It is an ideal and simple idea that, if we give everyone a monthly stipend, we will be able to eradicate poverty and eliminate the shortcomings of the flawed American “welfare state”. Minneapolis is the latest city to experiment with Universal Basic Income. It will provide $500 a month for 18 months to 150 of its low-income residents, with no restrictions on work or spending.
But some worry that it’s not that simple. A universal basic income can be costly to the public budget, and it may discourage people from working, which inadvertently increases inequality and social instability. And a new study suggests that the skeptics may be right: a universal basic income can do more harm than good at a very high cost.
The UBI test is not easy. What makes this income universal and essential is that everyone has access to money, and that the cash flow is long-term and predictable. Proponents of UBI point to some experiences that show that giving people cash does not reduce their work. But the Minneapolis experience and other studies are not really relevant to UBI because they all deal with a short-term period, with payments lasting only a year or two. This instability fundamentally changes how people respond. Most financial and work-related decisions are based on expectations of lifetime income, not on a few months of extra cash.
How payments are organized is also important. Another study looks at the income paid out each year from the Alaska Permanent Fund. Economists argue that these payments did not make Alaskans work less, and may encourage recipients to do more part-time work. But the perpetual fund is not universal and true base income, because payments are based on oil revenues, and thus vary widely from year to year. So permanent money payments actually increase income risk in Alaska, which is the opposite of what a universal basic income is supposed to do.
Advocates might say these studies are close enough. But proximity is not enough in this case. Claiming that these models represent comprehensive basic income is like saying that a fixed-rate console bond is a close estimate of a two-year bond or a dividend-paying stock. We know from finance that these types of assets have very different values and can therefore elicit completely different behavior on the part of investors with regard to risk and wealth effects.
A new study from the National Bureau of Economic Research takes a different approach to evaluating universal basic income, as economists review lottery winners over a five-year period. Lottery winners are a good test of universal basic income, because the lottery winnings are big enough that the income they generate can be life-changing. Economists estimate that the average earnings equate to an additional $7,800 a year, similar to universal basic income proposals. Lottery winners are also chosen at random, which makes for a good experience.
In contrast to unleashing creativity, motivation, and entrepreneurship, economists estimate that lottery winners are less likely to start a successful business. They also estimate that the winners were working less and were more likely to switch jobs for other jobs that paid less. Economists have also noted that many winners have relocated soon after winning the lottery, usually to a more isolated, rural area. But few have moved to higher quality neighborhoods, in terms of neighbors’ college level, median income, and other metrics that increase opportunities for themselves and their children. There was one positive effect: lottery winners are more likely to get married and less likely to divorce.
You might think that living in the country and working less is not a bad thing, because working in a lower-paid job can sometimes offer other benefits, such as spending more time with your children. But there are costs. Working in a job with lower requirements often means that you give up learning new skills and get a raise. This may not be a big problem for middle-aged people. But it can leave young people still building their careers and acquiring skills worse off. Most wage increases happen in your 20s and 30s, and if you miss those years you probably won’t catch up.
Our current welfare system is imperfect. But the fact that it makes payments contingent on income, age or even having a child is a better alternative. First, it’s less expensive because you don’t have to give money to the many people who don’t need it. Second, guaranteed money (or money you get no matter what happens) is worth a lot more than income that only pays off for a while. The more money we give people, the more influence it has on their behaviour, often in a not-so-good way.
* Distinguished Fellow at the Manhattan Institute
Published by special arrangement with the Washington Post and Bloomberg News Service.