Surprise! Universal Basic Income is Good for Business, Especially Local & Small.
Guaranteed income doesn’t just support households. It creates customers, encourages entrepreneurship, and strengthens local economies.
It shouldn’t come as a surprise that what is good for the American people is good for business.
Certainly, we’ve heard the reverse - that what is good for business is good for the people. The US Chamber of Commerce and National Association of Manufacturers both opposed Social Security in the 1930’s saying it would be bad for business and the economy, as well as socialism. It didn’t pan out that way of course. Countless billions have been spent by the business community, especially since the 1970s, to reinforce the second message and to tar the first.
Business organizations have often treated social legislation as a burden. Yet much of that legislation—from Social Security and public education to unemployment insurance and public health—has helped produce the healthy, educated, more financially secure workers and consumers on whom business depends. In a time of increasing economic change and insecurity there are plenty of reasons to think that universal basic income will benefit the economy, business, and all of us.
What does economic theory say about basic income and business?
Here are four ways basic income is likely to affect business and the economy based on economic theory:
Increases economic activity: The less well-off spend more of their income than the rich. Income transfers from the wealthy to lower income households increase consumer spending, which drives the economy and increases consumption. That benefits business.
Encourages entrepreneurship: A guaranteed floor reduces the personal risk involved in starting a business, freelancing, or becoming self-employed. We’ve often heard how important small businesses are to the economy, and gig and contingent work has ballooned.
Creates a more stable economy: UBI acts as an automatic stabilizer. Payments continue during recessions, helping businesses retain customers when wages and employment decline.
Leads to a more secure and stable workforce: Workers have greater ability to manage health problems, childcare, transportation, and job transitions. Lower-wage workers get a boost to their incomes. All of this can lead to a more stable workforce.
In short there are several theoretical reasons to believe that UBI, or any income supplement financed by taxing high incomes, would benefit people, the economy, and business. A recent study of the economic effects of Social Security, our largest existing income transfer program, estimates that each dollar of Social Security payment generates over two dollars of economic activity.[1]
What do basic income trials show about business effects?
The theoretical arguments that UBI helps business, especially local ones, are quite strong and backed by other “macroeconomic” data. For example, we know that stimulus checks increase spending and help businesses and the economy[2]. But is there direct evidence from basic income trials? There is, but quantifying the effect is difficult because most studies of income supplements enroll only a small percentage of the population and consider the effects of the payments on the recipients rather than the larger communities. The studies that have been conducted show encouraging results.
Study showing that cash payments increase business revenue, especially local businesses
A compelling study comes from rural Kenya. Researchers distributed a one-time payment of approximately $1,000 each to more than 10,500 low-income households across 653 randomly selected villages. The payments amounted to more than 15% of the local economy—a very large economic intervention.
Recipients spent much of the money locally. That increased revenue for nearby businesses and subsequently raised the income and spending of people who did not receive payments. The researchers estimated that every dollar transferred generated approximately $2.50 in additional local economic activity, with little measurable inflation. Source
Study showing that Alaska’s dividend supports locally oriented businesses
Since 1982, nearly every Alaska resident has received an annual Permanent Fund dividend. It is the closest longstanding American example of a universal cash payment.
A major study found that compared to projections the dividend did not reduce employment overall. Employment effects were more positive in “non-tradable” industries—businesses such as retail stores, restaurants, and local services whose customers are predominantly local. The authors concluded that the results were consistent with the dividend stimulating consumer demand and therefore labor demand. Part-time employment increased by 1.8 percentage points, while total employment was unchanged. Source
OpenResearch’s basic income trial demonstrates that recipients spend a substantial share of monthly payments, which benefits business.
OpenResearch conducted a three-year randomized experiment involving 3,000 lower-income Americans in Illinois and Texas. One group received $1,000 per month and the control group received $50.
The larger payment increased measured household spending by at least $300 per month. Spending rose across numerous categories, meaning that a significant portion of the money became revenue for businesses. Source
This does not demonstrate an economy-wide multiplier because only selected individuals received payments. Nevertheless, it supplies current American evidence for the first step in the mechanism: people with limited incomes spend a substantial portion of additional cash.
Counter arguments
There are three main economic counter arguments to UBI being a benefit to business:
Businesses, especially those relying on low-income workers, might have to pay higher wages to attract workers.
The taxes needed to fund UBI could hurt businesses by reducing after-tax income.
Shifting income from higher income households to lower income households would reduce overall savings and thus reduce investment in the economy.
The second two objections are dealt with quite easily. Business income is only reduced if the funding source for UBI includes direct taxes on businesses, but under Shares in America, the funding source is entirely the progressive personal income tax, not business taxes. The third objection is likewise easily dealt with. There is no sign of a lack of investment capital in the economy, in fact speculative asset bubbles indicate the reverse. The main threat to investment is the enormous federal deficit which has been fueled by huge tax cuts, mostly for the well off.
The first objection, that low-wage businesses may have to pay higher wages in some cases might very well be true. Labor, especially at the low end, has very little bargaining power in today’s economy, so any such increases would be small. But compensation for some low-paid work might very well go up. Would that hurt businesses? Would McDonalds and Walmarts and local restaurants go out of business? No. Probably any wage increases would be passed on as small price increases.
There is some empirical evidence on that score. Canada had a trial of minimum income for 5 years in the 1970’s in the township of Dauphin near Winnipeg. A recent paper found that some employers accustomed to hiring workers at low wages complained about having to offer higher wages. That is genuine evidence for the labor-cost objection. But it is evidence of changed bargaining power—not evidence of aggregate business damage. The study did not demonstrate increased business failures, declining total profits, or reduce overall economic activity. Some employers were worse off because labor became more expensive; workers receiving higher wages were correspondingly better off. Source
Alaska provides an instructive counterweight. Its universal dividend produces no significant reduction in aggregate employment over predicted growth as would be expected if UBI were “bad for business.” Source
Summary
There has never been an increase in the minimum wage that big business organizations didn’t say would cause job losses for low-wage workers and hurt low-wage businesses but we currently have more low paying jobs than ever. We were told that Social Security would be a disaster for business and nothing of the sort happened. Income supplements such as UBI will if anything help small and local businesses and drive growth of the overall economy. There is no evidence or theoretical basis to suggest otherwise.