The big tools in the policy toolbox of modern democratic governments are taxation and subsidization (and to be honest ignoring this is how most non-democratic governments go off the rails no matter how many boys with guns they have). This comes from basic economics – “If you want more of something, subsidize it; if you want less, tax it”. Hence taxes on “sin” products like booze and cigs and payments to wind-turbine builders, single mothers etc. In the USA, the Republicans current tax reform plan is making note of this and rolling back tax breaks on institutions (and, essentially, states) that don’t like them (and vice versa). While the current Republican lot are being a bit more blatant than others, they aren’t doing anything that politicians of all stripes haven’t done – after all a big chunk of what they are doing is cutting subsidies to things that their opponents liked.

Needless to say this is generally a “bad thing” because these tax breaks and subsidies will distort the economy and lead to people doing things that would not be rational except that the government gave them an incentive to do it. Worst case you end up with governments subsidizing some huge white elephant of a “National Champion” and a large number of unemployed/”disabled” while taxing into non-existence the entrepreneurial shoots that would otherwise lead to future prosperity. In the US, the various college/university tax breaks that the Republicans are trying to erase have led to some extremely suboptimal resource usage with universities relying on the labor of underpaid grad students and adjuncts to do most of the work. By trashing the deductability of tuition as a benefit in kind they totally change the economics of this and thereby almost certainly reduce the number of grad students. This, IMHO, is almost certainly a good thing as there is a glut of post grads and post docs and stopping more people deciding to follow that path to un-repayable student loans and no job after a decade of low wages for long hours sounds like a general win to me. Of course by cutting the number of such enormously they will also cause a bunch of knock effects that seem likely to also be positive for everyone except the parasites on the university bodies – the endless “deans of diversity” and other educrats that is.

Policy wonks of all political persuasions know all about the tax and subsidy incentive effects, and they also know that in countries with a welfare state, the welfare state itself provides all sorts of incentives for residents to do the wrong thing. For example the welfare trap, where it makes no sense to get a job (or a pay rise) because the job/pay rise results in lower post tax/benefit take home pay, is a feature of many welfare systems and it leads to a host of follow on bad incentives that ruin not just individuals but entire communities. Thus people look for ways to help the poor that don’t provide perverse incentives .

One of the proposals that has come up again recently is the concept of a “Universal Basic Income”.  In fact the Finns have been trialing the system, with some limited success. For those who don’t know what this is; the basic idea is that rather than pay various welfare credits and benefits, governments should pay everyone a fixed amount per week. There’s a lot to like about this idea in theory, but it also has a lot of obvious potential negatives if it is not implemented correctly and, since implementing it correctly would impact so many special interests, it is almost certain that it would not be done right and therefore would fail horribly.

So lets take a quick look at some of the ways a Basic Income could go wrong. The first and most obvious is that if there are additional welfare benefits then it probably doesn’t solve the welfare trap issue and therefore won’t provide any benefit over the current system except to cause more money to be paid out. This will likely increase public debt, increase inflation and generally put the economy on the skids.

If you do replace ALL current government welfare handouts – unemployment, state pension, disability, housing benefits/subsidized housing with the Basic Income then you instantly remove the welfare trap and you also allow a large number of government bureaucrats to be fired. You can do better and remove all the child benefits too with a BI and automagically introduce voucher based education funding by insisting that 50% of the BI children aged 5-16 is mandated to be used for education and that it is optional up to 18 or 21. All of this is wonderful.

However it leads to the next obvious trap. Who qualifies? If it is not limited to citizens then you suddenly discover millions of new immigrants who have come to take advantage of the governmental largess. This means you must limit it to citizens only and also strictly limit the number of ways that immigrants can become citizens. Unfortunately so doing means citizens must have a (hard to forge) method of identification (ID card). ID cards are problematic for lots of reasons: from ID theft to abuse of civil liberties to the inevitable bureaucratic SNAFUs (I wrote a story about the latter which some people mistook to be real 🙂 ) and the fact that “hard to forge” frequently turns out not to be the case.

Now assuming that we have a decent opt-outable ID scheme that only works for the Basic Income, there’s still a potential freeloader issue, plus the question of cost. To start with the latter. I haven’t done the sums for the USA, but a good decade ago I did do them for the UK and figured out that the sums only worked out if the benefit was between 66% and 75% of the notional “living wage”.

[How did that work? The 66% figure was based on no additional revenue from taxation and no gains from smaller government, the 75% one assumed lower government expenditure thanks to a drastic reduction in welfare administering bureaucrats and more tax. Why more tax? because you logically also tax ALL income at a minimum of say 10% rising to 20% and more at roughly current bands. ]

But the “living wage” thing is a chimera. Assume that the BI is US$200/week == $10400/year (and that number is more like 80% of the ‘poverty line’ so it’s a bit generous, but it makes the sums easy). If your housing (rent) is ~$50/week ($200-$250/month) then you have $150 a week or about $500 a month for food, clothing, heat (and possibly healthcare). That’s actually an income you can live on without any additional aid if you live in a groups of 2-4 others (a.k.a. a family) in a depressed part of the US – Appalachia or Detroit, say. With 4 people total you’re looking at almost $42,000 a year and that’s enough that the family is relatively well off – even if you take 50% of the (two) children’s incomes for education, the $31,000 left is OK. On the other hand if you live on the richer coasts it’s laughably low; a single person’s entire $200/week wouldn’t pay the rent of anything habitable in the SF Bay area or New York and our nominal family of four could have under $1000/month to feed, clothe, heat etc. everyone. In other words at $200/week relatively few people in more rural parts of the US would be have an incentive to keep working, while many people living in the coastal urban areas would barely see the point of getting the income, especially since it would have to be combined with a reduction in income tax deductions.

However at ~$10,000/year and  ~300 million US citizens the annual cost would be $3,000,000,000,000 == $3Trillion which is probably about 3 times what is affordable. So if you made it what could be afforded ($1 Trillion) then the BI drops to $65/week which makes it derisory for coastal inhabitants and very tight even for families in the deprived, rural areas. It’s also less than half the rate Finland pays in its test (~US$8000/yr == $150/wk). Now in some ways that’s a good thing because it provides incentives for people to find other sources of income (i.e. work). That’s fine for the unemployed who can be employed, but recall that the BI is the only payment anyone gets. So the disabled, pensioners and others who can’t supplement their incomes are in trouble. So much trouble that you can be absolutely sure there would be protests that would dwarf anything done by the Tea Party or Black Lives Matter.

So how would we fix this? One way would be to let the states pay something to top up the $65/wk. States do, after all, also spend a bunch on money on welfare so we could have a system were the federal government pays everyone $65/week and the states then top that up as they want. That might work, although you can be fairly sure that some states (coff Illinois coff) would need to contribute but wouldn’t. Another way would be for people on comfortable incomes to be shamed nudged into donating their BI to someone else who needs it. Making that a pre-tax write-off would certainly help and perhaps there would other ways to provide incentives.

While state top-ups and opt-outs/donations from richer people would probably raise the basic income significantly (it might perhaps get us to $130-150/week) it doesn’t solve some of the other problems, specifically the problem that a BI of $150/week is a lot closer to being useful in rural Appalachia or inner-city Detroit than it is in San Francisco or New York. Nor does it solve the problem that – because of the cost of living differences – there’s little doubt that it would not be the only benefit that governments would pay out. Thus the mooted saving of administrative overhead just wouldn’t happen.

In other words, the BI is an interesting idea but it won’t work. Sounds a bit like Socialism 🙂