Over the last couple of years, I’ve taken an interest in the rise in discussions on Universal Basic Income (UBI). It’s not often that I write about politics or economics but I wanted to compile the articles I’ve read and distill into one qualitative study on the topic to consider its attractiveness.
In case you aren’t familiar, the idea of universal basic income is to remove the various welfare benefit programmes and provide all citizens with a guaranteed monthly payment. It isn’t designed to be enough to live comfortably but should be enough to scrape by, i.e. above the poverty line. The summarised advertised benefits are simplified administration and providing dignity and a guaranteed safety net to citizens.
When considering the promise of UBI, I am aware of my bias towards liberalism and that I am more likely to be in favour of it. Before writing this, I would say that I held in my ideals that a “better” society would include some form of basic income. I realise that even the best ideals don’t necessarily work in practice. In pursuit of a more informed opinion, I’ve gathered research in order to review the evidence that is currently available on either side of the argument to understand when such a system would be appropriate, if ever.
What would cause us to need it?
By us, I’m focussing on the UK but I would think that the discussion is transferrable to other western countries. Historically, the UK is more renowned for its social support system. I understand we were once more proud of it, whereas now it is has fallen out of public favour. This is probably due to the portrayal of those that are seemingly taking advantage of the system. The US has a similar system, though it’s decidedly more conservative and puts a higher expectation on the support of the community.
Social support programmes are there to provide a safety net for those unfortunate enough to need it. At the moment, the support available often doesn’t provide enough to live on without additional income and it only provided on a temporary basis. So should we be replacing these with programmes that provide no need to find outside income? There are those that are already uncomfortable with the amount that we give. They wish to minimise the government’s involvement and control and instead encourage the community to provide support, which is a noble desire. Though, in practice, those that are in a position to provide support are not often in that close social proximity to those that need it. I would think that providing a guaranteed safety net via UBI is also an honourable desire, despite the need for government oversight, and does not detract from one’s ability to help others in need.
So what could cause our current programmes to be deemed sufficiently ineffective that they would require replacing with something such as UBI?
One instigator could be that the administrative overheads of so many complicated welfare programmes reach a point of inefficiency that there is a call for simplification. By itself, this is unlikely to incur a reform as extreme as UBI though.
A stronger trigger could be if the number of people that require welfare grows to such a significant percentage that the current programmes can’t support it. Presumably this could be “solved” be increased taxation to fund the current programmes, though it may make the costs of inefficiencies more difficult to swallow. Note that UBI would require an increase in taxation as well so this alone isn’t a reason to move to such as system but if the number of people requiring welfare trended upwards then this would beg further questions.
A factor that I believe would be important in considering the effectiveness of a welfare programme would be the number of people that are able to escape poverty and the need for support on a regular basis. If we reach a point where there is an increase in population that are claiming welfare along with a reduction in the number of people that escape the need for it then it does suggest a wider economical problem. This could be caused by such problems as mass job displacement without sufficient new opportunities that match the skills of those made redundant.
A related topic is that of social mobility, the ability of those with parents with incomes in the lower quartile able to rise to upper quartile. Freakonomics Radio did a fantastic podcast episode on the subject.
Do we need it?
After considering the events that could trigger a serious call for UBI, I think the most likely symptom to prompt a review would be mass job displacement. Administrative overheads can be tackled by consolidation or removal of programmes. An increase in the number of people needing support in the short term could be solved to a certain extent by raising taxes. Although, if the speed at which the increase occurred, through some mass economical shift in work, the current programmes are unlikely to be able to support that many for that long as they weren’t designed to.
This is just such a displacement that leaders in our industry our suggesting will be caused by artificial intelligence. The rate of progress in technology in the last century is astounding and the exponential effects of it are hard to entertain. Consider how much the workplace has changed in the last 20 years compared to the previous century. With continued progress in artificial intelligence there are numerous jobs that will become defunct. There is hope that rather than displacing jobs, it will rather allow for growth in production while retaining the same employment levels. For example, self-driving lorries could be worrying for the US given that truck driver is the most common job title but if instead of replacing them, shippers were able to increase their throughput by making each lorry driver responsible for a whole motorcade. Unfortunately, this doesn’t seem be what is happening as we are already seeing recurring news articles that suggest otherwise. We see that robots are replacing factory workers and IBM Watson is being used to replace Japanese insurance claims agents.
Estimates of the extent to which the workforce is at risk of automation ranges from 9% to 47% which is probably why it’s so difficult to know how much trouble we’re in. Another statistic, this one from the World Economic Forum, suggests that in the next four years, despite 1 million new jobs created, technology will make a further 6 million jobs defunct.
A common response to job loss is that workers should retrain and find other opportunities. This tough love approach may work on a small scale when the displaced are dispersed across locations but is unlikely to when 1000s lose their jobs and a geographic/economic area is unable absorb them into alternative positions. This is going to be even more difficult to do if it is a similar story across an entire country.
The scale of retraining is easy to under-appreciate. While there are many jobs that only humans can do, can we be ready to adapt to them? The psychological, time and cost barriers to retraining are immense. Our education system was already in dire need of update but AI may force us to re-consider prioritising other qualities above recall such as collaboration.
Even with the early signs of job displacement, I haven’t been able to find research that suggests that unemployment rates are rising dramatically. I think this is going to be the primary indicator that we should be monitoring as we employ more AI in our workplace. One thing that unemployment rates don’t show is whether those that have been displaced are being forced into lower paying positions because while robots displace blue collar workers, AI displaces white collar workers. It would be hard to identify this. You could see business owners that are profiteering from AI while average household income reduces. This is one of the reasons why there have been some suggestions of taxation on automation, most recently from Bill Gates.
While there is definitely cause for concern, and the situation could change quickly, my impression is that there isn’t sufficient evidence that UBI is needed or would be effective. As I say, we do need to keep our eyes open for the warning signs. We need to do better to understand those that are less well off than us. I believe that we need to remember that luck plays a far bigger part in our success than we give it credit. While many of us work hard, that doesn’t mean that we deserve it any more than those less fortunate than ourselves. Life is complicated.
Would it work?
Ok, so while we’re not looking to implement UBI just yet. If things do move in the direction that some fear, would it be the answer?
We have mentioned the administrative time and money savings that it would provide over the current welfare systems that are currently in place. There’s no need for a long application process, means testing and regular review. Providing a basic level of income would mean that even if someone were to lose their job, the would at the very least be financially stable which will help to protect from the downward spiral and resulting psychological damage that can occur from job loss, the struggle to find work, perhaps defaulting on their mortgage etc.
The amount that is provided as part of basic income and where the money comes from is the largest roadblock. It needs to be a large enough monthly payment that it keeps people above the poverty line but small enough to be “affordable”. The definitions of which differs between nations. The US considers the poverty line for a single person household to be $11,770 per year (add $4,160 for each additional person). In the UK, the poverty line is set at 60 percent of the median UK household income. This works out to be about £15,132 for a lone parent with 2 children. I do prefer the approach of linking payment amounts with statistics so that the amount is automatically adjusted each year. Though unsure it should be based on a percentage of median household income (particularly if that includes UBI payments!).
The funding for a UBI scheme would come from the current welfare budget, plus the savings made through administrative efficiency and the shortfall would be found through an increase to income tax. There are numerous different calculations available on how much additional money would need to be raised through tax and make no mistake it is a sizeable amount. The best piece I have read on the topic is from the World Economic Forum. However, I don’t think it’s so much a question of how much is ok and any more makes this infeasible. I think this is more of philosophical question on how much do you prioritise your own needs over the needs of those worse off than yourself. It’s high-wage earners that will be most affected from a raise in income tax so this is where the complaints will come from. These people, who are often the ones with the connections to policymakers, dislike the idea of more of their hard-earned money going to those that haven’t earned it. (These people are also likely to attribute their success to their efforts much more than their luck). Given the income inequality that we’re seeing, and given that there are indications that income above $75,000 doesn’t appear to increase happiness, I would say that higher rate of tax is appropriate. From a utilitarian aspect, the receivers of UBI would benefit much more than high-income earners would suffer from a higher tax. What’s more, it would be hard to argue that low-income workers put sufficiently less effort into their work than their high-income counterparts. From my limited economic knowledge, the trickle down economics do not work as well as intended and that “inclusive economies always outperform and outlast plutocracies”.
One important part of UBI is that it enables people to have the freedom to choose what they want to spend the money on and also what to do next for work. This is in contrast to welfare programmes that are controlling and provide credits that can only be spent with certain approved vendors. Despite fears, there have been several studies that suggest that cash transfers are effective and are not systematically abused by benefiters. It’s important to provide dignity and to respect and trust the individual’s choices. Giving people money provides them with the same access to opportunities that anyone else would have.
As Scott Santens writes, “there are a lot of people out there getting paid to do absolutely nothing. There are also a lot of people out there getting paid nothing to do everything.”. A fantastic benefit of UBI is that it goes some way to pay for the unpaid care work that is being done by hundreds of thousands. There are estimates that this is to the tune of $691m in the US which correlates to 5% of GDP.
A popular critique of UBI-style systems is that if we provide people with income every month, with no questions asked, they will choose to not work. This would undermine the programme as people would live off of the taxed efforts of workers up until a point at which the programme wouldn’t be feasible anymore. It appears to me that this argument may be valid for the means tested welfare but not UBI. There are people on benefits now that would end up with less money if they took a low paying job because they would no longer be allowed to claim benefits. This discourages those people from finding work because they could be similar or worse position for working harder. That makes sense. However, with UBI, working can only increase their household income so there isn’t a conflicting incentive to work. What’s more, one of the advertised benefits of UBI systems is it gives people the opportunity to study in order to retrain in other fields if necessary. It also gives people the opportunity to follow what they’re passionate about and make long term investments instead of finding the quickest way to get income to pay the bills, trapping them in low paying positions.
If we are still worried that people won’t work, are we suggesting that they won’t be able to find something that they’re passionate about? Then maybe we need to reconsider our school system to encourage more collaboration, exploration and following of interests over the pressure on academic results.
At the other end of the income scale, there is a suggestion that it would discourage high-earners from working harder because the increase would be taxed to pay for UBI. This is something that we experience now with higher-income tax brackets so it shouldn’t be too different. I don’t get the impression it puts off those in the higher tax bracket from earning more if given the opportunity to do so. I would imagine that the reason that they don’t accept higher-paid positions is because of other priorities than money, i.e. time with family. If it does become a problem, one way to tackle this would be to keep the tax the same for all income levels so that we could adjust to the cost. Then any increase in earnings would result in the same net pay increase regardless where you were on the scale.
Some of the positive discussion about UBI uses the reason of being able to be free from work because automation is generating value. I don’t think this is a realistic or wise pitch for such a system and it has been attacked. However much value we can get automated systems to generate, there is still going to be a need for people to work for a very long time because our thirst for economic growth will continue. What’s more, there’s a culture around it where we expect each individual to continue pulling their weight.
If we’ve got as far as this in our discussion about UBI, it would be wise to consider what research we have that validate it. Unfortunately, the answer is not much, it’s still a new area and so hasn’t received widespread testing but we do have some. There has been interest from numerous countries and Switzerland went as far as holding a referendum but it didn’t pass the vote of the people.
GiveDirectly is a charity that was set up to with the mission to use donations to fund a Universal Basic Income programme in Africa. They are very aware of the inefficiencies of other charities in the area and the corruption that can lead to very little getting through to those in need. So they set up a programme which aims to use a $30m fund to provide cash payments to people in Kenya for 12 years. They have seen fantastic initial signs with receivers investing their money so that they can create businesses that can sustain them over the longer term. An admirable feature of their approach is their attention to scientific validation. The programme goal is to be the largest randomised control experiment in history. Disclosure: I donate money monthly to GiveDirectly and so should you too! For science. If you need some further social proof, ebay founder also recently announced a $500k donation to GiveDirectly.
There are other pilots in the works from YCombinator in the US and on a municipal level in Finland, the Netherlands, India and Canada. So while there may be initial signs from related studies that cash payments can work, hopefully in the next few years we’ll have much more evidence on whether these trial schemes were successful or not.
All that being said, is it the right way forward? There are certainly attractive qualities to Universal Basic Income and hopefully soon we will have some evidence that can give us confidence one way or another about its effectiveness. Even with evidence, we still would have to persuade enough of the populate that this is the right way to spend our money. If we can’t raise enough, we could provide basic income on a non-universal basis. This would reduce the cost as it would only be provided to those beneath a certain wage bracket. There would still be some administrative effort for means testing but it would make it more affordable. The main problem I see with this is that we would retain the problem of not providing incentive for those near the basic income cap to work more or take on a higher-paid/higher value job.
In conclusion, if the meaning of life is to continue the human race, then sharing our income amongst all is a great way to do it. If it’s to enjoy life, if you already have enough money to live day to day then wouldn’t it be great to be able to give someone else the same opportunity to enjoy theirs?