B School for Public Policy

Professor Ioana Marinescu

The Economics of Universal Basic Income

The Alaska Permanent Fund has been issuing a cash transfer to every man, woman and child in Alaska since the early 1980s. The fund is provided through dividends invested from oil revenues, which is obviously a big part of that state. But can a similar Universal Basic Income program work across all of the US? And would providing such a program mean any change to working patterns in the United States?

An edited transcript of the conversation follows.

Knowledge@Wharton: In a recent study by Ioana Marinescu, Assistant Professor of Economics here at the University of Pennsylvania’s School of Social Policy and Practice, along with Damon Jones of the University of Chicago, found that the Universal Basic Income in the state of Alaska had no impact on labor patterns. The amount of money people received was at times as high as nearly $2,100 annually or as low as $800. In a recent B-School seminar for public policy, Professor Ioana Marinescu discussed the topic. Ioana joins us in the studio to discuss her work on this project. Nice seeing you again. Thank you for coming in.

Ioana Marinescu: I’m happy to be here, Dan.

Knowledge@Wharton: Thank you. So, the idea obviously of Universal Basic Income is drawing a lot of attention right now. What I think a lot of people don’t realize is that Alaska has had this in place now for the last couple of decades. The impact on the working public in Alaska as we mentioned, almost negligible. Tell us more.

Marinescu: Right. So first let me clarify for our listeners that in Alaska it’s not called the Universal Basic Income, but as you were mentioning, they are getting this cash every year, no string attached. So it very much functions as a Universal Basic Income, but it’s called the Alaska Permanent Fund Dividend. And also to be clear, this is not directly coming from oil money. They actually put the oil money in a fund like a wealth fund, and what they’re getting is the dividend on their investment. So it is actually kind of a smart thing to do because that means when they don’t get any oil revenue, this thing is still going because they have all the capital that they’ve invested giving out all those dividends.

My co-author Damon Jones and I have looked at the program and the underlying impact it has on the workforce. The worry that people have is, “Hey, if you give people free cash why would they be working? They can just stay home and relax.” We compared Alaska with other similar states and we found that people in Alaska are as likely to work, once the Alaska Permanent Fund was put in place, as people in similar states like Wyoming, and other similar US states. And so, therefore, we don’t find really any fact on the proportion of Alaskans who are working.

But we looked at other things too, and for example, how much people are working. And we found some small effects on the amount of work that people do. For example, more people seem to be working part-time. So there is some effect on the number of hours that people seem to be working, but no effect on the number of people who are working. So the overall employment rate is unaffected.

Knowledge@Wharton: Part of this obviously is the amount of money that the people have been receiving off of this dividend. When you’re talking about anywhere from $800 to $2,100 annually, not even monthly, but annually, that’s not exactly the amount of money that people could even consider to sit back and not work. So it’s almost like it’s an add on to it, to a degree it’s a Christmas bonus that they get.

Marinescu: Right. It’s not a lot of money, but just to put that into perspective, first of all in the high range if you’re a family of two parents, three kids, you would get about $10,000.

Knowledge@Wharton: Correct, because it’s per person.

Marinescu: Because it’s per person. And no matter the age, even if you’re a baby you get it. So it can add up to a non-negligible sum. But another way of putting this into perspective is to think about other policies that give people cash and how much are they getting with these other policies. Earned Income Tax Credit is a very popular policy for low-income Americans who are working. And the maximum amount that they could get from this tax credit is around $4,000 tops, per household. So that is really not more, it’s rather less than the Permanent Fund Dividend. And that program did move people into work because it had work requirements. 

So sums of money in that ballpark can move people in other contexts to work or not work. So I think it wasn’t a foregone conclusion that there would be no effect. It could have had an effect, we just don’t find any in this particular case.

Knowledge@Wharton: How much of an impact do you think that part of this in Alaska was the fact that it was a dividend? And how much of an impact do you think that had overall on the process? Because as you said, that allows it to continue to go no matter what the level of return is on the amount of oil or the revenue that these companies are making when they’re drilling up in Alaska.

Marinescu: Right. What’s important is this means that the fund has a permanence. Alaskans can reasonably expect that this is going to go on and on and on. They don’t need to raise any additional taxes for it. It’s already there. They have this fund that’s giving them dividends. And so that’s very important because other programs like this that were giving cash to people and trying to look at their behavior were time limited. They were experiments.

So they’d say, “Let’s do this for three years, five years.” But I’d say that doesn’t necessarily get us at what we want because people might react differently if they know that they can count on this for the rest of their lives versus just three to five years. And so in that sense, the Alaskan example is the best laboratory in the US that we have for a policy like a Universal Basic Income.

Knowledge@Wharton: But that was looking specifically at the relationship between the state and the people of the state and the oil industry.

Marinescu: Right.

Knowledge@Wharton: And that’s a significant component here because it makes you wonder could you replicate something like that with an industry in another state. Now obviously part of it could be oil in the lower 48 contiguous states. But probably in some states where you don’t have oil you’d have to try and find that component, correct?

Marinescu: Right. Indeed. One of the most interesting policy things you have to think about is how would you finance this kind of Universal Basic Income, even if we think the effects are pretty positive. I didn’t even mention, and we can talk about it later, that it has positive effects we’ve seen from other research on health and education among the most disadvantaged. So there are reasons to want to do this, good reasons. But still, how are you going to pay for it?

And that’s where you’re saying Alaska is very special. And some oil states might envision doing that, but I think more broadly one very promising avenue is to get money from, essentially, pricing pollution and carbon based on the idea that we want to reduce carbon pollution in order to deal with the negative effects on the climate. With the hurricanes, we have seen recently, the destruction that has caused, and we think more hurricanes are linked to climate change. So there are reasons to curb pollution, carbon pollution. And the idea is we’re going to tax that, or put a fee on it basically, pollute and pay. And then with that revenue, we can give it back to everyone, no strings attached because after all, you can say just like the oil is our oil, the air we breathe, the environment we live in is ours. And so the money that comes from protecting that, if you want, there could be some argument made that it should come back to everyone, every citizen who is contributing to this effort to protect the environment, which is a capital that we own in common.

Knowledge@Wharton: Were you able to determine what the impact was in Alaska of having this financial component on the people, but not necessarily just on the people but on the economy of the state in general?

Marinescu: Exactly. That’s part of why we think that the UBI, the kind of cash that Alaskans are getting isn’t really cutting employment. We think that part of what is going on here is that it stimulates employment in some businesses, and more specifically local businesses. For example, every year Alaskans get this cash inflow in October, and if you look at the data you can see that there’s much greater spending in October, November, December than the rest of the year. And a lot of this spending goes to local businesses like restaurants, local retail, all of these local businesses are benefiting from the spending. And presumably, want to hire workers in order to respond to this greater demand from consumers.

And so while on the one hand maybe some people would want to work less or not work, on the other hand, all of these local businesses are pumped up to hire more people. And we think the two effects essentially cancel each other out.

Knowledge@Wharton: And that’s why you see the potential growth in part-time employment because if the spending is in the holiday months, that’s basically continuing the trend we see pretty much across the country of companies needing to hire more workers at the holidays to deal with the restaurant or a store or whatever it might be.

Marinescu: Exactly. That could exactly be part of the explanation for the part-time work, is what kind of employment it stimulated. Some of it is probably this more part-time, seasonal, but it could also be more broadly because as the capacity of those businesses expands, some of the people they have to have year round. So it’s probably a combination.

Knowledge@Wharton: How different is the level of success that Alaska is at in comparison with other states or other parts of the world in terms of the types of programs they have wanted to put into place that are similar to what we’d call a UBI, a Universal Basic Income?

Marinescu: So right now there’s a lot of interest in that kind of program and there are a bunch of experiments that are being run in a number of different places, and we are hopefully going to learn more about how people react in many different dimensions, not just working but a bunch of different dimensions that you might care about such as political participation, for example. And I think right now this is an important topic. Is it the case that people having that economic security could potentially stimulate, say, political engagement? So that is some of the things that we will learn from these different experiments.

What Alaska is unique for is that, again, this is a policy where literally every Alaskan gets it and it’s been around for so long. So in terms of its scale and duration, it’s very unique compared to many of the experiments that are being done.

I will mention one more interesting experiment in the US. It’s not really an experiment, it’s something that is going on. Many Indian reservations have businesses, casinos in particular, that they’re drawing revenue from. And for many of these reservations, the idea[sic] is that the profit that the casino is making is going back to the tribe member on a per capita basis, no strings attached, so very much like a basic income. And so you could see that there’s some sort of similarity with the Alaskan model because it’s coming from their businesses of the tribe.

And so people have looked at the effect of that on various outcomes for the tribes that do this. And comparing members of the tribe who live there versus non-tribe members, other people who live in the same area. And what you see is there’s no effect on working, again, so it’s very consistent. But positive effects on education and reduction in crime.

Knowledge@Wharton: And health care obviously is another part to this as well. I’ve seen various stories over the years that talk about some of the issues with tribes and the use of drugs. Then obviously you hope that you’re having a positive impact on trying to lower the use of drugs, which obviously has various other impacts on people working part time, full time, whatever it might be.

Marinescu: Exactly. So the amazing thing about this study of the Indian reservation is that really you could worry, and that’s one of the things that you hear a lot, “If we give all of this money to people, poor people, they’re going to use it on drugs and alcohol.” And you know, that’s a valid concern in principle. But what they found looking at these Indian reservations is that, actually, addiction decreased after they received the money. It made a big difference, especially among youth. And also criminality decreased, potentially this might be linked because people can get into trouble when they do drugs. And so amazingly having this kind of policy actually helps, it seems like, address some of the addiction problems that they have in those areas. And therefore we can speculate that having this kind of policy might address other addiction problems we are facing right now like the opioid epidemic.

Knowledge@Wharton: How positive are you that we could move at some point in the future, to the idea of doing a tax on carbon that would have a benefit back to the American public?

Marinescu: You know, I think there is hope. And the reason why I think there is hope is that there is, for example, a thing called the Climate Leadership Council. And this is a national organization that is a bipartisan organization that brings together conservatives and liberals and has major– I’m an economist, so figures like Ben Bernanke and Janet Yellen, the former chairwoman and chairman of the Federal Reserve, in support of doing just such a carbon tax and dividend at the national level. So having this carbon fee nationally, returning it to every American, no strings attached, in cash. So I think right now the federal level politics is very much in a bind and it’s probably not going to happen right now. But the fact that there are so many powerful people who are interested in this makes me hopeful, let’s say, for the medium run that something like that can happen.

Plus let’s not forget the states. Every state has the opportunity to do their own policy. And so that is another avenue where it could happen much faster. For example, Washington State on November, right now they’re having on the ballot a carbon tax, which would be if it passed the first US state to literally have a carbon tax.

Knowledge@Wharton: Would there be issues though because of the fact that there would probably be some sort of interstate component to the company, to the people that work there, obviously a variety of elements of transportation? So while the State of Washington may bring something forward and want to have it, eventually, I would think there would have to be some sort of partnership formed with maybe Oregon or Utah, states that are right around the State of Washington.

Marinescu: Exactly. So one of the issues with implementing this is that potentially this might have an effect on how attractive the state is to businesses. And so, you know, that’s an issue that’s worth thinking about. But these kinds of tax differences are very common. For example, sales taxes are very different from state to state. So there are many respects in which states are different. A state is a package, it’s not necessarily that a change in one single tax is going to have such a big impact.

Plus let’s not forget that if the money is returned to the public, the same kind of effects that we talked about in Alaska in terms of stimulating consumption for some businesses might very well occur. It’s just that the likely effect, and that’s kind of the goal with a carbon tax, is to shift economic activity somewhat away from carbon-intensive activities towards other, less carbon-intensive things. So what’s important to keep in mind for us all is that this tax, especially if it’s returned in cash to everyone, there is no net loss. What it does is reallocate the activity, again, away from sectors—and that’s the whole goal—that are carbon intensive towards sectors that are less.

Or, and that’s similar, incentivize all these carbon-intensive sectors to use less carbon so that they pay less. That’s the whole point, is to tell them, “Look, you’re paying all of these taxes because you have so much carbon. Can you come up with new technologies that will do what you do with much lower carbon content?” So that’s really something that’s often overlooked by the public, and that we economists love so much, is the incentive effect. People tend to maybe see it more as a punishment, like “Hey, we’re putting this tax on you because you’re a polluter.” But that’s not really the goal from an economics perspective. The goal is to incentivize people in companies to basically recreate their technologies and their consumption modes to move away from the carbon-intensive types of activities and consumption and towards less carbon-intensive activities and consumption.

Knowledge@Wharton: Yeah, because all of those companies are really watching the bottom line. And if their bottom line is impacted by a tax, and they can get rid of the tax by using lower carbon, then their bottom line is going to look better to investors.

Marinescu: That’s exactly the point.

Knowledge@Wharton: Going back to the comparisons for a second. Obviously, we see what’s going on in Alaska, how does that compare to, I saw that Ontario has done a version of this, Finland has done a version of this. How did those compare with what Alaska is doing? And what are the parameters that they are using to try and be successful, whether it be oil or another industry or such?

Marinescu: The experiments in Finland and in Canada are a bit different in that they are not an actual policy, it’s kind of an experiment, meaning that it’s a small sample of people that we want to give this money to, to see how they would react. So, therefore, they haven’t necessarily budgeted a source to pay for the whole policy.

But what’s different is that in Finland for example, they were really interested in unemployed people. So then they only gave the money to unemployed people. It was an experiment. And we don’t have the results yet. But the goal was to look at how this would affect the behavior and lives of the unemployed, which is a very specific section of the population.

And then in Ontario, they were looking specifically at low-income people. So they selected low-income people and said, “Okay, if we gave you this, let’s say how behavior is going to be affected.” Both of these are interesting groups to look at. But what’s interesting with a thing like Alaska is that it was literally for everyone. And coming back to our early discussion, that makes a whole lot of difference, potentially on the business side. How it affects the business’ bottom lines in terms of people going around and spending money. Because obviously if you just give it to 1,000 people, yeah, the total amounts involved are not so high. So it’s not really going to make a big difference to the kind of business side of the equation.

And so we can learn a lot through these experiments about how individuals react to getting this cash in different contexts, whether they’re unemployed or low income in different countries, etcetera. But we’re not going to learn about how this affects the economy more broadly because these are small samples.

Knowledge@Wharton: But is there already kind of an idea of how this has been affecting the GDP in the State of Alaska over the last couple of decades?

Marinescu: We haven’t looked at that directly and it’s unclear how this has played out. But certainly given the employment rate it probably didn’t have a huge effect one way or the other, would be my speculation, but frankly, we haven’t looked at that.

Knowledge@Wharton: So from this research that you’ve done what is the next step in the process?

Marinescu: I think as we mentioned briefly a few weeks ago I talked about this to DC staffers, which was very interesting because there were many of them and the room was packed, and we got people from both sides of the aisle which I thought was very, very interesting. So clearly there’s a lot of interest in this kind of policy. I think there are two interesting things to think about. First of all, how does this policy stack up compared to other, perhaps, comparable policies? For example, what about having a child allowance? Kind of like a basic income but only for kids, so that would cost less. That’s an upside. And we’ve seen that a lot of the positive effects were for youth and the most disadvantaged kids. So that could be good. Also, we know in the US a lot of poverty is among families with kids. So it seems like potentially something that we can get behind. Conservatives also like this because they want to support families. So it can be something that has bipartisan support. So you know, just thinking about some of the trade-offs. On the other hand with something like a child allowance you wouldn’t help adults who fall on a rough patch. Part of the reason to have a basic income is to have a form of income security–

Knowledge@Wharton: A little safety net.

Marinescu: That no matter what, in last resort, you’d get a little something. And so if you just give it to kids, that part of the equation is lost. So nothing is for free, but it’s very interesting to think about what else could you do. Or you could expand the earned income tax credit, which I think is also a great idea. Right now it’s for families with kids. And so single people don’t get almost anything or people without kids. So that would be also another way to give more money towards low-income workers, that can also be promising. But there again, you know, if you don’t happen to work, if you can’t find a job, then you’re not getting that. So there are all sorts of trade-offs that are important to understand.

Knowledge@Wharton: Great seeing you again. Thank you for coming over.

Marinescu: Thanks.

Knowledge@Wharton: Thank you. Ioana Marinescu from the School of Social Policy and Practice here at the University of Pennsylvania.