Universal Basic Income: An Old Idea Raises New Questions
This post was written by Opportunity Lab (O-Lab) Program Manager Joseph Broadus based on a recent conversation with O-Lab Faculty Directors Hilary Hoynes and Jesse Rothstein. It was originally published on the O-Lab website.
Over the past several years, there has been increasing momentum in development and anti-poverty communities to provide cash assistance directly to poor families, rather than tying assistance to specific behaviors or to specific sorts of purchases. When put to the test, the approach has generated promising results in the developing world, most recently by CEGA Faculty Director Ted Miguel and colleagues who found that delivering unconditional cash grants to households in Western Kenya did not spur inflation and made the entire economy better off.
A similar push is underway in the United States, with enthusiasm for a Universal Basic Income (UBI) emerging in some policy circles and among politicians and industry leaders on both the left and the right. And while new experiments with UBI are underway, and while Democratic presidential candidate Andrew Yang has made the issue a centerpiece of his campaign, there is still a great deal we don’t know about how such a program would work in the United States. What would it mean for the safety net programs that are already in place, for example? Who would gain and who would lose through such a program? And how much would it truly cost to set one up?
To answer some of these questions, Opportunity Lab (O-Lab) staff sat down with O-Lab Faculty Directors Hilary Hoynes and Jesse Rothstein to discuss how UBI might work and what sorts of questions we need to be asking as we’re thinking about implementing such a program.
Let’s begin at the simplest level: what is it we’re talking about when we talk about the universal basic income? At the broadest level, how would you define it?
Hilary: In our paper, we break down the UBI into the U-, the B- and the I-. The I is simple — it’s income, so it’s something that’s always cash, not in-kind support. The B means that a true UBI would cover enough to meet your basic needs. The U is the one Jesse and I found to be less consistent across the programs we looked at. Universality could mean everybody’s eligible regardless of their income — that’s the one we thought to be the most pure version — but universal could also mean, demographically, everybody’s eligible, as opposed to targeting it to, for example, the aged, or single mothers, etc. At the end of the day, the one element that was consistent within all UBIs is that it covers you if you don’t have earnings.
What are some examples of UBI programs that are out there now? Do we have good models for what this can look like?
Jesse: The closest existing analogy is the Alaska Permanent Fund, where Alaska takes the royalties that it gets from leasing public land for oil drilling and distributes those royalties as a flat amount to everyone who lives in Alaska. It’s not “basic” in the sense that we defined it, since it’s nowhere near enough to live on, but it’s a flat amount and it goes to everybody regardless of how much they work, their income, and who they are.
Beyond that, there are a lot of pilot studies; there aren’t a lot of universally implemented programs. There’s a pilot study being done by Y-Combinator that’s picking a small number of families and giving a payment every month.
Hilary: But even though those are small pilots — the one in Stockton and the Y-Combinator one — they’re small, but also, to be eligible you have to have income below some level. And so they’re still targeted. Nobody’s testing, even in a demonstration project, what it means to randomly give people — in the universal sense — income.
Why do you think the idea has been generating such interest over the last couple years, even before Andrew Yang raised it in his presidential campaign?
Jesse: I can think of a couple explanations. One is just the sense that the labor market and all of our labor market institutions aren’t working, and that a lot of the things we were worried about before, we’re not as worried about now. Particularly, previously we were really trying to encourage people to get jobs, and now we have a sense that maybe there aren’t enough jobs, so maybe we ought to not be pushing people so hard to go find them. So, I think there’s just a sense that the labor market has faltered for a long time and we need to figure out new ways to provide support — that’s leading to the desire to do something.
Beyond the distinction of cash vs. in-kind support, how would this really differ from the kind of social safety net we have today?
Hilary: We do have cash programs, so the idea of using cash isn’t new. But the idea of [setting up a program to truly meet basic needs] — probably not so much, because the US has never been that generous. Aside from those two things though, I think the critical difference is that the cash benefit programs that we do have — or even food stamps, which is about as close to cash as there is without being cash — are phased out practically on the first dollar of earnings. By design they’re much more targeted to go to those who have income at the poverty level or below. So a simple, but profound difference, is in thinking about whether we should have a program that provides more benefits further up the income distribution before you phase them out. That seems to be a first order issue that, regardless of how you design the program, comes up in contrast to what we do in our current system.
Are we generally talking about layering this on top of existing safety net programs, or using UBI to replace them?
Hilary: I think this is more of an unknown. There are two different groups of people who like the idea of the UBI — there’s the group of people that says “our current system is a patchwork of programs with all sorts of hassles and high marginal tax rates and we’d be better off to just throw it away and replace it with the UBI.” That has profound distributional consequences if it’s revenue neutral. But then there’s another group that is advancing a more principled argument and is thinking of it more as an add-on to existing programs. And, in the pilot studies, the UBI is completely separated from the rest of the social safety net in terms of how they’re being implemented.
Jesse: Right. On the argument that we should just replace the existing safety net with a UBI — there are some programs you could imagine replacing. If you had a UBI, for example, you might not need unemployment insurance. Or maybe food stamps. But there are other programs that UBI just doesn’t come anywhere close to replacing, and those tend to be the expensive programs. You can’t replace Medicare with UBI. But all of the money is in Medicare — and Medicaid — so if you’re not going to replace those, then you’re not going very far towards paying for the UBI.
Hilary: Exactly. So if you take that same amount of money that we’re currently spending on food stamps, TANF, SSI — all these programs, and then you turn it into a universal program, the people at the bottom who are currently getting those programs are going to get a lot less. So that’s the sense in which it could have very profound distributional consequences, if it was revenue-neutral.
With those distributional consequences in mind, what is the best argument for this kind of program? Is it simply the political argument that people will be more supportive of a universal program?
Jesse: There is an argument that people will feel more positively about a universal program if they don’t feel like it’s only going to people who are somehow not worthy, and they’re more inclined to support it if they feel like they’re benefitting from it. I’m skeptical that they’re going to be that much more supportive once they get the tax bill though.
Hilary: Right, and it’s really unknown. We don’t have much evidence on this, so it’s hard to know. But I think a little bit more nuanced layer of this might be: you could have a not-universal program that’s phased out higher up the income distribution than where a lot of our programs are phased out, that would be less expensive and could have some important implications for labor supply and have implications for providing support in a broader sense than we’re doing now.
That sounds a lot like bringing back a welfare program and just making it available further up the income distribution.
Hilary: Yes. But maybe with some re-branding. A lot of people don’t think about EITC as welfare, for example (although it’s criticized for other reasons). And so, for example, could we move away from this very old negative view of welfare in America by bringing in something new?
On that point, I have never heard any discussion of Temporary Assistance for Needy Families (TANF) in current UBI discussions. It does seem likely that, once you get into experimentation and political compromise, that’s approximately where you would land.
Jesse: I think TANF is easily the most stigmatized of our existing programs, and I think one of the key virtues in the minds of UBI’s backers is that it would reduce stigma. And so, if you back UBI, it’s because you believe it won’t turn into TANF.
Hilary: And TANF feels so broken that it is difficult to think of how to fix the existing program rather than to replace it with something else.
Your paper suggests that a UBI would likely disincentivize work for some recipients, but you also discuss the opportunities it creates for people to pursue training, education, or other personal investments. Can you talk about why this is such an important aspect to consider?
Hilary: When you think about Unemployment Insurance, one of the arguments for it is not just to give income protection when you lose your job, but also that it gives you the time to search and find the next job. So any program that provides income support provides that mechanism, and the more generous it is, the more it allows time and the space for a person to get that training or education. So it doesn’t seem to me to be something that’s unique to UBI. The point we make in the paper — which Jesse really articulates — is that if you have a program that isn’t phased out or that’s phased out higher up or less steeply, you’re obviously going to have less of a work disincentive and maybe, if we we’re now worried that all the jobs are going away, we’re not as worried about work disincentives.
Jesse: I think the way I think about it is: the virtue of the UBI is that it provides a true safety net. You don’t have to worry that, if you need it, it won’t be there for you. Because everybody has it. And that hopefully allows people to take some risks — that could be going to school, taking some time out of the labor market, trying out a new business, and that potentially is a positive thing. In terms of the labor supply effects, you have to be concerned about the “compared to what” question; a UBI reduces labor supply modestly compared to no UBI, holding everything else the same. But relative to existing programs — TANF and food stamps — maybe it raises labor supply a little bit, because we think there are some disincentives in the existing programs. On the other hand, EITC increases labor supply. So it’s not quite clear what the net effect is.
When people outside economics and policy hear proposals along the lines of Andrew Yang’s $1,000/month proposal, what are some of the important questions they should be asking in order to assess the merits of the proposal?
Hilary: The first thing is: do a back-of-the-envelope calculation. Just do the math. $1,000 a month times 12 months a year times X million people. What is that going to take? What are the taxes that will take? It’s a lot.
Jesse: There is an argument that knowing this is there will make people happier and make people less stressed out about money and more comfortable and feel valued in society. And those are all potentially positive. So it’s not nothing. But it’s expensive.
Any final takeaways?
Hilary: I just think there’s a lot of discussion about the benefits, which I agree with, with less discussion of what the costs are. And you need to be thinking about both to figure out if it’s a good policy choice.
Jesse: Either you have to come up with a whole lot of new money to pay for it or you have to take money away from people who are the neediest people in our society or some combination of those two. But you can’t talk about how great the program is without thinking about which of those things you’re going to do.
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