View: What's Wrong With A Universal Basic Income (Unconditional Basic Income)

This article was contributed by a reader (MSc Economics)

In recent years, many countries across the globe have been flirting with the idea of UBI - Universal Basic Income, or the Unconditional Basic Income, depending on the term you use or who you talk to. And while many articles by various pundits, journalists, policy wonks, and even economists are in favour of such a simple and easy measure to solve poverty and counter a "post-work" world in the future with automation and technology when jobs have been massively impacted, supposedly freeing up people to do anything they like, or even better, pursue their dreams - this economics paper takes a stand to argue against this idea. 

I don't think that the UBI is a good idea. It strikes me as a bad idea. 

Why is it not a good idea to give people free money, and allow them to pursue their dreams in a post-work world? Why not do away with other forms of welfare and just go with a simple blanket redistribution? I am with the Swiss on this one - in June 2016, the Swiss people overwhelmingly voted to reject an unconditional cash payment given to all citizens to the tune of $2,500 a month. To my mind, they voted wisely. 

First, to pay for this plan, proponents suggest that all that is required is to reallocate spending on other transfer payments, such as payments to help people tide periods of unemployment, to UBI instead. Everyone gets a cheque. All the money that would have been allocated to unemployment benefits are now redistributed as a lump sum that goes to all the citizens of a country, rich or poor. So one way of looking at it, this camp argues, is that there are no new taxes raised as funding allocated to social spending will now no longer be targeted to the poor, but given to everyone. 

This strikes me as odd, that the social assistance is not targeted to the poor, or those who need financial support, but instead given to everyone regardless of their level of income. Currently, most countries don't have unconditional income - that is why we are having this debate - but they do not give the rich a lump sum that is unconditional, that is, tied to nothing. Why give the rich more money? 

And what makes this idea even worse is the fact that it completely ignores the fact that during good times and the economy is booming, less is handed out in transfer payments and more is collected in tax revenues, while the reverse is true - in bad times, there are many on the dole and taxes are often cut so as to boost AD. This means that under the situation of the UBI, during a recession relatively less government expenditure would be needed to fund the system, while during a boom time relatively more would be required to fund the system. Think about it for a second. In simple terms, more will be spent by the government handing out funding in the form of a universal basic income when times are good (as the government would not have handed out that much welfare benefit during a boom time); less will be spent by the government during a recession (as the government would have raised transfer payments counter-cyclically during a recession). 

Second, the UBI idea totally ignores the idea of economic incentives. I am not sure about other people, but surely I can speak for myself. If I received $2,500 for free - and I were to be taxed on income that I earn - because taxes do not simply pay themselves - I would definitely work less. I am a rational agent who actively responds to incentives. Why would this logic be any different when it is applied to a large population of people? While some unemployed would take this chance to get a better job and can have a proper subsistence - there's no denying that - some who are currently employed at around that wage would effectively have less incentive to work. I say again, I speak for myself but it is no stretch of the imagination that these incentives also work for other people - the incentive to be lazy and reduce work motivation, or for others to work in short term, simpler, less stressful jobs. At the slightest hint of problems at work, one would be tempted to leave as there is a UBI backing one up. Economists have often spoken of moral hazard and adverse selection - these important lessons should be revisited by anyone who is speaking about this topic. 

Third, I am not going to make an economic argument as I did above, but I am going to talk about unintended consequences of redistribution. And some history, especially involving redistribution (a few countries have had this experience). There was once a societal experiment, which everyone knows about, to build a classless society where everyone would work harmoniously - From each according to his ability, to each according to his needs. I am sure you know where this is going. If income is unconditional, we cannot expect the consequences to be the same as though the person got his income from hard work and labour; forgoing his present consumption; investing; saving; or even inheriting his wealth. There are unintended consequences and as history has taught us - sometimes these consequences can be quite dire. Many countries have tried to create utopia and solve poverty and inequality - many countries have failed. Free markets may not have solved all of the world's problems, but they do help massively, and the facts of history have borne their successes out. 

All in all, there are a lot of things wrong with a UBI. Please don't support it. Not only does work have meaning, but there's a lot to be said about financial incentives, a country's attempts to balance their budget, and the simple fact that there is no free lunch. 

JC Economics Essays - Special thanks to our readers for their kind contributions. This economics perspectives essay is contributed by SS.  

JC Economics Essays is an economics essay site that deals with A level economics essays, from H1 to H3, and also has articles on how to write an economics essay, how to craft paragraphs, and write strong justified evaluations. Thank you for reading and cheers! 

Economics Posts [2] - A Simple Demand and Supply Model of Stock Market Prices

Contributed by one of the consultants to Sallyforth Enterprise

I was recently giving consultation to a client, when this thought came to my mind: "Everything in economics can basically be explained by supply and demand."

I actually said that to her, confidently, in the course of our consultation:

"Everything in economics can basically be explained by supply and demand."

The problem with that statement was that it was too simplistic; I needed to also take into account market failures, government failures, and the structure of the industry, as well as moral, societal, philosophical, political considerations, and a whole bunch of other things. Well, to put it another way, I do know my economics well enough to be invited to write an article for this famous economics blog by my good friend.

But I was just trying to illustrate a point - that at its core, the market basically works on demand and supply (and a whole bunch of other things, too, ceteris paribus).

In this economics post, I want to share some insights from economics on the stock market.

Not on what I want society to be, like Ryan talked about - but on stock prices and how demand and supply can help in our analysis of market prices.

This means that, basically, my post is about a simple demand and supply model of stock market  prices.

Armed with this incredible illuminating or incredibly unexciting model, you will be ready to become a stock market millionaire. That is how great my economics post will be.

Just kidding.

This is just my contribution on economics: some ideas off the top of my head.

I should emphasise that this is just an academic model, and no advice on stocks, finance, investment, and making money is given here. That is a profession in its own right (or is it really?) and that is a question for another time. I am just talking here about a simple demand and supply model of stock market prices.

OK enough rambling. Let's begin.

I think that prices in stock markets are determined by the intersection of the demand and supply curves for a particular stock, in the stock market, ceteris paribus.  

Yawn.

I said that already, didn't I?

I think, the real question is: what are the determinants of demand and supply that affect a particular company's shares, in the stock market, assuming no market failures, ceteris paribus?

Now, this is what we are really discussing:

Demand Factors

First would be income. 

A rising income (household income or national income would be great proxy indicators) would raise the demand for any stock, as people seek to place their savings somewhere.

Second would be the stock's EPS (earnings per share).

The higher the EPS, the more likely the company would be profitable, and over here in my economic model the predominant assumption is that rational, profit-maximising people want to invest in profitable companies. Therefore, a rising EPS would lead to a rising demand for that company's stock.

Third would be the dividend rate.

The higher the dividend rate, the more money shareholders get when it comes to distribution time. Therefore, it stands to reason that a rising dividend rate would shift the demand curve for a particular company's stock to the right, raising prices, ceteris paribus.

Fourth would be the tastes and preferences for a particular investment theme.

If there is a theme that is particularly popular in recent moths, then there should be an increased demand for companies that are in that industry. Healthcare becoming a major issue in recent months? A new craze in town, or new thirst for the oil and gas industry? Bob's your uncle!

There are also other demand factors, but as an intellectual exercise, I will let you figure out what they are. Think about population and demographics; advertising and persuasion; and a whole bunch of other things like complements and substitutes.

Supply Factors

Other than demand, there is also the issue of supply.

First would be the number of shares. 

If there is a share consolidation, then the number of shares are reduced, and the supply would fall - no surprises here. If there is an increase in rights shares, then the supply would increase (or be perceived to increase), and the supply would increase.

Second would be what I call government intervention, or in this case, the "SGX intervention" or "MAS intervention". 

Trading halts, suspensions, and new SGX rules (the infamous and rather ridiculous MTP - Minimum Trading Price rule - comes to mind) would impact the supply of a particular company's stock.

There are also other supply factors, but as an intellectual exercise, I will let you figure out what they are. Do think about things like inputs, factors of production, and clearly in Singapore's case things like international trade.

Conclusions?

In the final analysis, stock prices really depend on a multitude of factors but a simple demand and supply model can help clarify one's thinking. This shows that supply and demand really form the bedrock of economics - and this is a crucial insight. If we could further incorporate market failures such as imperfect information and asymmetric information into this economic model, I think it would be a more robust and stronger model.

Now, are you ready to become a stock market millionaire? :)

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JC Economics Essays - Special thanks to S for this excellent contribution on a simple model of stock market prices. This essay is part of a series on economics posts shared by friends and readers on a range of economic issues or themes that interest them. It is a brief and hopefully illuminating diversion from my usual focus on purely A level economics essays.

After a quick run of economics posts on various socio-economic, political, and every day themes, I will do some quick data analytics on the results and crunch some numbers on the interest and readership - and then I will resume posting relevant, useful, and well-written model economics essays for H1, H2, and H3 A levels economics examinations. (This is as I always do - to help students through reading and learning from economics essays.) In the meantime, however, hopefully, these essay contributions can expand readers' thinking and inspire them to understand the beauty of this subject. 

I sincerely hope these economics posts on a range of topics beyond pure examinations can do something positive.

Thank you for reading, and cheers.

On Finance: The Path to Financial Freedom and Financial Independence

This post is an adapted version of an article on economics and finance I wrote recently, dedicated to two of my former economics students, WL & YC, who participated in the National Economics and Financial Management Quiz 2013 organised by the Economics Department at the National University of Singapore (NUS). Currently, the National Economics and Financial Management Challenge 2014 is on - good luck to all economics students participating and all the best! 

The Path to Financial Freedom and Financial Independence 

Recently, I was asked interesting questions about the path to financial freedom (how to achieve financial independence), and it is one of the economics and finance topics that interests me, so here's my sharing on steps to financial freedom. 

None of these ideas in this discussion constitute professional financial advice, and all ideas here should be considered principles, concepts, and ideas. I'm not a financial adviser. Take note further that while the steps may be simple, implementing them takes discipline and effort. The principles might be easy but the implementation and execution of these principles are much harder. Nonetheless, this finance article might be of great use to economics students who want to think through financial issues or who would like to learn about good ideas that I have collated via my experiences and would love to share with you. 

Here are some simple steps to financial freedom and independence you should seriously consider. 

(1) First, think through and plan your financial goals and objectives. 

First, the most important thing about financial freedom is about goal setting and objectives. You must think about your life and what you want out of life. What does financial freedom really mean, to you, personally? If you want a luxurious life full of fast cars and fanciful toys, then clearly the passive income you need from investments would be much larger and harder to achieve compared to someone who wants a simple life with occasional luxuries.

Clearly there are many myriad possibilities - so plan first your financial goals and objectives. 

(2) Second, think about "Why".

Why? It should be clear that different people have different goals and objectives, but the idea is to make sure you know why you are doing what you are doing. "Why" is often more important than "what", since it means that you will be motivated, inspired, and able to achieve what you want.

Personally, I want to have the freedom and time to pursue the many hobbies I have, and so having the financial means to do so without worrying about my paycheck is a strong incentive. 

(3) Third, always spend less than you earn. 

This is important: you have to spend less than you earn. Simple: keep your spending lower than your earnings and always live beneath your means. 

(4) Fourth, earn additional income to augment your main source of income. 

In fact, if need be, take up extra jobs or work harder in your current job to gain additional income. 

(5) Fifth, grow your money through sound investments. 

With money you save from spending less than you earn, invest the money. The idea is simple - don't let money accumulate under your bed and certainly do not have all your money only in your savings account; invest and grow your wealth. 

(6) Sixth, gain and grow your passive income. 

On this note, many suggest gaining passive income, for instance, through investment in stocks for dividends, and bonds for interest, and, for the more conservative amongst us, placing money into long term bank fixed deposits to gain interest might be a good idea. In short, invest your money. 

(7) Seventh, manage your debts.

Make sure you pay off your debts. Many people say, however, don't borrow; try not to get into debts at all; and debts are bad. One famous saying I usually tell my students is that Shakespeare says, "Neither a borrower nor lender be." On the other hand, I would say instead that it really depends on what your debt is about. If you borrow money to spend on consumption, such as borrowing for a new TV set, then that might not be a good idea. Try to pay those in full, because interest has this nasty habit of expanding and expanding. You always end up paying much more than you expect due to "effective interest rates".

If, however, you borrow money to spend on assets, such as a house (which is an asset as it can be rented out, or sold for capital gains) or to spend on machinery for your business if you are an entrepreneur, it is rather different from borrowing for consumption.

I would say, in my opinion, try to reduce "bad debt" and try to pay off "good debts". If you can pay for things in full, it would be better - but in my view if you have to borrow, try to borrow for the right reasons. 

(8) Eight, keep track of your incomes and expenditures.

Personally, I keep records of how much I spend and how much I earn, and this accounting keeps me disciplined. Make sure you know how much you spend, and how much you earn, and this will make sure you have the knowledge to cut in the right places. 

(9) Ninth, and this should be pure common sense, always spend within your allocated budget - have discipline!

Set a budget and spend within the budget. 

(10) Tenth, you could learn about dynamic asset allocation.

One of the recent National Economics and Financial Management Challenge 2014 FaceBook post questions in the competition was about comparing dollar cost averaging and asset allocation.

One of the financial ideas that is definitely useful here is dynamic asset allocation. You could allocate your resources across various classes of assets, like stocks, cash, bond, REITs, and insurance, as this diversification of investments helps you ensure that you build up your wealth while reducing company-specific and other associated risks drastically.

(11) Finally, there is also a need to eventually build up an emergency fund. 

Once you do the above steps in your journey to financial freedom, build up an emergency fund for a rainy day just in case you need the funds quickly. Many people say that an emergency fund should be 3 to 6 months of your income.Do this last because paying off existing debts and investing for long term dividend and capital gains should be your main priorities.  

Hope these economics and finance ideas on financial freedom help you think through carefully about your own journey to financial freedom. Do think through the ideas and concepts carefully and reflect on what you have learnt from them, and see which finance ideas are applicable to your own particular context and situation, and which ones will be important to you in future. Thanks for reading and cheers!

JC Economics Essays - This simple finance article is my personal sharing about the path to financial freedom and financial independence. Thank you for reading my sharing on economics and finance ideas and knowledge, and hopefully it is helpful for economics students competing in the National Economics and Financial Management Challenge 2014, NUS, Singapore. Thanks for reading and cheers.