Is universal basic income (UBI) a viable solution to inequality in the 21st century?

This essay 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 progress, rising inequality, and the looming threat of AI-driven job displacement, UBI has entered the Overton window as a bold and unconventional policy proposal. It refers to a form of social security that provides regular and uniform cash payments to all citizens without means testing or work requirements. 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 economic contexts. This analysis aims to determine whether UBI can serve as a practical and sustainable tool for fostering a balance between economic growth and equity in the modern world.

The concept of Universal Basic Income has evolved over centuries, rooted in philosophical and economic debates surrounding social justice and economic security. Early iterations can be traced to the Enlightenment period, when thinkers such as Thomas Paine proposed a “citizen’s dividend” in his 1797 pamphlet Agrarian Justice, advocating for redistributive payments funded by landowners to compensate for unequal access to natural resources. In the 20th century, the idea gained traction among economists across the ideological spectrum. Free-market advocate Milton Friedman proposed a form of UBI through his Negative Income Tax (NIT) model in the 1960s, aimed at reducing poverty while preserving individual freedom and market efficiency. Simultaneously, progressive scholars and social democrats viewed UBI as a pathway to social equity and economic stability in increasingly automated economies. The resurgence of interest in UBI in the 21st century has been fuelled by the dual forces of technological disruption and growing inequality, prompting pilot programs and policy debates in both developed and developing nations. Its evolution reflects a longstanding effort to reconcile economic efficiency with moral responsibility, positioning UBI as both a radical and historically grounded response to modern inequality.

A representation of wealth distribution among different income groups

Inequality today is primarily driven by wealth concentration, where assets are held disproportionately by a small elite, leaving much of the population financially insecure. As of 2021, the top 10% of the UK population owned 57% of the total wealth, while the bottom 50% held less than 5% (JRF, 2023). As a result, a growing number of workers compete in a labour market where opportunities are increasingly shaped by an asset-rich minority. This imbalance suppresses wages, reduces purchasing power, and limits access to essential goods and services.

Economic instability theories argue that extreme wealth inequality weakens consumer demand and hampers long-term growth (Piketty, 2014). In highly unequal economies, financial resources concentrate among the wealthy, who are more likely to save than spend (Dynan et al., 2004). UBI counters this by redistributing income toward lower-income individuals, increasing consumption and reducing the stagnation caused by inequality.

Further exacerbating inequality is the dynamic where asset owners generate passive income through rent and investments, while ordinary workers transfer their earnings to landlords and creditors. This perpetuates a self-reinforcing cycle of wealth accumulation at the top, limiting social mobility. Moreover, regressive taxation policies place additional strain on lower-income households. For instance, in 2020–21, the poorest 10% of UK households paid 9.8% of their income in council tax, compared to just 1.5% for the richest 10% (Resolution Foundation, 2023). This disparity reduces disposable income and deepens financial hardship among vulnerable groups.

These factors highlight the structural challenges embedded in the UK’s economic landscape, where wealth inequality is entrenched and inadvertently perpetuated by existing policy frameworks.

An illustration of the effects of an increased Aggregate Demand

UBI’s economic foundation is rooted in a post-Keynesian framework, which views the policy as a tool to counteract economic instability, unemployment, and inequality by stimulating demand and promoting financial security. Post-Keynesian economists emphasize the importance of aggregate demand in driving growth and maintaining economic stability. UBI acts as a direct fiscal stimulus by increasing disposable income, particularly for low-income individuals who have a high marginal propensity to consume. This boosts consumption, stabilizes real GDP growth, and reduces the risk of demand-side recessions, as explained by Keynesian multiplier effects (Bregman, 2017). Moreover, the Harrod-Domar growth model posits that economic growth is driven by savings and investment. By reducing financial strain, UBI enables low-income individuals to save more, increasing the pool of investable funds. If these are channelled into productive investments, growth accelerates, aligning with the model's predictions (Domar, 1946).

Higher aggregate demand can also lower unemployment as firms respond to increased consumption by hiring more workers. More significantly, UBI’s monetary security allows individuals to exit exploitative or precarious jobs without the fear of losing income. This freedom encourages greater participation in education, training, and entrepreneurship, enhancing both the flexibility and resilience of the labour market.

From a behavioural economics perspective, financial scarcity imposes a cognitive burden on the poor, limiting their ability to plan and make long-term decisions (Mullainathan & Shafir, 2013). This ‘scarcity mindset’ leads to short-term thinking, which entrenches poverty. By providing a stable and predictable income stream, UBI alleviates this burden, enabling recipients to invest in their future through education, skill development, and enterprise.

Despite its benefits, UBI faces criticism regarding its potential side effects. Chief among them is the risk of inflation. If aggregate demand rises without a corresponding increase in productive capacity, inflation may result. From a Keynesian perspective, the inflationary impact of UBI depends on the output gap—the difference between actual and potential real GDP. If the economy has significant slack (e.g., high unemployment), firms can meet increased demand through higher production rather than price hikes. However, in economies operating near full capacity, increased spending could exceed output, leading to demand-pull inflation. This suggests UBI may be more effective in developing countries, where underutilized resources are more prevalent.

UBI has shown promise in various pilot programs over the past decade. In Madhya Pradesh, India, unconditional monthly income grants led to significant improvements in debt reduction, education, and nutrition. With greater financial security, communities were able to negotiate better wages and working conditions. A separate study in Kenya found that lump-sum cash grants had a greater impact than monthly payments. Recipients who received lump sums started 19% more enterprises with 80% higher average revenues. This supports the theory that people in poverty are often constrained not by motivation, but by lack of capital. Some monthly payment recipients even formed rotating savings clubs to emulate the lump-sum model, reflecting resourcefulness and collective effort. These results underscore that poverty does not stem from a lack of vision, but from limited opportunities—a gap UBI can help bridge.

By contrast, a 2020–2023 UBI trial in the U.S. involving 3,000 low-income families in Dallas and Chicago produced mixed results (Vivalt et al., 2024). Families receiving $1,000 monthly for three years earned $1,500 less on average than the control group and worked 1.3–1.4 fewer hours per week. The additional time was largely spent on leisure rather than education or entrepreneurship, contrasting with the Kenyan outcomes. Researchers found no significant improvements in job quality, and their confidence intervals ruled out even small effects. These findings suggest a moderate reduction in labour supply not offset by productivity gains, challenging the assumption that UBI boosts human capital in all contexts.

Health outcomes were similarly underwhelming (Miller et al., 2024). Despite expectations that higher income improves well-being, researchers found no measurable changes in physical health or health-related behaviours. Minor mental health improvements observed in the first year had vanished by the second. These results indicate that unconditional cash transfers alone may be insufficient to address health inequalities, especially in developed countries with established health systems. Targeted interventions may be more effective in such settings.

Surprisingly, the average net worth of UBI recipients was $1,000 lower despite receiving $36,000 tax-free (Bartik et al., 2024). Although perceived financial security improved and credit scores rose modestly, increases in debt offset asset growth. Estimated marginal propensities to consume were 0.44–0.55 for non-durables and 0.21–0.26 for durables, while debt repayment rates remained negligible. This suggests that while temporary UBI can boost consumption and reduce financial anxiety, it may not generate lasting improvements in wealth without complementary policies such as financial literacy training.

That said, the findings from the U.S. study should be interpreted cautiously. The trial took place during the COVID-19 pandemic, which significantly distorted labour markets and consumer behaviour, potentially limiting the generalizability of the results.

Beyond its immediate effects on poverty and inequality, UBI’s long-term sustainability depends on how it integrates with existing welfare systems. As automation threatens widespread job displacement, traditional welfare programs will become increasingly costly and complex. UBI, with its universal structure, offers a potentially more efficient alternative. In systems where up to 30% of welfare spending is lost to administrative costs (Moffitt, 2016), UBI’s simplicity and direct distribution reduce waste. These benefits are likely to become more pronounced as welfare needs expand in response to future economic disruptions.

Universal Basic Income presents a compelling but context-dependent solution to inequality in the 21st century. Empirical evidence suggests that while UBI can improve consumption and perceived financial well-being in the short term, it may fall short in promoting long-term health or wealth accumulation—particularly in developed economies. However, its demonstrated success in developing contexts, where capital constraints are more binding and welfare infrastructure is weaker, highlights its potential as a powerful anti-poverty tool. As inequality deepens and technological change accelerates, UBI offers a simplified and potentially more equitable alternative to complex welfare systems. Though not a panacea, it is a serious policy contender that deserves further exploration—especially when paired with complementary investments in education, healthcare, and financial capability. In a rapidly evolving global economy, UBI merits more than theoretical curiosity; it demands real political and economic consideration.

Footnote:

1.      Although the NIT shares ideological roots with UBI, it differs significantly in structure. The NIT provides cash (a negative tax) to individuals who earn little or no income. As recipients begin to earn more, the benefit gradually decreases, ensuring they are always better off working. This mechanism preserves the incentive to work and encourages long-term self-sufficiency.

References:

Bartik, A.W., Rhodes, E., Broockman, D.E., Krause, P.K., Miller, S. and Vivalt, E., 2024. The impact of unconditional cash transfers on consumption and household balance sheets: Experimental evidence from two US states (No. w32784). National Bureau of Economic Research.

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.

Joseph Rowntree Foundation (2023) UK Poverty 2023: The essential guide to understanding poverty in the UK.

Miller, S., Rhodes, E., Bartik, A.W., Broockman, D.E., Krause, P.K. and Vivalt, E., 2024. Does income affect health? Evidence from a randomized controlled trial of a guaranteed income (No. w32711). National Bureau of Economic Research.

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

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

Paine, T., 2000. Agrarian justice. Raleigh, NC, USA: Alex Catalogue.

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.

Resolution Foundation (2023) Reforming council tax to address inequality. Available at: https://www.resolutionfoundation.org (Accessed: 5 February 2025).

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