Universal Basic Income: More affordable than at first glance

Pragmatic questions

As much focus as there is on the why of a basic income model such as Universal Basic Income (UBI) (examples here, and further reading here), advocacy efforts also need to address the how of implementing the program. Four critical ‘how’ questions are:

  1. How much does it cost?
  2. How are we going to pay for it?
  3. How do we institute a no harm UBI so that beneficiaries currently relying on social safety net programs are not net worse off?
  4. How do we structure a UBI program where we meet everyone’s basic needs, but it still pays to work?

This post is mainly going to address the accounting methodology of question 1 and will lean heavily on the US context for its examples – but the cost estimation methodology will apply in most country contexts.

Some of the defining critiques of the UBI model involve its cost, with figures quoted at US$3 trillion per year, and at a cost of 20-35% of GDP. However, these critiques use a faulty cost calculation whereby the cost is the UBI amount given to each individual multiplied by the size of the population. In the $3 trillion/year example, this would equate to a $10,000 UBI multiplied by the US population (300 million).

However, UBI as a redistributive program is quite unique to other entitlement programs in that some recipients of UBI are simultaneously contributors to the UBI funding pool via their taxes. In order to meaningfully arrive at a cost estimate for UBI, the methodology must consider the positive tax contributions of those recipients in order to arrive at the net cost.

This methodology is based on the works of Karl Widerquist, prominent thinker and writer on basic income. It is also well summarized by Elizaveta Fouksman.

“Here’s a simple example: imagine a room with 15 people who want to set up a UBI for the room of $2 per person. The upfront cost of the policy would be $30. The ten richest people in the room are asked to contribute $3 each towards funding it. After they each put in $3, raising the total $30 needed, every person in the room gets their $2 universal basic income. But because the ten richest people in the room contributed $3, and then got $2 back as the UBI, their real, net contribution is in fact $1 each. So the real cost of the UBI is $10.”

The upfront or gross cost in Fouksman’s example is reduced by a third.

Widerquist models a ‘back-of-the-envelope’ estimate of a UBI program set at the official US poverty line of $12,000 per adult and $6,000 per child with a 50% marginal tax rate (page 6). His estimate, after netting out the contributions of richer UBI recipients, lands at $539 billion per year, which is about 1/6th of the gross cost of $3T, and constitutes about 2.95% of GDP.

Methodology discussion – the salient points

The key to gaining true insight into the cost of UBI is to distinguish between gross upfront cost and the real net cost. Again, Fouksman outlines it best. This net-cost concept is fundamentally important to understand, because most other transfer payments are designed to flow to those who do not contribute into it. Fouksman highlights a fundamental blind spot with most gross UBI calculations – those who pay for UBI through their taxes, will also receive a UBI – negating some of the cost of contributing to UBI in the first place.

Another angle with which to examine the true cost of UBI: although a UBI will be paid out to all members in society – because the rich have already paid for their share of UBI via their taxes, their payouts need not be included in the UBI cost estimate.

Widerquist presents yet another way to understand the accounting: “UBI involves a very large amount of taking money from and giving back to the same people at the same time in the same form. If you don’t account for all this taking-and-giving-back, you can’t get a realistic assessment of how much UBI costs or of the distributive benefits and burdens it involves.”

From this we can begin to understand when one is a net beneficiary, when one is a net contributor, and the rate at which people gradually switch over from beneficiary status to contributor status as their incomes improve.

Outcomes of understanding the UBI net-cost estimation methodology

Current UBI cost estimations are grossly overstated and misleading, and do not contribute meaningfully to the debate on why and how UBI could be implemented. In Widerquist’s poverty-level UBI example, such a program in the US would cost $539 billion per year, which is just 25% of current US entitlement spending and approximately of 2.95% of GDP.

Understanding the net cost of a UBI is very significant in advancing the policy discussion around whether or not basic income schemes should be universal.

Under a UBI scheme, every member of society should expect a regular income, irrespective of their existing wealth or work status. This would mean billionaires such as Jeff Bezos and Bill Gates would receive a basic income – a concept that at first glance seems obscene.

Since learning more about this topic four years ago, I knew that I broadly supported a UBI due to its inclusiveness, and the reduction in stigma of receiving government support (due to the universal nature of the payment). What I didn’t know was how I felt about the wealthy also receiving the guaranteed income. What I personally hadn’t considered was the differentiation between a net beneficiary of UBI and a net contributor. I hope that knowledge of the net cost of UBI better circulates in public debate, as well as the knowledge that we can afford it, should we choose to.

 

 

Universal Basic Income Experiments around the World

The concept of Universal Basic Income as an economic and social vehicle to recommit to the social contract has been experiencing a renaissance over the last few years – increasing in public consciousness and political discourse.

I’m happy to share my latest project – a Tableau data visualisation showcasing past and present Universal Basic Income projects around the world. This project was completed piece by piece over many weekends – combining my love for data visualisation and social welfare innovation.

Click on the viz preview below to visit Tableau Public and interact with the visualisation!
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I hope this visualisation serves as an effective starting point for your exploration of UBI initiatives around the world.

Fair Shot: Rethinking Inequality and How We Earn |Book Review

Since coming to the realisation that I want to work for a better world through economic policy making I have been researching in greater detail my main area policy interest, Universal Basic Income.

Some simple Googling led me to The Economic Security Project. This movement strikes directly at the heart of my policy preoccupations – how do we achieve economic security for all in the face of rising inequality and job automation? Their website says it best.

The Economic Security Project is a network committed to advancing the debate on unconditional cash and basic income in the United States. In a time of immense wealth, no one should live in poverty, nor should the middle class be consigned to a future of permanent stagnation or anxiety. Automation, globalization, and financialization are changing the nature of work, and these shifts require us to rethink how to create economic opportunity for all.

Now is the time to think seriously about how expanding unconditional cash could work, how to pay for it, and what the political path might be to make it a reality.

       – The Economic Security Project: Who We Are

The figurehead piece of literature for this movement is the book Fair Shot: Rethinking Inequality and How We Earn by Chris Hughes, cofounder of the social networking site Facebook which is now valued at over US$500 billion.

Fair Shot describes Hughes’ perspective on growing inequality and the power of luck on the insane fortunes of entrepreneurs. The book challenges the current meritocratic narrative that success (on the scale of tech entrepreneurs) is directly attributable to the hard work of the average person.

Below are the elements of his work that I found the most striking and valuable.

Description of the neoliberalisation of various world economies from the 1980s onwards.

Hughes provides a high-level narration of the evolution of the US economy from President Nixon’s significant domestic spending and growth of government size through to the corporates and big businesses self-organising in the mid-1970s to lobby their interests. This lobbying resulted in the continued trend of reduced labour protections and reduced taxation on the investment income of the wealthy in the US.

Critically, Hughes states that these changes provided the foundation for three forces: rapid advances in new technologies, globalised trade and the rise of venture capital that made Facebook possible.

At this stage of my economic understanding, I always find it valuable to read up on the high-level changes that have occurred in the modern economy, in the US or otherwise.

Hughes’ opinion on how he and the other founders were in the right place at the right time in the technology industry and global economy when Facebook launched

Direct from a cofounder himself, Fair Shot informs us Facebook’s insane success was largely borne from launching during the “sweet spot” of the early days of the internet in 2004, that is, leveraging the first mover advantage that is difficult for latecomers to compete with.

“When Mark coded the first lines in the early days of 2004, only a third of people in the developed world were using the Internet at all. Today over 80 percent are, and Facebook was perfectly poised to capture nearly all of them. Like Google and Amazon, which had a few years’ head start on us, Facebook began operations in this sweet-spot in history when the size of the web was modest and quickly growing… We started Facebook just in time to ride the wave of the web’s explosive growth (Hughes 2018, p. 32).

The second element of Facebook’s success is the proliferation of internet-accessible devices, such as the Apple iPhone, that could be built cheaply by manufacturers in China with components sourced worldwide due to Washington’s lowering of tariffs and embrace of a globalised market the decade previous. Customers had a point of access to the Facebook product with the explosive growth of these devices.

The availability of unprecedented investment capital into risky early stage ideas by venture capitalists also grew during this time, thanks to high stock market prices and historically low tax rates. This level of capital was incredible fuel for growth.

Drawing back upon my undergrad studies in Strategic Management, Hughes clearly touches upon the fundamentals of business and entrepreneurship theory – that a successful business competes by exploiting its position in its industry, and that in true zero-sum-gain fashion, creates a high barrier of entry for its competitors. However, specifically within the context of the global economy at the time of Facebook’s launch – Hughes and his cofounders enjoyed a remarkable economic environment in which they achieved phenomenal growth and success.

Hughes’ evolution from traditional International Development approaches towards unconditional cash transfer approaches to addressing global inequality

I closely identify with the way that Hughes’ interest in basic income programs grew from his initial experiences with the traditional International Development model. Hughes, having greatly profited off Facebook, wanted to give back, and decided to focus on fighting extreme poverty internationally as his method to empower people to chase their dreams. However, having engaged with Jeffrey Sachs’ Millennium Villages program (which is now largely regarded as a failure), he rapidly became suspicious of the scale of impact of these kinds of interventions.

My experience working in International Development in Cambodia has led me to similar conclusions. I will refrain from going into great detail about the efficiency and effectiveness issues that Hughes’ witnessed, however I will highlight one particular quote that sums it up well. “Aid interventions can occasionally work, but the question is, at what cost”? He and I both are concerned about the efficiency of our dollars that we put into programming, and a simple question is posed. What if, instead of “experts” from abroad creating complex interventions in developing countries, we simply gave our target beneficiaries cash? It speaks volumes about the agency it would grant individual people to spend the money as they see fit to actually benefit their lives.

It’s interesting, and encouraging, to see Hughes’ train of thought and mine converging when it comes to the methodology for tackling poverty and inequality worldwide.

Hughes’ pragmatism when it comes to unconditional cash transfer initiatives

Fair Shot addresses the more detailed question of “how” to implement a basic income, which is a policy obsession of mine.

Hughes’ overall position is that a guaranteed basic income of, for example, $500 per month should be provided only to working people with an annual income of $50,000 or below. This amount should be paid by the ultra-rich, such as Chris Hughes himself. This design is modest compared to the universal basic income concept of paying a dividend to each and every single citizen, regardless of income or employment status.

His approach is more measured, as he believes that executing grand ideas too fast is unrealistic and sets up guaranteed income for failure. This is a lesson learned from his failure to make The New Republic, a liberal US politics and arts magazine, a financially successful venture. Hughes’ key takeaways from The New Republic experience: “In my work today I purposefully choose more modest means to accomplish otherwise idealistic and ambitious goals. …A prosaic and incremental approach can be a more effective way to put poetic ideals into practice” (2018, p.133).

Some examples of previous and current economic security pilot programs

The Alaska Permanent Fund is a current guaranteed income fund, albeit a small one. Every Alaskan gets approximately US$1,400 paid out of the fund. This initiative deposits a quarter of the annual royalties from the production of oil and gas in the resources rich Alaskan state and deposits it into a government-run savings account. The amount that is divvied out to each Alaska resident is not equivalent to the amount proposed by most guaranteed income schemes, but is exemplary of the kind of clockwork payment floor that can help Alaskans make ends meet.

The Negative Income Tax was the most popular design for how to create a guaranteed income for the better part of the 20th Century. The more that a person makes, the higher the income tax that they pay. At the same time, a tax allowance should also increase in proportion to the amount he falls further under the poverty line.

If the poverty line was set at £500, for example, and the negative tax rate was 50 percent, then a person who earned zero income would receive 50 percent of the poverty threshold, a guaranteed income of £250. If the person earned £200, then he would receive half of the difference between his wages and the poverty threshold, or £150, for a total income of £350. Once his wages passed the poverty line, he would begin paying taxes (2018, p.143).

Most policymakers loved that it encouraged people to work, as it paid to work. They would earn more from employment and policy combined than just benefits alone. However, this form of guaranteed income did not pass the senate in 1971.

Out of this guaranteed income debate grew the Earned Income Tax Credit (EITC) which is an anti-poverty program that offers Americans a tax refund, depending on how much was earned in the previous financial year. Currently the EITC provides $70 billion in cash with no strings attached to 26 million working families and individuals, and recipients get $500-$6000 per year from the Internal Revenue Service to spend as they wish.

The City of Stockton, California is providing a small group of its citizens with a guaranteed income. The Economic Security Project provided the seed funding for this initiative!

Key results from EITC impact assessments

  • Kids whose families receive the earned income or child tax credit are significantly more likely to stay in school longer, and they perform better on standardised tests. Economists have found that for every $1,000 a family receives in tax credits, students’ test scores improve by 6 percent. Kids are more likely to finish high school and to enrol in college, and when they get there, they are more likely to stay there.
  • In families with incomes boosted by $250 per month, children under five go on to earn 17 percent more each year than kids from families with no boost.
  • For every 10 percent increase in the EITC, infant mortality rates decrease significantly. The number of babies born with low birth weights, a sign of inadequate nutrition, also decreases meaningfully.
  • There is no evidence that cash benefits cause people to work less. In fact, some studies suggest that they work more. Women make more money in the years after getting a boost in their EITC than women in control groups who do not receive the boost.
  • The EITC seems to slightly reduce the rates of smoking and drinking, presumably because of decreased stress levels (2018, p151).

My favourite standalone ideas from Fair Shot

 “If you inherit a mansion, you should pay the same tax as you would if that mansion had been cash. Closing these loopholes would raise $34 billion (2018, p.165).”

“We should raise the tax rates on income above $250,000 back to the historical average for much of the twentieth century – 50 percent. A family making $300,000 a year would see their taxes go up by only a few thousand dollars, but a billionaire making $30 million would pay millions more each year. This change would raise $190 billion per year. These changes would pay for the entirety to the benefit without adding anything to the national debt (2018, p165).”

“The bumper-sticker promise would be simple: if you work to make your country better, your country will take care of you. Every American who lives in a household that makes less than $50,000 and who works in the formal economy, does caregiving at home, or who is enrolled in school would receive a guaranteed income of $500 a month. The wealthy won’t get the benefit, and only the richest of the rich will pay for it (2018, p166).”

“A surtax on the one percent isn’t pitchforks coming for the rich or punishment for prosperity (2018, p165).”

“We [Hughes’ guaranteed income skeptic father] both agree that people want to work, and that if you work, you should not live in poverty. He has come to understand how unstable jobs in America are becoming and the evidence behind cash transfers” (2018, p179).”

“The natural drift of capitalism toward inequality requires a constant vigilance to make the market work for everyone, not just for the rich. …The scarier, more dystopian possibility is an America that looks more like the old European civilizations, in which a wealthy gentry lord over the struggling masses (2018, p182).”

“When Martin Luther King Jr. began his fight for the guaranteed income in 1967, there were 40 million Americans living in poverty. Today, fifty years later, there are still 40 million Americans living in poverty and even more lower-middle-class people who are teetering on the brink of economic collapse. We have the power to change this. A guaranteed income of $500 a month, paid for by the one percent, would lift 20 million people out of poverty and give them a fair shot at economic independence (2018, p179).”

“I [Chris Hughes], got lucky. That the reason we are wealthy is not because of a gift of brilliance or decades of my own hard work, but because a new economy at the start of the twenty-first century created massive financial windfalls for a select few like us overnight (2018, p.184).”

Final thoughts

Overall I found this book very accessible and personal to Hughes. It provides a very general and high level perspective of the economic forces driving the US today. This book was a great way to learn more about how guaranteed income is an ultra-relevant policy lever to improve lives using the obscene wealth generated by the 1 percent. Hughes’ writing has weight, because he was a cofounder of Facebook – so I find it encouraging that his experience and views on how to help people reach their full potential evolved in-line with mine! (Except for the part of being a multi-millionaire technologist of course!)

I definitely recommend giving this book a read, and I look forward to hearing your own thoughts on the matter!