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Economics

Universal basic income: Money for nothing or efficient equalizer?

Offering every citizen a guaranteed monthly payment is an idea that has gained traction in some parts of the world. Would it really reduce poverty? We review the research.

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Economists, philosophers and political thinkers have long pondered how to end poverty. Lately, an old idea has taken on new life. A universal basic income (UBI) is an unconditional, regular cash payment from the state to every citizen. Proponents see it as a safety net for anyone battered by the fast-changing, globalized economy. Some in Silicon Valley have taken a shining to the proposal, seeing it as a way to stymie inequality should robots take our jobs.

The idea has been around a lot longer than robots, though. In 1516, in his political treatise Utopia, Sir Thomas More discussed a guaranteed income as a way to stop petty theft. In 1797, Thomas Paine, one of America’s Founding Fathers, proposed a one-time payment to every person at age 21, as well as annual payments to everyone after they turn 50.

Unlike some social welfare programs, a UBI does not penalize people for working. While it is not envisioned as enough cash to live an extravagant lifestyle, the UBI — sometimes proposed as a negative income tax (more on that below) — helps ensure a basic standard of living. And any additional income the recipient earns does not reduce his or her UBI payment.

Proponents on the left like the UBI’s redistributive qualities; on the right, that it is more efficient and requires less bureaucracy than the myriad welfare and social assistance programs available today. In India, for example, there are 950 anti-poverty programs, according to a count by The Economist. Milton Friedman – a hero of free-market capitalists – argued in 1968 that a negative income tax would empower welfare recipients, create incentives for them to work and reduce the size of government.

The idea has gained momentum in recent years, especially in some of the West’s advanced economies. For example, in 2016, Finland, a number of cities in Holland, and Ontario were all preparing experiments similar to a guaranteed income. Utrecht, a Dutch city, is exploring a plan to give selected social assistance recipients about $1,000 per month with no strings attached. But because the cash transfers only target welfare recipients, the program is a far cry from a true UBI, for now. New Zealand is also debating a UBI.

In the non-governmental realm, Give Directly, a charity, is piloting a cash transfer program for impoverished Kenyans.

Meanwhile, in June 2016, 77 percent of Swiss voters rejected a proposed guaranteed income for all. If approved, it would have been the first nationwide UBI in the world, according to the BBC.

NIT or UBI?

Though they are often used interchangeably, there are differences between a negative income tax (NIT) and a guaranteed income (UBI). This 2009 paper in the Journal of Socio-Economics finds that though they have the same result, a negative income tax (whereby anyone earning below a baseline income does not pay tax and receives a cash benefit) fits better into libertarian models than a UBI, which appeals better to egalitarian ideas. Also, a negative income tax does not entail a cash transfer to wealthier individuals, so it costs the government less, according to this 2006 article in Basic Income Studies.

Writing for the Federal Reserve Bank of Boston in 1987, economist Eric A. Hanushek argued that a negative income tax encourages young people to stay in school by offsetting the benefits of income, “by lessening the cost of not being in the labor force.”

In either case, there is a net transfer to lower income individuals. Under a UBI, the richest person would still receive a payment from the government, but he or she would also pay the government more in taxes to help fund that transfer; the poorer person would not.

Experiments

There have been few real-world UBI experiments. One of the best-known occurred in Dauphin, Manitoba, between 1974 and 1979, though it was only studied more recently. Writing in 2011 for the journal Canadian Public Policy, Evelyn Forget, an economist at the University of Manitoba, found that the basic income moderately reduced poverty and improved residents’ health. Though Forget found some reduction in the number of hours people worked, much of that time was dedicated to education. A 2017 study in Social Problems also looks at the Manitoba experiment; it found a larger decline in labor market participation.

Forget also discussed payment experiments in the United States in the late 1960s and early 1970s, though most of these were not true guaranteed income programs, since they were targeted at people who would have otherwise received social benefits. (At the time, the idea had broad bipartisan support.)

Another take on the American NIT experiments in the 1970s appeared in the Journal of Socio-Economics in 2005. Karl Widerquist of Oxford University found no evidence that an NIT causes a certain group of people to stop working, or that such a program would become financially unfeasible. Indeed, he found such a program “would have the side benefit of increasing wages, further reducing poverty and inequality.” At the same time, there is a small, but statistically significant “work disincentive effect,” that would increase the cost of the program.

Widerquist warns that it is easy to spin the results: “To those who believe that low-wage workers need more power in the labor market, the NIT experiments demonstrated the feasibility of a desirable program. To those who believe all work-disincentives are bad, the experiments demonstrated the undesirability of a well-meaning program. These normative issues separate supporters from opponents of the basic income guarantee, and therefore, the NIT experiments, as long as they are discussed, will always mean different things to different people.”

Since 1982, every resident of Alaska has received a monthly transfer known as the Alaska Permanent Fund Dividend, financed by production at the Prudhoe Bay Oil Field, the largest in North America. The amount varies depending on the current price of oil, from a few hundred dollars to over $3,000 in 2008. It functions in much the same way as a UBI by transferring cash to every individual and injecting liquidity into the economy. In a 2010 working paper for the Institute of Social and Economic Research at the University of Alaska, Anchorage, Oliver Goldsmith explores some unintended consequences of the program: It may be encouraging people to move to Alaska, especially people of retirement age, may be pushing down wages, and appears to be creating a “consumption-frenzy” at local shops each year when the checks are distributed. Goldsmith also argues that Alaskans have become addicted to the dividends, which have engendered a constituency that will stop at nothing to ensure the payments continue even as oil output slows.

Arguments

Much of the scholarly literature on UBI is consigned to the editorial pages of academic journals. In late 2016 and early 2017, the British Medical Journal published arguments for UBI implementation (it would improve health) and against (it would cut funding for welfare, health and education programs).

A 2016 debate between two New York Times business columnists weighs many of the arguments on both sides. One is a UBI skeptic; the other voices the views of those who think that most working-class jobs will be rendered obsolete by the high-tech industry within a generation. The skeptic concludes his argument with a nod to gridlock in American politics: “If the idea of robots taking over sounds like science fiction, the idea of the American government agreeing to tax capitalists enough to hand out checks to support the entire working class is in an entirely new category of fantasy.”

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About The Author

David Trilling was a staff writer from 2016 to 2018. He came to Journalist’s Resource from Columbia Business School, where he was a Knight-Bagehot Fellow. David worked for 10 years in the former Soviet Union and Middle East, most recently as The Economist‘s Central Asia correspondent and as an editor at EurasiaNet.org. He has written for Foreign Affairs, Foreign Policy, The Nation, The Guardian and other publications. His photographs have appeared in dozens of periodicals and can be viewed on his website: davidtrilling.com. Twitter: @dtrilling.