Universal basic income: What UBI is, how it works, how it would affect the economy, and what supporters and critics say

• Universal basic income is gaining global traction, with over 100 cash payment pilots in the US.
• UBI and basic income aims to reduce poverty by giving people cash, no strings attached.
• Participants spend basic income on necessities, but critics argue it's costly and discourages work.

Universal basic income has made giant strides from its origins as a utopian vision.

While UBI has gained traction as an idea in recent years, its universal nature is still a difficult political sell. However, to test out the idea on a more limited basis, many cities and states have piloted guaranteed basic income programs, which offer recurring cash payments to all individuals in a population regardless of their socioeconomic status. There are no restrictions on how the money is spent, and no repayment is expected.

Meanwhile, guaranteed basic income programs offer recurring cash payments, but participants only receive the money for a set period of time — often between one and five years. Guaranteed basic income programs have specific criteria: participants typically have a household income that falls near the federal poverty line or they fit into a certain demographic.

In the US, there have been more than 100 places that have tried basic income programs — with cities like Los Angeles, Chicago, Denver, and Atlanta offering participants direct cash payments, no strings attached. Countries like Kenya, Finland, India, and Canada have also tried the model as an approach to reducing poverty. Most of the basic income programs launched in the US and abroad are fixed, short-term pilots, making them GBI instead of UBI. For instance, the Alaska Permanent Fund gives each resident an annual dividend that Alaskans spend on goods like groceries and clothing.

For some participants, an extra $500 a month is what they need to afford rent and groceries. For others, it's the support they need to pay for childcare and necessary prescriptions.

"My life was always just a couple hundred dollars short," a grandmother who participated in a San Antonio basic income program previously told Business Insider. "For the first time, I can breathe."

Yet many people find the idea of handing out money without strings questionable, or even just plain wrong. In fact, some US programs continue to face legal challenges and political opposition.

Here's a closer look at basic income, its history, its potential advantages, and possible downsides.

What is universal basic income and guaranteed basic income?

Basic income programs are unique when compared to the existing social safety nets in the US. Participants have full agency over their spending, as opposed to federal programs that provide money for specific categories: like SNAP for food, Medicaid for healthcare, and housing vouchers for rent.

GBI programs often target specific groups of people. Previous GBI pilots have served low-income parents with young children, pregnant people, or individuals experiencing homelessness, artists, and budding entrepreneurs.

GBI pilot leaders often partner with researchers to study how participants use their cash payments. The studies — which are based on quantitative data like housing outcomes and qualitative information like interviews with participants — provide insight into how the pilots help participants during and after their programs.

The current wave of pilot programs in the US began in 2019 with a basic income experiment in Stockton, California, led by then-Mayor Michael Tubbs. The guaranteed basic income program offered 125 low-income people $500 monthly for two years. The Stockton pilot is widely used as an example for basic income in other cities across the country, and Tubbs went on to create and lead the national organization Mayors for a Guaranteed Income.

While the cash payment model has gained modern momentum, it isn't new. The idea for UBI goes back to at least the 1500s. Spanish humanist Juan Luis Vives called for everyone to be given food even if they'd gambled away their money in the 16th century, while American revolutionary Thomas Paine proposed a national fund in 1797 that would pay citizens annually after they turned 21. Similarly, economist and free market leader Milton Friedman, called for a negative income tax.

In 1967, Martin Luther King Jr. also showed support for UBI. He said cash payments could be a way to address historical racial discrimination and temper widespread poverty and unemployment in the Black community.

How does basic income work?

Advocates of basic income say it reduces poverty, strengthens the social safety net, promotes participants' health and happiness, and combats the stigma around welfare benefits.

An analysis of 30 pilot programs in the US involving nearly 8,300 participants found more than half of the cash grants went toward food and groceries, transportation, housing, utilities, healthcare, and education. The analysis reflects participant transactions made with a bank account or a debit card, and is updated quarterly. Cash transactions — which represent about 40% of spending — are not included in the spending data.

Paying for the costs of daily life has become more challenging in recent years, as inflation has jumped to 40-year highs. Credit card, car loan, and mortgage payments have also ballooned due to surging interest rates.

A guaranteed income can also give people the confidence, security, and freedom to know they won't go hungry or be evicted if they lose their jobs. Additionally, they might want to use the money to start a business, stay at home to raise their children, care for relatives, invest in training or education, or manage a sickness or disability.

"It was every single thing that I prayed for," a single mother who received basic income in Chicago previously told Business Insider. She used her monthly $500 to afford an apartment, buy clothes and shoes she needed, and take her 11-year-old daughter out to dinner.

Some basic income studies and experiments found that the cash payments helped participants earn higher wages, boost job satisfaction, and improve productivity. What's more, participants commonly reported improved physical and mental health during their programs because cash payments alleviated their financial stress and improved their access to healthcare.

However, most UBI and GBI research is based on short-term pilots and participants' self-reported experiences. While many participants have reported that basic income helped them afford basic necessities, there is not enough data to determine how basic income shapes people's future financial security. And it's not yet clear if funding basic income long-term is possible in the US or elsewhere.

Who qualifies for basic income varies by program. Typically, participants in city-based programs must fall within a specific ZIP code and meet certain income or demographic criteria. For example, In Her Hands, a basic income program for low-income Black women in Georgia required that participants live in Atlanta's Old Fourth Ward, Southwest Georgia's Clay-Randolph-Terrell county cluster, or the City of College Park. They also had to have an annual household income below 200% of the federal poverty line, which is $39,440 for a family of two.

The process for applying for basic income programs also differs, but most require proof of income. Some programs have a specific application window, while others accept applicants on a rolling basis.

Why critics say basic income is a bad idea

Some critics say UBI and GBI won't work because basic income encourages laziness or frivolous spending from participants and discourages work. Others question the high expense of basic income programs, worrying that it could lead to higher taxes or local government budget cuts.

For instance, Dave Ramsey has criticized basic income as "straight out of the Karl Marx playbook." The personal finance expert and radio host said that people build character by overcoming challenges instead of getting bailed out.

To be sure, many low-income people fall through the cracks of US social safety nets and, therefore, struggle to improve their circumstances. The federal poverty line is outdated, so millions of families living paycheck to paycheck aren't able to access the benefit programs that could help them get regular access to food, housing, and job security. Families might lack access to resources depending on where they live, and systemic racism can contribute to generational poverty.

Many Republican lawmakers have also opposed basic income, with states like Iowa, Arizona, and South Dakota introducing basic income bans. Some state leaders have called the programs "socialist," or said basic income isn't financially sustainable by cities and private funders.

Rep. John Gillette from Arizona previously told BI that GBI programs are a "killer for the economy."

"Is money a birthright now? Do we just get born and get money from the government?" he said. "Because I think the Founding Fathers would say that is very contrary to our capitalist system and encouraging people to work."

Other basic income opposition has come in the form of lawsuits, with cases filed in Missouri and Texas that oppose the use of public money for cash payments. For instance, Texas Attorney General Ken Paxton filed a suit in April and called a Houston-area basic income program "unconstitutional." The lawsuit placed a temporary block on the program, which was set to give 1,928 families $500 a month for 18 months.

Who supports basic income and why?

The list of high-profile basic income advocates includes Sen. Bernie Sanders of Vermont, technocrat Andrew Yang, OpenAI CEO, Sam Altman, and Tesla's Elon Musk. Some states, like California and New Mexico, have also introduced legislation that incorporates basic income into lasting policy.

These advocates say how basic income money is spent isn't a serious concern. Many basic income supporters say the lack of restrictions as a major benefit.

"The evidence from trials is that participants tend to spend most of the money received on the basic needs of everyday life," Jack Kellam, the head of operations at UK-based think tank The Autonomy Institute, told BI. The progressive research firm studies labor market trends and economic policy, including basic income.

Other experts say people's spending shouldn't be scrutinized. Douglas MacKay, an associate professor of public policy at the University of North Carolina at Chapel Hill, told BI that trying to control spending is "paternalistic" and fails to treat recipients with dignity — as adults and equals who are "fully capable of governing their own lives."

Aside from helping with everyday bills, families who received basic income have also reported that the money allowed them to build savings, spend more time with their children, and leave abusive relationships.

And, based on the findings of the Stockton, California pilot and others around the world, Tubbs hopes that basic income can be translated into future policy.

"We have the dataset, now it's about political will," Tubbs previously told BI.

Who pays for basic income and how much would it cost?

Basic income programs are funded by a combination of government funding, foundations, nonprofits, and philanthropic donors. It can cost millions of dollars to run a one-year basic income program for a few hundred participants.

However, most basic income funding doesn't come directly from taxpayers, despite what some critics say. Instead, cities like Baltimore and Flint have pulled from existing funding pools like the American Rescue Plan Act (ARPA) and Temporary Assistance for Needy Families (TANF) to finance their programs.

Other basic income programs are backed by major donors. Altman recently raised $60 million, including $14 million of his own money, to provide 3,000 low-income Texas and Illinois residents with $1,000 a month for three years.

As for some critics suggestions that basic income would raise taxes, it's complicated. It's unlikely that short-term guaranteed basic income programs would increase taxes. But, large-scale universal basic income programs would require more robust funding. It could raise taxes — but some advocates envision basic income programs alongside a more progressive tax system. This means that wealthy individuals would owe higher taxes than low-income families, even if they all received payments. Some economists have even suggested paying for basic income by taxing specific industries or resources, like a carbon tax.

There are still remaining questions about how nationwide UBI would affect the economy as a whole. Basic income might impact inflation rates, but there's not enough research to clearly determine if and how costs of living would increase. Still, the consumer-based market might see a boost with basic income because participants would have more money to spend on goods and services.

Some tech leaders, like Musk and Altman, predict the need for basic income will be more urgent if artificial intelligence renders millions of workers obsolete, making it necessary for governments to provide a safety net for the unemployed.

Does basic income work?

Universal basic income remains a largely theoretical idea. Most of the data on UBI and GBI examined short-term outcomes, rather than long-term financial horizons.

But recent basic income trials around the world show some promise. Researchers are studying the cash payment model hoping to reveal whether it's an effective way to address poverty along with helping people live healthier, happier, and more stable lives.

"This is about yourself and your neighbors," Tubbs previously said. "And this is a way to make sure that we live in a civilized place where everyone has a floor."

Have you benefited from a basic income program? Are you open to sharing how you spent the money? If so, reach out to this reporter at allisonkelly@businessinsider.com.