Basic Income: A Cure-All or Misstep?

Buddy, can you spare 120,000 dimes? 

Basic Income (BI) is a type of publicly-funded economic security system. Other terms for BI include universal basic income, universal demogrant and citizen’s income. BI is considered by some as a mechanism that can lead to a more equitable, just and utopian society. Ideally, BI provides all citizens with a regular, unconditional sum of money from the government, in addition to any income received from elsewhere.

As I mentioned in a previous blog, literary utopias began with Plato's Republic, where he described a communal society that eliminates poverty and enjoys an equitable distribution of income and resources for its citizens, with no lawyers. What’s not to love about this Republic? In 1516 Sir Thomas More’s Utopia first coined the term and was the “modern” primogenitor of all utopian considerations. Unfortunately, whenever any group – and there have been many – has attempted to actually create and live in such a setting, it’s ultimately been a fraught, generally futile process that appeals to few people (e.g., Twin Oaks in Virginia, Icaria in Illinois and New Harmony, Indiana).

Nevertheless, more contemporary believers in idyllic possibilities have considered BI as a way of getting to a larger-scale Eden. There have been several implementations of BI-like policies that have enjoyed some success including one in Alaska (of all places) and another in Brazil.

The Permanent Fund of Alaska [PFA], established in 1976, is seen more as a re-distribution program funded by North Slope petroleum tax revenues, rather than a basic income program. Nevertheless, several aspects of the PFA illustrate its close ties to BI. In 2015, the PFA provided Alaskan residents with $2,072, the highest yearly payment ever. These payments to Alaska’s more than 710,000 citizens represented 2.9% of its Gross State Product in 2015. Such large payments are not likely to be forthcoming this year or for as long as the price of oil remains relatively low. [The price of West Texas Intermediate– the US benchmark oil price – was $48.03/bbl on June 28; 1 year ago it was $61.70; 2 years ago it was $91.81.]

For the first time in decades, Alaska had a fiscal deficit last year due to dramatic drops in world oil prices. Because of the deficit, Alaska politicians are now considering using PFA funds to help balance their state budget rather than only directly paying residents – something that Alaska voters aren’t at all pleased about.

Brazil’s much-praised Bolsa Familia program, started in 2003, is not unconditional or universal but is fairly broadly offered. Payments are provided to over 13 million Brazilian poor families (about 26% of Brazil’s population), based on income criteria. To receive payments families must have their kids vaccinated and must send them to school. Average monthly payments are 70 reals ($21); average per capita GDP in Brazil is $993/mo. The Bolsa Familia program costs about $19 billion annually, roughly 0.6% of Brazil’s GDP.

The proponents of BI, who include left-leaning folks, argue that it’s the right solution to the ever-increasing problems of income inequality and poverty. Income inequality has become a prominent issue in American political discussions. [So pervasive has the “inequality” issue become in the media that last week The Atlantic posted a story under the headline, “Why lightning disproportionately kills the poor.” What’s one to do but contact Thor and Xolotl (respectively, the Norse god of thunder and lightning and the Aztec god of lightning) and beseech them to change their ways, reduce lightning inequality and abide by a lower Gini Index.]

But enough about unequal lightning and back to BI.

There are now debates in France, the Netherlands and Finland about how to begin Basic Income pilot programs. The Swiss held a BI referendum this month that was strongly defeated. The Swiss Basic Income Initiative received 76.9% “no” votes. The unstated but expected BI monthly payment was to be about 2,500 Swiss francs ($2,560) per adult, with a smaller subsidy for children, without regard to employment, education, disability, age or wealth. Small-scale BI projects have been instituted in Namibia, India and Iran.

Several Americans have proposed BI pilots in the US, including Sam Altman a wealthy, Bay Area tech entrepreneur. In May he proposed that his startup incubator, Y-Combinator, will run a “short-term” BI study in Oakland, CA with the purpose of learning “how to pay people, how to collect data, how to randomly choose a sample, etc.” that could lead to a long-term study. Predictably, his announcement received much publicity. But conspicuously absent from this proclamation were any actual details about the proposed study, such as when it would begin, its size, how long it would last and perhaps most critical, how much the payments would be. As such, it was an impressive but empty statement; it lacked any substantive details or actual commitment.

It’s beyond rare that a potential pilot BI program mentions the income payments that would be offered. This is probably by design since once a payment level is stated costs could be calculated and there would be protests about its inappropriateness – both too high and too low.

Nevertheless, here is my payment suggestion as a thought experiment for US BI income levels designed to reduce inequality and eliminate “official” poverty; $1,000/mo for 1 person ($12,000/yr), $1,700/mo ($20,400/yr) for a family of 3. BI-like programs, such as Bolsa Familia, do not have this substantial objective; instead they provide smaller, supplemental payments to ease poverty.

My suggestion is based on the official federal government-determined poverty-level incomes that are established each year, based on household size. The 2016 federal poverty “guidelines” are $11,880/yr for 1 person and $20,160 for a family of 3 people. The guidelines’ income levels for family sizes range from 1 person to over 8 people.

For some perspective, the current legal minimum wage in California is $10/hr or $20,800/yr with full-time work. In San Francisco the minimum wage will be $13/hr in July (about $27,000/yr).

I was interested to see how my suggested poverty-purging BI’s compared with proposed and much-discussed (but not implemented) living wage levels. [A living wage is an income level that approximates the costs of a person’s/family’s basic living expenses such as food, clothing, housing and medical care.] Using MIT’s handy living wage calculator for US states and localities, the 2015 living wage for Alameda County, CA is $13.35/hr for a single adult or $27,800/yr with full-time work. If the household has 1 adult and 2 children, the living wage is $32.09/hr or $66,700/yr. Thus, even my substantial BI’s represent only 30% of a living-wage based income for a family of 3.

Interestingly, the median household income in Alameda County is $67,169, which is almost the same income level that the MIT living-wage based income level is for a family of 3. As you recall, median income represents the income level that divides the distribution of income (here, for Alameda County) into two equivalent parts. This illustrates the practical fantasy of considering changing minimum wage levels to family-sized living wage levels. The living-wage minimum is almost equal to the median income level, meaning virtually 50% of the population’s income would need to be increased, which would be a political impossibility because it would be a very expensive effort.

Predictably, the strongest criticism of BI programs centers on their substantial costs.

Even if my suggested BI program is limited to providing $12,000 per year only to citizens 21 years and older, it could cost $2.78 trillion (T) per year or about 15% of our GDP and require the vast majority of federal tax revenues. This BI program would be much more expensive – greater than 3 times more – than merely offering tuition-free public university education.

The total FY2015 federal budget is $3.8T and total federal tax revenues last year were $2.96T. Because my BI program thus represents 94% of all tax revenues, the federal government couldn’t spend anything for much else except the BI program. With virtually any BI program, taxes would need to increase substantially, and not only for the rich and wealthy.

If my BI payments are cut to $2,000, which wouldn’t come close to clearing the poverty line (but would be as much as the Alaska Permanent Fund provided last year), the program would  cost $463 billion per year, representing 80% of what CY2015 defense expenditures are and over 15% of total federal tax revenues.

A BI program not only is wildly expensive, but many critics also state that such government-provided income can diminish folks’ incentives for seeking paid employment as well as lowering the motivation of workers displaced by robots (or far, far more likely, by other workers) from participating in skill-enhancement and -training programs. Potential alternatives to ameliorating poverty and labor displacement more cost-effectively include increasing the well-regarded, existing federal Earned Income Tax Credit, broadening government-funded job retraining programs or even creating a low-wage employment subsidization system.

As professor Laurence Summers stated, “A universal basic income is one of those ideas that the longer you look at it, the less enthusiastic you become.” Nationally implementing even a modest BI program would be an expensive misstep. Basic Income is a misplaced idea whose time hasn’t come. It’s time for Biexit.