Building a FIRE UBI (Universal Basic Income Part 6)

Before going into year-end mode, I want to take one last dive into the Universal Basic Income pool.

I promise this won’t be another 5,000 word tome. In fact, this will be a lot lighter on policy detail and a heavier on big picture ideas.

To recap our journey so far, we started by learning what Universal Basic Income actually is. We then looked into whether it works and addressed some commonly-raised concerns. Finally, we figured out how to pay for it with a combination of spending cuts and tax increases.

Today I want to step back and try something new. I want to apply a bit of FIRE thinking to UBI.

Starting in Alaska

To start, we should first understand the Alaska Permanent Fund.

Since 1982, Alaska has given every Alaskan a check every year just for being alive. Here’s how it works:

Alaska has a lot of oil. They make companies pay a royalty to the state when they take the oil out of the ground. Alaska then takes that revenue and puts it into an investment fund. This is called the Alaska Permanent Fund.

The Alaska Permanent Fund Corporation is tasked with investing this money. They invest in stocks, bonds, real estate, and alternative investments in order to grow the fund year over year. The principal is forever protected and cannot be spent without passing a constitutional amendment.

The growth is first used to make sure that the fund itself keeps up with inflation. After that, the fund pays out a dividend. To everyone. This is called the Alaska Permanent Fund Dividend.

The dividend varies year by year and is determined based on a five-year average of the fund’s performance. In the last ten years these payments have ranged from $878 per person in 2012 to $2,072 in 2015. (Payments would have been $2,300 and $2,700 per person in 2017 and 2018 respectively, but the legislature stepped in and reduced it.)

Crazy Popular

People in Alaska love the Permanent Fund Dividend.

40% of Alaskans say it makes a great deal of difference in their lives. Only 20% say it makes no difference. 80% say that the dividend is “an important source of income for people in my community.”

Not convinced yet? How about this: 64% of Alaskans would rather create a state income tax than reduce the dividend payments.

Almost two thirds of the people in one of the most conservative states in the country would rather CREATE A BRAND NEW TAX than decrease the Alaska Permanent Fund Dividend.

Adapting Alaska for America

$2,000 a year is great, of course. But it isn’t enough to live on.

This is a mere problem of scale, however. A larger fund can pay larger dividends. This is a problem that we can solve.

The bigger problem is the variability. It is hard to plan your life if your payment could drop 50% without warning from one year to the next.

This is an extra big problem if the payments are going to shrink when the economy is at its worst. This means people will be getting smaller checks at the very point in their lives that they need the most help.

APF UBI

But what if we took the best parts of the Alaska Permanent Fund and mixed it with the best parts of Universal Basic Income?

We could create an investment fund as the source of the payout, but include a predictable, flat (adjusted for inflation) payment.

The payout could be set at a dollar value that is lower than the gains in a normal year. This would mean that in most years the value of the fund would increase even after the dividends are paid out.

When the economy gets bad, though, the payout maintains its level. In addition to helping people when they most need it, this would function as an economic stimulus similar to deficit spending in a recession. You would be handing people a check at a time when they most need the money. They will be far more likely to spend it quickly and get the money circulating in the economy again.

The downside of course is that the fund would be shrinking in tough years. However, the good years outnumber the bad and if things dip too low we can always supplement with increased taxes, spending cuts elsewhere, or deficit spending as necessary.

The New America Fund

So let’s design our new America Fund.

First, we can take our FIRE knowledge and start building the fund before we pay anything out. We can have an accumulation phase.

This means that we don’t have to raise $2.8 trillion in taxes on day one. We can start small and get the snowball rolling down the hill. The higher we’re willing to raise taxes or cut spending, the shorter a runway we need. Essentially we’re increasing our income, cutting our spending, and investing the new cash. The more we save, the quicker we get to our goal.

With a less pressing need to raise funds quickly, we could start with socially beneficial taxes and see where that gets us first. A carbon tax and/or a tax on pollutants would bring in money while helping to combat climate change. (Which, in turn, would save a huge amount of money in future spending on federal flood insurance, wildfire response, disaster response and recovery, as well as numerous other areas.)

An increase in the estate tax would help folks start life on a (slightly) more even playing field. An increase in the top marginal rate, or a new bracket for the highest incomes, could help address some of the inequality that is dragging down our economy.

We could find more taxes like these, as well as spending cuts (fossil fuel subsidies, for example), that kill two birds with one stone. We would then have that money go directly into our investment fund to be invested in a diversified portfolio. Dividends would be reinvested until we decide there is enough to turn on the spigot and start distributing payments.

Easing In

If we want to maximize the accumulation phase even more, we could phase in the payments.

One method would be to start with a small paycheck for everyone and gradually build up. Maybe when the fund first starts distributing payments everyone gets $100 per month rather than $1,000. This would have the added benefit of allowing us to study the effects to the economy and gradually adjusting to the new system.

Alternatively, we could start by targeting payments to the most needy. Maybe we decide it is most pressing to eliminate child poverty, so we start with the payments to lift children out of poverty. We could then expand into eliminating poverty more broadly before cutting checks to the middle class and then the entire population.

The former seems like the more politically palatable choice, while the latter seems like it would do the most social good.

Either way, we could gradually build to a point where every American gets a living wage just for being alive. We could use FIRE to end poverty for good.

Join the Conversation!

So what do you think of a FIRE UBI? What other changes would you make? How would you implement it? Let us know in the comments!

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