2), pp.137-147.

Dynan, K.E., Skinner, J. and Zeldes, S.P., 2004. Do the rich save more? Journal of Political Economy, 112(2), pp.397-444.

Moffitt, R.A. (ed.), 2016. Economics of Means-Tested Transfer Programs in the United States, Volume I. University of Chicago Press.

Mukherjee, A., Singh, M. and Žaldokas, A., 2017. Do corporate taxes hinder innovation? Journal of Financial Economics, 124(1), pp.195-221.

Mullainathan, S. and Shafir, E., 2013. Scarcity: Why Having Too Little Means So Much. Times Books.

Petersen, H.G., 2003. Globalisation, capital flight and capital income taxation: A European perspective. Universität Potsdam, Faculty of Economic and Social Sciences, Discussion Papers.

Piketty, T., 2014. Capital in the Twenty-First Century. Trans. Arthur Goldhammer. Belknap Press of Harvard University Press.

Vivalt, E., Rhodes, E., Bartik, A.W., Broockman, D.E. and Miller, S., 2024. The employment effects of a guaranteed income: Experimental evidence from two US states. National Bureau of Economic Research Working Paper No. w32719.