'Give People Money' is a useful book about a bad idea

YouTubeAnnie Lowrey
  • I’ve written before that the idea of a universal basic income is one that needs to die.
  • Author Annie Lowrey disagrees, and she explores the concept in a new book.
  • Her book provides a framework to examine what changes we can make to make our safety net better.

Shortly after the 2016 election, I wrote that universal basic income – the blue-sky policy idea of the government providing a subsistence-level cash payment to every American, or at least every American adult – was an idea that needed to die.

Annie Lowrey disagrees.

Her new book, “Give People Money,” is an exploration of how UBI could help address three problems in society – disruptive changes in the labour market, persistent poverty, and race and gender biases in the existing income support regime.

As you might guess from my 2016 column, the book does not change my ultimate view on UBI. And anyway, Lowrey is not exactly urging implementation of the $US1,000 per-person-per-month, $US3.9 trillion-per-year US UBI proposal she discusses.

What her book does do is use UBI as a framework to examine why our safety net so often does not achieve what it is supposed to – and to help illuminate what changes, short of a true UBI, we could make for the better.

A UBI is too expensive to be practical

At $US3.9 trillion per year, a $US1,000 per-person-per-month UBI would be equivalent to about 20% of American economic output, or roughly equal to all existing federal government spending. It’s also about 20 times the size of the recently enacted Republican tax cut.

So, you could repeal that whole tax cut, and you’d only be about 5% of the way to financing a robust UBI.

Lowrey is right to note that not all new policies need to be fully paid for, a fact Republicans have repeatedly demonstrated whenever they have run the government for the last two decades. I agree that the US has a large capacity for deficit spending, a capacity that fiscal pundits have often understated.

Still, there are limits – a couple hundred billion here, a couple hundred billion there, and eventually you’re talking about an amount of new spending that can’t be deficit-financed without causing interest rates to sharply rise and creditworthiness of US government debt to be severely undermined.

Many big policy ideas aren’t big enough to reach this threshold, but UBI is.

So if the government is going to start sending out an extra $US4 trillion a year in checks, it’s going to have to collect something close to an extra $US4 trillion in taxes. And as Lowrey notes, higher income taxes on high earners wouldn’t come close to getting you there.

There are other revenue options, but they’re not very palatable. For example, she says a value-added tax could “easily” raise $US1 trillion a year. A VAT could do this simply, but not easily. Depending on the exact tax base, such a VAT likely need a rate around 10% to 15% – so it would be a large new tax on American consumers. And it would only pay about a quarter of the bill.

You could also finance a UBI partly through spending cuts. But as Lowrey correctly notes, many important safety-net programs are not fungible and can’t just be eliminated once we give people a cash benefit.

For example, UBI could not replace Medicare or Medicaid – that would leave people without healthcare. A UBI probably could replace food stamps and cash welfare, but eliminating those programs would save less than $US100 billion a year.

Mini-UBI proposals have their own problems

One way to make a UBI more affordable, of course, is to make the program smaller. For example, Lowrey suggests you could exclude Social Security recipients and phase out the benefit above incomes of $US72,000. That greatly shrinks the overall size of the UBI program, from $US4 trillion a year to $US1 trillion.

But these are not small tweaks.

For example, a phase-out above $US72,000 would act like a new tax on the incomes of many middle- and upper-middle income Americans, reducing their benefits as their labour income rises – and that implicit tax would be on top of whatever new taxes are imposed to finance the UBI to begin with.

This would produce intense divisions between people who would work a lot and pay a lot of new taxes to finance the UBI but wouldn’t even get to collect it, and people who would work less and become highly dependent on the UBI to support themselves – and it would mean the UBI was not actually universal.

Meanwhile, the Social Security exclusion would greatly undermine the purpose of the existing Social Security program.

Currently, Social Security acts like a forced-savings mechanism. Payroll taxes do little to discourage work, in large part because workers know they earn benefits for the taxes they pay.

But the average monthly Social Security benefit at full retirement age in 2016 was just over $US1,200, not much higher than the theoretical $US1,000 UBI. If the UBI excluded Social Security recipients, then Social Security would provide only a small benefit over the UBI everyone else is entitled to, and Social Security contributions would go from savings-like payments to regular taxes.

Plus, excluding seniors would do much to reduce political support for UBI – especially since those seniors would still be on the hook for taxes (like that VAT) to finance UBI.

UBI is still useful as an idea, because it provides some clues about how we should redesign existing safety-net programs

In her book, Lowrey looks at three major challenges surrounding the safety net:

  • The labour market is changing and government programs are not necessarily keeping up.
  • Despite long periods of growth, many people are still left in or near poverty.
  • And programs are stigmatised and segregated, with minorities and women helped less than whites and men.

The second problem is the one where Lowrey makes the strongest argument, drawing lessons from UBI-like experiments in rich and poor countries to show how poverty can be addressed with cash payments. This argument is strongest in part because it is the most obvious – when you give people money, it makes them richer – but this is still an idea that often eludes policymakers.

Looking at programs run by GiveDirectly, the charity that seeks to lift poor people in east Africa out of poverty by giving them money, she sees promising results – African villagers know what specific goods and services they need better than international aid groups do, and cash payments not only raise their level of consumption but help them make good investments that make them healthier and wealthier in the long run.

In richer countries, Lowrey presents mixed evidence of how unconditional payments (like Alaska’s permanent fund dividends financed by its oil wealth) affect work decisions, but she shows that when these programs do discourage work, it’s often for positive reasons, like encouraging teenagers and young adults to stay in school.

One lesson here is not to be afraid of cash aid.

When discouraging business regulation, conservatives often talk about the importance of local knowledge: The person closest to the ground knows best what they need, and planning the economy from on high works poorly. This lesson also applies to aid programs, domestic and international. Poorer people are not stupid, and their local knowledge of their own needs typically outweighs the benefit of having a paternalistic government overseer.

Our economic challenges are not as novel as they seem

UBI’s proponents often describe it as a policy for a rapidly changing world in which the labour market fails to work like it used to – and where automation threatens to make labour increasingly irrelevant.

As Lowrey describes, this is not actually happening today – if all our labour is getting automated away by brilliant machines, why do the economic statistics show slow productivity growth? – and I am even more sceptical than she is that such a shift is coming in the future.

The world already went through a labour disruption far more extensive than the one threatened by robots and artificial intelligence: Mechanization of agriculture, which destroyed the vast majority of the jobs that existed in the economy 200 years ago.

We found new things to do then. And my expectation, unfortunately, is that labour will remain not only in demand, but a necessarily central feature of the economy, for the rest of my lifetime and beyond.

Plus, if a machine revolution did come, the resulting productivity boom and economic growth would create a lot of fiscal space to pay for whatever government programs we might need to manage the labour transition.

The most important policy question to ask is not what we will do if the labour market sharply changes, but what we will do if it stays about like it is now.

Growth is not translating into as much improvement in broadly-shared prosperity as we would like. Certain sectors of the economy – health care and education, especially – are producing cost pressures that are hard for ordinary Americans to keep up with.

One lesson from Lowrey’s book is that more cash transfers are key parts of the answer to these problems of today and tomorrow. I don’t think we’ll be able to afford to make them universal. But they could be broader, larger and simpler than they are today.

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