A Closer Look at Universal Basic Income
September 20, 2019
Conservative economist Milton Friedman expressed his support for a “negative income tax” to establish a minimum guaranteed income. Towards the end of his life, Martin Luther King advocated for basic income to achieve greater equality for the poor. In 1969, President Richard Nixon unsuccessfully proposed the Family Assistance Plan, which guaranteed a minimum income to low-income families. One of the few large-scale UBI programs in the world today exists in the state of Alaska, where a state-owned oil fund established in 1982 pays an annual dividend between $1000 and $2000 to every person living in the state.
Interest in UBI is rising in policy circles all over the world. Experiments have been carried out in a diverse set of countries, from Kenya to Finland. Currently, a serious proposal to implement the largest-ever UBI program is being planned in the Indian state of Sikkim. Support for UBI is currently polling at 48% of Americans.
Democratic presidential candidate Andrew Yang is proposing to replace current welfare programs with an unconditional cash transfer of $1,000 a month paid to every American above the age of 18. Yang calls his flagship policy the “Freedom Dividend,” drawing a parallel between citizens of a country and shareholders of a company. Yang argues that the Freedom Dividend is necessary to combat the devastating effects of job loss caused by an impending wave of automation, a sentiment echoed by Silicon Valley elites such as Mark Zuckerberg, Elon Musk, and Richard Branson.
However, nothing resembling the scale of a full-blown UBI program in an economy the size of the United States has ever been implemented. Small-scale UBI experiments conducted around the world have inherent limitations that have so far prevented economists from drawing conclusive recommendations as to the efficacy of a large-scale program.
This article explores the impetus behind universal basic income, its potential benefits, and its economic soundness.
The Need for UBI
Historically, proponents of UBI have argued for it as a tool to fight poverty. Today, UBI advocates contend that artificial intelligence will threaten millions of jobs. They point to a UBI program as a necessary solution to maintain general economic welfare in the age of automation and AI.
Indeed, significant developments in artificial intelligence will reshape the employment landscape, with experts forecasting the elimination of tens of millions of jobs in the coming decades in the United States alone. In the 2000s, automation destroyed close to 5 million jobs in the US manufacturing sector, and experts fear the next wave of automation will particularly affect retail, call center, and truck driving occupations.
However, researchers disagree as to the extent of damage, with predictions ranging from mild to catastrophic.
The variability in the estimates stems from the uncertainty in forecasting technology adoption, with researchers having to make assumptions about how and when technologies will overcome the legal, social, and economic barriers to adoption. For example, even if self-driving technology is deemed viable today, when and where will the enabling infrastructure and legal requirements be established? Furthermore, researchers face the challenge of assessing the potential for automation across hundreds of occupations. Many of these occupations include a mix of multi-faceted tasks, some of which can be automated and others not, complicating the measurement of automation potential. Lastly, it is challenging to measure the net job impact, since, on the bright side, AI adoption will also likely create jobs but in areas that may be difficult to conceive of today. The McKinsey Global Institute finds that while there may be enough jobs created to offset the negative impacts of automation by 2030, the transition will be extremely challenging due to the massive shifts in occupations needed.
U.S. companies are already preparing for technological disruption with extensive retraining programs. Tech giant Amazon recently announced it would initiate a $700 million plan to retrain a third of its U.S. workforce to prepare workers for future demands of work. But while retraining sounds great in theory, in practice, studies show large-scale federal retraining programs have historically failed to transition displaced workers into meaningful employment. Andrew Yang puts it nicely: “Most people who think we can turn truck drivers into coders are neither.”
So, if we can’t avoid a massive technological disruption that will displace millions of workers, and experience has shown we aren’t very good at retraining workers on a large-scale, what are our options?
In comparison with traditional means-tested welfare programs, a modest universal basic income:
- Will not leave the risk of certain needy people ‘falling through the cracks’ due to eligibility rules.
- Doesn’t distort the work incentive structure, as it wouldn’t affect the ‘cost of not working,’ in contrast to most traditional welfare programs which place an income ceiling as a condition to receiving benefits.
- Can be managed in a straightforward, efficient manner.
Indeed, conservative-leaning UBI advocates believe the program can simplify the bureaucratic welfare system and reduce the associated administrative costs.
UBI proponents also tout a slew of other benefits that come along with economic empowerment, including the improvement of physical and mental health, enhancement of education outcomes, and reduction of crime.
Finland recently completed a limited 2-year basic income experiment and released a preliminary report of the findings. The study compared outcomes for unemployed Finns who received basic income and those who did not. It concluded that basic income recipients “experienced significantly fewer problems related to health, stress, and ability to concentrate,” and that they were “considerably more confident in their own future and their ability to influence societal issues.” In addition, basic income recipients were more confident in their ability to find a job or start a business.
A study by professor Ioana Marinescu of the University of Pennsylvania explores the behavioral effects of unconditional cash transfer programs, with a focus on the Alaska Permanent Fund Dividend. She concludes that the impact of unconditional cash transfers depend on program design, but generally notes an improvement in mental and physical health, education outcomes, and reduction in criminal activity among recipients. Most importantly, she concludes that basic income recipients were not significantly disincentivized to work, further adding to the growing body of evidence that disproves the stereotypical notion that UBI will make people lazy. Another claim from UBI critics is that cash transfers will increase spending on temptation goods like alcohol and tobacco. The Office of the Chief Economist, Africa Region at The World Bank examined 19 studies from 10 countries and issued a report concluding that this concern is unfounded based on the evidence.
In sum, various basic income experiments from around the world provide robust evidence to support the claims about the positive effects of UBI on quality of life, and simultaneously disprove the notions that UBI will significantly discourage people from seeking employment or increase consumption on temptation goods.
Doing the Math
Andrew Yang’s proposal of $1,000 a month to every adult American would cost close to $3 trillion a year. To put that figure into perspective, it is about three quarters of the entire annual federal budget and almost the full amount of tax revenue collected each year.
Yang argues that UBI funding is possible through a combination of new revenue from UBI-driven economic expansion ($800-$900 billion), a value-added tax ($800 billion), welfare spending cuts ($500-$600 billion), savings on healthcare and incarceration ($100-$200 billion), and additional taxes on top earners and pollution (amount unspecified).
The largest pool of funding ($800-$900 billion) comes from a projected increase in government revenue driven by economic growth resulting from the implementation of UBI. Yang bases his projection on a study conducted by the Roosevelt Institute, which estimates that a deficit-financed UBI program would increase GDP by 12.6-13.1% by boosting consumption of the middle and lower-income classes. The problem is, Yang’s proposal is not deficit-financed. It’s largely financed by a value-added tax. In the same study, a tax-financed UBI is estimated to produce a substantially lower GDP growth of 2.6%. If that is indeed the case, it will leave an $800 billion hole in Yang’s plan.
To cast further doubt on the economic growth assumption, a macroeconomic study conducted by the Penn Wharton Budget Model directly disputes the findings of the Roosevelt Institute. The PWBM argues that the Roosevelt Institution ignored the effect of reduction in government capital services on GDP, as well as minor decreases in labor hours, concluding that a $6000/year/adult UBI program would, in fact, reduce GDP over time, no matter how it is financed. PWBM did not study the impact of a $12,000/year/adult program.
The conclusions of these studies demonstrate that Yang’s largest UBI funding source, $800-$900 billion from increased government revenue due to economic expansion, is uncertain at best, and dramatically overstated at worst.
Yang also proposes $500-$600 billion cuts to existing welfare programs, whereby citizens who opt-in to UBI forego their claims to food-stamps, disability benefits, etc. Funding UBI through consolidation of the welfare system may generate conservative support, but economists such as Robert Greenstein view such an approach as fundamentally harmful to the poor. He writes, “If you take the dollars targeted on people in the bottom fifth or two-fifths of the population and convert them to universal payments to people all the way up the income scale, you’re redistributing income upward. That would increase poverty and inequality rather than reduce them.” However, Greenstein makes this assertion based on a hypothetical program that will largely or entirely be funded by cutting welfare programs, given his view that this is the only type of UBI that is likely to generate bipartisan support. He asserts that raising taxes to fund UBI is a political nonstarter. If Yang indeed manages to pass his proposal, which only sources about a fifth of its funding from the elimination of welfare programs, the net impact of on the poor is likely to be positive, despite the loss of other welfare benefits.
Indeed, amongst most economists, support for a UBI program funded wholly by eliminating social welfare programs is unpopular. An IGM Global Experts Panel surveyed over 40 economists with the following question: “Granting every American citizen over 21-years old a universal basic income of $13,000 a year — financed by eliminating all transfer programs (including Social Security, Medicare, Medicaid, housing subsidies, household welfare payments, and farm and corporate subsidies) — would be a better policy than the status quo.” The responses were overwhelmingly negative, with only about 2% of economists surveyed agreeing with the prompt.
It’s important to note that the survey may not reflect economists’ sentiments towards the general concept of a basic income, but rather the means of funding suggested in the survey. Eric Laskin, one of the economists surveyed who disagreed with the prompt comments: “A minimum income makes sense, but not at the cost of eliminating Social Security and Medicare.”
Moving the UBI Discussion Forward
In summary, experiments conducted worldwide have clearly demonstrated the benefits of UBI on people’s economic and social wellbeing, and disarmed stereotypical claims that it will make people lazy and increase spending on vices. However, how a UBI program would be funded, and how it would fit in with existing welfare programs, are not secondary details in the UBI debate. These are crucial questions that can sway political support one way or the other.
We are entering a stage where support for the general notion of UBI needs to be bolstered by specific policy proposals to address these pivotal issues. To garner more credibility, it’s time to for UBI proponents to transition from philosophical arguments to detailed data-driven proposals. National Bureau of Economic Research economists Hilary Hoynes and Jesse Rothstein note: “Attention may be running ahead of actual policy development.”
Ongoing experiments, as well as policy proposals such as Andrew Yang’s, are a step in the right direction, as they allow economists and others to scrutinize the often-idealistic portrayal of UBI schemes. Further deliberations on such policy proposals will not only shine a light on UBI as a “big picture idea” but also help address the details that concern skeptics. Indeed, close inspection of Yang’s plan reveals inadequacies in the proposed funding structure, as highlighted in this essay.
Furthermore, because a national UBI program would represent an unprecedented overhaul of economic policy, it may be wise to take an incremental approach. Professor Ioana Marinescu of the University of Pennsylvania notes: “Paying for such a program is not a trivial matter. As the political appetite for UBI is growing, a new UBI program is more likely to be implemented at the state level than at the federal level.” Another suggestion is to start with a small basic income that could gradually scale up as the growth in productivity from automation kicks in. Gradual approaches such as these may alleviate far-reaching economic risks and gain broader support for UBI proposals.
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