Bryan Caplan  

UBI: Ed Dolan Responds

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Ed Dolan responds to me on the UBI in the comments.  Complete text:

First of all, thank you, Bryan, for the civil, cogent, and detailed response. I think we might even find common ground--I might eventually be able to get you to concede that libertarian sympathizers should "take a UBI seriously" (that is not the same as drinking the UBI Kool-aid, after all) and in return I will concede that a UBI is not a magic bullet, but nonetheless is worth serious consideration.

A couple of specifics:

1. You say that I acknowledge elsewhere that the incentives are theoretically ambiguous,income effect vs.substitution effect and all that. Fine, but you give the wrong link. The place where I discuss that issue in detail is in the two-part series that starts here. Part 1 of that post deals with theory, and shows that although there is some ambiguity, it requires very special and implausible assumptions for the income effect to outweigh the substition effect. Part 2 looks at the empirical literature, and concludes that the overwhelming weight of evidence suggests that a UBI improves work incentives relative to any means tested program.

2. You are very right to zero in on the "done properly" proviso as critical. I completely agree that tacking a UBI onto the existing system would not work. I also strenuously object to the line you get from some conservatives that a UBI should replace welfare for the poor, but leave all tax and transfer goodies intact for the rent-seeking middle and upper classes. What is sauce for the goose is sauce for the gander. Does that make a UBI a hard sell politically? Maybe. I'm a lowly economist. As the song says, "If the rocket goes up/who cares where it comes down?/That's not my department/says Werner von Braun."

3. Taxpayers have right to attach conditions to public charity. I don't dispute that. Whether pragmatic considerations might lead them to avoid excessive or silly conditions is another matter.

4. "You shouldn't get aid unless you are poor through absolutely no fault of your own." Yes, that argument has some moral force. However, pragmatically, it is hard to pull off since it requires a huge welfare bureaucracy to decide who qualifies, and the very effort to decide has a Heisenberger-like way of changing the nature of the phenomenon you are trying to evaluate. Exhibit A is our disability system, which tries to follow the principle you suggest, but ends up with massive unintended consequences (UBI vs. disability is subject of a forthcoming post.)

Thanks again, anyway. I'd love to have a live debate on this.



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COMMENTS (9 to date)
Thaomas writes:

I'd like some discussion of a quasi-UBI via a very generous EITC. This still does not get to those who cannot find work (though eliminating minimum wages would encourage entrepreneurs to find ways of productively using those will low skills) and those really unable to work.

Jake Thompson writes:

Hello professor Caplan,

I'm not entirely clear on how a UBI would encourage work through substitution effects. Disregarding the following:

-labor taxes needed to finance a UBI
-reduction in R&D, investment, business expansion/formation

The former of which may lower labor supply, but the latter of which will certainly reduce labor demand, any substitution effects would seem to make work less attractive to persons receiving a UBI. We can assume consumption to have decreasing marginal utility as it increases. Since marginal consumption from working is (implausibly) unchanged, the marginal *utility* from working would be decreased since our hypothetical agent is already consuming ~4k/year.

Could you or another reader comment? Am I mistaking the income effect for a substitution effect?

-Jake

Tracy W writes:

@Dolan: perhaps I am missing something, but you appear to only be evaluating work impacts from the point of view of the people receiving the UBI, and ignoring the impact of paying for the UBI.

Ed Dolan writes:

Jake, Tracy ask very similar questions. How would it be possible to pay for a UBI without new taxes that would have disincentive effects of their own?

The answer is that you finance the UBI by getting rid of other existing transfers that already have disincentive effects of their own. Take just one example, food stamps (SNAP). In isolation, SNAP reduces your benefits by 30 cents for each dollar you earn, a hefty tax rate. Suppose you take away SNAP, and pay out the money as an unconditional grant, regardless of earnings. The UBI has no benefit reduction rate, so you keep more of the income you earn, thus having more work incentive. That is the favorable "substitution effect" of the UBI.

The trick is to find enough existing transfers to finance the UBI at a reasonable level. My version of the proposal does that by eliminating not just conventional welfare for the poor, but also "middle class welfare" in the form of tax preferences that benefit mainly upper-middle and high income households--things like the mortgage interest deduction. Also, people who now recieve benefits like Social Security or unemployment compensation have their choice of either the UBI or their old benefit, whichever is greater, but no double-dipping. That also makes the UBI more affordable. The whole plan gives you a UBI that is incentive-enhancing but revenue neutral. Read it.

Tracy W writes:

@Dolan, your proposal has a UBI per individual of less than $4,452 a year.

I agree that if you cut the income of the poorest drastically, namely to $4,452 a year, it'll increase work incentives for that group.

And I presume the UBI advocate's response to anyone too disabled or sick to work is "sorry to hear that, sucks to be you."

Ed Dolan writes:

Right,Tracy, maybe that's up to 5k by latest calculations. Remember that's per person, but yes, low.

IMO UBI is not a silver bullet or solution to all social safety net needs, whether public or private/charitable in form. For one thing, I don't see it as feasible to include healthcare. Some people say give a big enough UBI that people could go to market and buy insurance but I see many practical problems with that. I prefer a separate healthcare safety net. Ditto UBI not much good for people with severe mental disabilities or substance abuse problems. Right now I am working on relation of UBI to disability, hope to have something out soon on that important topic.

I think it is pie-in-the-sky, and not even a good thing, to have a UBI that lets you live a comfortable middle-class life. IMO it is "extreme safety net" only. A mentally competent nonaddicted homeless person could improve his/her standard of living quite a bit with $4k until they got their act together. But there are many views on UBI.

Tracy W writes:

@Dolan:
And the moment you start adding in more programs for the disabled, you can't ignore the impact on the people paying for it.

Ed Dolan writes:

Tracy writes: "And the moment you start adding in more programs for the disabled, you can't ignore the impact on the people paying for it."

Absolutely not. The disability program as it now exists puts far too big a burden on taxpayers. It needs to be modified or replaced altogether in a way that increases work incentives. Right now the disability is, in effect, a UBI with a bizarre catch: In order to qualify, you have to promise never to work again in your whole life. You'll have to wait for my complete post on this, it's too long to explain in a comment box, but believe me, I agree with you, we need to spend less money, not more, on this program.

Tracy writes:

@Dolan: the UBI figure you gave of less than $4,500 a year is already based on turning all existing disability spending into a UBI. To quote you:


Rector and Tanner calculate that welfare spending in the United States comes to about a trillion dollars a year. Neither of them proposes using those funds for a UBI, but suppose that instead of taking the roughly $1 trillion of welfare spending and giving it all to low-income families, we were to distribute it equally to all 316 million Americans. Doing so would give each person a grant of about $3,160 a year.

If you intend to introduce a UBI,then another welfare programme on top for disability, then you're talking about higher costs and thus the importance of considering the impact on the people paying for the system.

Although I was wrong to say that "you can't ignore the impact...". You are of course right in responding to that with an "absolutely not". UBI advocates are forever ignoring the impact on the people who would be paying for this. The only reason to pay attention to both sides is intellectual honesty. And we all know that's not very binding.

You'll have to wait for my complete post on this, it's too long to explain in a comment box,

Actually I don't have to wait. I already know you'll come up with some scheme that involves either cutting the incomes of the poorest drastically, or raising taxes drastically, or, depending on how you define drastic, both.

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