This is a response to Tun Daim’s comment on basic income. I have been waiting for a year for a Malaysian politician to publicly voice this one out, and it is about damn time we should discuss about this seriously.
I am going to take this to a broader perspective. Let’s expand this to a more ‘universal’ point of view. So this post is about Universal Basic Income, or UBI.
What is UBI?
The idea of UBI is the government (or in few case studies, private entity) hands you a certain amount of cash each month, and you are allowed to do anything you want with the money.
Yes, whatever you want.
The idea of UBI is not new. As matter of fact, it was introduced way back in the 17th century by Thomas Paine’s Agrarian Justice, where he proposed a system where everyone would receive an equal capital grant (or basic income) given by the government.
Former US President Richard Nixon was so close getting the UBI program going. But the plan was killed down by the Senate.
In 2016, Hillary Clinton was thinking about including UBI into her agenda as well.
So, here is my argument why UBI might be necessary? Automation and poverty.
The increasing interest on UBI was due to jobs being automated. In an article written by Straubhaar, he wrote:
“Jobs will be lost and it remains uncertain how many new jobs will be created to replace them. Thus, concerns are rising about the future of employment, the viability of social welfare and the financial stability of social security systems.”
When Finland ran its UBI program, their youth unemployment was 19% (Malaysia’s was around 10%). Decent jobs now are limited. This means, if could provide some cash for these group, it will encourage entrepreneurship. This explains why Mark Zuckerberg, Elon Muck, and Richard Branson are supporting this program. This is because if the work they are trying to do does not work out, at least UBI will be able to provide a safety net for the person.
Another reason why UBI will be necessary is that it will reduce poverty. When cash is given to an individual, he or she will be able to escape from living under poverty. You can study the outcome of every cash transfer program in this world, and more people were able to leave poverty thanks to the program.
Why choose UBI?
These are the pros of UBI. First, it provides a better social economic welfare. When Namibia ran a pilot test between 2008 and 2009, they found there was a drop in the number of malnourished children, a decreased poverty rate, increased income, and a lower crime rate.
Second reason, UBI could substitute or at least complement the existing welfare programs. The idea of UBI is to give out cash to everyone. Other program such as food stamps or targeted cash transfers will not work in my opinion. This is because targeted cash transfer will cost more (efficiency reason, you have to ask the person if he is eligible or not), and food stamps will not be effective to push down poverty (because food stamps ain’t paying the bills).
The case of “against” UBI.
The question arises when free money is given out, that the person who receives it might have less incentive to work. But every basic income programs that were held up until today, studies found that people who receive it work more than they were supposed to.
I understand that those who oppose UBI argue that UBI will be very expensive, and raise the question of how a UBI will be funded. This was the main reason why the Swiss voted against a proposed UBI back in 2016.
Many calculations out there were focusing on the UBI’s price tag itself (even OECD made this mistake), not on its net transfer.
The math behind UBI
Let me explain how UBI works (using Scott Santens’ calculation, since it is simpler to understand)
Let’s say in Malaysia, there are 5 income groups, ranging between RM0 to RM2,000, RM2,001 to RM4,000, as shown above.
Assuming each group contributes 8% of their income, that means the RM2,000 income group will contribute RM160. The RM4,000 income group will contribute RM320, and the list goes on. That means, in the end of this process, the money collected will be RM2,400.
If we want to equally distribute to all of these group, that means each and every single of them will get RM480. Sounds fair right?
That means, the net gain for the RM2,000 group is RM320. This is because initially, he had contribute RM160 into the pool. So, when he gets the RM480 basic income, his final amount will be:
RM2,000 (initial money in pocket) – RM160 (contribution) + RM480 (basic income) = RM2,320.
Confused? Let’s take the RM8,000 group as another example. So initially, he has RM8,000 in his pocket. Now he will contribute 8% (or RM640) of his income into the pool.
In this example, everyone gets a RM480 basic income. That means, in the end of the day, his final amount will be:
RM8,000 (initial money in pocket) – RM640 (contribution) + RM480 (basic income) = RM7,840.
Hold on. He actually lost RM160! Yes that is correct. That is the whole point of this program. A progressive income tax will work efficient in this case, and it is more socially fair for those in the higher income tier to contribute more.
How this will work for Malaysia?
If you are paying attention to my calculation, you must have realized that the income distribution was RM480. This is because Malaysia’s poverty line is RM800. The rule of thumb of UBI is 60% of the poverty line. So that explains how I got RM480 in the first place.
So, if we calculate this using Malaysia Household Expenditure Survey 2016 provided by DOS. Using the same methodology like what I had calculated above, here are my findings:
- If we would like to distribute RM480 to everyone, that means everyone needs to contribute 6.7% of their monthly income.
- The breakeven point (the midpoint between net gain versus net loss) is between those who earn RM7,000 and above. This is reasonable since the median income for the whole income group is around RM4,000.
In the case of Malaysia, I personally think that we are not ready for a full scale basic income program (yet). This means a smaller program will work better at this moment. If I have to choose, I prefer to give it out to the poorer states first such as Kedah, Kelantan, or Perak.
These are some evidence of successful UBI experiments
These are few cities/countries are implementing the UBI program
And these are the few still considering UBI in the future
Note: Update on Oct 7, due to some calculation error.