Perspective on ‘A Basic Income for Everyone is Not Affordable’ – Part 2

This blog-post is a continuation to the posts


Top Economist says: “Universal Basic Income is Not Affordable”
Perspective on ‘A Basic Income for Everyone is Not Affordable’ – Part 1

Read them first for context.


In this blog I’d like to conduct the thought experiment of playing out the assumption that a basic income can be provided to everyone unconditionally – to then see what possible problems might occur and assess: if it is affordable – is it do-able?

First point to consider here is that to organize such a money stream – you’ll quite likely have to use income taxes as a source of funding. And that’s where I foresee possible problems. Income taxes today are a touchy subject, because everyone feels they have earned their income. If part of it is let go of and allocated towards ‘the common good’ – that’s cool, so long as people feel that it is justified. Considering the basic income as one of the expenses, where a person will now receive this income regardless of how much they work – you’ll most probably run into resistance and if it were to be established – resentment towards those who choose to simply live off a basic income. Sure – everyone will receive it, so even if one works and part of one’s salary goes towards funding a universal income, one will equally be paid out a basic income. For some that may mean receiving back more than what one paid in taxes. But for others, it will square out or they’ll still pay more taxes than the basic income amount. Inevitably this will lead to resentment, because we’ve for decades lived within the paradigm that money is something you should earn. So – for some to pay for others’ income entirely – no strings attached – may be easier in theory than in practice. So – yes, the numbers may work out, but that doesn’t mean you’ll receive the approval of the majority and get a green light to manifest a universal basic income system.

When it comes to income taxes and resentment, consider the current state of the welfare state – the complicated rules, the intricate web of conditions to qualify – the conditions set to ensure a person ‘deserves’ the support given. This complexity didn’t come falling out of the sky – it exists because people demanded it to be so. Although the ideas of unconditionally giving money to everyone and of giving up a part of one’s income to realize such a situation are noble ones – it’s worth asking the question if we as a society live up to that nobility. Herein a follow-up question could be: and if we do provide an unconditional basic income funded through income taxes – what is to say we will not end up right where we started, with ever increasing demands placed on those who do not ‘contribute’ to society in the conventional way of taking up employment and in one way or another being part of the national economy?

Apart from resentment, we have to also consider the dimension of what effect funding an unconditional universal basic income will have on employment. Herein I’m not referring to what effect it will have to create a support structure within which anyone will be guaranteed an income regardless of work efforts and whether that will induce people to simply stop working. Rather – I’m looking at the ‘message’ that is sent out by taxing the incomes of those who work, from the perspective of it being interpreted or having the same effect as punitive measures. For instance, in basic income experiments, the effect on unemployment was negligible or only significant in relation to certain individuals, such as youngsters, students and mothers – where it can be argued that this is not such a bad thing – they will be able to focus on other activities, such as educating themselves or raising their children, which will have long term benefits for society and the economy as a whole. But within those experiments, only the ‘receiving’ aspect of a basic income was tested – the ‘giving’ aspect of a basic income was not. Within the experiments, money was made available by governments or organizations and the effects of receiving the income were observed. What didn’t happen, was taking a small village or town that was approximately representative of the national population and taxing incomes in that village in such a way as to generate enough funds to redistribute it equally among everyone, where the amount given to each one is sufficient to live off of. In that scenario, one might have observed a greater shift from employment to unemployment, simply to be on the side of those that ‘benefit’ rather than those who work and pay for others to benefit.  It is this effect on unemployment that Paul De Grauwe was referring to in his article.

I’ll continue in my next post.

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Perspective on ‘A Basic Income for Everyone is Not Affordable’ – Part 1

In my previous post I shared an article by Belgian economist Paul De Grauwe who came to the conclusion that a basic income would only work if it were limited by giving it to those who need it, rather than providing it to everyone unconditionally.

The article raised some eyebrows, but more importantly, generated cool discussion. The universal basic income concept is only one of the many basic income ideas that are suggested, discussed and promoted around the world. Ideas and concepts differ in name, in scope, in amount, in funding method, etc. – but all have the same goal in sight: to eradicate poverty, to stimulate economic growth and to secure human rights.

The Living Income Guaranteed proposal is one of these particular concepts or ideas. One of the points that sets it apart from other proposals is that it doesn’t suggest to provide a basic/living income to everyone unconditionally. Herein, I’d like to place the article by Paul De Grauwe into more perspective – or rather, the publishing of the article – I will not presume to speak in his name.

But firstly, keep in mind that the Living Income Guaranteed Proposal is not ‘against’ providing everyone with a basic income.  The consideration here is the affordability within doing so – and where affordability is theoretically possible, is it also practically feasible? The basis for the argument of universality is often found within the idea that everyone has a basic right to life, therefore everyone should receive enough money to live off. Sure, sounds good, but then we also have to consider that within the current economic model, many are able to satisfy this right for themselves adequately without the need for a supplementary income. Two other, perhaps more significant arguments, play a role within advocating unconditionality. The first consideration being the reduction of the labor force and the strengthening of the unemployment trap. If one receives a basic/living income without having to lift a finger – what is then the motivation to invest in education, develop skills and take up employment? The effects of providing a basic/living income to only those who need it then takes on an unintended punitive dimension to those who do work. Unfortunately – we have defined ‘receiving something’ as a ‘reward’ and ‘not receiving something when another does’ as a ‘punishment’. Providing a basic/living income to everyone is one way to prevent these adverse effects. The second consideration is the cost of administration. With everyone receiving a living/basic income – a check is written out to every adult citizen in the country, and that’s that – there is no bureaucratic lump-slump that is cost and time inefficient.

The Living Income Guaranteed proposal has a different suggestion to mitigate the adverse effects on employment. Rather than providing everyone with a living/basic income, the suggestions is to set the minimum wage at double the living income. Setting these conditions within the labor market makes employment attractive, because even in the lowest-paying job, one will be far better off than when living on a basic/living income.
Administration would still be simplistic as the proposal suggests, especially at on-set, to stick to providing a living income to those who are unemployed or retired. In other words – those who would usually receive ‘unemployment benefits’ or ‘pensions’ would instead receive a living income. Herein there are no strings attached from the perspective that there is no expectation that a living income recipient should find employment soon. Working/not working becomes a personal choice, but a choice that entails the consideration that when one is not economically productive, it is reflected in one’s income.

So – before looking at the affordability of a universal basic income, it is worthwhile to remember that: even if it is not affordable (in practical terms), that’s okay too – the same goals can be achieved in different ways.

In my next post I’ll lay out some concerns in relation to funding a universal basic income through tax revenue.

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Top Economist says: “Universal Basic Income is Not Affordable”

This is an article by Paul De Grauwe translated from Dutch.

You can find the original article here: http://www.demorgen.be/opinie/een-universeel-basisinkomen-kan-nooit-van-de-grond-komen-a2166604/25mXp2/

A Universal Basic Income Will Never Happen

Top economist Paul De Grauwe, professor at the London School of Economics, writes weekly about people, the world, the economy.
30 December 2014

The idea to provide everyone with a basic income exerts a strong intellectual appeal towards both the left and right side of the political spectrum. The appeal for left is that a universal basic income that is sufficiently high can ban poverty. For the right, a universal basic income is popular because it will remove the unemployment trap. In the current system of unemployment benefits, the unemployed lose their benefits upon finding a job. That discourages the search for a job. This shortcoming disappears with a universal basic income. Because in that system, the unemployed retain their basic income after finding a job.

Affordability

With such broad support you would expect that the universal basic income is already a reality. But that is obviously not the case. And that has everything to do with its affordability. Due to the fact that in such a system everyone, both rich and poor, working and non-working, receive the same basic income, the government requires to organize a massive money stream.

A numerical example: Suppose that the universal basic income is 1000 EUR per month (which is not that much if it is intended to ban poverty entirely) and that the basic income is given to all adult Belgians. This would mean that government expenses would increase by 100 billion, or 25 percent of GDP.

The universal basic income of course makes it possible to save on large portions of social security. Unemployment benefits and benefits for illness can be scratched; we could also save on pensions. But an important part of social security is not dropped. For instance, health care, child support and the portion of pensions above 1000 EUR remain.

Andreas Tirez from the think-tank Liberales has done an interesting exercise on the subject. He came to the conclusion that after deducing the savings on social security that would become possible through the basic income, there is still a shortage of about 35 billion EUR. That is about 9% of GDP.

It then also means that, after the introduction of the basic income, tax revenue would have to increase by 35 billion. The total tax burden that now represents about 51% of GDP, will need to increase to 60% of GDP.

Weakening work incentives

One can argue over these numbers. Do they overestimate or underestimate the costs of a universal basic income? The reality will not be far off in my opinion.

A universal basic income that has the ambition to ban poverty from the world, is then immensely expensive. That doesn’t need to surprise you. To give the poor (a minority in society) a basic income, you have to also provide a basic income to the large majority that doesn’t need it. This leads to new problems. The working majority receives a basic income that stands loose from labor efforts, but will have to pay extra taxes (and not a small amount) on their labor incomes. And that is the best way to weaken work incentives.

Conclusion: The only realistic system is one where the basic income is limited to those who need it. A universal basic income will never happen.

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