Universal Basic Income – why it doesn’t deserve the hype

To judge from my Facebook news feed and Twitter updates, the idea of Universal Basic Income (UBI) is gaining traction on the political left and centre-left. The extraordinary measures being undertaken by governments to prop up economies hit by Coronavirus and associated lockdowns somehow make it look less outlandish. In Britain the idea is getting closer and closer to being official policy for both Labour and the Liberal Democrats; it is already there for the Greens. I have always been a sceptic, and I still am.

The attraction is easy to see, and the crisis has highlighted its virtues. It is one answer to the massive information gap that lies between governments and the citizens they serve. This makes it impossible to target aid accurately to those in need. Government schemes like the furlough scheme leave many gaps, are subject to administration delays or injustices, and doubtless pay lots of money to those who don’t really need it, including fraudsters. On the other hand, attempts to target better involve humiliating procedures to verify need, which are often administered by officials that seem to take pleasure in the exercise of petty power for its own sake – and who are not empowered with discretion to use common sense nor accountable for the human results of their work.

This information gap has two main causes. The first is privacy, whereby we deliberately limit the information we make available to the authorities, or anybody else. The is one of the core aspects of what we understand by freedom, and all psychological benefits that come with empowerment and autonomy. But there is also the sheer scale and complexity of the information problem. Even in countries unworried by the idea of privacy, like China, face colossal problems trying to understand individual people’s needs, and often resort to arbitrary rules.

UBI is income that everybody is entitled to, on the minimum possible qualifications (such as nationality; there would likely be some form of age-based entitlement too). This would eliminate the need to provide targeted help in most cases, its advocates argue. In particular it would not depend on whether the citizen is working, and could replace unemployment benefit, or, in the UK, Universal Credit. There is no need for the state to gather data on income and work status in order to check entitlement.

Some support for this idea has recently come from Finland, where a randomised trial was carried out between UBI and unemployment pay. It was found that UBI did not reduce the incentive to look for work, while significantly improving the wellbeing of those receiving it. One worry about UBI, especially if it is substantial enough to replace entitlements to benefits, is that a significant number of people would give up the search for work, because they would not need it. But advocates point out that the incentive to work is improved because people keep all the extra earnings (subject to taxes), rather than having benefits withdrawn. The Finnish study provides some interesting evidence here.

But if the incentives argument falls away, there remains the question of how the state manages to pay for it. There is a dilemma here. The higher the rate of UBI, the more it can replace other benefits, and so deliver the advantages advocates want to see. In the UK Universal Credit is an obvious target, and so is the basic state pension. And yet as soon as it reaches this sort of level, the state outlays required to cover it become massive. Of course there are savings. Since the state pension is already a more or less universal entitlement, there may not be much extra outlay. Tax free allowances on pay could be withdrawn. But the gap remains massive.

Some on the left wave all this away, based on the insights offered by Modern Monetary Theory (MMT), which basically suggests that budget deficits can be funded by borrowing or printing money, and so traditional ideas of balancing budgets are old hat. Now I’m not as rude about MMT as most conventional economists seem to be, but it does seem to have encouraged the sort of magical thinking I last remember being widespread at the time of the tech boom in the late 1990s (“losses are the new profits”). The problem is that UBI would potentially unleash a wave of extra consumer demand across the economy, which could lead it to overheat and break down, through inflation or a debt crisis (because of the need to borrow foreign currency to buy imports sucked in by the excess demands). That is unless demand could be dampened down in some way, i.e. taxes raised. This is not a question of just taxing wealth, and top pay either. This may be a good idea anyway, but it is not likely to have a big enough impact on demand to head off trouble. Some combination of increases in basic income tax, national insurance and VAT will be needed too. This needs to be discussed more openly by the idea’s advocates.

But my reservation goes deeper. To me UBI seems to be trying to shortcut the sort of interventions that our society needs. It is an attempt to give people money in the hope that their problems will go away. That may work for a lot of people, but we will still be left with a vast residue of people with more complex needs, which a basic UBI does not begin to solve. I prefer solutions based on a highly devolved interventions by empowered professionals, able to tailor solutions across the whole range of public services from health, to housing, to law enforcement. The way to bridge the information gap is through people intelligently examining individual needs and crafting complex solutions. This will entail a judicious mixture of conditional and unconditional benefits. Our public services have been going in the opposite direction for two decades or more, as successive governments have sought to take the humanity out of public services and replace it with targets that turn out to be meaningless. By focusing so much on UBI, we are distracting attention away from the real crisis in public services.

The craze over UBI illustrates one of the biggest failings in a our politics. The search for simple, if radical, ideas instead of trying to understand the humanity of our society, and going about the messy and painful business of adjusting to this reality.

8 thoughts on “Universal Basic Income – why it doesn’t deserve the hype”

  1. Matthew – I too am sceptical about UBI, at least in the medium term. As you say, if we were willing to increase substantially what we spend on improving the lives of people on low incomes, other measures might be more effective, such as allowing for more humanity in the delivery of services to the disadvantaged.

    In the longer term, much depends on the way the economy pans out given such developments as driverless vehicles and the need to curtail greenhouse gas emissions at a faster rate than technological developments alone might achieve. One outcome could be an increase in modestly but adequately paid employment in less productive sectors of the economy, soaking up the labour rendered superfluous by automation and reduced GDP. In that case, UBI might still be regarded as inferior to other approaches to increasing well-being among the low-paid.

    Alternatively, the impacts of automation and progress towards a sustainable economy might mean that the market for adequately-paid labour is too weak to support full-employment as we currently think of it. Measures might be needed to allow most people to work a shorter week or to do work that has social value not fully monetised in a predominantly market economy. In that case UBI might possibly emerge as a cost-effective measure.

    1. Actually there may be a good case for some form of UBI in due course, as a better way of managing a society where there is less paid work around, given massive advances in productivity in the productive parts of the economy. But I think it is a mistake selling the idea as a replacement for benefits. It is better to think of it as some form of redistributive dividend, of royalties from natural resources, or carbon taxes. The Alaska dividend is an example. But this will be small (at least at first) and explicitly tied to some form of revenue.

      1. I agree – UBI can be no more than a partial replacement for benefits. The idea of tying it to a specific form of government income (eg a carbon tax) is attractive.

  2. @ Matthew ,

    “Now I’m not as rude about MMT as most conventional economists seem to be….”

    I don’t mind you being as rude as you like but I would ask you to at least get your facts right.

    1) MMT economists don’t support the concept of a UBI. For a whole number of reasons including some of the ones you’ve given.

    2) I’ve commented on the possibility of a dangerous inflationary situation to develop if our productive capacity isn’t restored soon. With somewhat better credentials than myself Prof Bill Mitchell has written:

    We don’t know yet how disrupted the supply-side of the world economy has been and what the implications for delivery of goods and services into various markets will be.
    But inasmuch as there are significant disruptions occurring, while at the same time governments are stabilising (to some extent) income levels, there will be a break in the expenditure-income-output cycle, which may trigger inflationary impulses.
    Remember the basic rule of macroeconomics – Spending equals income equals output, which drives employment growth. In this crisis, fiscal intervention is aiming to reduce the fall in income arising from the enforced lockdown. But if the income from one period is cycled into the system next period but output has fallen in that next period then where does the spending go? Into accelerating prices is where!”

    3) The point about budget deficits isn’t a suggestion by proponents of MMT. MMT attempts to describe what happens in the real economy. In the UK we nearly always have budget deficits. And we’ve had them long before anyone had ever heard of MMT. So why aren’t the IMF knocking on the door demanding their money back? Because that’s not the way the system works as everyone in the economics profession surely knows, but pretended they didn’t until MMT came along to blow the whistle on that kind of nonsense. It can only have been promoted by the political right to scare everyone.

    1. My point isn’t that the serious advocates of MMT, including you, advocate magical thinking. You are simply looking at economic problems in a different way, and pointing out that much of the conventional wisdom on public finance is nonsense, at least at the margin. But what I have noticed, in social media anyway, is that some people on the left, and advocates of UBI in particular, are trying to use MMT as cover for not talking about the idea’s economic consequences and how these might be managed.To be honest I’m not entirely sure what winds up so many economists about MMT – I have put this down to the rather confrontational way they state their case (often dismissing mainstream economists as rubbish) rather than what they are actually saying. As you say, budget deficits have been part of the furniture for ages, and American liberal economists have been pretty chilled about it. Yet it is often those economists that get rude about MMT.

      Whether we are building up an inflationary wave is an interesting question. Lots of people (like me) have seen no effect on their income, but have reduced spending. There is bound to be a bit of pent up demand from them. But many others have been living off debt and running down savings, and these will want to save a higher proportion of their incomes when the recovery comes. In fact I think a lot of the fiscal support will get withdrawn, and this will provoke a slump and rising unemployment, which will overwhelm the extra demand from those that have done well financially.

      1. @ Matthew,

        I do take your point that many MMT advocates don’t really understand MMT! I agree it doesn’t help and I do often use the phrase, on MMT websites, that there’s more to it than just saying the Govt can’t ever run out of money. But, having said that, I’d say you should go to the top rather than what someone on the periphery thinks they might know! Maybe that should include me too!

        You could be right about the way it will go after the lockdown ends. I don’t think Bill Mitchell is saying there definitely will be an inflation problem, but there could be, and it’s good to keep an open mind at present.

        On the subject of the UBI, one of the MMTers who is always worth a read is Pavlina Tcherneva. I’ve never come across her put anyone down aggressively. But I know Bill Mitchell can be quite caustic at times! She argues against a UBI and makes some telling points such as that it wouldn’t act in a countercyclical manner.

        http://neweconomicperspectives.org/2014/01/16-reasons-matt-yglesias-wrong-job-guarantee-vs-basic-income.html#sthash.Yvd1g4aq.dpuf

  3. I too am sceptical about the UBI – I simply don’t see the modern state, hemmed in by the constraints of globalisation, having a power to tax sufficient to cover the expense involved. So the issue arises: how on liberal lines do we provide for the poor, the marginalised and those at the receiving end of the problems of globalisation? In terms of your first three paragraphs, Matthew , how does one preserve the autonomy of the individual, while giving this role to the state, given the problems you identify? I would attack the present link between the state knowing who its needy are, and the invasion of privacy by a state seen as threatening to independence. In the 19th century, British political society leant how to build safeguards against corruption. I think the trick in the 21st century is to vest the information about the needy in agencies created as independent from political power , with the head official personally responsible for ensuring that data does not leak to those that could misuse it. In the present situation, for example, such an agency could provide a standard basic income to those in the gig economy which the Government has been unable to reach effectively. How would this jeopardise personal autonomy? – to my mind it does not.

    1. There is an important debate to be had about the role of independent entities to administer benefits and services. This clearly works well in many contexts. But political accountability is also important. The British government since Tony Blair at least has liked to delegate responsibility to independent or quasi-independent bodies (including limiting the discretion of local councils). There are some excellent examples of this working well (primary schools for example), but too often these agencies are tied to an inadequate system of numerical targets. It can also be hard to make these agencies cooperate effectively. This happened in the last Labour government’s attempts to tackle the needs of vulnerable children. That is why I thinking that making the political units much smaller geographically is an essential part of the mix, as politicians are often needed to bang heads together. But that brings problems of its own.

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