Will Basic Income Cause Massive Inflation? No

That’s just an internet fairy tale.

There are still quite a few people online who mistakenly believe that Basic Income will cause huge problems with inflation. Some of them even claim it will ‘obviously’ cause runaway hyperinflation and the collapse of the economy. But don’t worry. These claims are not true.

Basic Income is not likely to cause any sort of major inflationary problems.

The belief that Basic Income will ‘obviously’ cause inflation is essentially just an internet fairy tale. It’s a myth perpetuated by people who misunderstand how a Basic Income system would work and/or misunderstand one or more well-known theories about what causes inflation.

To be fair, you can see how these misunderstandings arise. Basic Income involves everyone being given money. All other things being equal, that means more money being around, doesn’t it? And having more money around will cause inflation, won’t it? But that’s really not what the situation is at all. Let me explain.

The main misunderstanding is the idea that Basic Income involves giving the population ‘new’ or ‘extra’ money that they wouldn’t otherwise receive. But this is not true.

For starters, Basic Income, as generally proposed, would replace a whole series of welfare schemes. Thus, a lot of the money for Basic Income payments will be the same money that is currently paid out to people as part of existing welfare schemes. People who rely on welfare payments will not necessarily be getting any more money in total than they do now.

Basic Income is also likely to replace personal tax allowances. Currently, these tax allowances allow people to earn a basic amount of income without paying income tax. But since Basic Income will give all citizens a basic amount to live on, these personal tax allowances won’t be necessary anymore. So, under a Basic Income system, people will pay that tax money and then simply receive the money back as Basic Income. Essentially, it’s the same money.

Furthermore, Basic Income will be accompanied by tax changes that mean that whilst the government pays out more in total, it will also collect more in taxes. Thus, citizens, on average, may have no more money to spend than they have now.

Some people have heard of ‘demand-pull inflation.’ This is the idea that inflation can be caused by an excessively high level of demand in the economy in general. If firms can’t increase what they supply to meet increases in demand, this might lead to inflation. But there is no particular reason to believe that Basic Income will lead to the sorts of ‘excessive’ increases in demand that might cause such a problem. This is because, as I’ve already said; Basic Income will be instead of most other welfare payments and instead of personal tax allowances — not as well as — so people, on average won’t suddenly have lots of extra buying-power.

Some people have heard that an increase in the ‘money supply’ can cause inflation — but Basic Income does not necessitate any increase in the money supply.

Even if the economy booms and people’s incomes rise as a result of the many economic advantages of having a Basic Income system, that does not mean the money supply will increase. Income levels and the money supply are two different concepts. It is perfectly possible to have rising incomes without any increase in the money supply — and certainly without the sort of increase that would cause problems with inflation.

It’s understandable that some people get confused about these things. I’m not a particle physicist. I can read an article about quantum physics, but there’s obviously the possibility that I might misunderstand it as a result of not having devoted years of my life to studying particle physics. And the same sort of thing happens with Economics. Fairly obviously, a person may read an article about inflation, but may misunderstand it as a consequence of not being a skilled economist.

The trouble is that whilst people generally accept that particle physics is not an easy thing for the layperson to understand, there isn’t the same level of recognition for how easy it is to misunderstand issues in Economics.

Just as analysing the results of a particle collision is a job for a particle physicist, analysing the causes of inflation is a job for a trained economist. Unfortunately, there are numerous people who imagine they understand the issue, despite never having seriously studied Economics — and they go around spreading nonsense around the internet, as if they are some sort of authority of the subject. But please; don’t be taken in by their nonsense.

I’m not saying a Basic Income system won’t have any effect on inflation. If such a system is about to be introduced, economists can conduct regression analysis and run computer simulations to see what effect that specific Basic Income scheme might have on inflation. It’s possible they might, at that stage, forecast an inflation rate of 1.8%, compared to the 1.7% they would have expected without a Basic Income scheme. Equally, they might predict that Basic Income will reduce inflation to 1.6%. It will depend on the particular scheme in question and the economic circumstances at the time.

In short, however: Basic Income does not require any ‘new money.’ It does not need to involve any sudden increase in aggregate demand or any increase in the money supply. Consequently, it is not at all likely to cause the huge inflationary problems some non-expert doomsayers adamantly claim would be inevitable.