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Why the Guardian is wrong on UBI

Gareth MorganTax and WelfareLeave a Comment

Even in Finland, universal basic income is too good to be true

Declan Gaffney, Guardian Newspaper 10 December 2015

With rebuttal by Gareth Morgan

Finland is not planning to scrap its existing benefit system and give everyone an unconditional grant of €800 a month – contrary to what some recent headlines may have told you.

What it is planning promises to be an interesting policy experiment involving a sample of the population, which may or may not include some form of basic income paid to all participants: which in turn may not be unconditional, and may be worth a lot less than €800. Still the general excitement was testimony to widespread interest in the basic income idea.

That idea has been around for a very long time (at least since the aftermath of the first world war), attracting support from both left and right. Versions have been supported by economists as divergent as Friedrich Hayek (who inspired Margaret Thatcher) and Tony Atkinson (who didn’t). Another variant was part of the Green party’s general election manifesto.

Perhaps the most widely advocated version is the proposal for a UBI – unconditional basic income – to replace most existing social security benefits. A UBI is an income provided without conditions to every adult and child (or, in some versions, only citizens) to provide at least a subsistence level of resources. It is not means-tested, although it is subject to income tax. It is usually assumed to provide an equal payment to everyone, with a special rate for children.

The idea of replacing benefits and tax credits with UBI has huge intuitive appeal. No means-testing of benefits, and thus no families stuck in poverty traps where benefit withdrawal erodes any increase in earnings. No out-of-work claimants afraid to take up short-term job offers for fear of losing benefit entitlement. No intrusive testing of benefit eligibility, no punitive sanctions regime, no jobcentre advisers hassling people to apply for the lowest-paid jobs. No fraud and no gaming the system. Most of the bureaucracy of the welfare system swept away. And the possibility for everyone to take time out of employment as and when they want to and for as long as they want to, answerable to no one.

If this all sounds too good to be true, that’s because it is. To be clear, it needs to be said that some of the more obvious objections to UBI are misplaced. The argument that it is “too expensive”, for example, makes no sense given that UBI is a scheme of income redistribution where gains and losses across the population add up to zero.

This is the point I make all the time, it is a redistributive transfer, it is not a cost to government. Rather it’s a cost to some people and a benefit to others, the net cost is zero.

The same applies to the objection that UBI is politically impossible to deliver: a lot of policy proposals have been politically impossible right up to the time a government implemented them.

But on the journey from initial concept to practical implementation UBI encounters a host of problems, most of which can be encapsulated in a single criticism: it promises a division of labour between government and market that is neither feasible nor desirable, in which the government’s role in ensuring economic security is to redistribute income and then stand back.

To do otherwise is to propose that a government can define eligibility criteria with sufficient acuity to effectively pick those “losers” who are blameless and correct their predicament via corrective incentives. Why should government be good at this when we generally accept that they are not in running businesses for example, that market forces are superior? It’s a selective logic.

Also, the UBI does not preclude the government having a whole host of interventions in labour markets that impact on economic security. These regulations are designed to equalise bargaining power, ensure safe working conditions (in the broadest sense) and give access to those excluded on the grounds of race or health for example. Labour market regulations exist in every developed economy so in no sense does any government in a developed country ‘stand back’ from this market. The UBI would not alter this fact. These interventions impact significantly on individual and family economic security.

This might work in a world of perfect markets inhabited by perfectly rational individuals with perfect foresight and perfect mobility. But that is not a world we live in or will ever live in, and adapting UBI to a more realistic universe undoes most of the advantages claimed for it. We can see this by looking in turn at UBI’s main selling points: no conditionality, no means-testing and equal payments to all.

The current UK government’s punitive sanctions regime makes the idea of unconditional benefits attractive. However, conditionality does not need to take such a severe form, and the risk that unconditional payments would encourage some people to drift into long-term worklessness can’t be discounted.

This depends on the level the UBI is set – it cannot be so high as to be aspirational, but shouldn’t be so low that people with insufficient choices cannot improve their position. To claim that the only socially valuable way someone can spend time is to do market work is weak. Working for the community, looking after dependents, environmental work, cultural education (preserving arts and crafts), art and innovation all contribute enormously to society.

The question is whether having the right financial incentives, as promised by UBI, is enough to prevent this happening.

A world of perfect markets inhabited by perfectly rational individuals is not a world we live in or will ever live in.

Single parents in the UK offer a test case, as up to 2008 they were effectively in receipt of something very like an UBI, when not in employment. They had no obligation to actively seek work while tax credits ensured that most would be significantly better off in work. Employment rates had increased since the 1990s in response to improved incentives but remained relatively low, and from 2008 obligations to look for work were imposed. By 2014 the employment rate outside London had risen from 57% to 61%. In London the increase was dramatic from a lower baseline: from 45% to 57%.

Sure – if you tell someone they will starve unless they are in paid work, they will seek it – either by legal or illegal means. This is a red herring.

This example merely shows that if the State wants to force people to act against the own interests using starvation as the stick it can.

This is also just one part of society – different groups react to the UBI in different ways. We know from a previous UBI experiment in Manitoba in the 1970s that the main reason fewer hours were worked was that male students stayed in school longer – they no longer had to help support their family – and mothers stayed at home longer with newborns. These were both responses which benefitted society and ultimately GDP. Levels of adult and child health rose dramatically and stayed high, meaning worker productivity and the number of hours worked rose. Usually when beneficiaries work they lose their benefit but the UBI removes this disincentive. As a result we expect the net impact on employment to be minimal.

The lesson is that incentives matter (as shown by the rise in employment prior to 2008) – but in the absence of conditionality, some parents who would otherwise have been working remained out of the labour market. Even allowing for the fact that many parents moved into low-paid part-time work, it is hard not to see the change since 2008 as on balance an improvement. By not having conditionality in place and relying solely on incentives, the system prior to 2008 led to more children living in workless households, a situation associated with poorer outcomes in later life.

This is very weak; why should paid work be superior to voluntary community work, to child-rearing, to education, to pursuit of whatever an individual regards as fulfilling? Do moronic, boring process jobs lead to better outcomes for family and health? We know from studies in the United States that encouraging solo parents back into work will certainly increase employment, but doesn’t improve outcomes for kids. What matters is income and choices surely – the UBI increases both for the cohort being discussed here.

It is hard to see why this lesson would not apply equally to a basic income scheme. Unless we are completely relaxed about long-term worklessness – and all the evidence tells us we should not be – some form of conditionality seems to be essential. But if UBI were subject to conditionality much of what it aims to eliminate would reappear: sanctions, eligibility testing, welfare bureaucracy.

It is possible that in the long term economies will function with relatively fewer people employed in paid work. Those who are employed may have more and more casual hours. This situation could well increase as a result of globalisation, the ICT revolution, and an increasing polarisation of wealth and income. The challenge is how to ensure people still have meaningful, enriched, rewarding lives within this context. Access to opportunities to engage in enriching, meaningful activity is not necessarily something that is, will be, or should be bought and sold in markets. Paid jobs have the potential to be enriching, but they are not the only example of this.

Eliminating means-testing also runs up against the problem that has haunted UK social security policy since Beveridge: housing costs. In the absence of means-testing UBI would have to include a flat-rate component to meet rents. This would imply windfall gains for those without housing costs. Worse, a housing element that would meet London rents would lead to huge windfall gains for people renting more cheaply in other regions. If set at national average rents, London and other high-rent cities would become no-go areas for anyone who ever expected to have to rely on UBI. As geographical mobility is not perfect, a steep rise in urban poverty would be likely.

With “The Big Kahuna”, the CCIT (comprehensive capital income tax) is the funding mechanism and it also deflates the property speculation bubble so that housing costs are more aligned to the demand and supply of housing. It is not reasonable to assume that rental costs will continue, with that measure, to rise beyond the reach of the demand for accommodation. Revitalisation of the rural areas (as people relocate) is not necessarily bad – there is a lot of sunk capital out there that is not being utilised.

Finally, equality of payments becomes much less attractive once long-term sickness and disability are brought into the picture. If all involuntary interruptions to employment were short-term in nature, a subsistence level income might be enough to tide people over with the help of savings and borrowing. When people are going to be out of the labour market for months or years, with savings exhausted and no access to credit markets, the proposition is much less attractive. Hence benefits for long-term sickness have historically been higher than for short-term unemployment. But paying a higher rate of UBI to people who can’t work because of disability brings us back to some form of work-capability assessment.

The UBI does not exclude the possibility of targeted assistance to groups that have long term need. It does vastly reduce the gambit of targeted social assistance however. For instance, disabled people are known to have higher expenses. The approach under The Big Kahuna is to have a fixed government budget and allocate it across these long-term disadvantaged persons. Yes, this does imply an ability to clearly identify genuine needs.

In a world of perfect markets, people could take out insurance to top-up UBI in the event of long-term inability to work. But markets aren’t perfect: most risks are not insurable in private markets – that’s why we have social security systems.

The UBI is social security, so the point is irrelevant. What it isn’t is a plethora of ad hoc, selective criteria-based, eligibility rules to decide which people are deserving and which aren’t. To posit that bureaucrats have some kind of superior notion of ideal family arrangements or reasons for family failure, is to severely limit the ability of taxpayers to be sure that everyone has a dignified life and a range of options that maximise their well-being.

Moreover, people can purchase unemployment and sickness income replacement insurance now, so the market does exist. Banks often require a basic policy to be taken out to cover the costs of the mortgage (the most important risk to cover) for a fixed period in the event of illness or unemployment. Reverse equity and revolving credit mortgages are relatively modern policies that enable people to use their net worth creatively to manage life risks such as unemployment and sickness.

The ad hoc changes to UBI needed to overcome these problems bring it much closer to what existing social security systems already do, however inadequately. And this may be no bad thing: it may be better to think of UBI and other basic income proposals as thought experiments, allowing us to test our intuitions about subjects such as fairness, inequality, property, markets and risk. Outside the confines of the thought experiment, UBI needs to be made much more like existing social security to be feasible. But the thought experiment might also lead us to conclude that existing social security systems need to be much more like UBI to be equitable and efficient.

It’s a matter of what the default option should be. Targeted social assistance has become so unworkable as society has changed with the definitions of families no longer fitting the 2 parent, 2 kids stereotype, that designing rules as to who should and who shouldn’t be eligible for social assistance is so complex that large numbers are falling through the cracks. This leads to poverty traps and social dysfunction on a scale that the numbers of special purpose agencies to address certain types of dysfunction have proliferated. That means the cost of delivering social assistance have soared.

The “Big Kahuna” tax and welfare reform winds all that back, it does not exclude any targeting but that targeting is on a tiny scale compared to the status quo. Most importantly it aligns far more people’s ability to fulfil their lifetime ambitions (which surprise, surprise do not always mean paid work from cradle to grave) with their opportunities.

Why the Guardian is wrong on UBI was last modified: December 15th, 2015 by Gareth Morgan
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Gareth Morgan

Gareth Morgan

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Gareth Morgan is a New Zealand economist and commentator on public policy who in previous lives has been in business as an economic consultant, funds manager, and professional company director. He is also a motorcycle adventurer and philanthropist. Gareth and his wife Joanne have a charitable foundation, the Morgan Foundation, which has three main stands of philanthropic endeavour – public interest research, conservation and social investment.