Should a Universal Basic Income Be Adjusted for Local Prices?

Kind Of. Depends on the Aim.

I was recently cited in a discussion of proper conservative perspectives on welfare reform. It’s an interesting read, whether you agree or not. You can also read the same author’s related views on a “Universal Basic Income” here. In the Twitter discussion of UBI, we got chatting about whether or not a Universal Basic Income (or, frankly, any welfare program) should be adjusted for local prices.

Some people pretty adamantly think the answer is “No.”

I, however, think UBI probably should vary across localities. But perhaps in some un-intuitive ways. Let’s think through some arguments for this issue.

What Makes Income Basic?

UBI guarantees people a “basic income.” Crucially, that’s not a minimum income. For example, if I get a $12,000 UBI, but lose, say, $30,000 due to a loss-making business, my actual income is -$18,000. UBI absolutely does not guarantee me a minimum income, it guarantees me a specific cash flow.

But if UBI is not in fact a promise of a minimum income, then what is it? People treat it as if it’s a promise of a minimum income because they have in mind pretty simple revenue situations, but that view is foolish. You can’t on the one hand hope that UBI would free up low-level entrepreneurship and on the other ignore the extremely volatile income situations of business-owners.

UBI is not, then, about a minimum income but a basic income, an income that forms a base or basis. We can interpret this two ways: first, that it’s a base on which other income sources are stacked, or from which they’re subtracted. I’ll call this the “Base Accounting Model of Basic Income” or BAMBI. Or, maybe it means basic as in basic needs, as in, the income should provide for the most rudimentary human needs. This is the idea that motivates many leftist advocates of UBI, and is the basic idea underlying the view that UBI could/should replace welfare. I’ll call this the “Welfare Allowance Model of Basic Income,” or WAMBI.

I think most people have in mind both of these concepts, but WAMBI probably predominates. Every time someone talks about replacing welfare, or guaranteeing basic needs, or freeing up resources for entrepreneurship, they’re appealing to the WAMBI concept of UBI, not the BAMBI concept. If they talk about UBI in terms of wealth redistribution, or enabling people to arbitrage local prices, or develop investment capital, they’re implicitly referencing BAMBI, not WAMBI.

For BAMBI, a locally-unadjusted (that is, flat) UBI makes sense. We guarantee people a cash flow, their use of it is their choice, and if their local area is too expensive, well, move!

For WAMBI, a locally-adjusted UBI is almost a necessity. If you’re guaranteeing people a basic standard of living, then you can either say, “No, we only guarantee that contingent on you living in the cheapest place in America,” or you can adjust for local prices.

What Do Local Cost Adjustments Do?

Think about the incentives involved in basic income.

If I’m guaranteed $12,000 a year, and I either do not want to work, or do not believe it is likely that I will obtain employment, then I can maximize my real income by living in the cheapest possible areas. I will stick with known networks, inherited assets, low-risk ventures, etc. In other words, a fixed dollar UBI encourages recipients to live in cheap, rural areas where they have extensive social networks. Fixed-dollar UBIs encourage poor people to locate in areas of high poverty and low opportunity.

On the other hand, let’s say we full adjust for local costs, and we’ll pay whatever it takes to guarantee a certain real income. In this case, recipients are totally unconstrained by location. That’s a good thing, because they can just focus on where their life opportunities are greatest. But, on the other hand, this is overwhelmingly likely to lead to tons of people flocking to amenity-dense areas, getting the government to foot the bill, and sharply increasing demand in those places. Imagine that every time San Francisco’s costs rise, everyone in San Francisco automatically gets a few hundred extra bucks, paid for by taxes on the rest of the nation. This situation is no bueno. Cost-adjusted UBIs subsidize areas with damaging housing policies, actively feed into local cost-spirals, and are likely to cost the government extremely large amounts of money.

Luckily, we can game the system!

See, the problem for flat UBIs is entirely at the low-cost end of the spectrum: they encourage people to live in poverty. Meanwhile, the problem for adjusted UBIs is entirely at the high-cost end of the spectrum: they encourage people to live in exorbitantly-priced areas, and may drive prices even higher.

This convenient asymmetry of problems clearly directs us to the solution. We should cost-adjust along the bottom half of the cost spectrum, and not the top half. Here’s how this works.

Say we have a UBI of $1,000 per month as the basic figure. For every metro area with a local price level 105% of the national average or less, we adjust the monthly grant to their local price level. So if local prices are 80% of the national average, UBI drops to $800/mo. And if local prices are 105% of the national average, UBI is $1,050/mo. But if local prices are 120% of the national average (hello DC, NYC, SF, etc), UBI is still just $1,050/mo.

This results in a kinked real-income curve with respect to metro area prices. Here’s what it looks like:

Source. X-axis shows local price level, with higher numbers meaning higher local prices. Y axis is in dollars.

As you can see, when nominal UBI rises with local costs, the real UBI value is steady. In any city where local costs are 105% of the national average or less, the UBI fits the WAMBI model: we guarantee a certain basic standard of living. But, if you choose to live in an expensive city, it switches to a BAMBI model, where you have to manage your money as you see fit, and we make no promise that this “base” income will cover all your “basic needs.” This model subsidizes movement out of poverty, but doesn’t subsidize the bad policy choices or unfortunate geography of high-cost cities.