Basic Income: Unintended Consequences
The basic income has gotten some press recently with Y Combinator’s research arm putting out a request for research to generate much needed further inquiry on its potential effects in the United States. Switzerland has even rallied enough public support that the issue of implementing a basic income will be put to a referendum vote.
The idea of a basic income is simple. Instead of relying on specific government programs to combat poverty, an unconditional cash transfer would be provided to all citizens. The argument is that by stripping out and simplifying the bureaucracy required to maintain programs such as Medicaid or food stamps, we can combat poverty more efficiently. It’s appeal stretches across political lines with neo-liberal economist Friedrich Hayek finding common ground with Marxist rapper sociologist Erik Wright (albeit for very different reasons).
The purpose of the rest of post is not to debate whether basic income policies are better than the status quo. Instead, I want to engage in some speculation on some unintended consequences of a basic income world. For the purposes of discussion, I make the assumption that a basic income would be defined as payments totaling $12,000 (the federal poverty definition for households with one individual) per year.
1. Heyday for Payday?
It is intuitive to assume that payday lenders would be staunchly against a basic income since their business model relies on borrowers who need risky, short term loans. There is evidence for this — Scott Santens provides a summary of studies on the effects of unconditional cash transfers on indebtedness in Namibia and India and argues that the basic income will be the bane of payday lenders.
This assertion in the context of the US is less clear. Payday borrowers in the US are disproportionately low income, but the data reveal that a significant percentage of payday loan borrowers have incomes higher than what a basic income would provide.
The number of, and amount in payday loans could decrease. The stability afforded by a regular, unconditional income could prompt more savings and less need for emergency, short term loans.
On the other hand, the basic income could expand the market for payday-like loans. For someone to take a loan, they must be able to demonstrate the ability to repay, for which the burden of proof in the payday loan world is usually a pay stub. The basic income would provide many with the necessary income stream by which to take out loans.
On the bright side, even if the number of payday loans increases due to a basic income, the very existence of basic income payments make it more likely that individuals are able to pay off these loans in the first place thus reducing the risk of delinquency and place competitive pressure on payday lenders to offer better terms and lower interest rates. Rather than totally eliminate the payday loan market, the basic income could force the payday industry to evolve into a more legitimate institution.
Additional data on the size of payday loans taken out by income level or, even better, experiments on the effect of unconditional cash transfers on indebtedness in the US would help refine these conclusions.
The basic income provides a guaranteed source of income so why stop at short term loans?
2. Basic Income Collateralized Loans
Instead of providing short terms loans which rely on one basic income pay period for payment, why not extend a longer term line of credit that will be paid off by a series of basic income payments? It turns out that the modern economic system with its combination of a mature bond market and retail banking system is already very good at this.
Basic incomes can be thought to be an annuity paid out until an individual ceases to be a citizen or dies. Similar to how state lotteries offer the choice between a lump sum and yearly payments, basic income recipients will have an implicit choice to make between money later or money now.
Since the lifetime of the average person is roughly 78 years, net present valuing a lifetime of $12,000 yearly basic income payments works out to roughly $287,000 assuming that yearly payments total $10,000 and applying a 4% yearly discount factor. That is enough to purchase a median priced single family home in the US, or if don’t mind living in Ohio, enough for three single family homes. (A natural, and somewhat terrifying thought is that there is a mechanism here to cause a housing bubble.)
Given the sheer number of people which would be made eligible for loans based on basic income payments, lenders would certainly capitalize on this through programs designed to capture this market. The primary risks associated with loans collateralized solely on basic income payments are if the government reduces or eliminates such payments in the future or if the borrower stops being eligible for payments by ceasing to be a citizen or by dying.
There is also a place for commercial banking given the established precedent from the housing market. Loans made on the promise of basic income payments could be securitized and freely traded on the value of future payments associated with the security. These securities could even have tranches with those who purchase more risky, lower tranches betting, to some degree, that less people die and stop receiving payments than expected.
A large enough market for securitized basic income collateralized debt would help ensure the survival of basic income policy. Beyond the public backlash that would occur if basic income entitlements were threatened, crashing the basic income securities market could have a negative impact on the broader economy, similar to how the implosion of the mortgage backed securities market tanked the world economy. The irony of using securitized debt to align the support of monied interests and the impoverished is not lost on me.
Whether or not this market will even be allowed to exist is another question. History has shown that government is slow to recognize and can even participate in the misalignment of incentives which can have explosive consequences.
3. (Mass?) Migration
I grew up in a quaint college town in the South by the name of Fayetteville, AR whose primary claim to fame is the University of Arkansas, Bill Clinton, and for being half an hour away from Walmart corporate headquarters. I now reside in San Francisco where the cost of living is nearly double my childhood home.
Suffice it to say that there will be economic incentives to pack up and move to a lower cost of living area for low income recipients of basic income payments. The basic income would enable more people to move since obstacles such as needing to find employment before moving would be reduced or removed. States and local governments may even attempt to incentivize migration into their locales to attract those sweet, sweet basic income dollars.
Any migration which can be attributed to a basic income program requires that the payment amounts be unadjusted for local costs of living. I wouldn’t expect the basic income to be subject to costs of living adjustment since the federal government is not currently in the habit of adjusting its policies by cost of living. The federal poverty level (not counting Hawaii and Alaska) and the Supplemental Nutrition Assistance Program do not discriminate based on geography. Additionally, implementing cost of living adjusted payments comes with its own host of issues such as the costs associated with measuring costs of living and how to prevent fraudulent behavior (e.g. lying about living in a higher cost of living location to claim larger basic income checks).
Basic Questions, Not so Basic Answers
Beyond being an interesting thought experiment, speculating on the less discussed consequences of a basic income system is a reminder that while the basic income is simpler than our current welfare system, it is not immune from being made complex by virtue of interacting with existing, interlocking financial and political systems. This fact is largely ignored in current discussions of the basic income. This is understandable given that the goal of its advocates is to present a clear argument in favor and drum up political support rather than muddying the message with the details. I suspect detractors don’t use this line of criticism because it is easier to elicit images of a new generation of “welfare queens”.
I am in favor of basic income policies, though I prefer a close cousin, the negative income tax to allocate money to those who actually need it. However, support should not preclude the need for more evidence of efficacy and discussion around the benefits, weaknesses, and consequences of the details surrounding the implementation of such a system.
Originally published at jonthewang.com on February 15, 2016.
