David R. Henderson  

The Case Against a Basic Income Guarantee

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Jason Kuznicki of the Cato Institute has written a piece calling for an "Unconditional Basic Income." (I should note that he did not publish this under the auspices of the Cato Institute. I mention Cato only to identify his affiliation.) Under Kuznicki's proposal, the government, presumably the federal government, would guarantee everyone a basic income. While he lists a number of upsides to his proposal, he never mentions the amount of the guarantee. It matters.

In my article, "A Philosophical Economist's Case for a Government-Guaranteed Basic Income," I took Matt Zwolinski's proposal for a $10,000 guarantee per U.S. adult. I showed that the result would be a huge increase in federal spending, a huge increase in tax rates, and a huge increase in the deadweight loss from taxes.

One excerpt:

Zwolinski has argued elsewhere that a BIG "would be much better than the current welfare state." He writes: "Current federal social welfare programs in the United States are an expensive, complicated mess. According to Michael Tanner, the federal government spent more than $668 billion on over one hundred and twenty-six anti-poverty programs in 2012. When you add in the $284 billion spent by state and local governments, that amounts to $20,610 for every poor person in America" (2013b, emphasis in original). He wonders, "Wouldn't it be better just to write the poor a check?"

It might be better to "write the poor a check," but notice what Zwolinski has done. He started by arguing for a check for every adult American citizen and then in his cost comparison shifted to having the government write a check only to poor people. In that same essay, he writes: "A Basic Income Guarantee involves something like an unconditional grant of income to every citizen. So, on most proposals, everybody gets a check each month. 'Unconditional' here means mostly that the check is not conditional on one's wealth or poverty or willingness to work" (2013b). For that reason, the relevant expenditure does appear to be the $2.068 trillion figure given earlier.

Assume, as Zwolinski advocates, that such a program would displace all 126 federal antipoverty programs and all state and local government antipoverty programs. Later, I challenge that assumption, but for now imagine that it is true. Notice what would happen. A $2.068 trillion program would replace programs whose total expenditures in 2012 were $952 billion. Even rounding up the $952 billion to $1 trillion, the program that Zwolinski advocates is more than twice as costly in budgetary terms as current antipoverty programs.


So it would be helpful to know what basic income guarantee Jason Kuznicki proposes.

I found this part of his article surprising and troubling:

But also as real incomes rise, the price system may run into trouble on the low end of the economic spectrum: How can someone send a price signal when they don't have any money at all? How can the comparatively feeble price signals of the very poor compete with the price signals of the middle class, which are strong and (happily) getting stronger?

It's possible, and tempting, to make gross simplifications of this situation. But the impaired ability of the poor to signal via the price mechanism has some predictable effects, and they aren't especially good. We might say, for example, that inexpensive, high-quality basic consumption goods will be underprovided, in favor of conspicuously non-basic goods. The latter signal at great cost that the consumer belongs to a higher social class. That's a big problem if you're poor. (Revealing, too, is that the word "basic" itself has acquired such a negative connotation in recent years.)


Whom does he have in mind who doesn't "have any money at all?" Also, when he writes, "inexpensive, high-quality basic consumption goods will be underprovided," I immediately thought of Wal-Mart, where high-quality basic consumption goods are provided in great quantity and at low prices.

Kuznicki adds:

We might further hypothesize that when charity is left to the upper classes, a good deal of supposed charitable expenditure will be devoted instead to virtue signaling.

Sure, we might hypothesize that, and there's certainly a lot of that. But part of the problem is that government has a welfare state and that, as Russ Roberts has shown, has displaced transfers to the poor. Moreover, it's not just upper classes who traditionally helped poor people. It's also the middle class.

By the way, even though I've focused on the fiscal aspects of the basic income guarantee, my piece that I reference above does deal later with the moral case for a guarantee, which I find highly problematic.


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COMMENTS (18 to date)
Justin White writes:

Wouldn't any discussion of a universal basic income require replacement of other transfers, like Social Security, Medicaid, and Medicare? Those three specific programs alone account for $2T in annual spending and would certainly accommodate the $10,000 payment per person. I can't imagine any level of UBI offering the potential for success without this crucial step.

Personally, I have problems with the sort of incentives that a UBI might impose, even with the benefits that it brings like lowering the reservation wage and eliminating bureaucratic waste.

Levi writes:

"Also, when he writes, "inexpensive, high-quality basic consumption goods will be underprovided," I immediately thought of Wal-Mart, where high-quality basic consumption goods are provided in great quantity and at low prices."

Indeed. Ignoring obvious empirical facts about the way certain groups are treated by others seems to be growing in popularity among free-market economists. The Niskananen Center's has been putting out a lot of this type of nonsense too.

Matthew Moore writes:

My anecdotal impression was that most charity for the working class came from the working class.

There is more fellow-feeling, better ability to discern fault and need, and a greater probability of the need for future reciprocity.

zeke5123 writes:

I enjoyed the article Prof. Henderson. Would add one point I've been toying around in my head (that is probably novel only to me) about these kind of grand trade-offs: politics is an iterative game that discourages compromises.

What I mean by this is lets say all sides got together and promised to end the current welfare state (including things like minimum wage, OSHA, welfare, SS, etc.) in exchange for a BIG. This is something classically liberal people may get behind, as the perfect should never be the enemy of better. But -- and this is a big but -- politics is iterative. In two years, politicians need something to get the base excited. How about a larger BIG!? Or perhaps we really need to help the poor a bit more than the BIG does!? Etc, etc. It is then a difficult political position to say: defend the bargain! No base actually likes the bargain.

In short, the problem with any grand compromise is that the deal is immediately up for re-negotiation if not the next election, then the election after. And constant re-negotiation is no way to create a grand compromise. Thus, even if we could get around the magnitude problems you posit, I wouldn't agree with a BIG, unless there was some solid constitutional amendment that fixed the size of the BIG, along with limiting future re-lapses into the welfare state. Otherwise, you end up with BIG plus the welfare state instead of BIG in place of the welfare state. But a constitutional bargain is even more difficult compared to a grand bargain.

Floccina writes:

I think it could be much cheaper than that $2.068 trillion because, you tax the BIG it away at a high rate. I, for example, would tax the recipients of the BIG at a 50% rate until their taxes hit the $10,000 that they receive. I would also replace SS with the BIG along with the minimum wage, which is a cost to the economy though not through spending. The BIG problem (pun intended) is the disincentive to pay taxes (not the same as the disincentive to work, I used to know people who worked quite hard for in home consumption and for cash to avoid the tax man.)

Hans writes:

Once you start a handout line it
is only likely to grow larger.

Hans writes:

More works of Mr Kuznicki.

http://www.libertarianism.org/people/jason-kuznicki

R Richard Schweitzer writes:

Among the intriguing rhetoric promoting "basic income," there appeared in the Boston Sunday Globe a few weeks back in its editorial section:

"We must seriously start talking about decoupling income from work. Adopting a universal basic income, aside from immunizing against the negative effects of automation, also decreases the risks inherent in entrepreneurship, and the sizes of bureaucracies otherwise necessary to boost incomes."

Given the space, front of section , and large, garish illustration, this very extensive piece might best be seen as part of the effort to restore the Abitibi newsprint industry.

But, seriously, "income," is the service exchanged for service (work) - Bastiat.

David R. Henderson writes:

@Justin White,
Wouldn't any discussion of a universal basic income require replacement of other transfers, like Social Security, Medicaid, and Medicare?
Good point. And then you would get nowhere. Think of what percent of seniors vote. A large number of seniors get more than $10K in Social Security alone, not even taking account of Medicare. Indeed, many seniors get between $15K and $20K annually in SS, and have little other income. Imagine telling a 70-year-old that his government benefits will fall by half.
@Floccina,
I think it could be much cheaper than that $2.068 trillion because, you tax the BIG it away at a high rate. I, for example, would tax the recipients of the BIG at a 50% rate until their taxes hit the $10,000 that they receive.
I cover that in my article.

Tracy W writes:

Justin White: if you take out Medicare and Medicaid then people have to fund their healthcare needs out of their Basic Income. If the person is elderly, or a widow with three kids (as the $10,000 is per adult), that's going to be a severe strain on their $10,000 a year.

Basically, however you cut it, a Basic Income is only affordable if you're willing to drastically cut government transfers to the poor.

David S writes:

How about a twist: instead of giving a basic income to all citizens, we give employers a $10,000 grant for each employee exclusively employed by the company.

That should make startups even easier, all you have to do is provide more interesting work or a better work environment. Most of the money would likely end up in the employee's hands anyway, but you would boost employment numbers. Everybody loves high employment numbers!

Noah writes:

Non-poor people would just be writing a check to themselves. Most of the increase in government would be an accounting mirage.

Paul T writes:

You appear to be assuming that Social Security is not subsumed by this program; would it not be logical to divert all SS funds into the BIG fund as well? This doesn't appear to be addressed directly in Kuznicki's piece either.

If one is getting a basic living wage from the BIG, surely the need for the SS program disappears.

$10k/year of BIG doesn't quite cover the current average SS payout, so this doesn't fit exactly -- but it's the same order of magnitude, so a transition from SS to BIG seems tractable.

The SS expendatures in 2015 were $0.9tn, which takes the shortfall down to $0.468 by your reckoning -- still significant, but not as dramatic as the 50% tax increase that you project in your piece.

David R. Henderson writes:

@Paul T,
You appear to be assuming that Social Security is not subsumed by this program; would it not be logical to divert all SS funds into the BIG fund as well?
I answered this.
$10k/year of BIG doesn't quite cover the current average SS payout, so this doesn't fit exactly -- but it's the same order of magnitude, so a transition from SS to BIG seems tractable.
Let’s say you earn $50K and someone advocates cutting it to $25K. That’s the “same order of magnitude.” No big deal?

khodge writes:

I like it. Let's start by unwinding the 126 existing programs. California will institute a BIG. Then let's start to negotiate what the Federal Government should do.

Most of my concerns were addressed in other comments; I think that the legislation should be titled the "Law of Unintended Consequences." Think of the great case studies it would produce for introduction to economics classes.

David R. Henderson writes:

@Noah,
Non-poor people would just be writing a check to themselves. Most of the increase in government would be an accounting mirage.
That’s incorrect. Think about why.

Thomas B writes:

I understood that a key driver of the BIG proposal was that it would eliminate the steep marginal tax rate on those with low incomes. If there is a cutoff for who receives the BIG, those who approach that cutoff will face a high marginal rate - which is why it would apply to everyone. Thus, Floccina's proposal - a high marginal rate until the BIG is repaid - would partly defeat the purpose. Conversely, part of the tradeoff of the BIG is that the tax system should not be progressive: there are also no low rates for low incomes.

It seems to me that any calculation of the BIG has to start at the other end: what revenue would be generated by an acceptable (flat) tax rate on incomes, and how much per person is that after allowing for other government programs? It's going to be about $3,000 per person per trillion in allocable funds. $3,000 per person just isn't much. Of course, you'd have to give it to kids, but $12,000 in BIG for a family of 4 is... tough. It would have to be more like twice that (which would take the family of 4 up to the poverty level with no earned income), so $2T in taxes. For a single person, $6k isn't much (it's half the poverty level), but that's with NO employment income, and single people can share apartments too.

Replacing SS and medicare are also a problem: this is apples and oranges. Those are insurance programs: might as well say "we could create a basic income by taking all the payouts from AIG and forcing its customers to keep paying premiums". The fact that these are government-run insurance programs doesn't make it any more appropriate to just seize their assets.

Medicare raises another issue. It's one thing to say "here's $6 k, now get a job and top that up" to a healthy person, but some people are sick/disabled and may have high medical costs. So you still need "special situations" programs.

I like the idea of a BIG: it's humane, and it avoids creating poverty-trap incentives. But it's hard to make the numbers work.

WP Kelpfroth writes:

Consider BIG as a replacement for a minimum wage. Suppose one is working at a minimum wage, presumably because that's all the more value the employee can bring to the market. The way to improve earnings is to make oneself more valuable on the labor market, typically through education. But there are a fixed number of hours in a day, so work at subsistence wages must get the priority of time over education.
Conceptually, a BIG would let some people continue at a subsistence wage but give others the time to become more valuable to the labor market, as the need to earn a subsistence would no longer be a primary task.
Then, as the now more skilled worker gathers more income, the
BIG becomes less important, and could even be taxed away. Society should not continue to use the crude income steps for tax tables; use something on the order of a higher order polynomial to figure out what the BIG reduction would be as non-BIG income increased.

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