Considering a universal basic income

With the economic carnage caused by the lockdown response to the coronavirus crisis, and most governments responding with a much more generous social safety net, many people are wondering about whether it is time to seriously consider a universal basic income (for example, see here and here). However, before we get ahead of ourselves, we need to consider what adopting a universal basic income (UBI) would mean, and what we already know from the limited experiments that have been undertaken so far in developed countries.

In a 2019 article (open access) published in the journal Annual Review of Economics, Hilary Hoynes and Jesse Rothstein (both University of California, Berkeley) do an excellent job of reviewing the academic literature on UBI. The start with the obvious - what is a universal basic income? It seems like an obvious question, but it turns out that when people talk about UBI, they often mean different things. Hoynes and Rothstein note three features of a canonical UBI:

1. It provides a sufficiently generous cash benefit to live on, without other earnings.

2. It does not phase out or phases out only slowly as earnings rise.

3. It is available to a large proportion of the population, rather than being targeted to a particular subset (e.g., single mothers).

It turns out that a lot of UBI proposals depart from this ideal, especially in terms of the first feature (by keeping the payments small, in order to manage the total cost), or the third feature (by limiting who is eligible).

Hoynes and Rothstein then go on to outline the arguments in favour of a UBI, of which there are three main ones:

One motivation commonly offered for adopting a UBI is that the labor market is not delivering, or is not expected to deliver, adequate growth of wages and earnings for the lower portion of the income distribution. This is sometimes presented as the “robots are coming” argument...

A distinct argument for a UBI is that it could replace the current patchwork of transfer programs in the United States, thereby avoiding the high cumulative marginal tax rates implicit in many existing poverty programs, such as cash welfare... According to some, a UBI would radically simplify the transfer system, reducing perverse incentives while still ensuring a minimum level of income for those who are truly unable to work...

...a UBI represents a more comprehensive and politically defensible safety net [than the current patchwork system], one that reaches all of the needy and not just a demographically targeted subset... They argue that a more universalist approach would also reduce the stigma of program participation, simplify cumbersome application processes, and possibly move the conversation away from assessments of the deservingness of the poor...

In the current crisis, the first argument for a UBI becomes overwhelming, but not for the reasons originally proposed. If the labour market is unable to deliver wages at all due to a lockdown, then that makes the case for a UBI much stronger.

Hoynes and Rothstein then outline how a UBI compares with existing social security programmes in the U.S., and only some of that section applies to countries like New Zealand, where the existing social safety net is more comprehensive and generous. However, the takeaway message is important, since it would apply broadly to most social security systems:

In sum, a UBI would have quite substantial distributional and cost effects. A smaller proportion of UBI dollars would go to the bottom of the income distribution compared to the current system, though a generous UBI, with the needed revenue funded by a progressive tax, could increase the absolute size of transfers to the bottom and thus would represent a (potentially very large) downward redistribution of income. Similarly, a canonical UBI would give a larger share of transfers to the nonelderly and nondisabled than the existing programs, so any proposal to finance it through cuts in health and retirement programs — the largest sources of funds in the existing US transfer system — would need to address the large declines in living standards that the elderly and disabled would experience.

The article reviews the literature on the potential labour market effects of a UBI - a key consideration for some, who believe that the work disincentives would be large. Finally, they review the existing literature on the effects of UBI pilot programmes (such as those I have previously discussed here and here), but in general that literature might be summarised as unhelpful, because:

UBIs meeting the definition we laid out above — large enough to live on, and without phaseout or other eligibility restrictions — have never been implemented in a rich country on a large scale or even in a pilot experiment. What we know about the likely effects of a UBI comes from analyses of policies that are similar in some ways to UBIs, though different in others, and from the broader labor supply literature.

Finally, it is impossible to adequately consider a UBI without considering its cost. As Hoynes and Rothstein note in their conclusion:

The source of the new funds is a first-order issue and will have substantial impacts on the distributional effects of the policy and its ability to target those most in need of assistance. In particular, replacing existing antipoverty programs with a UBI would be highly regressive, unless substantial additional funds were put in.

The idea that adopting a UBI could represent a regressive change in the social security system would come as a surprise to many people, I expect. Overall, will a UBI be a saviour for the economy - unless we are somehow able to solve the issue of how to fund it, we may never find out.

[HT: Marginal Revolution, last year]