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Universal Basic Income

Author(s): John Cochrane

From the Grumpy Economist:

Universal Basic Income is in the news. Charles Murray wrote a thoughtful piece in the Wall Street JournalSaturday Review. The Swiss overwhelmingly rejected a referendum -- but on a proposal quite different from Murray's.

Murray proposes that "every American citizen age 21 and older would get" $10,000 per year "deposited electronically into a bank account in monthly installments." along with essentially a $3,000 per year health insurance voucher.

The most important part of Murray's proposal: UBI completely replaces

Social Security, Medicare, Medicaid, food stamps, Supplemental Security Income, housing subsidies, welfare for single women and every other kind of welfare and social-services program, as well as agricultural subsidies and corporate welfare. 

There is a lot to commend this idea. First, it would reduce the dramatic waste in the current system:

Under my UBI plan, the entire bureaucratic apparatus of government social workers would disappear

Moreover, the bulk of government spending now does not go to people who are really poor. SSI and medicare go to old people, many of whom are quite well off. Housing subsidies such as the mortgage interest deduction go to people with big mortgages and big tax rates -- nor poor people. Murray doesn't really emphasize this point, but his proposal is far more progressive than the current transfer system. 

Second, it would reduce the very high disincentives of the current system, which traps people. 

 Under the current system, taking a job makes you ineligible for many welfare benefits or makes them subject to extremely high marginal tax rates. Under my version of the UBI, taking a job is pure profit with no downside until you reach $30,000—at which point you’re bringing home way too much ($40,000 net) to be deterred from work by the imposition of a surtax.


If I read Murray correctly, he takes away $3,500 of the benefit between $30,000 and $60,000, which is an 11.6% surtax. That applies on top of the Federal 25% marginal rate, 16% payroll tax, state income and payroll taxes and so forth. So not zero, but it is a lot less disincentive than many current programs.

Both considerations place the proposal not in the "perfect world" category, but "how can we do what we're trying to do now a lot more effectively." So, evaluate it as such.

The biggest problem in the argument is the biggest selling point: We trade a check -- even much more than $10,000 -- for complete elimination of everything else.

A UBI will do the good things I claim only if it replaces all other transfer payments and the bureaucracies that oversee them. If the guaranteed income is an add-on to the existing system, it will be as destructive as its critics fear.

There are a lot of these "big trades" on the table, and there should be more. A big carbon tax, in return for complete elimination of all the regulatory nudges and crony energy related subsidies. A VAT in return for complete elimination of income, corporate, estate, and other taxes.  Lots of infrastructure money in return for elimination of Davis-Bacon, endless legal challenges EPA reviews, and other regulations, strict cost-benefit analysis rather than subsidized anachronisms, and so on.

In all these much simpler cases, the deal doesn't get off the ground. Will the "right" allow a big enough carbon tax? Will the "left" really get rid of their subsidies? Will the "right" really allow a large enough VAT? Will the "left" really not just pile all the other taxes back on top? Making these deals is hard enough even when both sides admit the deal would be good.

That case is going to be even harder here. The "left" has not even thought about the deal, let alone agreed in principle with only trust issues remaining! The Swiss referendum [sad aside on media: it was really hard to find the actual text!] made no mention at all of a swap -- it was pure basic income on top of other social programs.

Programs will remain tempting, because a flat basic income is not close to the "perfect world" social insurance system, or even common sense. We want to give more help to people who need more help. That lets us be more generous to those who do need help, and contains moral hazard that people who don't really need help should be working and paying taxes to supply help. Social security goes to old people, because old people objectively are less able to work.  Disability goes to disabled people, because it's harder for them to work as well. Unemployment insurance goes to people who just lost jobs, we know they are more likely to have suffered a bad shock. Insurance payments go to people whose houses have burned down. 

These social insurance programs are indeed ineffective, bureaucratically bloated, and do a terrible job of picking who really needs help from who doesn't. But UBI takes a pretty extreme view that the project is completely hopeless, and the Government should do no conditioning at all, other than reported income:

Government agencies are the worst of all mechanisms for dealing with human needs. They are necessarily bound by rules applied uniformly to people who have the same problems on paper but who will respond differently to different forms of help.

Well, ok, but the call of the better world will be hard to resist, and the "left" has far from accepted that bureaucracies are "the worst" mechanism for sorting the needy from the less needy.

There will still be unfortunate people,  they will still need help, and our electorate will still demand programs to help them. Disability: Ok, it's grown  out of control, but some people really are disabled. You're only going to give them $10,000 and turn your back? What about the guy who takes his check, blows it all on a weekend of meth and beer, and now is lying in the gutter, his children homeless?

Some people will still behave irresponsibly and be in need before that deposit arrives, but the UBI will radically change the social framework within which they seek help: Everybody will know that everybody else has an income stream. It will be possible to say to the irresponsible what can’t be said now: “We won’t let you starve before you get your next deposit, but it’s time for you to get your act together. Don’t try to tell us you’re helpless, because we know you aren’t.”

He goes on to extol the virtues of private charities. I don't think our electorate is ready to completely forswear all bureaucratic help. And the vine grows back.

Eliminating housing subsidies? Agricultural subsidies? "Corporate welfare?" These are all great ideas on their own. If we could do that, our economy would be in a lot better shape than it is.

A bit of paternalism is pretty ingrained in social policies, and it isn't necessarily a bad thing. I'm happier paying taxes to support food, clothes and school for the kids, and basic housing than I am to subsidize a beer and meth weekend. Murray already gives in, by restricting the first $3,000 to a health insurance voucher. If he's going to get rid of social security, he should restrict the next $1,000 to a forced savings plan. If we're going to get rid of all housing programs (a great idea) the next $2,000 is a rent/mortgage voucher.

Some paternalism is justified as a pre-commitment. We know if they blow the money, we'll enact social programs to help them after the fact.

There is a deeper problem -- and I have a constructive solution.

In fact, Americans use far fewer benefits than they are eligible for. Many programs have 2% take up rates. Lots of people eligible for medicare, Obamacare subsidies, disability food stamps, welfare, home heating subsidies, and so on and so on all the way down to Palo Alto's income-based parking permit system don't take advantage of the benefits. If each American took advantage of every subsidy and social program to which he or she is entitled, the country would be bankrupt in about 10 minutes.

Why not? Well filling out the forms is a pain. And, more importantly, most people really do use social programs for a limited time. Call it a stubborn independence ethic or some remaining shame to taking assistance, it's there. For now. I fear that welfare states fall apart when the social stigma of taking the money fades.   

For now, both act to limit moral hazard. If it takes a few hours and trips down to an unpleasant bureaucracy to get help, then only people who really need it are likely to ask. If there is some remaining social stigma to getting help, then only people who really need it are likely to ask -- and likely to get out as fast as possible.

Before I get howls of comments on how heartless this view is, remember the objective -- money is limited, we want to use it to help people who really need it, and if we can do something to keep out people who don't, we can be a lot more generous to those who do. If we impose some cost on people to get help, we get them to reveal who really needs it, and we can help them a lot more.

So, my major suggestion -- please, don't automatically send the check to every American the minute they turn 21! Don't send it to my kids! At least, make people go down to a dull and dirty office, stand in line, fill out a long form, and repeat once a year. 

Murray limits the benefit once you get to $30,000 per year, introducing a surtax above that level. I've been mulling over a different way to limit benefits and thereby make them more generous: Limit by time, not by income. You can have an additional (say) $10,000 per year, for 5 years, at any point in your life. Most people using social programs do in fact use them to get out of trouble and back on track. Let's make that the expectation. This is not permanent income support, this is help to get out of trouble.  That lets us be more generous, without blowing the budget, and without inducing as large a marginal tax rate to working.

Murray has a lot of speculation on how society will adapt to $10,000 per year check and NO other social programs.

the entire bureaucratic apparatus of government social workers would disappear, but Americans would still possess their historic sympathy and social concern. And the wealth in private hands would be greater than ever before. It is no pipe dream to imagine the restoration, on an unprecedented scale, of a great American tradition of voluntary efforts to meet human needs. 

Trust private charity, with an ever-larger share of income in plutocratic hands? I don't see Bernie Sanders supporters signing on to the deal on that basis.

The known presence of an income stream would transform a wide range of social and personal interactions. The unemployed guy living with his girlfriend will be told that he has to start paying part of the rent or move out, changing the dynamics of their relationship for the better. The guy who does have a low-income job can think about marriage differently if his new family’s income will be at least $35,000 a year instead of just his own earned $15,000.
Or consider the unemployed young man who fathers a child.

Maybe. Maybe not. We do have some experience with corners of societies that live off government checks. We have more experience with places where lots of people don't work. Welfare neighborhoods in the 70s to mid-90s. Europeans living on the dole. Molenbeek. Saudi Arabia. By and large, places where most people live on government checks or large numbers don't work are not happy places.

One can also speculate in contrary ways. Labor markets are more and more regulated and restricted. Well, if people can all get $10,000 from the government, why fight for lower minimum wages for entry level workers, looser occupational restrictions, and so forth?

Murray also confuses the issue, and substantially weakens the case, I think, by wandering off into a soliloquy on once robots do everything there won't be any more jobs.

We are approaching a labor market in which entire trades and professions will be mere shadows of what they once were... the jobs (now numbering 4 million) that taxi drivers and truck drivers will lose when driverless vehicles take over... Advances in 3-D printing and “contour craft” technology will put at risk the jobs of many of the 14 million people now employed in production and construction...The list goes on, and it also includes millions of white-collar jobs formerly thought to be safe..
... as many as 47% of American jobs are at risk...it will need to be possible, within a few decades, for a life well lived in the U.S. not to involve a job as traditionally defined.  

I think this is wrong. Murray acknowledges

I’m familiar with the retort: People have been worried about technology destroying jobs since the Luddites, and they have always been wrong.


Indeed they have. The invention of the tractor was way worse than the invention of the self-driving car for the jobs of about 70% of Americans and about 99% of everybody else at the turn of the 20th century -- farm labor. Murray writes

 It takes a better imagination than mine to come up with new blue-collar occupations that will replace more than a fraction of the jobs..

It's a good thing that every time in the past we did not rely on policy writers' imaginations to come up with occupations for people. I think the answer is pretty clear: services. When robots make everything for us, then people make money supplying services to each other.

But I don't have to be right either.  The deeper problem with this line of argument, common on the left, is how utterly hopeless it is, and how it contradicts Murray's case.

Hopeless: Really? Your vision for the future is that 47% of working-age Americans will be living on a $10,000 per year check from the government, doing nothing? $10,000 is not a lot of money, barely sustaining a life on the margins in pockets of poor rural america. It buys a used trailer and a six pack of beer in a place with little hope. 

We can do better than that! And we can. We're talking about a several decade shift in the labor force here. If services are the answer, we need to fix schools and other barriers that keep people from getting the skills needed to earn money in the service economy. We need to fix labor markets to make it easier to hire people in flexible ways and help them to develop skills on the job.

Contradictory: Murray's numbers work out (I think, I haven't checked, but it seems plausible) in today's America. But if half our labor force, and all our retired or non-working people, are living off a government check, the cost would explode past what the country could possibly support with any level of taxation.

So set this apart, recognize that adapting to automation will require getting people skills not sending them checks. And that is going to mean keeping the price system alive. It has to be crystal clear that computer programming pays more than goof off majors.

Bottom line, most of the Murray's social changes and adaptation to robot workforce is, I think, a mistake and a distraction.

A Big Deal -- along with the others -- remains attractive: Substantial cash grants and vouchers in place of many current programs -- could offer substantially more help to people who need it, with far fewer distortions.  In place of middle class subsidies -- housing, college, etc. -- and corporate subsidies even better.  But let's not pretend it will cure social ills, or save us from confronting labor market distortions.


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