Basic income works, a quick case study approach to debunking some basic income myths
In our analysis of the rapid changes in the robotics industry we mentioned that experts such as Frey and Osborne of Oxford University, have suggested that approximately 47 per cent of all American jobs have the potential to be automated in “a decade or two”. The potential for 47 per cent of jobs to be lost to technological unemployment has meant that calls for policy measures such as basic income have been getting increasing attention. We aim to explore the answers to some of these questions surrounding basic income with a case study answering:
1. What is basic income? 2.Does basic income reduce or increase incentives for work? 3. How would a basic income be financed and how feasible is this?
For this analysis to have any credibility we make the following assumptions:
- The incentives of wealth maximisation and survival in the population sample will be the same as other the world. As a result we assume that the rest of the world will respond in the same way to receiving a basic income.
- Corporations and governments will be sufficiently liquid and solvent such that financing a basic income would be feasible.
- Finally that this case study because of points 1. and 2. is representative of how basic income would work in most economies.
We then conclude arguing that the view that basic income will perversely effect incentives is largely unfounded and that the opposite may true. How to finance a basic income programme is more problematic with any solution likely to include new ways to raise capital, as well as the reallocation of current resources.
So what is basic income?
A basic income is just a certain amount of money intended to be only enough for a person to survive in order to encourage people to engage in economic activity.
1. Does basic income reduce or increase incentives for work?
The view against a system of basic income is that it reduces the incentive to work. If the government guarantees the population an income people will have no incentive to work and just watch Netflix and eat burritos. Other researchers have suggested the complete opposite that is because a basic income actually encourages work and economic activity. This is because people are less risk averse and are willing to pursue entrepreneurship, and risky but rewarding enterprises because they know they have something to fall back on.
Applying the permanent income theory of consumption in a new way would also suggests that giving a basic income won’t result in people reducing the number of productive activities.
Permanent income theory of consumption suggests that :
Current income = permanent income + transitory income Where permanent income is the income you can which people expect to persist into the future e.g. your annual salary if you were say a real estate agent .
Transitory income is just temporary deviations from average income which tends to be cyclical For example the extra commission you might get for selling 10 properties in a hot property market. Why should you care about this theory? Well this theory suggests that only changes in permanent income will change the level of economic activity. Whereas, any changes in transition income won’t directly increase economic activity, as it will be saved, because the population knows this transistory income won’t be around forever. Basic income because it’s likely to be a form of permanent income and persist into the future, it’s likely to induce the population to consume, as well as undertake productive activities because the population expects the permanent income to persist in the future.
So how would you go about financing a basic income?
The way that most researchers believe we can finance a basic income is either through publically owned corporations or a negative income tax. In economics, a negative income tax (NIT) is a progressive income tax system where people earning below a certain amount receive supplemental pay from the government instead of paying taxes to the government.
So what happened in the case study?
In order to provide evidence of their potential of basic income, in 2010 an unconditional transfers, or basic income grants, in rural areas of Madhya Pradesh India was created.
For 18 months, over 6,000 individuals received small unconditional monthly payments. Their situation before, during and after receiving the grants was then evaluated by three rounds of statistical surveys and by case studies, comparing the changes in the period with what happened to a control group that did not receive grants. In total, the surveys covered over 12,000 individuals[1].
The two pilots consisted of the following:
* The MPUCT (Madhya Pradesh Unconditional Cash Transfer) — 8 villages with everybody provided with monthly grants, 12 similar villages as control villages.
* The TVUCT (Tribal Village Unconditional Cash Transfer) — one tribal village in which everybody
What does the case study tell us about the impact of a basic income on incentives?.
Initially, in the larger pilot, each adult received 200 rupees a month, each child 100 rupees. After a year, the amounts were raised to 300 and 150 rupees respectively. In the tribal village, the amounts were 300 and 150 rupees for the entire 12 months. These figures mean that an average family received the equivalent of $24 or £15 a month. The effect of this increase in basic income appears to act as an incentive rather than disincentive to work and productivity.
Cash grants were associated with improvement in school enrolment. Although initially there was no significant difference in enrolment, by the FES the enrolment rates of children from 4 to 18 years was 12% higher in the cash transfer villages. Transfers led to increased spending on essentials for school, including stationery, shoes, uniforms and basic equipment. Cash grants were associated with more regular school attendance, with 29% of cash transfer households reporting an improvement, compared with 13% in control villages.
Cash grant households were also twice as likely to have increased their production work as non-transfer households. Cash grants led to an increase in own-account work, and a relative switch from wage labour to own-account farming and small-scale business. This was especially true for scheduled caste households and for women workers. The shift from labour to own farm work was especially marked in the tribal villages. Many families used cash grants to buy small items for production, such as sewing machines and seeds and fertiliser. Cash grants were associated with the purchase of more livestock to increase production. Households in the cash-grant tribal village increased their livestock by 70%.
So all in all there was a notable increase in the productivity and human capital (which are alluded to in the infographic below) of those involved in the project.
What does the case study tell us about the feasibility of a basic income study?
The original amount was calculated so as to be enough to make a difference for basic needs. This amount was calculated as about a quarter of the income of median-income families, at just above the current official poverty line. If so how, grants could be incorporated into Indian social and economic policy[2]. As the number of people receiving a basic income was fairly small raising sufficient funds to finance a grant programme was not particularly problematic. Ideally this system would be implemented based on what tax bracket an individual fell in (shown below).
Additionally, basic income could be financed not only from finding new ways to raise capital, but using the existing capital base more efficiently. For example while ever country needs to protect itself, could a country like the US reduce their military expenditure and reallocate some it to funding a basic income? Indeed, the graph below shows that United States military expenditure in 2012 was approximately the same size as the next 14 biggest spenders.
Some conclusions
Overall, the case study in India suggests that the fears surrounding basic income in creating disincentives have been overblown. It appears the security of knowing you will always have enough money to meet your basic needs encouraged to undertake more economic risk than they might of otherwise. Others may argue is this necessarily a good thing, because people may grow far more reckless with their finances? We would say providing basic income, just takes care of basic needs and no more than this won’t be a problem. People will always strive to live rather than survive hence fears of people growing completely reckless with their finances are likely to be exaggerated. But what is clear is that the issues surrounding basic income need to be debated by the wider public and governments sooner rather than later.
Sources
[1] Unconditional Basic Income: Two pilots in Madhya Pradesh A Background Note prepared for the Delhi Conference, May 30–31, 2013 p 1
[2] Unconditional Basic Income: Two pilots in Madhya Pradesh A Background Note prepared for the Delhi Conference, May 30–31, 2013 p 2
Originally published at www.tumotech.com on October 27, 2014.
