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How About a Universal Basic Income?

The idea of a universal basic income is gaining popularity in the U.S. and elsewhere.
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Last week, Reuters reported that Finland is considering an experimental pilot program to replace part of its social safety net with a universal basic income (UBI). Advocates hope the program will cut costs, simplify the country’s bureaucracy, and encourage people to take on lower-paid or part-time work. Finland is not alone. The Swiss will vote on a UBI referendum in June, and other European countries are also flirting with the concept. Perhaps most surprisingly, the idea of granting all citizens a guaranteed income sufficient to meet their basic needs has also gained some high-profile advocates in the United States—libertarians, conservatives, and Silicon Valley billionaires have all expressed support for a UBI over the last few years.

The U.S. is currently grappling with some major economic challenges. Globalization and automation have fundamentally changed the structure of the American economy, and it’s not clear if the new labor market will ever generate enough well-paid, middle-class jobs to make up for those that have been lost. Wages are stagnant, upper-tail inequality has reached astronomical levels, and millions of the poorest Americans are living on less than $2 a day.

The UBI represents a solution to some of these problems — everyone, rich or poor, employed or unemployed, gets an income sufficient to meet their basic needs (though, in practice, the wealthy would pay more in taxes than their UBI benefit, so the primary beneficiaries of such a policy are the poor). If someone’s job is outsourced to Mexico, he’s got a fallback. If driverless trucks eliminate one of the last professions that offers a reliable middle-class wage for high school graduates, the displaced could use their UBI to support themselves while they re-train as computer coders, or to supplement their wages if they land a lower-paid job. For single parents raising young kids, they finally receive a living wage for doing so.

Even free-market libertarians love the UBI—it eliminates government bureaucracy, reduces some of the employment disincentives built into current social safety net programs, and is less market-distorting than, for example, minimum wage laws. It might also increase workers’ bargaining power, which has been sorely depleted in recent decades, and enable people to go back to school. Here’s what Matt Zwolinsky had to say about the UBI in a 2014 article in Cato Unbound:

Not only does the U.S. welfare state spend a lot; it spends it badly. Poor Americans receiving assistance face a bewildering variety of phase-outs and benefit cliffs that combine to create extremely high effective marginal tax rates on their labor. As a result, poor families often find that working more (or having a second adult work) simply doesn’t pay. And still, despite massive expenditures by the welfare state, some 16% of Americans are left living in poverty.

Wouldn’t it be better just to scrap the whole system and write the poor a check?

Of course, the U.S. already kind of does this, for one demographic: It’s called Social Security. But in general, the U.S. isn’t really a big fan of giving poor people cash with no strings attached. Since the 1960s, government transfers to the poor have shifted dramatically to either in-kind transfers or cash transfers that come with strict employment requirements. The government provides housing vouchers (that can only be used for housing), food stamps (that can only be used for food), child-care credits (that can only be used for child care), Temporary Assistance for Needy Families benefits (that are time-limited and require recipients to be working or searching for a job), or Earned Income Tax Credit benefits (that are only provided to people who are working).

At the root of this policy shift is a strongly held belief among people across the political spectrum that the poor just can’t be trusted with cash. Michael Strain, a scholar at the American Enterprise Institute, a conservative think tank, laid out this argument in an op-ed published in the Washington Post earlier this week: “If we take money from John to give to Matthew, who would starve without it, then we owe it to John to make sure that his money is appropriately spent on Matthew’s food and shelter, not on Matthew’s alcohol and gambling,” Strain writes. “And surely there are a lot of Matthews out there who, if given the chance, would spend John’s money on alcohol and gambling.”

In recent years, however, it has become increasingly clear that there actually aren’t “a lot of Matthews out there,” and that the poor are, in fact, perfectly capable of making responsible decisions about how to spend their money. In a working paper released last fall by the National Bureau of Economic Research, a team of researchers studied what happened to a group of Native American children whose families received an unexpected and significant increase in their annual income, thanks to a cash benefit from a casino built on their tribe’s reservation. The families who received the benefit, which amounted to an increase in annual income of about 20 percent, thrived. Researchers found that the money improved relationships between spouses, and between parents and children. Parents drank less, children exhibited lower rates of emotional and behavioral health issues, and some families even moved to better neighborhoods (a surefire way to boost a child’s life prospects). The researchers concluded that their work demonstrated “large beneficial effects of improved household financial well-being on children’s emotional and behavioral health and positive personality trait development.”

These findings are consistent with a large body of research from developing countries, where cash transfer programs are all the rage. Time and again, researchers have found that cash grants to the poor in developing countries do not, in fact, discourage work, and are not squandered on alcohol or cigarettes. In fact, those grants are frequently invested in education or family businesses that can increase long-term earnings and economic stability. In an article published last fall in Foreign Affairs, the development economists Michael Faye, Paul Niehaus, and Chris Blattman summarized the evidence on cash-transfer programs:

In an assessment of cash transfers, World Bank President Jim Kim has said that “the results have been astounding.” The United Kingdom’s Department for International Development convened a panel, in which two of us participated, to study the use of cash in humanitarian contexts. The panel’s top recommendation: “Give more unconditional cash transfers.” Another was to “systematically analyze and benchmark other humanitarian responses against cash.” In fact, the 2015 Conservative Party Manifesto itself includes a commitment to “help people in the UK give or lend money directly to individuals and entrepreneurs around the world.”

There are plenty of valid reasons not to support a UBI. If the benefit is too high, for example, no one will want to work at all, and it does leave children more vulnerable to their parents’ financial mismanagement. But the persistent paternalistic belief that most of the poor are irresponsible deadbeats who, if left unsupervised, will waste all their money on booze and slot machines is increasingly contradicted by the evidence.