Universal basic income isn’t a magic bullet— but it’s a start

A big trade on transfers could reduce waste and disincentives

John H. Cochrane | Aug 26, 2016

Although it is hardly a new idea, universal basic income (UBI) has become something of a trendy idea for policy makers and policy pundits of late. Swiss voters considered—and overwhelmingly rejected—a referendum in June that would have guaranteed 2,500 Swiss francs to every adult and a smaller monthly income for children. Finland has cleared the way for a pilot project to test UBI next year. The renewed interest in minimum guaranteed income prompted Chicago Booth’s Initiative on Global Markets to poll its Economic Experts Panel on UBI, and Charles Murray to write a thoughtful piece on the subject in the Wall Street Journal

Murray’s proposal in particular has a lot to recommend it. He suggests that “every American citizen age 21 and older would get [$10,000 per year] deposited electronically into a bank account in monthly installments.” He would add a $3,000-per-year health-insurance voucher. The most important part: UBI would completely replace social security, Medicare, agricultural subsidies, food stamps, and all other transfer programs.

Replacing transfers with a single direct payment to citizens has a number of advantages. First, it would reduce the dramatic waste in the current system. Moreover, the bulk of government spending does not currently go to people who are really poor: social security and Medicare go to old people, many of whom are quite well-off. Housing subsidies such as the mortgage interest deduction go to people with big mortgages and big tax rates—not poor people. 

In addition, UBI would reduce the current system’s high disincentives for work. Murray’s plan does include a reduction in benefits based on earnings—your UBI starts dropping if you make $30,000 or more per year—but that reduction is capped at $3,500. That applies on top of the federal 25 percent marginal rate, 16 percent payroll tax, state income and payroll taxes, and so forth. So the disincentive is not zero, but the plan poses a lot less disincentive than many current programs.

The biggest problem in the argument is also the biggest selling point: we trade a check for complete elimination of everything else.

Universal basic income in practice
A number of city, state, and national governments have tried out some form of universal basic income, and several more are planning to experiment with the idea in the near future.

 

There are a lot of these “big trades” on the table, and there should be more. A big carbon tax, in return for complete elimination of all the regulatory nudges and crony energy-related subsidies. A hefty value-added consumption tax (VAT) in return for complete elimination of income, corporate, estate, and other taxes, and all deductions. Lots of infrastructure money in return for elimination of the Davis-Bacon Act, endless legal challenges, Environmental Protection Agency reviews, and other regulations. And so on.

In all these much simpler cases, the deal doesn’t get off the ground. Will the Right allow a big enough carbon tax? Will the Left really get rid of their subsidies? Will the Right really allow a large enough VAT? Will the Left really not just pile all the other taxes back on top? Making these deals is hard enough even when both sides admit the deal would be good. That case is going to be even harder here. 

Social programs in their current form will remain tempting, because a flat basic income is not close to the so-called perfect-world social-insurance system, or even common sense. We want to give more help to people who need more help. Social security goes to old people, because old people objectively are less able to work. Disability goes to disabled people, because it’s harder for them to work as well. Unemployment insurance goes to people who just lost jobs, because we know they are more likely to have suffered a bad shock. Insurance payments go to people whose houses have burned down. 

Social-insurance programs are indeed ineffective and bureaucratically bloated, and they do a terrible job of separating who really needs help from who doesn’t. But UBI takes a pretty extreme view that the project is completely hopeless, and that the government should do no conditioning at all, other than on reported income.

Even with this UBI, there will still be unfortunate people, they will still need help, and our electorate will still demand programs to help them. Disability has grown out of control, sure, but some people really are disabled. You’re going to give them $10,000 and turn your back? And what about the guy who takes his check, blows it all on a weekend of meth and beer, and now is lying in the gutter, his children homeless?

I don’t think our electorate is ready to completely forswear all bureaucratic help. Eliminating housing subsidies, agricultural subsidies, and corporate welfare are all great ideas on their own—if we could do those things, the US economy would be in a lot better shape than it is. But a bit of paternalism is pretty ingrained in social policies, and it isn’t necessarily a bad thing. I’m happier paying taxes to support food, clothes, and school for the kids, and basic housing, than I am to subsidize a beer-and-meth weekend. Murray already gives in, by restricting the first $3,000 (of $13,000 total) to a health-insurance voucher. If he’s going to get rid of social security, he should restrict the next $1,000 to a forced savings plan. If we’re going to get rid of all housing programs (a great idea), the next $2,000 should be a rent/mortgage voucher.

Maybe some paternalism is justified as a precommitment: we know if people blow the money, we’ll enact social programs to help them after the fact. But there is a deeper problem, and I have a constructive solution.

In fact, Americans use far fewer benefits than they are eligible for. Many programs have 2 percent take-up rates. Lots of people eligible for Medicare, Obamacare subsidies, disability, food stamps, welfare, home heating subsidies, and so on, and so on, all the way down to Palo Alto’s income-based parking-permit system, don’t take advantage of the benefits. If each American took advantage of every subsidy and social program to which he or she is entitled, the country would be bankrupt in about 10 minutes.

Why are such programs underused? Well, filling out the forms is a pain. And, more importantly, most people really do use social programs for a limited time. Chalk it up to a stubborn ethic of independence or some remaining stigma attached to taking assistance; it’s an observable phenomenon. For now. I fear that welfare states fall apart when the social stigma of taking the money fades.   

For now, the costs of participating in these social programs act to limit moral hazard. If it takes a few hours and trips down to an unpleasant bureaucratic office to get help, only people who really need it are likely to seek it. If there is some remaining social stigma to getting help, only people who really need it are likely to ask for it—and they’re more likely to get out as fast as possible.

If that sounds heartless, remember the objectives: money is limited. We want to use it to help people who really need it, and if we can do something to keep out the people who don’t really need it, we can be a lot more generous to those who do. If we impose some cost to getting help, we reveal who really needs it, and we can help those people a lot more.

So, my major suggestion for the project of UBI is: please, don’t automatically send the check to every American the minute they turn 21! Don’t send it to my kids! At least make people go down to a dull and dirty office, stand in line, fill out a long form, and repeat once a year.

We do have some experience with communities that live off government checks. We have more experience with places where lots of people don’t work. Welfare neighborhoods in the US in the 1970s through the mid-1990s. Europeans living on the dole. Molenbeek, Belgium. Saudi Arabia. By and large, places where most people live on government checks, or where large numbers of people don’t work, are not happy places. 

UBI also threatens progress on the agenda to integrate people to markets. Labor markets are more and more regulated and restricted. Well, if people can all get $10,000 from the government, why fight for lower minimum wages for entry-level workers, looser occupational restrictions, and so forth? Keeping our current, highly restricted labor markets, and our awful education system for low-income people, and then sending those people checks because they’re not qualified to do legal work is what supposedly caring progressives advocate. But what an awful and hopeless life they leave people with. 

A big trade remains attractive. Substantial cash grants and vouchers in place of many current programs—in place of middle-class subsidies, in place of corporate subsidies—offer substantially more help to people who need it, with far fewer distortions. But let’s not pretend a big trade will cure social ills. It very well could be an improvement; it would not be a panacea.

John H. Cochrane is distinguished senior fellow at Chicago Booth and a senior fellow of the Hoover Institution at Stanford University.

This essay originally appeared as a post on The Grumpy Economist blog, at johnhcochrane.blogspot.com.