Economy, explained.
Why everyone is talking about universal basic incomes
A successful UBI program in a Kenyan village will not provide insights relevant to the challenge posed by fast-changing technology in advanced economies.
Economy, explained.
A successful UBI program in a Kenyan village will not provide insights relevant to the challenge posed by fast-changing technology in advanced economies.
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Why everyone is talking about universal basic incomesWhy everyone is talking about universal basic incomes
When the Indian Finance Ministry devoted a full chapter of its recentEconomic Report to the idea of a universal basic income (UBI), it might seem like revolutionary ‘pie in the sky’ musings, especially as the cost would equal nearly half of India’s budget. But in fact the ministry is just joining the zeitgeist or, more accurately, revisiting an idea with a long and active history. Even in rich countries, some version of this idea has received wide backing – ranging from business tycoon Elon Musk, to conservative economists such as the late Milton Friedman.
While the idea of UBI is now commonplace, within this broad nomenclature there is diversity of both objective and mode of implementation: UBI advocates are often talking about very different things. The motivations might be classified as:
The Indian proposal fits the first two objectives. The suggestion is that 75% of poor and middle-income Indians would be given a direct cash transfer of around $3 per person per week. This might seem like a trivial sum but it would be (just) enough to alleviate extreme poverty. While poverty alleviation is a motive, so too is the inefficiency of existing subsidy programs. The central government currently has nearly a thousand different programs, which transfer about 5% of GDP. Not all of these are specifically anti-poverty: the middle class are also recipients, as the subsidies reduce the general price of food and energy. Replacing this mish-mash of programs with a cash handout costing the budget only a little more would raise the incomes of the very poorest. It is technically feasible, as just about all Indian adults have a digital registration.
Seen in these terms, it doesn’t seem such a radical idea to replace many (but not all) of the subsidy programs with a quasi-universal cash allocation to individuals, especially as it would be introduced gradually. Political opposition from the less-poor who are currently benefiting from the subsidies would, in any case, ensure than nothing happens too precipitately. It is, as the report says: ‘an idea whose time has come perhaps not for immediate implementation but at least for serious public deliberation’.
In fact cash transfers are now quite common in social programs in developing countries, both for ongoing poverty alleviation and as a response to natural disasters. A current trial in Kenya has been successful enough to suggest that UBI cash transfers should have a bigger role in international assistance programs. In this case, it is foreign donors (mainly Silicon Valley tycoons) rather than the national government who are funding direct distribution of small amounts of regular cash in order to eliminate dire poverty.
Some also suggest that UBI might be relevant in rich countries as well. The Trump victory has focused attention of the ‘working poor’; those who are employed, but at what is barely a living wage. The archetypical Trump supporter might be thought of as a white, blue-collar worker whose previous employment was in the well-paid manufacturing or mining sectors. The job opportunities are now in services, in particular ‘girly’ jobs with income inadequate to support a family and lacking in manly social prestige. This is not a recent phenomenon, but Trump’s victory has highlighted the deficiencies of existing programs designed to help. The aim of UBI here would be to ensure a decent living wage for all.
Others (usually of a visionary disposition, such as Elon Musk) see UBI as a response to automation taking away jobs. The idea is that as robots take over, most of us should work less - or maybe not at all - with our basic income provided by the state.
Again, this is an old topic, with Keynes predicting in 1928 that by now we would spend most of our time at leisure activities (perhaps meeting in Bloomsbury discussion circles). The future hasn’t worked out like this for most, because our aspirations have gone towards a more complex life rather than more simple leisure: we want much more education, health, travel and entertaining diversions. Paying for these has kept us harnessed to our jobs, always needing more income. It has also created opportunities for others to supply our wants, largely in the form of services rather than goods manufactured in a factory. Keynes correctly predicted the huge rise in GDP but missed the disparities of both income and opportunity which have left most people unable to enjoy a life of fulfilling leisure. Whether UBI could successfully address the income distribution issues that go with a much more service-oriented Downton Abbey world is a moot point.
For each of these diverse motivations, some common issues are raised by UBI. For example, would people given UBI decide to stop work, or at least do much less? For some, this is a positive factor for UBI: we shouldn’t have to spend the best years of our lives chained to a soulless job we don’t like. For others, there is puritan virtue in work, and people often find social satisfaction in their job. In developing countries, the tiny UBI won’t take away the incentive to earn more income. In rich countries, the best guess is that some might slack off, but others, currently constrained from working by the prospect losing their social security if they find employment, would actually work more.
The main issue for rich economies is budgetary cost: giving everyone a ‘living wage’ would be a huge cost to the budget. For America, it is estimated that giving a $10,000 per year UBI would require not only the dismantling of the current welfare system, but also the raising of taxes by around 10% of GDP – hardly politically acceptable in any environment, let alone the current one. Yet this level of UBI would leave those who currently rely heavily on social security worse off, often in penury. If transfers are universal rather than means-tested, there is a sharp trade-off between generosity and affordability.
While the case for paying social security in the form of cash transfers is strong (and not just in India), the budget-blowing consequences of a truly universal income guarantee mean that it is unlikely to replace more targeted and means-tested measures (raising minimum wages; negative income tax; earned income tax credit). Switzerland recently rejected a referendum proposing a ‘living wage’ UBI. Finland’s current small-scale trial has the more limited aim of encouraging the unemployed to seek employment, unhindered by the disincentive of losing their benefit when they find work.
UBI should be seen as an element in a broader debate about loosely-connected issues: distribution of income; the efficient provision of social welfare and international aid; and the implication of robots and artificial intelligence in society. These are diverse problems and any role for UBI in addressing them will differ hugely between countries. The UBI concept finds widespread support because different elements appeal to different constituencies. Some like the social and equity aspects, while others like the idea of reducing the clumsy hand of government administration.
Practical trials of the sort being undertaken in Finland will provide some evidence on how to improve the administration of social security in advanced countries. In developing countries, there seems a strong case for replacing many poorly targeted subsidies with cash transfers, and this may have some application in rich countries as well. But non-means-tested UBI is not going to provide a panacea for society’s ills. Some of the Silicon Valley funders of the Kenya trial may look for a wider application, but a successful UBI program in a Kenyan village will not provide insights relevant to the challenge posed by fast-changing technology in advanced economies. While Bill Gates’ suggestion of taxing robots to put human workers on a more-even competitive footing with the robots deserves serious consideration, the time when governments will pay everyone a living wage seems a long way off.
Photo courtesy of Flickr user: Simply CVR
About the author
Stephen Grenville
Dr Grenville is a Nonresident Fellow at the Lowy Institute.
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