The Basic Income Guarantee: Simplicity, but at What Cost?

In theory, a universal basic income offers an intriguing alternative to our current dysfunctional welfare state. But a closer look raises several questions about whether and how a UBI could be implemented in a way that doesn’t create more problems than it solves.

I set aside the question of whether redistribution – for that is what UBI really is – is ever justified. Matt Zwolinski makes a solid case in favor of such efforts, and certainly a limited amount of redistribution has been supported in the past by prominent libertarians, including Hayek, Nozick, and Friedman among others. On the other hand, as Michael Huemer points out, UBI will, of necessity, violate the Nonaggression Principle at the heart of much of modern libertarianism. Yet, as interesting as such debates are, there will be some form of government-imposed redistribution for the foreseeable future. The real question therefore is whether UBI offers a better way to fight poverty.

Our current welfare system is clearly a mess. The federal government currently funds 126 separate anti-poverty programs, at least 72 of which provide either cash or in-kind benefits to individuals. For example, there are 33 housing programs, run by four different cabinet departments, including bizarrely the Department of Energy. There are currently 21 different programs providing food or food purchasing assistance. These programs are administered by three different federal departments and one independent agency. There are eight different health care programs, administered by five separate agencies within the Department of Health and Human Services. And six cabinet departments and five independent agencies oversee 27 cash or general assistance programs. All together, seven different cabinet agencies and six independent agencies administer at least one anti-poverty program. This maze of overlapping bureaucracies is difficult to navigate for those in the system and perhaps even more difficult to supervise and evaluate.

And obviously we should be concerned that the existing welfare system has utterly failed at its primary mission: lifting people out of poverty and enabling them and their children to become independent and self-supporting members of society. Last year alone, the federal government spent nearly $700 billion to fund anti-poverty programs. State and local governments kicked in an additional $300 billion, bringing the total to roughly $1 trillion. Since the Start of the War on Poverty in 1965, we have spent nearly $19 trillion. Recent studies suggest that welfare programs did help to reduce the worst deprivations of material poverty, especially in their early years. But they have long since reached a point of diminishing returns. We may have reduced the discomfort of poverty, but we have failed to truly lift people out of poverty.

Therefore I am sympathetic to the argument that some form of guaranteed basic income would be an improvement over what we have today. For example, while I am skeptical of some of the predicted administrative savings, there would be clear advantages to a simplified system. Second, it would treat poor people like adults, expected to save and budget, rather than doling out small allowances for those specific goods and services that the government believes they should have. Third, as Zwolinski notes, it helps break up the entrenched constituencies that support the welfare state.

But despite these potential advantages, I would want to see better answers to several important questions before I could endorse such an approach.

For example, if every American were to receive a flat cash grant that was large enough so as to enable the poor to support themselves in the absence of other welfare programs, the cost would likely be prohibitive.

Zwolinski does not propose any specific income, but cites Charles Murray’s suggestion of $10,000 per person. Spread over a U.S. citizen population of roughly 296 million, the cost of such a program would be $2.96 trillion, or almost 3 times our current welfare expenditure. And there is considerable question as to whether $10,000 would be a sufficient grant. Last year, the poverty threshold for a single individual under 65, after all, was $12,119.

Of course, some suggest using the basic income to replace middle-class social welfare programs such as Social Security and Medicare, as well as those targeted to the poor. The idea of abolishing Social Security and Medicare is far more problematic, both politically and practically, than using UBI to replace more conventional welfare programs. Besides, it still wouldn’t raise enough money to fund a truly universal basic income. Using CBO data for 2013, eliminating welfare state programs including Social Security, Medicare, Medicaid, income security and so forth (but excluding tax expenditures) would yield only $2.13 trillion. If we also included, as some have suggested, so-called tax expenditures, such as the mortgage interest deduction and the exclusion of employer contributions, as well as Social Security, EITC and CTC related tax expenditures, we could add an additional $393 billion for a total of $2.5 trillion. That still wouldn’t be enough.

Others would limit grants to adults only. This would clearly be more affordable, dropping the cost to roughly $2.25 trillion. However, limiting participation to adults would leave families with several children well below the poverty level. Consider that the poverty threshold for a family of four was $23,624 in 2013, while grants for the two adults in the family would total $20,000. One possibility would be to adjust the benefit downward for each additional person in a household, recognizing that there are some economies of scale as household size increases. This would reduce costs and the incentive to increase household size (potentially by having more children) while also allowing the initial benefit to be set higher (benefiting smaller households], but would introduce another layer of complexity.

Another issue that would arise in any national level implementation of a UBI is how to address the regional variation in the cost of living. The benefit might be more than sufficient in low cost states like South Dakota, but it might not be enough in high cost states like California and New York. A recent study by the Tax Foundation looked at the purchasing power of $100 in each state, with the relative value ranging from $84.60 in Washington D.C. to $115.74 in Mississippi. Our current system addresses this disparity to some extent, although some of the variation may be due to states increasing benefit generosity for reasons other than cost of living differences. In The Work versus Welfare Trade-off 2013, I found that the benefits package from the same seven programs ranged from $25,491 in Arkansas to $49,175 in Hawaii. The impact of the UBI would vary by location, and low-income people in high cost areas could be worse off. It is not hard to imagine a scenario where people advocate for some kind of benefit adjustment based on the cost of living in the area. While this could potentially be a better design, it would again add a layer of complexity to what initially seemed like a very simple program.

Moreover, whatever the initial size of the UBI, there will be enormous political pressure to increase it. A UBI would establish as both a legal and a philosophical concept that every American citizen is entitled to a minimum income - exacted from the taxpayers. Once that “right” is established, the political process will inevitably expand it. Murray argues that $10,000 is the correct amount. But how long before some politician comes along and says, “No one can live on $10,000. We need to make it $11,000.” Soon another politician, not wanting to be thought less compassionate than the first, will propose $12,000. There would also be pressure to “carve-out” additional payments to certain groups, like families with a person with a disability or some kind of long-term illness, adjusting for age (since the elderly have higher health care expenses), and so on. We could then get to the point that we have moved far away from the unconditional universal cash grant, to some extent sacrificing the very simplicity that makes up part of the UBI’s appeal.

The more affordable alternative would be to make the grant available only to those with incomes below some predefined level. While under this approach the grant itself would not be universal, it would nevertheless establish a universal floor of income below which no American would be allowed to fall. Friedman’s negative income tax takes this approach. Similarly, Murray would begin to tax back a portion of benefits for families with earned income above $25,000.

The design of any negative income tax becomes crucial. If the benefit is phased out fairly quickly for those with incomes above the poverty level, the program may well be affordable, even cheaper than the current welfare system. But too rapid a phase-out would create a “poverty cliff,” where the marginal tax rate for earning additional income would significantly discourage work or other efforts to escape poverty. A more gradual phase-out minimizes this problem, but adds considerably to the expense of the program.

Zwolinski believes that the studies of NIT and work are ambiguous, at least as far as the degree to which the NIT discourages work. I also think it is fair to ask whether an NIT would discourage work more or less than the current system. (My own research has shown that the current welfare system, where benefits exceed minimum wage in 35 states, has serious potential to discourage work. In the NIT experiments the control group was eligible for traditional welfare, so the work disincentives were relative to the welfare system in place at the time. That being said, there have been significant changes to the welfare system since the NIT experiments, introduction of tax credits etc., so to some degree they cannot tell us that much about how the NIT would compare to the welfare system we have today.)

While the NIT experiments have many important insights, they are to some extent limited in how much they can inform this debate. By their nature, the experiments were temporary, which means that they cannot tell us anything about the permanent work-disincentive effects of an NIT. Would a generation that grew up with an NIT be affected differently?

Zwolinski asks “so what?” if the NIT does reduce work effort. But I can think of at least three reasons why we should be concerned. First, if we are to accept some level of redistribution, it seems fair to require that those receiving the benefits of such efforts take steps that would enable them to become self-supporting as soon as possible. Second, if we actually want to help the poor escape poverty, rather than simply make poverty less uncomfortable (which would be the compassionate thing to do), we know that work is one of the keys to achieving that goal. And, third, a reduction in labor force participation lowers GDP growth, making all of us a little bit poorer. For example, CBO estimates that Obamacare subsidies will encourage people to leave the labor force, reducing aggregate labor compensation by one percent.

A better approach might then be to tie any benefit more explicitly to work. For example, Rep. Paul Ryan, Sen. Marco Rubio, and President Obama have all suggested changes to the Earned Income Tax Credit (EITC). This would in essence establish a minimum income for anyone who was willing to work. It would also be both more effective and better targeted than an increase in the minimum wage.

But the benefit would not be truly universal. It therefore raises the question of what to do about those who are disabled or who cannot work for other reasons. For that matter, what about those who cannot find jobs? Would there be a parallel welfare system to care for those people? If so, it would appear that all we have done is add a new benefit on top of the current system. Moreover, the EITC is already one of the most fraud-ridden of all federal programs.

The virtues of the universal basic income lie in its universality and simplicity. But the closer the program hews to those goals the more likely it is to increase the cost of the welfare state.

Until these questions can be answered, it might be worth experimenting with something similar to what the British government recently undertook with some of its major welfare programs. Britain consolidating its six major welfare programs (the jobseeker’s allowance, the income-support allowance, the employment-support allowance, the child tax credit, the working tax credit, and housing benefits) into a single cash grant, payable monthly to recipients.

The United States could follow suit by consolidating our own disparate welfare programs and, instead, pay recipients a direct cash benefit instead. Such a baby step would allow us to realize some, though not all, the upside of a UBI, while giving us time to further investigate the potential problems.

Opponents of the welfare state have long criticized its supporters for believing that good intentions justified even failed programs. In considering some form of a universal basic income, we should avoid falling into the same trap.