I have an intuition that if we implemented universal basic income, the prices of necessities would rise to the point where people without other sources of income would still be in poverty. I assume there are UBI supporters who’ve spent more time thinking about that question than I have, and I’m interested in their responses.
(I have some thoughts myself on the general directions responses might take, but I haven’t fleshed them out, and I might not care enough to do so.)
The goal of a UBI isn’t necessarily to eliminate poverty—which, given that poverty is relative, is impossible anyways—but rather to shift welfare from a complex set of rules with many hazards and pitfalls to a simple set of rules with few if any, while simultaneously permitting a simplification and flattening of the tax system without disproportionate adverse effects on the poor.
I get the impression that some people, including on rationalist tumblrsphere, do think a UBI will eliminate (or at least severely reduce) poverty.
Though it occurs to me that that’s quite likely an oversimplification of their views. So I’m also interested in clarification on what people think the effects of UBI on poverty will be.
Well, UBI will probably eliminate poverty for some definition of “poverty”, and not for the new one which will appear soon afterwards. Some people will keep updating the definition to mean “below the (new) average”.
But if we taboo the word, we can hope that UBI will remove e.g. starvation. And it will be done without having to employ a greater army of bureaucrats. Maybe the money saved on the unnecessary paperwork will be a significant fraction of the costs for removing starvation.
So if you give me a budget and ask me whether I would rather spend it paying people to create and process unnecessary paperwork or feeding people who starve, I guess the answer is obvious for most people, regardless of their other political opinions.
(Okay, some people would call it a false dilemma, and say we should neither feed the hungry nor pay the bureaucrats, but use the money in some other way; maybe not even collect it. But when you take into account the mainstream opinion, and what choices are realistic, this one is an obvious improvement. Well, depending on technical details, of course.)
The core question is whether you pay burocrats to keep taps on whether the people who starve write job applications and attempt to get in work or whether you don’t require people to apply for work.
What exactly happens when a bureaucrat tells you: “you will only get money if you can prove me you try to apply for a work”?
If you really want the money and don’t want a job, you can go to a job interview and make a really bad impression. Like, wear some old smelly clothes, pretend to be slightly retarded or drunk. They will reject you on the spot, and then you can go to the bureaucrat and give them a certificate that you applied for a job but were rejected. Doing this once in a month is more or less what they require from you to keep the money flowing.
The only people who get punished by the system are those who play fair. Ironically, the less time you spend unemployed, the less likely you are to get the unemployment benefits if it happens to you, because you don’t know how to play the game. Also, your education works against you, because the better education and work experience you have, the less credible it seems that you can’t find a job.
The only people who get punished by the system are those who play fair.
The system’s goal—at least the official, declared goal—is to get people off welfare and into jobs. Therefore if the system forces someone into a job, it counts as a success.
If you just want to keep on receiving free money, your goals are in opposition to the goals of the system—you are adversaries. In this context, I’m not sure what “playing fair” means. In an adversarial situation if you play by your opponent’s rules, you will lose.
But what if that’s an unrealistic goal. The whole point of UBI is that it’s a lot easier to get people into jobs if you let them keep their ‘welfare’ at the same time, albeit with some phase-out. (I.e. the people who are actually getting money on net are those with low-value jobs)
I don’t understand what that means. You’ll never be able to get everyone off unemployment into a job; you’ll surely be able to get some people off unemployment into a job.
The whole point of UBI is that it’s a lot easier to get people into jobs if you let them keep their ‘welfare’ at the same time
This is entirely not obvious to me, given that the motivation to go get a job will be less.
This is entirely not obvious to me, given that the motivation to go get a job will be less.
Given the way welfare is set up in the US right now, I’d argue, quite strongly, that the motivation to go get a job would be more, given, under many circumstances, that you have to reach upper-middle class levels of income before you reach the same standard of living achievable on welfare. (I’m a staunch libertarian, mind. UBI isn’t my ideal, far from it, but it’s a hell of a lot better than what we have right now.)
I strongly recommend anybody opposing the UBI on general principle grounds run a google search on “Welfare Cliff”, and research exactly how terrible the existing system is. Don’t let the perfect be the enemy of the better.
Yup. Much of the advocacy for UBI can be rephrased as “let’s get rid of welfare cliffs!” given that mostly any sane (cliff-less) welfare system can be rephrased as a UBI plus a marginal tax/phaseout schedule. (Sometimes these are dependent on other factors like the presence of children, but you could also account for such variations in a UBI-based system if you really wanted to.)
If I understand the current US system correctly, if you are a single person who is able to work and simply chooses not to do so, you may not qualify for any welfare whatsoever. If that is correct, a UBI would surely decrease your incentive to work.
Yes, this is the least convenient case. But UBI can still be a win in the longer run since it obviates the case for minimum wages and a lot of onerous regulation in the labor market. And let’s be honest, if there are single folks who would be induced to exit the labor market under a (realistic) UBI, they’re probably not getting much done at work in the first place!
This is entirely not obvious to me, given that the motivation to go get a job will be less.
Not sure what you mean. If you can have a paying job and some of your ‘welfare’ on top of it, the incentive is obviously greater than if getting a paying job meant giving up all welfare. This matters, especially for low-paying jobs which are the kinds welfare recipients are most likely to get.
If you can have a paying job and some of your ‘welfare’ on top of it, the incentive is obviously greater than if getting a paying job meant giving up all welfare.
Not at all. If the UBI is meaningfully large (there is really no point in something like $100/month), you would be able to live on it. If you can live on UBI, the incentive to find a job is less because the alternatives are MUCH more pleasant.
The carrot is slightly larger, but the stick becomes almost non-existent.
Are you comparing UBI recipients to people who get no subsidy/welfare at all? I’m not sure that’s a meaningful comparison. And one can structure the UBI amount such that utility of income is still steeply increasing at the margin—or, phrased differently, such that folks will most likely want to supplement their UBI by doing some work on the side. It’s a lot harder to do that if the premise is that you’re “looking for work at this time” but not actually getting market income.
Are you comparing UBI recipients to people who get no subsidy/welfare at all? I’m not sure that’s a meaningful comparison.
UBI recipients, by the virtue of that “U”, are also known as “the entire population”. I am a bit confused which “comparing” are you talking about.
one can structure UBI such that utility of income is still steeply increasing at the margin
Can you demonstrate? If you increase the marginal utility of earned income at some level, you will by the same token decrease that marginal utility at some different level. Unless you want UBI to monotonously increase with the amount earned, of course...
people will want to supplement their UBI by doing some work
Humans are satisficers. If UBI is sufficient to pay for a room, an internet connection, and enough pizzas, why should I work? Work takes an awful lot of time, is often unpleasant, the bosses are not the nicest people, etc. Much easier to spend time in front of a screen or hanging out with your friends.
And by the time your low-motivation teenager figures out that money is useful and that advancing in life could be worthwhile, he is in his late 20s and basically unemployable—not only because of lack of skills, but also because of lack of work ethic.
I’m not talking about phaseouts or things like that, I’m just saying that the UBI amount can be set at a level where looking for some work on the side has a high utility at the margin.
Humans are satisficers. If UBI is sufficient to pay for a room, an internet connection, and enough pizzas, why should I work? Work takes an awful lot of time, is often unpleasant, the bosses are not the nicest people, etc.
Well, by working, you can pay for a nicer room, a faster connection, and better pizza toppings. Yes, many jobs are unpleasant, but some are not. Especially as the UBI would make things like minimum wages obsolete, so folks would be free to seek better work conditions in exchange for some combination of higher skills and giving up some pay.
There are factors pointing both ways here. If getting a job means giving up benefits for the unemployed, or means-tested welfare that you’ll become ineligible for, that’s a disincentive to get a job. But utility isn’t linear in money, and so a job paying N dollars will always be more attractive to someone making zero dollars than the same job is to someone on UBI worth K dollars—and increasingly so the higher K is. That’s also a disincentive.
Which of these disincentives is bigger depends on the sizes of N and K and the specifics of the welfare system. I think I’d usually expect the incentive landscape on the margins to be friendlier under UBI, but it’s by no means a certainty.
The only people who get punished by the system are those who play fair.
The only people, out of the people who act optimally, who get punished by the system are those who play fair.
Many people don’t act optimally. The type of person who doesn’t want a job is likely to be lazy in a general manner, which will also lead him to not go to interviews at all rather than go to them drunk. Going to an interview drunk in order to keep the money coming in is psychologically difficult to such people for the same reason that actually getting a job is—they act based on a very short time horizon and really don’t want to be doing something that is immediately distasteful for a benefit slightly later.
A common counter-example is people who do not want this job, for example because it pays less than their current lifestyle costs to support. It isn’t lazy, it is making the smart economic decision.
You are also assuming that the trouble of traveling to and from an interview is where the stress and effort lies. I would only credit that as the case if they had a high-demand skill set and were traveling across the country for the in-person interview, which is highly unlikely to apply to someone drawing unemployment benefits. The stress and effort stems from preparation before and performance during an interview, neither of which apply if the goal is to fail at it.
A counterexample is useful to rebut a generalization. But I didn’t say that all people who are punished are people who don’t play fair; I said that some people who are punished are people who don’t play fair. You can’t use a counterexample against a point which says “there are some examples of X”; it’s perfectly consistent for there to be some examples, and some other cases that are not examples.
You are also assuming that the trouble of traveling to and from an interview is where the stress and effort lies.
I am assuming that that stress is enough to discourage some lazy people. It needn’t be a large percentage of the total stress to discourage lazy people; it could be that deliberately failing an interview is only 10% of the stress of a normal interview, but a sufficiently lazy person is unwilling to undergo even 10%.
So you are saying that there is no starvation that could be treated by government programs, but there is starvation that could be eliminated by UBI?
Would UBI be a government program?
I was taking your overbroad and incorrect claim—that no one in Western countries starves—and replacing it with a narrowly targeted claim—that there is no starvation left that can be fixed by government programs. The last time I looked, most starvation was caused by negligence on the part of legal guardians, deliberate self-harm (as in anorexia), or being out of the system (many homeless people have difficulty collecting food stamps). But all three of these issues will still be problems under UBI, and all three of them are being approached by specialized programs that are probably about as effective as one can expect a government program to be.
I was taking your overbroad and incorrect claim—that no one in Western countries starves
Nothing like adding a bit of straw to, erm, fill out the opponent’s argument :-P I, of course, did not say “no one”. I said “there is no starvation” which, given that we’re discussing social programs in the context of society-wide policy proposals like the UBI, means that there is no starvation as a social issue in the West, in particular one which the UBI might fix.
In the same sense I feel justified in saying that there is no slavery in the West, even though I’m sure some individuals are effectively slaves. The social-policy context and the nit-picking context are different.
So, I’ll stick with my claim and continue to consider it narrow enough to be correct. Constructing straw extensions to make it incorrect is, of course, always possible.
Huh? UBI is, basically, an unconditional grant of economic value. Moreover, it’s guaranteed to be there next month. You don’t get to create economic value out of thin air (and guarantee it will be there next month) just by making another altcoin.
UBI means every citizen gets a sum of money in their account each month. Current government programs means people need to jump through multiple hoops in order to get food. I don’t think UBI is a panacea, but I don’t think it’s a stretch to say it’ll reach people who aren’t being helped by the current welfare systems.
That line of reasoning falls somewhere between the worst elements of Reaganomics and Keynesian economics. It’s wishful thinking about something somebody already supports.
OK, I admit that maybe I did pass on this lore too quickly. It was one bit I took away from a discussion about basic income grants some time ago. But I can’t find evidence for it online. The evidence I can find seems to argue against it (except the dubious Nigeria case) but then all evidence also includes assumptions about labour supply and demand that do not seem to hold in an age of machine mass production.
That seems like a lot of conclusions to be drawing about Gunnar_Zarncke’s thinking, on the basis of very slender evidence. Would you care to unpack your own reasoning a bit?
The first question you should ask is whether or not consumption should be stimulated. This “stimulation” concept is where Reagonomics and Keynesian economics collide—the idea that the macro economy’s ideal (efficient?) state is higher than what it currently is, and needs to be adjusted. It’s worth noting that profit is the difference between consumption and production—in a generalized sense, and also in the trivial sense of mere net flow of dollars. What does stimulated consumption do? What does profit mean, on a global scale?
The second question is whether consumption can be stimulated.
Those are very reasonable questions, but how do you get from asking those questions to concluding that Gunnar_Zarncke is engaging in reasoning “somewhere between the worst elements of Reaganomics and Keynesian economics” and in “wishful thinking”?
It’s true (as I understand it) that Reaganomics and Keynesian economics both tend to approve of “stimulus” to the economy. That seems like a quite different (and much weaker) claim than that approving of economic stimulus partakes of the worst of those two views of economics.
In case you didn’t gather, I consider the “stimulus” aspect (and the related ideas) to be the major problem with those two economic views. If the answer to the question of whether stimulus is a good idea is “No”—a question neither school of economics truly addresses, assuming the answer to be “Yes”—and both schools of economics fall apart.
Yes, I understand that. What I don’t understand is how you get from “Gunnar approves of economic stimulus and I don’t” to “Gunnar is engaging in wishful thinking”. Nor for that matter why you pick out Keynesian and Reaganite economics in particular, since so far as I can tell liking the idea of economic stimulus is pretty much universal. (Though clearly you don’t share it.)
Wishful thinking is (necessarily) a thing people do, not a properties of ideas themselves. But I take it what you mean is that when you wrote, in response to Gunnar’s comment, “That line of reasoning falls somewhere between the worst elements of Reaganomics and Keynesian economics. It’s wishful thinking about something somebody already supports.” you meant not that Gunnar in particular was engaging in wishful thinking, but that … some unspecified other people advocating UBI for the sake of economic stimulus are engaging in wishful thinking.
Fair enough. It might have been worth making it clearer, but of course hindsight is always 20⁄20.
It seems reasonable to me that the marginal spending of money given to those of low incomes will be higher than the marginal spending of money given to those of high incomes.
And if we mandated by law that all durable products be slightly less durable than they are now, more people would be employed replacing or repairing the damaged old ones, and demand for labor would rise, and wages would rise, and we could make products even less durable. There’s no limit to the prosperity we could achieve.
That value you’re trying to maximize? You might want to consider what it’s measuring, before you try to maximize it.
There are three reasons why the price might go up:
demand increases
supply decreases
inflation
Right now, everyone is already consuming these necessities, so if UBI is introduced, demand will not go up. So 1 would not be true.
Supply could go down if enough people stop working. But if this reduces supply of the necessities, there is a strong incentive for people on just UBI to start working again. There is also increasing automation. So I find 2 unlikely.
That leaves 3, inflation. I am not an economist, but as far as I understand this shouldn’t be a significant factor.
Right now, everyone is already consuming these necessities
Uhm, no? I mean, those poor enough who cannot get those necessities are not partecipating in that market. If they suddeng gain the power to do so, you would have an increase in demand.
That leaves 3, inflation. I am not an economist, but as far as I understand this shouldn’t be a significant factor.
I guess it depends on where the money for UBI comes. If you just redistribute the money that is already spent elsewhere, then yes, inflation is not an issue. Instead if you just print bonds to keep up with the extra expenses, then it might become a problem...
Some people do die from poverty, so there we might expect an increase in purchases following UBI.… but this isn’t a big number,and therefore not a big increase, iff we are assuming that ‘necessity’ means food, water, enough shelter that you don’t die.
In fact, UBI might decrease some costs, for example, medicine is often a necessity, and if people choose to get health insurance (or better health insurance) with their new funds, this may have the effect of reducing overall costs (Obamacare is banking on this effect, on a larger scale).
However, UBI might be expected to raise some prices, for example, for apartments, used cars, and other inflexible markets. But remember, most markets like having lots of customers, so if new cars go up in price, the car manufacturers will be happy to make more cars next year to meet demand at the original price—in fact, unless all the car manufacturers collude, they will have to increase production / reduce price in order to stay competitive. Otherwise, one smart company will lower prices while the others don’t and corner the market.
You can see why the most popular goods are likely to be of the mass-market, easy-to-produce-more type. Truffles are not popular, not because they are not delicious (or so I’ve heard), but because they can’t be too popular—there aren’t enough of them. iPhones, McDonald’s, and puppies are popular because they can be enjoyed by anyone with a moderate amount of money. And if those things went up in price, Android, Wendy’s, or Leroy down at the puppy mill would be happy to fill the void.
I would see apartments as being the big worry; if millions of people move out of their parent’s basement, decide they don’t want roommates, or stop living in their cars, then apartments go up in price. But that only means that many of those people will not, after all, be able to move out of their parent’s basement, etc. (and that the rest of us have higher rents).
I agree with everything you say, indeed the increase in demand is only the first movement of market in search for a new equilibrium. Surely at higher prices markets become more attractive, and those which has a lower cost of entry will attract new supplier, and price goes down, and so on. It is difficult to predict a new equilibrium, although I share your view that the main problem is going to be houses.
if this reduces supply of the necessities, there is a strong incentive for people on just UBI to start working again
Technically, there is a danger that the tax rate for the working people may become so high (imagine e.g. 99%) in order to support the UBI, that when a person finds out they are unable to survive on UBI alone, they are screwed anyway.
It may happen to some people sooner than to others because not everyone has the same expenses. For example people with health problems may need to pay extra for medicine. We can get situation where UBI allows you to survive without work if you are healthy, but if you are sick even UBI plus heavily taxed salary will not be enough to survive.
I am not sure how realistic this is… I am just trying to imagine the worst possible scenario (while aware that people are often insufficiently pessimistic at predicting what could go wrong).
EDIT:
It would also be better, I think, if the first dollar gained above UBI is more or less untaxed. Less incentives for gray market. (Otherwise I expect at least 5-10% of population living on UBI + some undocumented income.) Which implies some kind of progressive taxation. (Which has its own bad incentives.)
It would also be better, I think, if the first dollar gained above UBI is more or less untaxed. Less incentives for gray market. (Otherwise I expect at least 5-10% of population living on UBI + some undocumented income.) Which implies some kind of progressive taxation. (Which has its own bad incentives.)
The ideal, at least as I approach it, is the combination of the UBI with a flat tax, wherein the flat tax applies to the UBI as well as all additional income. You use the UBI to offset the flat tax’s regressive tendencies.
This has an additional nicety in that everybody is equally affected by taxation and government spending, so you don’t up with moral hazards where the people voting for stuff aren’t the people who have to pay for it.
The actual research into welfare-maximizing tax systems argues for a UBI plus roughly U-shaped marginal tax rates, i.e. relatively high phaseout rates on the UBI itself, then low but mildly progressive rates for folks making more than the breakeven point. The point, I think, is that this strongly incents folks to become net contributors, since at that point they will be paying lower marginal rates. Your point about whether the UBI should be taxed is interesting. Of course at any given time it’s a wash, but you might be right that taxing the UBI itself (say, depending on tax revenue as a fraction of GNP) is a good institutional choice.
You could just adjust the UBI payout to achieve precisely the same result? Or is there another variable being maximized there relating to, say, household size? (Or is it just psychological?)
The point of taxing the UBI itself (even before earned income enters the picture) is precisely to adjust the amount in a predetermined way—in this case, it’s supposed to be proportional to the fraction of GNP that’s not affected by government taxation, so that, as you put it, “everybody is equally affected by taxation and government spending”. One issue with this is that it may make the UBI too volatile, which is bad as you want it to be as small as possible on average (because redistribution is very costly, even with the best system you can think of).
Taxes would increase to pay for the Universal Basic Income. You could do it using the money we currently spend on welfare, but that includes things like medicare. Either we need to keep that, or we need to give them extra money to pay for medical insurance.
Supply of labor could decrease. This is a necessary consequence of any effort to help the poor. But since we already have a welfare system, it’s just a question of which causes labor to decrease less.
Supply of labor could decrease. This is a necessary consequence of any effort to help the poor. But since we already have a welfare system, it’s just a question of which causes labor to decrease less.
For things like welfare (and almost certainly for UBI, though I doubt there’s enough empirical evidence either way to be sure), yes.
Things like education subsides (assuming they subsidize professionally relevant education rather than just signaling, which admittedly is a somewhat dubious assumption) and the EITC (basically a negative income tax for the working poor in the US) could very well increase the labor supply.
basically a negative income tax for the working poor in the US
That would increase incentive to work for the poor, but decrease the incentive to work hard enough to stop being considered poor. They can’t have the income tax be negative for everyone.
The idea is that you’re taxed on the UBI, as well, so your tax rate remains flat (or flatter than the current system) regardless of your income.
The big divergence is with the way welfare works now, when, depending on state, every dollar you can make, on average, costs you $1.50 in benefits, up to ~$70,000 for a single mother. That is, working makes you actively worse off. (Google “Welfare Cliff” for more information on this phenomenon, if you’re interested.)
One of the big things which happened during Clinton’s administration was a systematic adjustment of welfare cut-off points to reduce the gradient of the various welfare cliffs; this resulted in a labor boom, which coincidentally coincided with the .dot boom. Over time inflation ate away at the gradients, and further adjustments raised the cliff face, and we’re now worse-off than before in that regard.
So you can very much have a system in which the government is providing more welfare and yet people have a stronger incentive to work. That just seems bizarre in our universe, where every increase in welfare actively -destroys- people’s incentive to work, since their receipt of welfare is more or less conditional on their not working.
The simple model would be: everyone needs a certain minimum amount of food. If everyone is getting $300 a month and spending $200 a month on food, and if the price of food suddenly jumps to $300 a month, people will start to spend $300 a month on food. So we’d expect the price of food to increase, so retailers can extract everything they can from customers.
I’m not sure that prices rise because of inflation, so much as inflation being the name we give to the phenomenon of rising prices. I’d be moderately surprised if economists could accurately (and precisely) predict the effects of UBI on inflation.
Also also not an economist, although I took economics classes once.
I had a go at translating the simple model into one of those supply ‘n’ demand scribbles. For parsimony I assumed a straight line for the supply curve. For the demand curve I assumed no one bought more than the subsistence level of food, and that if the price was too high to reach that level, everyone simply bought as much food as they could with a constant budget.
That makes the status quo
and after a universal jump in income to relax everyone’s budget constraint, the non-vertical part of the demand curve rises:
At both times the intersection of S and D determines the equilibrium price. The intersection stays in the same place, so, in this incredibly simplified model, the equilibrium price is unaffected by everyone getting more money.
Being so primitive, this graphical model does not remotely prove that the price would stay the same in real life. But in trying to figure out why the graphical model disagreed with the verbal model, I managed to put my finger on why the two differ, and I think it’s a hole in the verbal model.
The verbal model observes that if people have $300/month, all of the retailers could jack the price of food up to $300/month, and everyone would be compelled to pay that. But that assumes coordination/cooperation/collusion between retailers rather than competition. If every food retailer raised their price to $300/month, any one of those retailers could swoop in and steal the others’ custom by cutting their own price to $299/month. And then another retailer could cut their price to $298/month, and so on. By the obvious inductive argument, the equilibrium price would wind up at the same $200/month it was before.
My main reaction to that graphical model is that it would be surprising if the intersection point was currently exactly on the cusp in the demand curve, unless there was something keeping it there. To the extent that that model works, I’d expect our current situation to have a shorter vertical bit on the demand curve (there are in fact people going hungry), so that the intersection is somewhere in the slopey bit, at lower price than your first picture. Then UBI could bring us to the second picture, where the price has risen, but food is still more widely available than the status quo. (This is one of the directions I was looking at.)
With competition, it seems to me that retailers currently have margins that competition could eat into, but doesn’t. If one of the factors keeping margins above epsilon is the amount of money people are willing to spend, then an increase in that would presumably also increase margins.
I guess I ruled out the possibility that the status-quo intersection was on the slopey bit because then everyone would be going hungry (from the assumptions that everyone were spending $200/month on food and that everyone shared the same subsistence level). However, I don’t have an argument for why the status quo would be on the cusp rather than below it; I just had a hunch which I should (with hindsight) probably have ignored.
Remember that retailers are in competition. If Food Lion raises it’s prices and Aldi does not, then Aldi magically gets more customers. Neither grocery store is motivated to become the High Cost Loser.
it seems to me that retailers currently have margins that competition could eat into, but doesn’t. If one of the factors keeping margins above epsilon is the amount of money people are willing to spend, then an increase in that would presumably also increase margins.
Also consider that retailers do in fact have different prices. Instead of Sainburys raising prices, we might find Sainsburys starting to get edged out by Waitrose. (This feels sketchy to me, especially since it’s least likely to happen in poor areas, and I’m not about to argue for it specifically. But I do want to suggest that prices can rise from factors other than “retailers decide to raise prices”.)
If you want information on how increased income due to UBI would affect people’s spending on food, you can look at the data that we already have on the relationship between income and spending on food. Three stylizedfacts:
As income goes up, the proportion of income spent on food goes down.
As income goes up, the total amount of money spent on food goes up.
As income goes up, the proportion of one’s food budget spent on restaurants goes up.
These trends generally hold if you are comparing different countries with each other, or if you are comparing different people within a single country, or if you are looking at a single country over time as it gets richer. I don’t see any strong reasons to think that they wouldn’t also apply to people whose income went up due to receiving a new UBI.
So if a household was making $20,000 per year and spending 20% of it ($4,000) on food, and UBI increases their income to $25,000 per year, then we can predict that they will spend somewhere between $4,000 and $5,000 per year on food, and some of the increased spending will go towards increased quality & convenience (such as eating out). You could probably make more precise predictions if you tried to put numbers on the three stylized facts.
More generally, the model here is: UBI affects the distribution of ‘income after taxes & transfers’, and the distribution of ‘income after taxes & transfers’ affects other things like prices & spending habits. So if you want to predict how UBI will affect something like prices, then study how ‘income after taxes & transfers’ affects prices, and combine that with your estimate of how the UBI will affect the distribution of ‘income after taxes & transfers’.
I would take such data as evidence if it was peer-reviewed (and not just a report by the organizers who claim that “we introduced it and it’s great”), and, more importantly, if we had information about its long-term effects. All of these projects are very recent. What will happen after a year? The initial enthusiasm might prompt people to spend the money wisely, but what will happen if they grow used to take it for granted? What will happen after ten years? Or after a whole new generation grows up?
I’m living in Eastern Europe, where, although no “basic income” was introduced, the changes in the last few decades led to a situation similar to basic income. And it had a disastrous effect. I’m not exaggerating with the word “disastrous”, because this region was invaded, looted and burned regularly during its history, by Mongols, Ottomans, Russians and others, and it was always rebuilt. The last few decades brought a greater devastation than any war from which it might never recover, with abandoned villages, destroyed culture, and a general hopeless mood despite a more comfortable living people in this region ever had.
Please let me elaborate.
In the past, people had to work very had just to survive. They had no other choice. Still, as everyone was almost equally poor and had to work equally hard, they were relatively happy. This I can attest from all the cultural artifacts which remain from that period, beautiful clothes, handcrafting, made by simple villagers and decorating every house, cheerful folk songs, and childhood memories of my grandparents who had to work on the fields even as children, walked barefooted most of the time, but still have very happy memories. I know, there might be some bias in those happy memories, but still, the society as a whole survived and even prospered. If an army devastated the village and burnt the houses down, the survivors rebuilt everything without any outside help from the government, and life went on.
Today, although the economic situation is quite bad, especially when we compare it to the rich Western Europe, you can get away with not working. You can get away with being irresponsible, and you can get away with being an alcoholic. You will not starve. Life might be hard for you, but basic food is cheap enough, basic clothing is almost for free, and there are plenty of opportunities for survival even for the very lazy and very uneducated people. They can do some seasonal jobs for a short while, receive some financial aid, then loiter around for months. They might live uncomfortably, but they won’t starve to death. Life is much easier, compared to what was the norm for many centuries. But as the rich West is nearby, people are depressed. They are depressed that they only make 5 times as much as their grandparents did, and not 50 times as much, like they do in the West. Although in the past the villages were mostly self-sufficient, and they worked even the hardest fields on the mountainsides, today there are vast fields with good quality soil on the plains, most of which are abandoned. Corruption is rampant, in many villages people were first used to not being required to work from morning till evening because they got a little financial aid, and now they bribe the doctors to put them on disability pension.
And there are opportunities for working, there are a few motivated people who start again with mostly self-sufficient agriculture, but for most people the low wages are not attractive. They rather loiter, barely surviving, instead of going to work for just a little bit more money as what they can get without having a stable job. Of course, if the wages were higher, that would motivate more people, and of course, the low wages can be partly responsible form many people to choose welfare instead of work, but the biggest problem is that the damage to culture is already done. And such a trend is very hard to be reversed, if the majority of society is used to something.
The point is, that in the past people didn’t have the possibility to choose this lifestyle, as they would have starved to death. These psychological changes happen through decades, not over a few moths. This is why I would be very careful in evaluating the “basic income” projects too soon.
Sadly, all this will remain anectodal evidence, because the region is not interesting enough to be featured in any English-speaking media, besides very one-sided and politically-motivated rants about racism against Gypsies. And speaking of Gypsies, you will not find it in the media, but if you come here, 100 people out of 100 will be able to testify that since they started getting financial aid (which they didn’t get back before the fall of communism) they are poorer (and work less) than before.
Human advancement is (and always was) motivated by need. If you take that need away, you will take the motivation away.
And sadly, in this ever-faster world people don’t see the side-effects of very slow social changes, which will be measurable only after several decades. Maybe they don’t even care, because the next election is in 4 years, not 40.
Speaking about the Gypsies, here is a problem that frequently happens:
There is a group of people, culturally and otherwise related, who have a strong preference for living close to each other. Also, most people in the group are unemployed. What happens?
The costs of living are different in different places. Usually the proximity of good job opportunities drives the prices up. So, if you are unemployed and almost all your friends and relatives are unemployed, it makes economically a lot of sense to move—together—to a location without job opportunities. You can sell your old small appartment and buy a new larger house, and you will still have some money left. The problem is, now you are effectively locked in the unemployment.
Even worse, your children are also locked. Even if they would like to get a job, they can’t. They live in a location without job opportunities. And they won’t move to a better place, because they are part of a culture that has a strong preference for living close to each other, and all their friends and relatives live in a place without job opportunities. Even if a few of them leave, most of the group will stay where they are, and the problem remains for generations.
The lesson for the basic income is the following… if you allow too many people to live without having jobs… so we would not be talking about unemployed individuals, but about whole communities where unemployment is a norm, then their children who might want to have a job could have a problem finding one simply because there is none in the area.
The same mechanism is at work in many American Indian communities.
The problem is exacerbated by ongoing evaporative cooling: people (mostly young) with energy, talent, motivation all leave. What’s left behind in the community is usually not pretty.
The problem is exacerbated by ongoing evaporative cooling: people (mostly young) with energy, talent, motivation all leave. What’s left behind in the community is usually not pretty.
It may not be pretty, but that’s most likely because they either don’t have any money, or can only get it under onerous conditions (‘welfare’). If you just pay everyone the same amount, it doesn’t take much to improve these folks’ living standards until they’re at least tolerable. (Since their local area is so cheap.) And once you have some money flowing in the area, local job opportunities would also spring up. (This is basically the principle GiveDirectly relies on, although they apply it to some of the poorest people in the world, as opposed to Roma or Native Americans.)
Money is a part of the problem, or maybe the origin of the whole problem, but at some moment there is a culture that perpetuates itself, and from that point giving more money does not help.
For example, in a group of poor people it makes sense to reduce the concept of private property. To make a mutual treaty of “if someone from our group is starving, and others have food or money, they are obliged to share”. At some moment this treaty benefits everyone, so it becomes a part of the culture. But in a long term… as soon as the first job opportunity appears, you would have to be an idiot to take it. It means more work and less free time for you, while your wage is shared with everyone. But you can’t go against the whole culture. Except if you leave the group. This is a reason why the motivated people leave; they simply cannot live the new lifestyle within the old group.
Okay, this is too complicated topic to be discussed as a sidenote in a “stupid questions thread”. Just wanted to say that “a poor community surrounded by rich communities” is a different dynamics than “a poor community surrounded by poor communities”. The difference is the easiness of just going away for all motivated people.
To make a mutual treaty of “if someone from our group is starving, and others have food or money, they are obliged to share”. …
Interesting point. Still, it would be interesting to see whether UBI can affect this dynamic. After all, the whole point of UBI is to provide social insurance (i.e. make sure that nobody is starving, at least in a literal sense) more effectively than any arrangement within the poor group.
make sure that nobody is starving, at least in a literal sense
The point is, that it’s already done without an UBI, by a much lesser scarcity than in previous generations, augmented by a very meager but existing aid system, that nobody is starving in the literal sense, and this allows them to choose a less responsible lifestyle. And it is very hard for those who try to break out of this lifestyle, they have to literally flee their peers. I know of Gypsies who did successfully try to break out and become medics or engineers, and they (especially, but not exclusively, girls) were bullied by their own families: “how dare you think you are better than us!”
I’m living in Eastern Europe, where, although no “basic income” was introduced, the changes in the last few decades led to a situation similar to basic income
Well, this is one point of view obviously, but UBI supporters might disagree about how “similar” it is. Some of the things you mention, wrt. family farms being abandoned in favor of urban lifestyles, are happening literally across the world; the unfavorable comparison with the West is also not something that basic income could affect either way. And ISTM that widespread abuse of things like disability is even worse than most ‘welfare’ in making people disinclined to work. But this is something that UBI aims to correct, while still making life easier for the folks who receive it.
The basic income scheme that I’ve seen proposed in Finland would not increase people’s incomes: it would simply be a less bureaucratic way of giving people on welfare the same amount of money that they’re already entitled to, but with less hoops to jump through and fewer welfare traps. People who earned enough to not be eligible to welfare today would still receive the money from the UBI, but the tax rate on their other income would be slightly increased to compensate, for an approximately zero change in net income.
In Finland, today, can I just say “I don’t feel like working” and get welfare for life?
(Not an expert on this stuff, but here’s my rough understanding.)
You get a couple years of pretty straightforward welfare if you quit your job, then it looks like they will start doing means testing (tarveharkinta) on your savings and will stop paying you if it doesn’t look like you’re living hand-to-mouth. After you’ve gone through all your savings that the employment office is aware of, I think you can go on living in some sort of rental apartment and get food. There’s also a spectrum of make-work programs from “send your application to this poorly matching open job we picked for you” to “attend this useless training course” to “rehabilitative labor activity” which can end up looking sort of like the American prisoner labor thing. The welfare will be suspended as a sanction if you refuse to attend, but I’m not quite sure how easy it is to end up actually homeless if you keep diligently pestering the social services and refuse to cooperate with anything work-like.
One problem is the diligent pestering of the social services part. Many of the actual unemployed are ill or have some mental problems, and they might not be that good at working the bureaucracy. So it probably helps if you’re reasonably energetic and smart enough to navigate the systems of regulations if you want to become a lifestyle unemployed. Also, you need to make sure to spend your time in an economically unproductive way. Starting any kind of small business will wipe out all welfare eligibility instantly.
then it looks like they will start doing means testing (tarveharkinta) on your savings and will stop paying you if it doesn’t look like you’re living hand-to-mouth. … There’s also a spectrum of make-work programs from “send your application to this poorly matching open job we picked for you” to “attend this useless training course” to “rehabilitative labor activity” which can end up looking sort of like the American prisoner labor thing.
Now here’s why these are really, really dumb policies: they amount to a capital levy and a corvée that are selectively applied to low-income folks who would otherwise qualify for welfare. Needless to say, there’s a reason we don’t use capital levies and corvées anymore, and limiting them to low-income folks does not change that assessment much.
If you’re willing to live on a rather low budget and spend a bunch of energy gaming the system, yes, but that low of an income tends to stress most people out (especially since the system is known to do “fun” stuff like noticing that your insurance company compensated you for your bike getting stolen, and then count the insurance claim as income to be directly subtracted from your welfare payments).
Similarly, as rsaarelm mentioned, if you do anything that the system might consider “work” (sometimes including stuff like volunteering at an event for no pay), you might be denied your payments.
Some prices would likely rise, but not uniformly and new equilibria are very hard to predict generally, nigh-impossible without specifying a bunch of implementation specifics (including where the money comes from, how it’s distributed, what limits there are on qualifying or using the money, and how it’s indexed to change over time).
I suspect we’d redefine poverty such that roughly the same percentage of people would be in poverty, but it would be a (slightly) different set of individuals, and likely a much more pleasant poverty than without. Much like has happened dozens of times already in modern civilization. I call it “progress”.
My general expectation is that either you’re right, people will complain loudly until food and water stay cheap, or prices will avoid inflating because the people who produce need the people living on UBI to buy their stuff.
I have no general idea on which is more probable. I like the last one because it is the most convenient, but I’m not convinced it has any more probability than the first two.
I have an intuition that if we implemented universal basic income, the prices of necessities would rise to the point where people without other sources of income would still be in poverty.
I have an intuition that if we implemented universal basic income, the prices of necessities would rise to the point where people without other sources of income would still be in poverty. I assume there are UBI supporters who’ve spent more time thinking about that question than I have, and I’m interested in their responses.
(I have some thoughts myself on the general directions responses might take, but I haven’t fleshed them out, and I might not care enough to do so.)
The goal of a UBI isn’t necessarily to eliminate poverty—which, given that poverty is relative, is impossible anyways—but rather to shift welfare from a complex set of rules with many hazards and pitfalls to a simple set of rules with few if any, while simultaneously permitting a simplification and flattening of the tax system without disproportionate adverse effects on the poor.
I get the impression that some people, including on rationalist tumblrsphere, do think a UBI will eliminate (or at least severely reduce) poverty.
Though it occurs to me that that’s quite likely an oversimplification of their views. So I’m also interested in clarification on what people think the effects of UBI on poverty will be.
Well, UBI will probably eliminate poverty for some definition of “poverty”, and not for the new one which will appear soon afterwards. Some people will keep updating the definition to mean “below the (new) average”.
But if we taboo the word, we can hope that UBI will remove e.g. starvation. And it will be done without having to employ a greater army of bureaucrats. Maybe the money saved on the unnecessary paperwork will be a significant fraction of the costs for removing starvation.
So if you give me a budget and ask me whether I would rather spend it paying people to create and process unnecessary paperwork or feeding people who starve, I guess the answer is obvious for most people, regardless of their other political opinions.
(Okay, some people would call it a false dilemma, and say we should neither feed the hungry nor pay the bureaucrats, but use the money in some other way; maybe not even collect it. But when you take into account the mainstream opinion, and what choices are realistic, this one is an obvious improvement. Well, depending on technical details, of course.)
The core question is whether you pay burocrats to keep taps on whether the people who starve write job applications and attempt to get in work or whether you don’t require people to apply for work.
What exactly happens when a bureaucrat tells you: “you will only get money if you can prove me you try to apply for a work”?
If you really want the money and don’t want a job, you can go to a job interview and make a really bad impression. Like, wear some old smelly clothes, pretend to be slightly retarded or drunk. They will reject you on the spot, and then you can go to the bureaucrat and give them a certificate that you applied for a job but were rejected. Doing this once in a month is more or less what they require from you to keep the money flowing.
The only people who get punished by the system are those who play fair. Ironically, the less time you spend unemployed, the less likely you are to get the unemployment benefits if it happens to you, because you don’t know how to play the game. Also, your education works against you, because the better education and work experience you have, the less credible it seems that you can’t find a job.
The system’s goal—at least the official, declared goal—is to get people off welfare and into jobs. Therefore if the system forces someone into a job, it counts as a success.
If you just want to keep on receiving free money, your goals are in opposition to the goals of the system—you are adversaries. In this context, I’m not sure what “playing fair” means. In an adversarial situation if you play by your opponent’s rules, you will lose.
But what if that’s an unrealistic goal. The whole point of UBI is that it’s a lot easier to get people into jobs if you let them keep their ‘welfare’ at the same time, albeit with some phase-out. (I.e. the people who are actually getting money on net are those with low-value jobs)
I don’t understand what that means. You’ll never be able to get everyone off unemployment into a job; you’ll surely be able to get some people off unemployment into a job.
This is entirely not obvious to me, given that the motivation to go get a job will be less.
Given the way welfare is set up in the US right now, I’d argue, quite strongly, that the motivation to go get a job would be more, given, under many circumstances, that you have to reach upper-middle class levels of income before you reach the same standard of living achievable on welfare. (I’m a staunch libertarian, mind. UBI isn’t my ideal, far from it, but it’s a hell of a lot better than what we have right now.)
I strongly recommend anybody opposing the UBI on general principle grounds run a google search on “Welfare Cliff”, and research exactly how terrible the existing system is. Don’t let the perfect be the enemy of the better.
Yup. Much of the advocacy for UBI can be rephrased as “let’s get rid of welfare cliffs!” given that mostly any sane (cliff-less) welfare system can be rephrased as a UBI plus a marginal tax/phaseout schedule. (Sometimes these are dependent on other factors like the presence of children, but you could also account for such variations in a UBI-based system if you really wanted to.)
If I understand the current US system correctly, if you are a single person who is able to work and simply chooses not to do so, you may not qualify for any welfare whatsoever. If that is correct, a UBI would surely decrease your incentive to work.
Yes, this is the least convenient case. But UBI can still be a win in the longer run since it obviates the case for minimum wages and a lot of onerous regulation in the labor market. And let’s be honest, if there are single folks who would be induced to exit the labor market under a (realistic) UBI, they’re probably not getting much done at work in the first place!
Not sure what you mean. If you can have a paying job and some of your ‘welfare’ on top of it, the incentive is obviously greater than if getting a paying job meant giving up all welfare. This matters, especially for low-paying jobs which are the kinds welfare recipients are most likely to get.
Not at all. If the UBI is meaningfully large (there is really no point in something like $100/month), you would be able to live on it. If you can live on UBI, the incentive to find a job is less because the alternatives are MUCH more pleasant.
The carrot is slightly larger, but the stick becomes almost non-existent.
Are you comparing UBI recipients to people who get no subsidy/welfare at all? I’m not sure that’s a meaningful comparison. And one can structure the UBI amount such that utility of income is still steeply increasing at the margin—or, phrased differently, such that folks will most likely want to supplement their UBI by doing some work on the side. It’s a lot harder to do that if the premise is that you’re “looking for work at this time” but not actually getting market income.
UBI recipients, by the virtue of that “U”, are also known as “the entire population”. I am a bit confused which “comparing” are you talking about.
Can you demonstrate? If you increase the marginal utility of earned income at some level, you will by the same token decrease that marginal utility at some different level. Unless you want UBI to monotonously increase with the amount earned, of course...
Humans are satisficers. If UBI is sufficient to pay for a room, an internet connection, and enough pizzas, why should I work? Work takes an awful lot of time, is often unpleasant, the bosses are not the nicest people, etc. Much easier to spend time in front of a screen or hanging out with your friends.
And by the time your low-motivation teenager figures out that money is useful and that advancing in life could be worthwhile, he is in his late 20s and basically unemployable—not only because of lack of skills, but also because of lack of work ethic.
I’m not talking about phaseouts or things like that, I’m just saying that the UBI amount can be set at a level where looking for some work on the side has a high utility at the margin.
Well, by working, you can pay for a nicer room, a faster connection, and better pizza toppings. Yes, many jobs are unpleasant, but some are not. Especially as the UBI would make things like minimum wages obsolete, so folks would be free to seek better work conditions in exchange for some combination of higher skills and giving up some pay.
There are factors pointing both ways here. If getting a job means giving up benefits for the unemployed, or means-tested welfare that you’ll become ineligible for, that’s a disincentive to get a job. But utility isn’t linear in money, and so a job paying N dollars will always be more attractive to someone making zero dollars than the same job is to someone on UBI worth K dollars—and increasingly so the higher K is. That’s also a disincentive.
Which of these disincentives is bigger depends on the sizes of N and K and the specifics of the welfare system. I think I’d usually expect the incentive landscape on the margins to be friendlier under UBI, but it’s by no means a certainty.
The only people, out of the people who act optimally, who get punished by the system are those who play fair.
Many people don’t act optimally. The type of person who doesn’t want a job is likely to be lazy in a general manner, which will also lead him to not go to interviews at all rather than go to them drunk. Going to an interview drunk in order to keep the money coming in is psychologically difficult to such people for the same reason that actually getting a job is—they act based on a very short time horizon and really don’t want to be doing something that is immediately distasteful for a benefit slightly later.
You have oversimplified to uselessness.
A common counter-example is people who do not want this job, for example because it pays less than their current lifestyle costs to support. It isn’t lazy, it is making the smart economic decision.
You are also assuming that the trouble of traveling to and from an interview is where the stress and effort lies. I would only credit that as the case if they had a high-demand skill set and were traveling across the country for the in-person interview, which is highly unlikely to apply to someone drawing unemployment benefits. The stress and effort stems from preparation before and performance during an interview, neither of which apply if the goal is to fail at it.
A counterexample is useful to rebut a generalization. But I didn’t say that all people who are punished are people who don’t play fair; I said that some people who are punished are people who don’t play fair. You can’t use a counterexample against a point which says “there are some examples of X”; it’s perfectly consistent for there to be some examples, and some other cases that are not examples.
I am assuming that that stress is enough to discourage some lazy people. It needn’t be a large percentage of the total stress to discourage lazy people; it could be that deliberately failing an interview is only 10% of the stress of a normal interview, but a sufficiently lazy person is unwilling to undergo even 10%.
Ah—I appear to have misread your comment, then.
Would I be correct in limiting my reading of your remarks to rebutting the generalization you quoted?
There is no starvation in Western countries.
Well, there is some. A better way to put this is something like “there is no starvation left that could be treated by government programs.”
Not perfectly true in Britain, as far as I can tell. Families are using food banks in masses, and one kid got scurvy as I recall.
So you are saying that there is no starvation that could be treated by government programs, but there is starvation that could be eliminated by UBI?
Errr....
Would UBI be a government program?
I was taking your overbroad and incorrect claim—that no one in Western countries starves—and replacing it with a narrowly targeted claim—that there is no starvation left that can be fixed by government programs. The last time I looked, most starvation was caused by negligence on the part of legal guardians, deliberate self-harm (as in anorexia), or being out of the system (many homeless people have difficulty collecting food stamps). But all three of these issues will still be problems under UBI, and all three of them are being approached by specialized programs that are probably about as effective as one can expect a government program to be.
What other alternatives are there?
Nothing like adding a bit of straw to, erm, fill out the opponent’s argument :-P I, of course, did not say “no one”. I said “there is no starvation” which, given that we’re discussing social programs in the context of society-wide policy proposals like the UBI, means that there is no starvation as a social issue in the West, in particular one which the UBI might fix.
In the same sense I feel justified in saying that there is no slavery in the West, even though I’m sure some individuals are effectively slaves. The social-policy context and the nit-picking context are different.
So, I’ll stick with my claim and continue to consider it narrow enough to be correct. Constructing straw extensions to make it incorrect is, of course, always possible.
Certain altcoins, like uCoin, purport to be a kind of currency with built in nongovernmental UBI.
Huh? UBI is, basically, an unconditional grant of economic value. Moreover, it’s guaranteed to be there next month. You don’t get to create economic value out of thin air (and guarantee it will be there next month) just by making another altcoin.
UBI means every citizen gets a sum of money in their account each month. Current government programs means people need to jump through multiple hoops in order to get food. I don’t think UBI is a panacea, but I don’t think it’s a stretch to say it’ll reach people who aren’t being helped by the current welfare systems.
And also to stimulate consumption and thus economy.
That line of reasoning falls somewhere between the worst elements of Reaganomics and Keynesian economics. It’s wishful thinking about something somebody already supports.
OK, I admit that maybe I did pass on this lore too quickly. It was one bit I took away from a discussion about basic income grants some time ago. But I can’t find evidence for it online. The evidence I can find seems to argue against it (except the dubious Nigeria case) but then all evidence also includes assumptions about labour supply and demand that do not seem to hold in an age of machine mass production.
That seems like a lot of conclusions to be drawing about Gunnar_Zarncke’s thinking, on the basis of very slender evidence. Would you care to unpack your own reasoning a bit?
The first question you should ask is whether or not consumption should be stimulated. This “stimulation” concept is where Reagonomics and Keynesian economics collide—the idea that the macro economy’s ideal (efficient?) state is higher than what it currently is, and needs to be adjusted. It’s worth noting that profit is the difference between consumption and production—in a generalized sense, and also in the trivial sense of mere net flow of dollars. What does stimulated consumption do? What does profit mean, on a global scale?
The second question is whether consumption can be stimulated.
Those are very reasonable questions, but how do you get from asking those questions to concluding that Gunnar_Zarncke is engaging in reasoning “somewhere between the worst elements of Reaganomics and Keynesian economics” and in “wishful thinking”?
It’s true (as I understand it) that Reaganomics and Keynesian economics both tend to approve of “stimulus” to the economy. That seems like a quite different (and much weaker) claim than that approving of economic stimulus partakes of the worst of those two views of economics.
In case you didn’t gather, I consider the “stimulus” aspect (and the related ideas) to be the major problem with those two economic views. If the answer to the question of whether stimulus is a good idea is “No”—a question neither school of economics truly addresses, assuming the answer to be “Yes”—and both schools of economics fall apart.
Yes, I understand that. What I don’t understand is how you get from “Gunnar approves of economic stimulus and I don’t” to “Gunnar is engaging in wishful thinking”. Nor for that matter why you pick out Keynesian and Reaganite economics in particular, since so far as I can tell liking the idea of economic stimulus is pretty much universal. (Though clearly you don’t share it.)
I don’t think Gunnar is doing either of those things, and didn’t when I wrote that. I said the idea exhibits those properties.
Wishful thinking is (necessarily) a thing people do, not a properties of ideas themselves. But I take it what you mean is that when you wrote, in response to Gunnar’s comment, “That line of reasoning falls somewhere between the worst elements of Reaganomics and Keynesian economics. It’s wishful thinking about something somebody already supports.” you meant not that Gunnar in particular was engaging in wishful thinking, but that … some unspecified other people advocating UBI for the sake of economic stimulus are engaging in wishful thinking.
Fair enough. It might have been worth making it clearer, but of course hindsight is always 20⁄20.
It seems reasonable to me that the marginal spending of money given to those of low incomes will be higher than the marginal spending of money given to those of high incomes.
And if we mandated by law that all durable products be slightly less durable than they are now, more people would be employed replacing or repairing the damaged old ones, and demand for labor would rise, and wages would rise, and we could make products even less durable. There’s no limit to the prosperity we could achieve.
That value you’re trying to maximize? You might want to consider what it’s measuring, before you try to maximize it.
Why would the price of necessities rise?
There are three reasons why the price might go up:
demand increases
supply decreases
inflation
Right now, everyone is already consuming these necessities, so if UBI is introduced, demand will not go up. So 1 would not be true.
Supply could go down if enough people stop working. But if this reduces supply of the necessities, there is a strong incentive for people on just UBI to start working again. There is also increasing automation. So I find 2 unlikely.
That leaves 3, inflation. I am not an economist, but as far as I understand this shouldn’t be a significant factor.
Uhm, no? I mean, those poor enough who cannot get those necessities are not partecipating in that market. If they suddeng gain the power to do so, you would have an increase in demand.
I guess it depends on where the money for UBI comes. If you just redistribute the money that is already spent elsewhere, then yes, inflation is not an issue.
Instead if you just print bonds to keep up with the extra expenses, then it might become a problem...
Some people do die from poverty, so there we might expect an increase in purchases following UBI.… but this isn’t a big number,and therefore not a big increase, iff we are assuming that ‘necessity’ means food, water, enough shelter that you don’t die.
In fact, UBI might decrease some costs, for example, medicine is often a necessity, and if people choose to get health insurance (or better health insurance) with their new funds, this may have the effect of reducing overall costs (Obamacare is banking on this effect, on a larger scale).
However, UBI might be expected to raise some prices, for example, for apartments, used cars, and other inflexible markets. But remember, most markets like having lots of customers, so if new cars go up in price, the car manufacturers will be happy to make more cars next year to meet demand at the original price—in fact, unless all the car manufacturers collude, they will have to increase production / reduce price in order to stay competitive. Otherwise, one smart company will lower prices while the others don’t and corner the market.
You can see why the most popular goods are likely to be of the mass-market, easy-to-produce-more type. Truffles are not popular, not because they are not delicious (or so I’ve heard), but because they can’t be too popular—there aren’t enough of them. iPhones, McDonald’s, and puppies are popular because they can be enjoyed by anyone with a moderate amount of money. And if those things went up in price, Android, Wendy’s, or Leroy down at the puppy mill would be happy to fill the void.
I would see apartments as being the big worry; if millions of people move out of their parent’s basement, decide they don’t want roommates, or stop living in their cars, then apartments go up in price. But that only means that many of those people will not, after all, be able to move out of their parent’s basement, etc. (and that the rest of us have higher rents).
I agree with everything you say, indeed the increase in demand is only the first movement of market in search for a new equilibrium. Surely at higher prices markets become more attractive, and those which has a lower cost of entry will attract new supplier, and price goes down, and so on. It is difficult to predict a new equilibrium, although I share your view that the main problem is going to be houses.
Technically, there is a danger that the tax rate for the working people may become so high (imagine e.g. 99%) in order to support the UBI, that when a person finds out they are unable to survive on UBI alone, they are screwed anyway.
It may happen to some people sooner than to others because not everyone has the same expenses. For example people with health problems may need to pay extra for medicine. We can get situation where UBI allows you to survive without work if you are healthy, but if you are sick even UBI plus heavily taxed salary will not be enough to survive.
I am not sure how realistic this is… I am just trying to imagine the worst possible scenario (while aware that people are often insufficiently pessimistic at predicting what could go wrong).
EDIT:
It would also be better, I think, if the first dollar gained above UBI is more or less untaxed. Less incentives for gray market. (Otherwise I expect at least 5-10% of population living on UBI + some undocumented income.) Which implies some kind of progressive taxation. (Which has its own bad incentives.)
The ideal, at least as I approach it, is the combination of the UBI with a flat tax, wherein the flat tax applies to the UBI as well as all additional income. You use the UBI to offset the flat tax’s regressive tendencies.
This has an additional nicety in that everybody is equally affected by taxation and government spending, so you don’t up with moral hazards where the people voting for stuff aren’t the people who have to pay for it.
The actual research into welfare-maximizing tax systems argues for a UBI plus roughly U-shaped marginal tax rates, i.e. relatively high phaseout rates on the UBI itself, then low but mildly progressive rates for folks making more than the breakeven point. The point, I think, is that this strongly incents folks to become net contributors, since at that point they will be paying lower marginal rates. Your point about whether the UBI should be taxed is interesting. Of course at any given time it’s a wash, but you might be right that taxing the UBI itself (say, depending on tax revenue as a fraction of GNP) is a good institutional choice.
You could just adjust the UBI payout to achieve precisely the same result? Or is there another variable being maximized there relating to, say, household size? (Or is it just psychological?)
The point of taxing the UBI itself (even before earned income enters the picture) is precisely to adjust the amount in a predetermined way—in this case, it’s supposed to be proportional to the fraction of GNP that’s not affected by government taxation, so that, as you put it, “everybody is equally affected by taxation and government spending”. One issue with this is that it may make the UBI too volatile, which is bad as you want it to be as small as possible on average (because redistribution is very costly, even with the best system you can think of).
Taxes would increase to pay for the Universal Basic Income. You could do it using the money we currently spend on welfare, but that includes things like medicare. Either we need to keep that, or we need to give them extra money to pay for medical insurance.
Supply of labor could decrease. This is a necessary consequence of any effort to help the poor. But since we already have a welfare system, it’s just a question of which causes labor to decrease less.
For things like welfare (and almost certainly for UBI, though I doubt there’s enough empirical evidence either way to be sure), yes.
Things like education subsides (assuming they subsidize professionally relevant education rather than just signaling, which admittedly is a somewhat dubious assumption) and the EITC (basically a negative income tax for the working poor in the US) could very well increase the labor supply.
That would increase incentive to work for the poor, but decrease the incentive to work hard enough to stop being considered poor. They can’t have the income tax be negative for everyone.
The idea is that you’re taxed on the UBI, as well, so your tax rate remains flat (or flatter than the current system) regardless of your income.
The big divergence is with the way welfare works now, when, depending on state, every dollar you can make, on average, costs you $1.50 in benefits, up to ~$70,000 for a single mother. That is, working makes you actively worse off. (Google “Welfare Cliff” for more information on this phenomenon, if you’re interested.)
One of the big things which happened during Clinton’s administration was a systematic adjustment of welfare cut-off points to reduce the gradient of the various welfare cliffs; this resulted in a labor boom, which coincidentally coincided with the .dot boom. Over time inflation ate away at the gradients, and further adjustments raised the cliff face, and we’re now worse-off than before in that regard.
So you can very much have a system in which the government is providing more welfare and yet people have a stronger incentive to work. That just seems bizarre in our universe, where every increase in welfare actively -destroys- people’s incentive to work, since their receipt of welfare is more or less conditional on their not working.
Also not an economist.
The simple model would be: everyone needs a certain minimum amount of food. If everyone is getting $300 a month and spending $200 a month on food, and if the price of food suddenly jumps to $300 a month, people will start to spend $300 a month on food. So we’d expect the price of food to increase, so retailers can extract everything they can from customers.
I’m not sure that prices rise because of inflation, so much as inflation being the name we give to the phenomenon of rising prices. I’d be moderately surprised if economists could accurately (and precisely) predict the effects of UBI on inflation.
Also also not an economist, although I took economics classes once.
I had a go at translating the simple model into one of those supply ‘n’ demand scribbles. For parsimony I assumed a straight line for the supply curve. For the demand curve I assumed no one bought more than the subsistence level of food, and that if the price was too high to reach that level, everyone simply bought as much food as they could with a constant budget.
That makes the status quo
and after a universal jump in income to relax everyone’s budget constraint, the non-vertical part of the demand curve rises:
At both times the intersection of S and D determines the equilibrium price. The intersection stays in the same place, so, in this incredibly simplified model, the equilibrium price is unaffected by everyone getting more money.
Being so primitive, this graphical model does not remotely prove that the price would stay the same in real life. But in trying to figure out why the graphical model disagreed with the verbal model, I managed to put my finger on why the two differ, and I think it’s a hole in the verbal model.
The verbal model observes that if people have $300/month, all of the retailers could jack the price of food up to $300/month, and everyone would be compelled to pay that. But that assumes coordination/cooperation/collusion between retailers rather than competition. If every food retailer raised their price to $300/month, any one of those retailers could swoop in and steal the others’ custom by cutting their own price to $299/month. And then another retailer could cut their price to $298/month, and so on. By the obvious inductive argument, the equilibrium price would wind up at the same $200/month it was before.
My main reaction to that graphical model is that it would be surprising if the intersection point was currently exactly on the cusp in the demand curve, unless there was something keeping it there. To the extent that that model works, I’d expect our current situation to have a shorter vertical bit on the demand curve (there are in fact people going hungry), so that the intersection is somewhere in the slopey bit, at lower price than your first picture. Then UBI could bring us to the second picture, where the price has risen, but food is still more widely available than the status quo. (This is one of the directions I was looking at.)
With competition, it seems to me that retailers currently have margins that competition could eat into, but doesn’t. If one of the factors keeping margins above epsilon is the amount of money people are willing to spend, then an increase in that would presumably also increase margins.
I guess I ruled out the possibility that the status-quo intersection was on the slopey bit because then everyone would be going hungry (from the assumptions that everyone were spending $200/month on food and that everyone shared the same subsistence level). However, I don’t have an argument for why the status quo would be on the cusp rather than below it; I just had a hunch which I should (with hindsight) probably have ignored.
Remember that retailers are in competition. If Food Lion raises it’s prices and Aldi does not, then Aldi magically gets more customers. Neither grocery store is motivated to become the High Cost Loser.
I addressed that below:
Also consider that retailers do in fact have different prices. Instead of Sainburys raising prices, we might find Sainsburys starting to get edged out by Waitrose. (This feels sketchy to me, especially since it’s least likely to happen in poor areas, and I’m not about to argue for it specifically. But I do want to suggest that prices can rise from factors other than “retailers decide to raise prices”.)
If you want information on how increased income due to UBI would affect people’s spending on food, you can look at the data that we already have on the relationship between income and spending on food. Three stylized facts:
As income goes up, the proportion of income spent on food goes down.
As income goes up, the total amount of money spent on food goes up.
As income goes up, the proportion of one’s food budget spent on restaurants goes up.
These trends generally hold if you are comparing different countries with each other, or if you are comparing different people within a single country, or if you are looking at a single country over time as it gets richer. I don’t see any strong reasons to think that they wouldn’t also apply to people whose income went up due to receiving a new UBI.
So if a household was making $20,000 per year and spending 20% of it ($4,000) on food, and UBI increases their income to $25,000 per year, then we can predict that they will spend somewhere between $4,000 and $5,000 per year on food, and some of the increased spending will go towards increased quality & convenience (such as eating out). You could probably make more precise predictions if you tried to put numbers on the three stylized facts.
More generally, the model here is: UBI affects the distribution of ‘income after taxes & transfers’, and the distribution of ‘income after taxes & transfers’ affects other things like prices & spending habits. So if you want to predict how UBI will affect something like prices, then study how ‘income after taxes & transfers’ affects prices, and combine that with your estimate of how the UBI will affect the distribution of ‘income after taxes & transfers’.
Logic can only take you so far, actual data is essential:
https://en.wikipedia.org/wiki/Basic_income#Pilot_programmes
I would take such data as evidence if it was peer-reviewed (and not just a report by the organizers who claim that “we introduced it and it’s great”), and, more importantly, if we had information about its long-term effects. All of these projects are very recent. What will happen after a year? The initial enthusiasm might prompt people to spend the money wisely, but what will happen if they grow used to take it for granted? What will happen after ten years? Or after a whole new generation grows up?
I’m living in Eastern Europe, where, although no “basic income” was introduced, the changes in the last few decades led to a situation similar to basic income. And it had a disastrous effect. I’m not exaggerating with the word “disastrous”, because this region was invaded, looted and burned regularly during its history, by Mongols, Ottomans, Russians and others, and it was always rebuilt. The last few decades brought a greater devastation than any war from which it might never recover, with abandoned villages, destroyed culture, and a general hopeless mood despite a more comfortable living people in this region ever had.
Please let me elaborate. In the past, people had to work very had just to survive. They had no other choice. Still, as everyone was almost equally poor and had to work equally hard, they were relatively happy. This I can attest from all the cultural artifacts which remain from that period, beautiful clothes, handcrafting, made by simple villagers and decorating every house, cheerful folk songs, and childhood memories of my grandparents who had to work on the fields even as children, walked barefooted most of the time, but still have very happy memories. I know, there might be some bias in those happy memories, but still, the society as a whole survived and even prospered. If an army devastated the village and burnt the houses down, the survivors rebuilt everything without any outside help from the government, and life went on. Today, although the economic situation is quite bad, especially when we compare it to the rich Western Europe, you can get away with not working. You can get away with being irresponsible, and you can get away with being an alcoholic. You will not starve. Life might be hard for you, but basic food is cheap enough, basic clothing is almost for free, and there are plenty of opportunities for survival even for the very lazy and very uneducated people. They can do some seasonal jobs for a short while, receive some financial aid, then loiter around for months. They might live uncomfortably, but they won’t starve to death. Life is much easier, compared to what was the norm for many centuries. But as the rich West is nearby, people are depressed. They are depressed that they only make 5 times as much as their grandparents did, and not 50 times as much, like they do in the West. Although in the past the villages were mostly self-sufficient, and they worked even the hardest fields on the mountainsides, today there are vast fields with good quality soil on the plains, most of which are abandoned. Corruption is rampant, in many villages people were first used to not being required to work from morning till evening because they got a little financial aid, and now they bribe the doctors to put them on disability pension. And there are opportunities for working, there are a few motivated people who start again with mostly self-sufficient agriculture, but for most people the low wages are not attractive. They rather loiter, barely surviving, instead of going to work for just a little bit more money as what they can get without having a stable job. Of course, if the wages were higher, that would motivate more people, and of course, the low wages can be partly responsible form many people to choose welfare instead of work, but the biggest problem is that the damage to culture is already done. And such a trend is very hard to be reversed, if the majority of society is used to something. The point is, that in the past people didn’t have the possibility to choose this lifestyle, as they would have starved to death. These psychological changes happen through decades, not over a few moths. This is why I would be very careful in evaluating the “basic income” projects too soon.
Sadly, all this will remain anectodal evidence, because the region is not interesting enough to be featured in any English-speaking media, besides very one-sided and politically-motivated rants about racism against Gypsies. And speaking of Gypsies, you will not find it in the media, but if you come here, 100 people out of 100 will be able to testify that since they started getting financial aid (which they didn’t get back before the fall of communism) they are poorer (and work less) than before. Human advancement is (and always was) motivated by need. If you take that need away, you will take the motivation away.
And sadly, in this ever-faster world people don’t see the side-effects of very slow social changes, which will be measurable only after several decades. Maybe they don’t even care, because the next election is in 4 years, not 40.
Speaking about the Gypsies, here is a problem that frequently happens:
There is a group of people, culturally and otherwise related, who have a strong preference for living close to each other. Also, most people in the group are unemployed. What happens?
The costs of living are different in different places. Usually the proximity of good job opportunities drives the prices up. So, if you are unemployed and almost all your friends and relatives are unemployed, it makes economically a lot of sense to move—together—to a location without job opportunities. You can sell your old small appartment and buy a new larger house, and you will still have some money left. The problem is, now you are effectively locked in the unemployment.
Even worse, your children are also locked. Even if they would like to get a job, they can’t. They live in a location without job opportunities. And they won’t move to a better place, because they are part of a culture that has a strong preference for living close to each other, and all their friends and relatives live in a place without job opportunities. Even if a few of them leave, most of the group will stay where they are, and the problem remains for generations.
The lesson for the basic income is the following… if you allow too many people to live without having jobs… so we would not be talking about unemployed individuals, but about whole communities where unemployment is a norm, then their children who might want to have a job could have a problem finding one simply because there is none in the area.
The same mechanism is at work in many American Indian communities.
The problem is exacerbated by ongoing evaporative cooling: people (mostly young) with energy, talent, motivation all leave. What’s left behind in the community is usually not pretty.
It may not be pretty, but that’s most likely because they either don’t have any money, or can only get it under onerous conditions (‘welfare’). If you just pay everyone the same amount, it doesn’t take much to improve these folks’ living standards until they’re at least tolerable. (Since their local area is so cheap.) And once you have some money flowing in the area, local job opportunities would also spring up. (This is basically the principle GiveDirectly relies on, although they apply it to some of the poorest people in the world, as opposed to Roma or Native Americans.)
Money is a part of the problem, or maybe the origin of the whole problem, but at some moment there is a culture that perpetuates itself, and from that point giving more money does not help.
For example, in a group of poor people it makes sense to reduce the concept of private property. To make a mutual treaty of “if someone from our group is starving, and others have food or money, they are obliged to share”. At some moment this treaty benefits everyone, so it becomes a part of the culture. But in a long term… as soon as the first job opportunity appears, you would have to be an idiot to take it. It means more work and less free time for you, while your wage is shared with everyone. But you can’t go against the whole culture. Except if you leave the group. This is a reason why the motivated people leave; they simply cannot live the new lifestyle within the old group.
Okay, this is too complicated topic to be discussed as a sidenote in a “stupid questions thread”. Just wanted to say that “a poor community surrounded by rich communities” is a different dynamics than “a poor community surrounded by poor communities”. The difference is the easiness of just going away for all motivated people.
Interesting point. Still, it would be interesting to see whether UBI can affect this dynamic. After all, the whole point of UBI is to provide social insurance (i.e. make sure that nobody is starving, at least in a literal sense) more effectively than any arrangement within the poor group.
The point is, that it’s already done without an UBI, by a much lesser scarcity than in previous generations, augmented by a very meager but existing aid system, that nobody is starving in the literal sense, and this allows them to choose a less responsible lifestyle. And it is very hard for those who try to break out of this lifestyle, they have to literally flee their peers. I know of Gypsies who did successfully try to break out and become medics or engineers, and they (especially, but not exclusively, girls) were bullied by their own families: “how dare you think you are better than us!”
Well, this is one point of view obviously, but UBI supporters might disagree about how “similar” it is. Some of the things you mention, wrt. family farms being abandoned in favor of urban lifestyles, are happening literally across the world; the unfavorable comparison with the West is also not something that basic income could affect either way. And ISTM that widespread abuse of things like disability is even worse than most ‘welfare’ in making people disinclined to work. But this is something that UBI aims to correct, while still making life easier for the folks who receive it.
I wonder what slatestarcodex would make it this.
The basic income scheme that I’ve seen proposed in Finland would not increase people’s incomes: it would simply be a less bureaucratic way of giving people on welfare the same amount of money that they’re already entitled to, but with less hoops to jump through and fewer welfare traps. People who earned enough to not be eligible to welfare today would still receive the money from the UBI, but the tax rate on their other income would be slightly increased to compensate, for an approximately zero change in net income.
In Finland, today, can I just say “I don’t feel like working” and get welfare for life?
(Not an expert on this stuff, but here’s my rough understanding.)
You get a couple years of pretty straightforward welfare if you quit your job, then it looks like they will start doing means testing (tarveharkinta) on your savings and will stop paying you if it doesn’t look like you’re living hand-to-mouth. After you’ve gone through all your savings that the employment office is aware of, I think you can go on living in some sort of rental apartment and get food. There’s also a spectrum of make-work programs from “send your application to this poorly matching open job we picked for you” to “attend this useless training course” to “rehabilitative labor activity” which can end up looking sort of like the American prisoner labor thing. The welfare will be suspended as a sanction if you refuse to attend, but I’m not quite sure how easy it is to end up actually homeless if you keep diligently pestering the social services and refuse to cooperate with anything work-like.
One problem is the diligent pestering of the social services part. Many of the actual unemployed are ill or have some mental problems, and they might not be that good at working the bureaucracy. So it probably helps if you’re reasonably energetic and smart enough to navigate the systems of regulations if you want to become a lifestyle unemployed. Also, you need to make sure to spend your time in an economically unproductive way. Starting any kind of small business will wipe out all welfare eligibility instantly.
Now here’s why these are really, really dumb policies: they amount to a capital levy and a corvée that are selectively applied to low-income folks who would otherwise qualify for welfare. Needless to say, there’s a reason we don’t use capital levies and corvées anymore, and limiting them to low-income folks does not change that assessment much.
If you’re willing to live on a rather low budget and spend a bunch of energy gaming the system, yes, but that low of an income tends to stress most people out (especially since the system is known to do “fun” stuff like noticing that your insurance company compensated you for your bike getting stolen, and then count the insurance claim as income to be directly subtracted from your welfare payments).
Similarly, as rsaarelm mentioned, if you do anything that the system might consider “work” (sometimes including stuff like volunteering at an event for no pay), you might be denied your payments.
Some prices would likely rise, but not uniformly and new equilibria are very hard to predict generally, nigh-impossible without specifying a bunch of implementation specifics (including where the money comes from, how it’s distributed, what limits there are on qualifying or using the money, and how it’s indexed to change over time).
I suspect we’d redefine poverty such that roughly the same percentage of people would be in poverty, but it would be a (slightly) different set of individuals, and likely a much more pleasant poverty than without. Much like has happened dozens of times already in modern civilization. I call it “progress”.
This essay has overlap with your question...
http://www.la-articles.org.uk/ec.htm
I am advocating reading this essay. I am not advocating for or against this organization or its positions.
My general expectation is that either you’re right, people will complain loudly until food and water stay cheap, or prices will avoid inflating because the people who produce need the people living on UBI to buy their stuff.
I have no general idea on which is more probable. I like the last one because it is the most convenient, but I’m not convinced it has any more probability than the first two.
I think you are right.