Basic Income (Part 2: Universal Cash)
TLDR: Welfare programs involving direct, unconditional cash transfers are more efficient than in-kind benefits, especially when paired with a system of guardianship.
Prerequisites: Part 1, Personhood
Foundational to: Part 3
“Let us not underestimate the ingenuity of the poor people in converting what they get from the relief worker to what they want. And that’s just wasteful. They would be far better off if we just gave them the money and let them spend it.”
― Milton Friedman
In this essay I’m assuming that it’s good for large-scale government to provide a social safety net, ensuring that nobody goes hungry or has to live on the street. This support should cover disasters, unemployment, and disabilities, but also provide enough for children and the elderly to live good lives.
Government Spending & Taxes
Most countries today have some kind of welfare program. The big “welfare” program in the USA is Medicaid, which resembles health insurance for many poor Americans. But I claim that Medicare, targeted at the elderly and disabled, and CHIP, targeted at children, are also forms of welfare, even if they don’t explicitly address “the poor.” And for that matter, so is Social Security, the largest government program in the United States, which provides cash payments for those too old to work. In theory Social Security is like a savings account that workers pay into when they’re young and withdraw from after retirement, but while Social Security benefits do scale based on taxed earnings, it’s really much closer to a collective fund that’s paid for by the young. (For instance, benefits do not disappear if someone lives longer than expected, and those who didn’t earn much in their youth can still collect if they can demonstrate need/poverty.)
Not including edge cases like education or benefits for public servants (incl. veterans), total welfare spending makes up 57% of the federal budget, or about 3.3 trillion dollars — about 17 thousand dollars per worker per year. (Of course, thanks to progressive income taxes, this burden is disproportionately put on high-earners.)
But I think it’s a bit silly to think about welfare as “government spending” in the same way that we might think about education or military spending. This is because programs like social security are essentially just moving money around; there’s no associated use of real goods. If the air-force uses a piece of steel to make an airplane, that steel can’t be used by someone else. But simply moving money from the hands of workers to seniors doesn’t change the amount of steel, food, etc. that’s used by citizens to make their lives better. Social Security is the biggest agency by budget, but it comes nowhere near the armed forces in terms of cost.
Regardless, I want to draw attention to something that I’ve never heard anyone call welfare, but I claim is at least equivalent to redistribution: the standard income-tax deduction. The United States (and UK, as well as many other countries) allows for taxpayers to ignore the first $12,950 that they earn each year, for the purposes of calculating how much they owe in income taxes. If there was a fixed 25% income tax rate, this would be equivalent to a $3,238 payment from the government to everyone who earned at least minimum wage. Awkwardly, because US income taxes are progressive, this means income tax deductions are regressive — disproportionally benefiting high-earners. (Someone on a 50% marginal tax rate benefits $6,425 from a standard deduction, for instance.)
I think a better system would be to have tax credits instead of deductions. For instance, here’s what we’d have gotten if we’d switched from a standard deduction of $12,950 to a standard credit of $4,000 in 2022 (all numbers in USD):
Income | Raw Taxes Owed | After Std Deduct | After Credit | Difference
5000 | 500 | 0 | -3500 | 3500
35050 | 3505 | 2210 | -495 | 2705
48000 | 6177 | 3505 | 2177 | 1328
60950 | 9026 | 6177 | 5026 | 1151
183000 | 38792 | 34648 | 34792 | -144In addition to being simpler, the credit system eliminates the way our current tax deduction system benefits the wealthy. But also notice what we get on the low end: a negative income tax. Many tax systems that use credits simply throw away negative numbers, but we don’t have to. If we allowed those with negative income tax values to collect a refund, our tax credit becomes a basic income.
Universality
The United State has an Earned Income Tax Credit (EITC), which allows low-earning families to owe negative income taxes and to thus get refund such that their burden after taxes is lower than before taxes. This is a basic income, but not a universal basic income. Just as Social Security, Medicare, and CHIP check for specific age ranges, EITC checks for income. But unlike Medicaid, EITC scales down at the low-end of the income range, meaning a single-mom (of one child) earning less than $10k a year gets less assistance from EITC as she becomes poorer.
This scale-down goes to zero at the low end, presumably to ensure that the EITC is only going to help people who are employed, and to encourage people to work more. But this is weirdly contrary to how other means-tested social care programs work in the USA. Unemployment, disability, medicaid, food stamps, housing assistance, and more all require that the beneficiary not earn much.
If the income tax credit stopped being an earned credit, and started being universal, then it would mesh with the other welfare programs at work — providing help to those in the most need. And because income taxes are progressive, there is literally no issue with simply maintaining the income tax credit (a.k.a. basic income) at all income levels. The benefit here, rather than having the weird trapezoidal system depicted above is mostly in the simplicity. Having everyone using the same system, poor and rich alike, means that everyone will be familiar with how things work and be ready to collect their check when they retire or are between jobs.
But universality doesn’t just reduce the number of people who fall through the cracks as a result of not being able to navigate the bureaucracy (a big problem for the disadvantaged!); it also reduces stigma. Suddenly the single-mother who works part-time isn’t getting a hand-out because she’s too pathetic to get a real job/husband, instead she’s getting her income tax credit, just like everyone else. We see this with Social Security, which is an expected part of retirement in the US, and “definitely isn’t being on welfare.”
Programs like EITC are usually called “means-tested” because they test whether the recipient of the welfare truly doesn’t have the means to support themselves. But means-testing is degrading (“prove you really need it: beg”) and can fail to identify needy people who for one reason or another don’t check the relevant boxes (“you only qualify for this shelter if you were physically abused”).
Universality clears that away and improves efficiency at the same time since it doesn’t require as many government workers to handle all the different testing and tracking. Very importantly, universal benefits (including e.g. universal healthcare) don’t trap people in the same way that conditional ones do.
If someone is on a welfare program like Medicaid, taking a part-time job can sometimes result in losing important benefits. Someone on a fixed-income from Social Security might feel the need to earn a bit more in a tough time, only to find that to do so they’d need to earn a lot more because the second that they “come out of retirement” their benefits disappear. These kinds of traps are real, but are easily avoided with universal programs.
Cash
One of the best parts of a basic income is that it’s cash, rather than specific benefits like medical care, education, housing, or food. If someone has to call in sick one week and thus can’t afford rent, giving them food-stamps is basically just adding insult to injury. At best they’d be able to sell those stamps/groceries and be able to pay rent that way, but at that point it would’ve been easier on everyone if they’d been given cash in the first place. Likewise, if someone’s having a hard time feeding their children, the fact that their housing is subsidized isn’t really solving the problem.
There are a thousand things that a human being needs, in the course of living. Perhaps a plane ticket means the difference between being able to find productive work and being unemployed. Perhaps buying a gun is the difference between being attacked and being safe. Perhaps buying a subscription to Netflix is the difference between being functional and being depressed. Nobody really knows what it’s like to be in another’s shoes until they’ve lived in the same conditions with the same mind and body and community.
One reason that I’ve encountered for giving benefits like healthcare and housing, rather than the cash needed to buy such things, is that the government is better at negotiation than poor individuals. Even leaving-aside the market-distortionary effects of this, I think it’s basically just false, at least in the first-world. Just as we each have our own balance of needs for books vs. exercise equipment, we each have our own needs when it comes to housing, medicine, et cetera. By buying housing on behalf of the poor we ensure that poor people live in lousy houses. A similar (but slightly different) argument could be said for education. It’s almost a miracle that grocery stores that take in significant quantities of food stamps aren’t (much) worse.
But the biggest reason I’ve heard for not giving poor people cash is for fear of them using that money to buy drugs or otherwise wasting it. I find this argument to be pretty offensive — almost all the poor people I’ve known were quite capable of spending money well, and were poor mostly due to some combination of health problems, mental health problems, youth, bad luck, or having too many dependents to support. And yes, I’ve known an addict or two, but they were never spending marginal dollars on their addictions; their addictions came first, and “necessities” came second.
These arguments are especially hollow when it comes to supporting the poorest people on Earth: those in regions such as the global south that didn’t have the historical privilege of being centers of trade, natural resources, and colonial power. Unless one is extremely rigorous in studying the needs of a distant community, including participating in dialog with those people, purchases on behalf of that community are almost always worse than purchases by that community. The world’s poorest aren’t drug-addicts; they’re families living under the burden of ignorance, disease, and distance from opportunity.
There are people out there who can’t be trusted to take care of themselves. But these people don’t need food-stamps; they need guardians with cash.
Basic Income in the Wild
Universal cash-transfers have been tried many times now. And the results are good, in my opinion. Let’s set aside means-tested mechanisms like Social Security and the EITC and look at examples of pure, universal basic income. Does giving everyone money cause damage to the economy, perhaps by reducing employment?
Let’s start with Alaska, which has the Permanent Fund Dividend, which provides a yearly income of around $1600 to nearly every resident of the state. While this is hardly enough money to live on considering American cost-of-living, it has substantially reduced poverty in Alaska, especially in indigenous communities. To quote the relevant study: “Evidence has not appeared for commonly hypothesized potential adverse social and economic consequences of UBI.”
Negative income taxes (NIT) were experimented with in North America five times during the late 20th century. These experiments found a notable, but not severe drop in employment paired with several other positive outcomes. To quote Wikipedia:
Firstly, it was noted that there is an unambiguous decrease in labour supply as a result of NIT and that there exists a pattern among each of the groups. The results show that husbands are the least responsive to NIT in terms of withdrawal from labour force while the youth is the most responsive. … It is however important to note that … the [youth] decrease in labour supply was equalled by increase in school attendance. Moreover, the chances of completing school education also rose notably in New Jersey by 5% and in Seattle-Denver by 11%.
Between 1974 and 1979 the Canadian province of Manitoba experimented with a guaranteed income of around $17k/year. “The … project found it did not discourage people from working, except for two key groups: new mothers, and teenaged boys who opted to stay in school until graduation.” Additionally, there’s some evidence to suggest that overall physical and mental health improved as a result of the study. Unfortunately, this and other studies have often been cancelled when the government changes hands, limiting the amount of long-term data.
In 2011 and 2012 a pair of studies were done in Madhya Pradesh, India, testing the efficacy of universal cash transfers in poor villages.
The findings show numerous improvements in health, productivity, and financial stability. In terms of impacts to health, the unconditional cash transfers were associated with better food security and lower rates of malnutrition in female children. Less food deficiency improved children nutrition and led to more balanced diets. Recipient villages had lower rates of illness, more consistent medical treatment, and more consistent medicine intake. Families receiving cash transfers had more livestock, which helped improve health and financial stability. Additionally, productivity rates increased, as children in recipient villages had higher rates of school attendance. Villages receiving cash transfers had higher expenditures on schooling and agricultural inputs, promoting better education and higher agricultural yields. Some concerns of the universal basic income are that it will discourage labor and encourage consumption of alcohol. However, cash recipients had higher rates of labor and work, especially in self-employed contexts. And, there was no evidence of higher alcohol consumption in recipient villages than control villages; in fact, in the recipient tribal village, alcohol consumption actually decreased. The effect on labor productivity was especially strong for women and tribal communities. Financial stability improved significantly in villages receiving cash transfers. Households with cash grants were three times more likely to open a new business or take on a new production activity than households that did not receive the cash transfer. These households also decreased their indebtedness and increased their savings, and some were even able to open bank accounts to remit the cash grants.
There are ongoing experiments in Kenya, New York, Germany, Wales, and more. In general these experiments show the same things, again and again: basic income is effective in fighting poverty, improving health, increasing education and entrepreneurship, at the cost of moderately decreasing short-term employment.
We don’t need everyone to work. It’s good for parents to have time to spend with children. It’s good for children to spend time learning. And let’s not forget that much of the point of life is simply to play and enjoy leisure. Even under strong, progressive taxes and universal support there’s plenty of reason for skilled adults to put in time at work and be rewarded for that labor with a better quality of life than could be found when unemployed. This is the promise of UBI: a world where all workers are happy to be producing and no-one is a slave to their paycheck.
In Part 3 I dive in to what I think that looks like in my particular conception of Utopia.
“I don’t think there is, or ever again can be, a cure for unemployment. Unemployment is not a disease, but the natural, healthy functioning of an advanced technological society.”
— Robert Anton Wilson