Sunday

June 25th, 2017

Insight

Universal basic income is ahead of its time

Megan McArdle

By Megan McArdle Bloomberg View

Published June 8, 2016

Obama, Immigration Propaganda and Our National Identity

The universal basic income is an idea whose time has not yet come. Or so say the Swiss in a referendum this weekend, in which the idea of a basic income grant was overwhelmingly rejected, with more than three-quarters of the population voting against.

Bloomberg View columnist Leonid Bershidsky, whose work periodically appears on JWR, says, correctly, that this is unsurprising because Switzerland, with its highly affluent population and low unemployment, was in many ways a bad test site for a UBI. On the other hand, in some ways a country like Switzerland is the best possible test for a UBI: It's got a lot of high-income residents from the finance industry, and its low unemployment rate means that a UBI will probably not discourage work as it will in places where jobs are less pleasant, or easy to come by. So why did it fail?

Well, because the UBI has some problems as a policy. The idea of a UBI is that it fixes many of the problems with the existing welfare system. The current patchwork of food stamps, health benefits and cash assistance creates a lot of economic distortions, because we're giving people the stuff we think they ought to want (food, health care), rather than the things they actually do want.

This can create problems for poor people who might, say, urgently need to cut back their food budget in order to repair their car, something that you can't do unless you can find a repair shop that takes food stamps.

Moreover, because all these programs have different income cutoffs, the benefit "cliffs" can create absurd marginal tax rates, even climbing over 100 percent -- where you will literally cost yourself money by working more or getting an hourly raise, because the money lost in benefits is greater than the money gained in wages. The UBI is supposed to solve these problems by creating a single benefit that goes to everyone, regardless of income. And in theory, by providing a safety net, the UBI can free potential entrepreneurs and creatives to take risks chasing their dreams, which they couldn't do if the probable downside ended in bankruptcy and homelessness.

Unfortunately, policy makers trying to craft a UBI end up with an unpalatable choice between creating a benefit that is useless, or one that is too costly to pass. Consider a basic income of $1,000 a month. Most of us would not consider an annual income of $12,000 a year enough to live on; it's just a smidge above the poverty line for a single person.

But there are 242 million adults living in the U.S. Now, 7 percent of the U.S. population consists of noncitizens, but even if we assume that grants go only to citizens, that's 225 million adults. Multiply times $12,000 a year … right, it's $2,700,720,000,000, or 70 percent of the current federal budget.

Yes, but we'll get rid of the other programs, you say. OK, well, this monthly grant is considerably less than the current average Social Security benefit, a benefit that President Obama (and judging from my social media accounts, most of his party) consider too paltry. It's going to look even skimpier once you get rid of Medicare and force retirees to buy their health care on the open market, a cost that would consume most of their guaranteed basic income.

Oh, we weren't going to get rid of Medicare? Nor Medicaid or Obamacare? And of course we'll keep providing public schooling, and assistance for disabled children, and…. By the time you've started saving programs that obviously can't be cut without immiserating large chunks of the population who currently rely on the government, what you have is a $2.7 trillion program to substitute for Temporary Assistance for Needy Families (welfare), unemployment insurance, Social Security and food stamps -- four programs upon which the federal government currently spends about $1.2 trillion.

Moreover, since the grant would be, in many cases, less generous than what a lot of people are currently collecting, we will probably have to either top up for those groups, or increase the size of the benefit, until we have a $3 trillion or $4 trillion program to replace $1.2 trillion worth of welfare spending.

Even if we tax back the whole benefit from higher earners (which would reintroduce many of the marginal tax problems we were trying to avoid with the UBI in the first place), the dead-weight loss of the additional taxation needed to pay for this program will probably harm economic growth, making the program more expensive still. I'm not a supply-side hawk who thinks that any tax increases will plunge us all back into the dark ages, but running an additional $2 trillion to $3 trillion through government coffers every year might give even some ardent big-government Democrats pause.

These numbers are, of course, specific to the U.S., but the problem is the same in any developed country. Handing out a universal benefit of any size at all will be fantastically expensive. You can make it smaller, of course, but then you don't get any of the vaunted benefits: It doesn't prevent the benefit cliffs, doesn't encourage entrepreneurship, doesn't lessen the distortions of all the in-kind benefits you've left in place.

I suspect this is why the advocates of a UBI have recently become so interested in the problem of robots taking our jobs. The idea is that automation will make human labor so worthless, and make humanity so fantastically wealthy, that we practically won't notice if we siphon a considerable amount of that money into a benefit that will, effectively, allow people to be permanently unemployed without starving to death. I'm skeptical of this story for a number of reasons -- starting with the fact that "the machines are about to put us all out of work" has been a staple of science fiction for a century without coming noticeably closer to science reality. This time may be different, of course; even the boy who cried wolf eventually did come across a predator.

But even if this story eventually comes true, it isn't true now -- and until it is true, there's no real reason for voters to want to shuck their current welfare state for one that is either much more expensive or cuts benefits for current beneficiaries, while throwing in some possibly strong disincentives for lower-skilled people to hold jobs. After all, the government is pretty good at mailing checks. In the event that a majority of the population is thrown out of work by robots, a UBI can be set up in a trice.

The UBI advocates, in other words, have provided neither a realistic fiscal plan for their policy, nor any urgently compelling reason for us to pursue it. It's possible that the UBI is the policy of the future. But if so, that future is probably still quite a ways off.


Previously:


06/03/16: What the Saudi $3.5 billion stake in Uber means for the unicorns
05/27/16: Hillary's server doesn't look like honest mistake
05/09/16: Welcome to the modern economy, where increasingly, everything not compulsory is forbidden
05/09/16: The four horsemen of the Republican apocalypse
04/21/16: Parents could go bankrupt simply trying to look adequate
04/18/16: Your assessment of the 2016 election is way off
04/13/16: Those tax 'loopholes' were created for a reason
04/01/16: Enlightened crybabies: Campuses can't become one big 'safe space'
03/16/16: A 'cashless society' is great until it's not
03/15/16: President Trump's revolution? Fear not
03/14/16: Trump's clumsy pivot to the general election
03/08/16: Trump too poor to stage a third-party run
03/07/16: We can all relate to Trump's policy tactics
02/25/16: Twitter can only lose when it polices abuse
02/09/16: Rubio faces the risk of going off script
02/08/16: Sanders and Clinton get substantive, and go wrong
02/03/16: 6 takeaways from an exciting night in Iowa
02/02/16: Trump fans should know he'll offend them next
01/04/16: Obama: Dreamer or irresponsible luftmensch?
12/21/15: Sheltered students go to college, avoid education
12/17/15: Trump disproves liberal and conservative myths
10/28/15: Preschool Helps Kids. Sometimes. Briefly.
10/26/15: If you like truth, don't watch the movie 'Truth'
10/21/15: Turns out timeless cliches and the Beatles understood the 2016 election season before the rest of us did
02/09/15: Reading the tea leaves for 2016 gets you nowhere
02/02/15: Hillary's late start won't stop punches

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Megan McArdle is a Bloomberg View columnist who writes on economics, business and public policy. She is the author of "The Up Side of Down." McArdle previously wrote for Newsweek-the Daily Beast, the Atlantic and the Economist.

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