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Wednesday, October 18, 2017

Why Universal Basic Income Is a Pipe Dream

There are so many better ways to help people out of poverty.

One future-related proposal getting a lot of attention nowadays is the Universal Basic Income. The idea is to give everybody some money every month — typically something like $1,000 a month. That is not enough for everybody to live luxuriously, but enough for everybody to get by without needing to work.

Supporters say it’s needed because the robots will take all the jobs, plus they hope it will raise entrepreneurship. While others say robots are a false alarm, that we’ll have a surplus of jobs so why pay people trillions to sit on the couch and refuse to work. It’s a big topic, but today I’ll sketch out some of the debate.

There are really two big trends at work here. One is a desire to hand out free money, either because you’re altruistic or because you’re buying votes.

This has been politically popular for a very long time. For example, the Roman Empire gave free bread to people in Rome, to go along with the state-sponsored Circuses. 19th-century socialists talked of a “social dividend” — the idea was the state would seize and redistribute wealth. Song Dynasty China a thousand years ago handed out subsidized loans and price controls to peasants, destroying the economy in a desire to help the poor.

Handing out free money becomes more viable when a society gets rich — it’s not so painful to carve off a couple percent of GDP. And this will be true whether, again, the motivation is altruism or old-fashioned vote-buying.

The second long-running concern involved in the UBI debate is the idea that machines will take all the jobs. This has been a theme since at least the 1700’s, long before Ned Ludd started smashing machines in 1779, inspiring his “Luddites.”

And the argument has been popular even as centuries have now shown that automation doesn’t kill jobs, it changes jobs. Incidentally, it makes those jobs pay much more than they ever did. Still, it seems that robots and AI uniquely capture the imagination and convince people that somehow “this time it’s different.”

First off, what, specifically, is the Universal Basic Income proposal? The most common is something like give every adult $1,000 per month, maybe $500 extra for each child. In other words, enough to provide some minimum lifestyle — for an individual, $1,000 per month would put you at about the bottom 9% — not luxurious by any means.

$3.6 Trillion Per Year

Now, how expensive would this be? To get an idea of scale, in the US today we have about 260 million adults and 65 million under-18’s, so this would cost something like $3.6 trillion per year. That would take roughly doubling the current federal budget, and note that we already borrow $500 billion today of what the feds spend. So to cover a UBI you’d have to double the federal take and still borrow a trillion dollars to cover it.

$3.6 trillion is a lot of money, and people don’t end up very rich — right at the poverty line. So why do it? There are three common arguments: first, that UBI would make people more entrepreneurial. Second that UBI can replace our current welfare system. And third is more of a fear, that robots will take all the jobs.

I want to address the entrepreneurship and welfare points. I’ll save the robots since that gets a lot deeper into how economies fundamentally work.

Claim: UBI Will Allow People To Be More Entrepreneurial

Starting with the entrepreneurial argument, the idea is that if people’s basic needs are covered they can take risks. Of course, the UBI is too small to provide actual entrepreneurial capital — you’re not going to be able to build a serious business with it. So the asset in question here is time and effort — sweat equity.

Now, note that even a full-time job only occupies about 40 hours per week — that leaves you early mornings, evenings, weekends, holidays — nearly a third of your days not going to work. In other words, even full-time workers already have 2/3 of their time off — 80-odd hours.

If they were champing at the bit to start a business, they can do it now. Indeed, not only do they have that spare time, they have an actual salary. They’ve even got the money to invest in the business.

Logically, we might be surprised if going from mostly unemployed with a nice salary to fully unemployed with only survival money sparks some entrepreneurial jump.

How Do Unemployed People Actually Spend Their Time?

That’s logic, what about the real world? Well, there’s a rush on to do pilot UBI’s, but thankfully we have many natural experiments of what happens when you give people free money. And the answer is pretty much what you expect; they sit on the couch.

A bit of data so nobody accuses me of being cynical about humanity’s work ethic. In 2009 the New York Times put out a survey of how Americans use their time. People with paid jobs spend 5 hours a day working — about 35 hours a week (remember, holidays and vacations are going to make that under 40 hours).

Meanwhile, people who are unemployed — meaning they don’t have a job but they want a job — spend 0.5 hours a day actually looking for a job. 10% of the extra time. While they spend the other 4.5 hours a day watching TV, napping, chatting with friends, and surfing the internet.

Leisure is preferred to work. In other words, the average marginally employable person — the specific group we’re trying to help with UBI — does pretty much exactly what you’d expect if they don’t have to work — they sit on the couch.

Keep in mind unemployment benefits don’t last forever, so even that 10% of time spent looking for work might not happen under a UBI, because it’s permanent. It’s free money forever. So we’re talking, I guess, something north of 95% lost work effort goes directly into the couch.

Now, I’m not trashing unemployed people — indeed, I’m precisely arguing that everybody, employed or not, is fundamentally pretty lazy. A UBI will inspire people of all walks of life to spend their day on the couch.

This is a core economics assumption, by the way — leisure is preferred to work. Indeed, I’d argue there’s a kind of odd magical thinking going on here by UBI advocates, that somehow if you give free money to people they somehow become enlightened and do the exact opposite of what we already know people do with free money.

Natural Experiments of Unconditional Cash Gifts

Okay, so what do we know? What are some of these natural experiments? Well, they include pensions and social security — which kick in at a given age, in the US traditionally 65, disability payments, subsidized loans to college students, and existing welfare payments today, from subsidized rent, free food, lump-sum cash payments, in-kind payments, and conditional payments like unemployment benefits.

Unemployment benefits are actually a nice natural experiment here — studies have found that if benefits last longer, people simply stay unemployed longer. In other words, free money simply encourages people not to work.

In none of these do we see a big jump in entrepreneurship. Indeed, when I went hunting for startup rates among seniors — a group that receives a basic income in many countries today — most countries don’t even collect statistics because entrepreneurship drops off a cliff.

The Kauffman Foundation does a periodic survey and records a steady 0.35% entrepreneurship rate from 35 to 64 — in other words, people start just as many businesses as they get older. They don’t get “tired out.” Until age 65, that is, when Kauffman doesn’t even bother reporting the number.

So the entrepreneurial claim involves quite a bit of magical thinking. Similarly, a study by the Information Technology and Innovation Foundation breathlessly studies innovation among older folks, but when they get to age 65 they simply note that “Innovation seems to decline sharply after 65, the median expected retirement age of the American workforce.”

Finally, BLS tallies up labor force participation for over-65’s, which comes out to 8% working full-time and another 7% working part-time. This compares to 63% of the general population under age 65.

It’s hard to avoid the obvious conclusion that a basic income does not spark some huge jump in entrepreneurship. If you’re giving people a million in financing then we can talk, but obviously, that would be very expensive. A basic living stipend does what you’d expect it would do — takes the pressure off to do anything besides enjoy more leisure.

Now, these are government programs; we’ve got many more natural experiments in person-to-person handouts. For example, people who live in their parents’ basement or whose parents pay their credit cards, people who inherit young or get a trust-fund, lottery winners, Indian Casino payments that give dividends to all tribe members, Saudi Arabia’s payments so people don’t have to work.

And the common thread is people do not have an epiphany and suddenly get entrepreneurial. Kids who live in Dad’s basement do, once again, pretty much what you’d expect.

So the entrepreneurial claim, I’d argue, involves quite a bit of magical thinking given the many, many natural experiments we have.

UBI As Welfare Replacement

The second Universal Basic Income argument I want to address here is the welfare replacement argument. The idea is that traditional welfare discourages work, so replacing it with a UBI fixes that problem.

This is obviously a good thing, removing poverty traps, but again I’d argue this contains a very strong dose of magical thinking. To illustrate, let’s say today you’re getting $1,000 a month on welfare doing nothing, while a minimum wage job at 40 hours per week would pay $1,247 a month. If the job makes you lose your benefits, you only earn $247 more for 173 hours of work — $1.44 per hour. You’d have to be crazy to take that job.

This, by the way, is a long-standing critique of welfare in general, called the “poverty trap.” And economists on both left and right try to figure out ways to reduce the problem — the most popular technique is removing benefits only gradually, so the “steps” in benefit loss aren’t so dramatic.

Anyway, the idea on UBI is that there’s no “poverty trap” at all — you can take the job and keep your benefits. Now, this is obviously a good thing, removing poverty traps, but again I’d argue this contains a very strong dose of magical thinking. That what’s most likely to happen is the poverty trap remains, with a UBI tossed on top of it.

Broken Promises On the Poverty Trap

Why so cynical? Because we’ve been here before. The 1975 Earned Income Tax Credit (EITC) was sold as a kind of “negative income tax” that instead of taxing the poor, tops-up their wages.

So you earn 8 bucks an hour, the EITC tops that up with government payments to 12 or 16 bucks, depending on family size. It’s the kind of poverty program economists like and, indeed, today the EITC hands out $50 billion a year topping up wages of low-income workers.

The UBI is just about the worst targeted poverty-reduction policy imaginable. Alas, that $50 billion got tossed on the pile along with existing welfare and nothing was repealed. So the poverty trap remained — you still lose your benefits if you take a job. The welfare lobby swallowed the $50 billion without blinking and kept on pushing for the exact same programs as before.

Given this history, it would be naive to think Universal Basic Income will replace any welfare at all. At best, it becomes 5 or 10% cheaper by replacing dollar-for-dollar current welfare spending, but like the EITC it just goes on the welfare pile. In which case we keep the poverty trap in all its horrific glory, but now we’ve piled on $3.6 trillion in new taxes that disincentivize both work and disincentivize employers to create the jobs that are supposed to pull people out of poverty in the first place.

Now, I think most of us agree there are people who need help, and that charity should be much better targeted than it is today — welfare programs often fail to help the people truly in need, and instead sometimes give money to people who don’t need it.

The UBI is just about the worst targeted poverty-reduction policy imaginable — handing the same amount of money to everybody from Bill Gates on down. You’re essentially using a fire hose to water a flower.

Considering the $3.6 trillion running through that hose cost likely millions of real jobs to collect in the first place — jobs-creators have to find the $3.6 trillion somewhere — the better metaphor may be if your fire hose actually killed the flower you paid so much to water.

Hate Poverty? Deregulate.

This doesn’t mean give up on the poor. What it does mean is smarter welfare. Namely, we get far better targeting by simply deregulating, both business and consumption.

Many jobs done by the poor are burdened by government regulations. What I mean by deregulating consumption is that, for example, even wealthy Silicon Valley has increasing numbers of people living in tents or vans because housing regulations are written against the poor.

If you were to simply permit smaller apartments, zoning for tiny houses, re-legalizing boarding houses, or permitting taller apartment buildings, all of these ideas are a lot cheaper than $3.6 trillion.

Alternatively, many jobs done by the poor are burdened by government regulations — hair-braiding, dog-walking, road-side vendors, freelance lawn-mowing.

Repealing these regulations often won’t cost a thing, and is far better targeted to increase entrepreneurship and to break the poverty trap than tossing trillions out of helicopters, trillions raised by taxing those very small businesses. So the question isn’t whether we want to help the poor or unfortunate. Rather, the question is whether a UBI kills the very golden goose that all of us, especially the poor, rely on to survive.

Reprinted from Medium

  • Peter St. Onge is an assistant professor at Taiwan's Fengjia University College of Business. He blogs at Profits of ChaosFor more videos and articles like this, subscribe And if you’d like to see more on future topics like this please consider donating at Patreon.