A single solution to poverty? (It costs more to be poor, part II)
Last week, I wrote about how it costs more to be poor. There’s the financial cost. Fees charged by banks, by payday lenders, by stores that cash checks. There’s the time cost. Traveling long distances to buy groceries because the stores located in low-income neighborhoods prefer selling candy and fast food to fresh food.
And there’s the cognitive cost. The amount of processing power — mental bandwidth — that juggling the everyday challenges of poverty uses up.* This last cost is often overlooked because it’s hard to measure. But it can be the most impactful. When our mental bandwidth is fully occupied, we find it difficult to access the part of our brain that is responsible for making good, measured long-term decisions. We become susceptible to present bias, putting more weight on today than tomorrow. So when we’re rushing to meet a deadline and get hungry, we reach for a slice of pizza, even though we know the consequences for our waistline. When we’re preoccupied with thoughts of work, we switch on the TV even though we know we should read to our children to aid their future development.
For the poor, present bias can be particularly damaging because it is what gets them stuck in a perpetual poverty cycle. It’s what makes them focus on putting food on the table, instead of thinking about attending a free training program that might help their job prospects tomorrow. It’s what pushes them to take out a payday loan of $100 even though the interest payments will be so high that they are unlikely to be able to afford the future repayments.
How do we address the costs of poverty? Well, I could talk to you about how we should provide free banking. Or subsidies for grocery chains to locate in poor neighborhoods. Or even behavioral nudges that might make it easier for low-income families to take up the many programs on offer to them. But poverty is fundamentally a lack of money. So why not just provide everyone with a universal basic income (BI)?
This is not my idea. It’s been around for many years. Martin Luther King Junior proposed a BI. Both Presidents Nixon (R) and Carter (D) tried to pass legislation to guarantee a minimum income. Even today, commentators from across the political spectrum have supported the idea.
What would it mean? Well, it would mean providing every American citizen with a fixed amount of money every year to raise them above the poverty line. Based on 2015 data, that would be around $12,000 a year for an adult. It would replace the complicated plethora of federal and state welfare programs, like food stamps and housing benefit, with one universal payment. That’s why it’s so popular across the political spectrum. Because, it would both reduce the sizeable bureaucracy created by the welfare state and eliminate poverty.
A universal basic income would put expenditure decisions firmly in the hands of people. They would have a lump sum to spend how they choose, rather than being given welfare payments that were explicitly tied to products, like food stamps or housing vouchers.
Would people make the ‘right’ decisions? Would a BI make people lazy? Or spend their money frivolously? The honest answer is, we don’t know.
On the one hand, when someone is provided with protection, they can often undertake more risky behavior. For example, drivers in the UK were found to keep less distance between themselves and a cyclist when they saw that the cyclist was wearing a helmet. The perceived danger had been reduced. That’s what is known as moral hazard. So in this case, some people might argue that a basic income might reduce the incentive to work. Because the risk of not doing is lower.
On the other hand, we know that the majority of people living in poverty are in work. Probably holding down more than one job. Despite the floor provided by existing welfare programs and the sharp withdrawal rates of welfare payments when they work longer hours. Most people are not lazy. And even when they receive pay rises at work, they don’t cut their hours. In fact, Americans have never worked harder.
Enabling families to meet their basic needs would alleviate the stress caused by living in poverty. It would free up some of their mental bandwidth. That, in turn, would enable them to make more careful, thoughtful long-term decisions. Like investing in their children’s education or their own health.
What about the cost, I hear you ask? Well this is hard to get a handle on. Yes, we can add up the cost of providing $12,000 to each person. And weigh that up against the savings from other welfare programs that would be cut. But what about measuring the lifetime costs of poverty? The savings on our healthcare and criminal justice system? Or the benefits from improved education outcomes and lifetime earnings? This is where it starts to get more complex.
The universal basic income is a compelling idea. It is its simplicity that makes it attractive. No country has implemented it on the scale that the United States would have to. Is now the time to try?
*See Mullainathan, S. and Shafir. E. “Scarcity: Why Having Too Little Means So Much” for a great explanation of how constraints to our mental bandwidth — scarcity — can impact our decision-making capabilities.
Originally published at tellingtimes.me on November 18, 2015.
