Universal Basic Income

This past month I saw quite a bit of talk about universal basic income (UBI). Most notably, Elon Musk has gone on the record saying there’s a pretty good chance UBI will become a reality. Y Combinator has revealed its plans to start a Basic Income project in the near future. With all this happening, I wanted to see what the fuss was all about. I’ve summarized some of my learnings about the topic here.

What is UBI?

Universal basic income is simply an unconditional, standardized cash payment made to all members of society. It has five noteworthy characteristics:

1. Universal: Given to anyone and everyone without a means test
2. Unconditional: There is no requirement that needs to be satisfied either now or in the future, to receive the payment.
3. Individual: Awarded to individuals and not families/groups of people.
4. Periodic: The payment is made at regular intervals
5. Cash: The chosen form of remuneration. This is important because it gives one the right to choose how one spends the money.

Interestingly, basic income is not a new idea.

Contemporary History:

(Details can be found here)

In the US, basic income was talked about in the ’60’s during the civil rights movement. MLK advocated for it in his 1967 book “Where Do We Go From Here: Chaos or Community?”:

“I am now convinced that the simplest approach will prove to be the most effective — the solution to poverty is to abolish it directly by a now widely discussed measure: the guaranteed income.” — Martin Luther King, Jr.

The idea saw some support amongst the right as well. Economist Milton Friedman proposed the notion of a negative income tax, whilst Richard Nixon’s proposal for partial basic income passed the House (ultimately stalling in the Senate).

But by the early 1980s, enthusiasm had petered out again. Ronald Reagan and Margaret Thatcher took power in the U.S. and Britain, riding a wave of conservative backlash to expansive government programs. The tenor of debate shifted from improving the welfare state to cutting it. Those receiving government assistance were called lazy, if not corrupt. “Welfare queen” entered the lexicon and President Bill Clinton promised to end welfare as we know it. Progressives and anti-poverty advocates went on the defensive. Basic income was tabled, if not forgotten.

Currently, the American welfare system is extremely fragmented and apart from the sheer administrative costs of maintaining such a system, there are structural flaws with it. Unlike UBI, most welfare is means-tested which often results in what’s called a welfare trap. As this article points out:

“Some households that receive larger benefits or higher state taxes have even higher effective rates: 10 percent of households just above the poverty line face a marginal rate higher than 65 percent. For each additional dollar earned in this range, these households would lose almost two-thirds to taxes or lost benefits. The comparable rate for the highest earners, households above 400 percent of the poverty level, is only 43.4 percent.”

Whichever way you slice this, the American welfare system is suboptimal. But yet it’s remained unchallenged for all these years. Basic Income, it’s biggest threat, has been largely dormant. Until recently.

Resurrection:

So why has basic income made it back into mainstream debate? The answer lies in increased automation. Here’s a quote from outgoing President Obama:

“What is indisputable … is that as AI gets further incorporated, and the society potentially gets wealthier, the link between production and distribution, how much you work and how much you make, gets further and further attenuated.”

Essentially, because of huge strides in the field of artificial intelligence and the ever growing sophistication of machines, jobs will soon be automated away. According to this paper, 47% of American jobs are at risk of computerization. Interestingly, as this article from the economist points out, it may not just be blue collar jobs at risk.

“The idea that manual work can be carried out by machines is already familiar; now ever-smarter machines can perform tasks done by information workers, too. What determines vulnerability to automation, experts say, is not so much whether the work concerned is manual or white-collar but whether or not it is routine.”

It is this potential upheaval of the labor market as a result of impending automation that has brought people back to the idea of basic income.

Debate:

Naturally, there are both advocates and critics of the basic income model. I’ve listed what I think are the three most compelling arguments for either side.

Advocates:

1. Basic Income provides a cushioning for people to pursue the work they want to do. It eliminates fear and fosters commitment which in turn is likely to lead to greater value creation. Scott Santens cites the results of a basic income pilot in Nambia, in this piece, as a data point for this assertion:

“The village school reported higher attendance rates and that the children were better fed and more attentive. Police statistics showed a 36.5% drop in crime since the introduction of the grants. Poverty rates declined from 86% to 68% (97% to 43% when controlled for migration). Unemployment dropped as well, from 60% to 45%, and there was a 29% increase in average earned income, excluding the basic income grant. These results indicate that basic income grants can not only alleviate poverty in purely economic terms, but may also jolt the poor out of the poverty cycle, helping them find work, start their own businesses, and attend school.”

2. As highlighted before, the current welfare system in the United States is inefficient, bureaucratic and laden with “welfare traps”. Michael Strain, Director of Economic Policy Studies and Resident Scholar at AEI, eloquently outlines a world with no welfare system and just UBI:

“No longer are the poor subject to the whims, requirements and irritations of government bureaucracy. Under UBI, the welfare state is eliminated; the bureaucracy, gone. Gone, too, is the stigma associated with drawing benefits — if everyone wears the UBI scarlet letter, then no one does. Eliminated are the “poverty traps” associated with the “phase outs” of many of today’s safety net programs; UBI never phases out, so an extra dollar of work does not result in a loss of safety-net benefits. In a world with UBI, citizens no longer need to go to the government when the circumstances of their lives change: when they lose jobs, become disabled or see their incomes fall below a certain level.”

3. In this piece, “How Basic Income Solves Capitalism’s Fundamental Problem”, the writer makes the argument that while technological progress has increased variation in production (to use a PGism) and consequently allowed us to supply more with less, demand hasn’t quite kept up.

“Every year, technological progress allows us to make more goods and services with fewer inputs of labour and capital. As consumers, this is wonderful. We can buy better and cheaper goods than ever before. As workers, however, productivity increases threaten our jobs. As we need fewer workers to make the same amount of stuff, more of us become redundant. And it is likely to get worse. The rise of the robots may eliminate 47% of existing jobs within the next two decades. Unfortunately, even though a robot can make an iPhone, it cannot buy one. If we are hurtling towards a post scarcity future, only a Basic Income Guarantee can ensure sufficient demand to keep the global economy ticking over.”

Critics:

1. One of the biggest fears of Basic Income is that it will erode people’s desire to be a part of the workforce. Because of the stigma associated with welfare and the current need to work to survive, people argue that in today’s economy people do not take self reliance for granted. However, as the author of this piece points out:

“A UBI would redefine the relationship between individuals, families, communities, and the state by giving government the role of provider. It would make work optional and render self-reliance moot. An underclass dependent on government handouts would no longer be one of society’s greatest challenges but instead would be recast as one of its proudest achievements.”

2. Another common gripe against UBI is that its very expensive. The common question people have is, how will we fund basic income? Check out this assertion by the Economist, in its piece “Basically Unaffordable”:

“Paying for a basic income worth 10% of the average income requires average taxes to rise by ten percentage points, to 35%. A basic income worth 20% of the average income requires average taxes to be 20 percentage points higher, at 45%, and so on. Eradicating relative poverty, defined as income beneath 60% of the median, would require tax rates approaching 85%. A generous basic income funded by very high taxes would be self-defeating, as it would reintroduce the sort of distortions that many of its advocates hope to banish from the welfare system. Loafers could live comfortably without lifting a finger.”

3. Despite the heavy criticism levied against the welfare system, this NY Times piece shows that abolishing it in favor of UBI could result in greater redistribution of wealth upwards, opposite of the intended consequences of UBI:

“Thinkers on the right solve the how-to-pay-for-it problem simply by defunding everything else the government provides, programs as varied as food stamps and Social Security. That, Mr. Greenstein observes, would actually increase poverty. It would redistribute wealth upward, taking money targeted to the poor and sharing it with everybody, including you and me.

As Lawrence H. Summers, the former Treasury secretary and onetime top economic adviser to President Obama, told me, paying a $5,000 universal basic income to the 250 million nonpoor Americans would cost about $1.25 trillion a year. “It would be hard to finance that in a way that wouldn’t burden the programs that help the poor,” he said.”

Where do we go?

Ok, so we’ve seen both sides of the basic income argument and you might be inclined to believe that both sides have equally compelling cases. What you might also notice however, is that both sides talk in the abstract. They talk about what would happen in a world with UBI. This is because, despite the various basic income pilots that have been tried throughout the past 30–40 years, “a full long-term universal basic income has never been tried, let alone rigorously evaluated”. This is why entities like YCombinator are looking to test basic income in the United States over a longer term:

“We want to run a large, long-term study to answer a few key questions: how people’s happiness, well-being, and financial health are affected by basic income, as well as how people might spend their time.

But before we do that, we’re going to start with a short-term pilot in Oakland. Our goal will be to prepare for the longer-term study by working on our methods–how to pay people, how to collect data, how to randomly choose a sample, etc.”

From this five thirty eight piece:

“The closest research we have to how a universal basic income could work comes from a small town in Canada. From 1974 to 1979, the Canadian government partnered with the province of Manitoba to run an experiment on the idea of providing a minimum income to residents. The result was MINCOME, a guaranteed annual income offered to every eligible family in Dauphin, a prairie town of about 10,000, and smaller numbers of residents in Winnipeg and some rural communities throughout the province.MINCOME remains one of the most influential studies of basic income in a rich-world country.”

It turns out that the data from MINCOME was abandoned until economist Evelyn Forget from the University of Manitoba, dug up the old data and digitized it. In a paper she published in 2011, she found that the results of MINCOME were largely positive. People were healthier with few hospitalizations and high school graduation rates were higher. Moreover, she found that primary income earners did not change their behavior and that there was no substantial decline in employment.

Conclusion

I’m personally bullish on basic income. I do see a world in the not so distant future where it may be necessary. But as we’ve seen, there are strong counter arguments against UBI. These arguments bring to bear certain key assumptions that we would have to either validate or invalidate and I’m happy to see a renewed interest in conducting experiments for this purpose.

These are exciting times. We are at the cusp of profound technological and social changes.

Thanks for reading! Feel free to share this post and write a response to share your thoughts. I’m anaganath on Twitter if you would like to discuss further!