Money For Nothing and Your Checks for Free: Why the Basic Income Makes More Sense Than You Think

Joel Anderson  |

I’m a liberal. Hardcore liberal, actually. I spent a decent amount of my late teens and even early 20s firmly believing that utopian socialism and the elimination of currency were real, viable ideas. But, as the old adage goes, “Anyone under 30 who’s not a socialist has no heart; anyone over 30 who’s a socialist has no head,” and I am now over 30. More notably, I spent the better part of my 20s slowly coming around to how free-market economies, chaotic and lacking in empathy as they may be about it, ultimately do more to improve the lives of the people living in them than any other approach.

Which is why I’m pretty intrigued by an idea that seems to combine both the ideals of my youth with the more sensible (knock on wood) beliefs I’ve arrived at today: the universal basic income (UBI).

The core idea is pretty simple: every adult citizen in the nation receives a stipend from the government that would elevate them above the poverty level and ensure that, no matter how dire their employment situation, they can at least be ensured of basic necessities like food and lodging.

On its surface, this is an entirely untenable idea for many. People have been negatively painting social welfare programs as “handouts” for years, and any way you slice it, this is precisely that: a handout. However, increasingly, there are a number of studies and pilot programs around the world that suggest that, of all the options for dealing with poverty, just giving people money is the best way to go.

So, here’s a good long look at why the UBI is an idea that may finally be getting its due. In three acts.

Act I: Why on Earth Would We Do Something so Crazy?

The basic idea here would be to offer up an amount money that means people aren’t struggling to get housing, food, and other basic needs, but aren’t living in enough comfort that they aren’t motivated to work. So, $15,600 a year would be 133% the federal poverty rate of $11,700, which is the point at which Obamacare subsidies kick in and a person is moved off of the Medicaid expansion (unless you live in one of the states where your Governor is an asshat). One can, and should, fiddle with that number to find a truly optimal level, but this seems as good a starting point as any.

So, what would that really mean?

Well, a lot of things. Most of which, frankly, can’t accurately be predicted by hypotheticals alone. However, let’s start with the labor market.

Poverty is Leverage Employers Can Use to Drive Wages Lower

On a basic level, our labor market is not efficient. Any negotiation that begins from a place where one party needs to make a deal while the other can easily walk away isn’t going to end with an equitable result. As such, American workers are at a disadvantage. As long as they’re faced with the potential for poverty if they don’t have a job, employers possess an extra degree of leverage.

Obviously, that doesn’t describe ALL American workers. If you have special skills or are a member of a powerful union, you’re not negotiating from the same place of weakness. You may even have leverage over your employers in that you’re difficult to replace. Unfortunately, there’s a pretty wide swath of the American workforce that isn’t so lucky.

Currently, more than 40% of American workers make less than $15 an hour, with about 30% of workers falling into the category of “near minimum wage” and about 15 million workers making less than $10 an hour. That’s a figure that gets even more concerning when you consider that the underemployment rate, one that includes part-time workers who would prefer more hours, is at or near 15%.

Of course, it can, and frequently does, get a lot worse. If you’re at or below the poverty level, $30,000 a year (a 40-hour a week job at $15 an hour), is probably going to sound pretty sweet. If you’re trying to negotiate up your hourly wage from $15 an hour, anyone living in poverty is a person your employer could hypothetically replace you with at or below your current wage. Not to mention, someone who’s a constant reminder that it’s a lot better to be working than not.

So how many Americans are living in poverty? That would be 46.7 million, or just under 15% of the total population. If about one in seven people are living in circumstances that would lead them to need additional employment at almost any level of compensation, it’s going to create a specific downward pressure on wages for almost anyone working a low-skill job.

With a basic floor for every American’s earnings, this imbalance is hypothetically corrected. Workers who don’t have to worry about where their family’s next meal will come from won’t get forced into accepting a bad job out of necessity.

Wages and Benefits as Incentives Rather than Essentials

In many ways, a UBI could be pro-business as well. A society with a UBI could do away with the minimum wage and allow the labor market to operate entirely on the basis of supply and demand. While completely necessary today, a society that sets a floor for income independent of employment wouldn’t actually need laws dictating a floor for wages. Wages and benefits would be offered purely as incentives to make work attractive. As an employer, you could know that, if someone’s willing to do a job for $4 an hour, it’s a sign that it’s easy work and $4 an hour is about right. If you have to pay $20 an hour and a health care plan before anyone will accept a position, you can be sure that’s money well spent to attract talent to a more-difficult-to-fill position.

Either way, employers wouldn’t have to worry about where their employee’s next meal is coming from, a responsibility they have historically proven pretty uncomfortable with. A UBI might be a very positive separation of business interests from social welfare, a clear shift from our current amorphous, undefined relationship between corporations and their workers. Any business that obeys the law and pays their taxes could be free to operate in whatever fashion was most profitable without having to worry about whether or not they’re paying a “living wage.”

And that’s important, because the direction of business in this country is increasingly one that’s not going to fill the needs of a broad segment of the American people.

The Inevitable Economic Shift

Another serious weight on the American labor market derives from the fact that we’re in the midst of a shift from a manufacturing-based economy to a service-based one. Manufacturing jobs that used to be the bedrock of the American middle class have disappeared, gone to better technology and globalization. We’re increasingly living in a society that’s divided between a well-educated professional class and a growing number of people scrambling to make ends meet with low-wage, low-skill jobs.

This has led to a lot of anger and soul searching in America, as we struggle to understand this new identity. Many have lashed out at free trade agreements, politicians or corporations as scapegoats, but the reality is that this is part of a broader economic movement that’s way too big to stop. America and its European counterparts have reached a post-industrial era of tremendous wealth and prosperity, but one without solutions for sharing that prosperity with the middle and lower class.

And it’s an issue that seems destined to only get worse. Continued advancements in robotics and better information technology are poised to diminish the role played by American workers even further in the coming years. If we’re going to continue being able to do more with fewer people, the prospects for relief in the labor market coming down the pike don’t seem great no matter what the most recent populist firebrand may be shouting from the pulpit. If anything, what we’re facing today could be just the tip of the iceberg.

As such, a UBI might be a simple acknowledgement of this reality. Instead of an economy with a functional balance between workers needing jobs and jobs needing workers, we’re now living in a world where a large section of society is searching for a role to play without a clear sense that there will be one.

Instead of continuing to subdivide what work still needs actual humans into a series of low-wage, low-skill jobs that few people actually want to do, why not embrace our changing future and try to empower people to find how they can contribute value that’s unique to them? A UBI would hypothetically give every citizen the flexibility to make choices about how they use their time in a society that increasingly doesn’t need them to spend it working.

Combine a basic income with the proposed initiatives to make all community colleges free of tuition and you’ve started to empower a generation of American workers to prepare themselves to be a part of the 21st century economy. Among workers making less than $10.10 an hour, over 90% don’t have a college degree.

Act II: Okay, Hippie, How Do You Intend to Pay for This?

Of course, the obvious sticking point here is the issue of cost. If we stick with a figure of $15,600 for every adult, you get to about $3.9 trillion a year. Throw in an additional $5,000 for each dependent, something that makes a lot of sense to me, and it’s about another half trillion dollars (based on $5,000 for every American under age 18). That is a pretty massive sum. Total federal expenditures are, at the moment, about $3.8 trillion, so you would be talking about more-than doubling the federal budget. That is, if you weren’t also cutting a lot of other expenditures in the process. Poverty costs a lot of money.

The reality is that we already live in a society that’s taken steps to give resources to our neediest citizens. The patchwork of anti-poverty and welfare programs currently in place ultimately spends about $18,500 a year for each person in America living in poverty. Or, in another manner of speaking, over 58% more than the actual poverty rate. And that’s just at the federal level, there’s $200 billion or so a year spent by state and local governments, another $4,250 or so per person living in poverty.

Throw in all the non-governmental charitable organizations and advocacy groups and formalizing and simplifying the promise of our social safety net would take a lot of the same resources and distribute them more efficiently. It might also eliminate the “poverty tax,” the ironic reality for many poor families that increasing their earnings through work can result in a loss of government benefits and actually reduce their total income, essentially punishing them for finding a job.

So, let’s take a look at the FY 2013 budget. For starters, you can begin by eliminating Social Security, Medicaid1, and the aforementioned welfare programs, all of which the UBI should completely replace. That eliminates $1.4 trillion in spending at the federal level in addition to $272 billion at the state and local level. So, basic cost reductions due to redundancy account for about 32% of the total cost and take the price tag down to about $3 trillion.

From there, you should also consider that a UBI would itself be taxed, something that would defray costs while only affecting those earning enough to pay income taxes. If you look at how many taxpayers are in each tax bracket, multiply that number by $15,600 each, and then simply apply their current tax rate to that money, you get to an additional $265 billion or so in revenue.

If you potentially start phasing out the UBI for higher incomes (which doesn’t really make it “universal” anymore, but so it goes), you can reduce costs even more. Say the 25% bracket ($37,650-$91,150 for a single filer) pays a 50% tax on its UBI payment and all those earning more, about $100,000 a year or more for a single filer, would pay a 100% tax (i.e. not get a UBI payment). That would, hypothetically, generate at least another $435 billion a year, bringing the price tag down to $2.6 trillion.

The Likely Savings on Crime and Education Spending

From here, the extra cost savings and benefits start to get a bit murkier and less easily quantifiable, but that doesn’t mean they don’t exist.

America currently spends about $265 billion a year on the justice system between federal, state, and local levels. How much of that might be eliminated? When you consider that a basic income pilot program in Namibia saw crime rates plunge by over 40%, it could be a lot. What’s more, anyone serving time in a prison or jail would likely have a lien placed on their UBI to cover the costs of their imprisonment. All told, cost savings there could be as high as $100 billion a year in the long run, not to mention the immense benefits of a society with a lot less crime.

Education might see some savings as well. Total government spending on public elementary and secondary schools comes to between $600 billion and $650 billion a year, and conservative commentators have long been fond of pointing out that the United States’ per-pupil spending is among the highest in the world without getting anywhere near the same results as many other developed nations. However, the United States spends a larger portion of its education budget on factors other than instruction, including security and other services that may be greatly reduced in a society with a UBI. Throw in the fact that children living in poverty have pretty consistently shown lower educational outcomes on average and it should be pretty clear that, in the long term, a basic income would either result in lower educational costs or at least the ability to shift existing costs into areas that do more to improve outcomes.

There’s also a variety of other government costs that would be replaced by a basic income. Homelessness, for instance, costs the federal government $5 billion a year in addition to a lot of costs at lower levels. However, organizing housing and shelters becomes much easier if every person you care for has enough income to pay for the services provided.

There’s also over $30 billion a year spent on “community development,” a cost that would likely gradually start to erode as impoverished communities developed with the money flowing in via the UBI. Another $300 billion a year at all levels of government is spent on employee pension plans, something that might be phased out or significantly reduced over time. Not to mention, the cost of administering all of these government programs and agencies that are getting cut down and/or eliminated is a factor.

So, given that it’s impossible to truly nail down what all those savings would look like, let’s just call it $100 billion a year and put the total cost down to $2.5 trillion, even though there’s a very real chance it would be a lot more than that, particularly in the long term.

Economic Growth Boosts Tax Revenues

One must also consider just how much more revenue the government could realize by simplifying the administration of our tax code. Tax revenues could be increased by $1 trillion without changing any of the marginal rates just by eliminating loopholes, and that’s without counting the $180 billion or so of corporate taxes lost to similar tax breaks. Now, some of those breaks and deductions actually make a lot of sense and shouldn’t go anywhere, but plenty of others are ripe for elimination.

The mortgage interest deduction costs an estimated $70 billion a year and is almost universally reviled by economists. There’s also the Earned Income Tax Credit (EITC). Long a point of contention between liberal and conservative economists, it’s likely another $70 billion in lost revenue that wouldn’t seem as necessary in a society with a UBI. Taxing capital gains at a separate rate than income costs about $100 billion a year. Could we eliminate deductions for charitable donations given that the UBI would effectively address most concerns involving poverty? Quite possibly.

All told, finding another $500 billion a year in revenue just by closing loopholes doesn’t seem especially outlandish. This is, of course, nothing new. Reforming the tax code has been on the to-do list of everyone in Washington for decades and has repeatedly proven entirely impossible to accomplish in the partisan political environment. However, since we’re already setting up camp in la-la land to talk about the UBI, why not go ahead and assume our politicians actually accomplish that thing that everyone already agrees would benefit everyone, unlikely as that may seem?

Add that extra revenue and our price tag is down to $2 trillion a year.

Keynesian Economics on Steroids

The other consideration would be just how much more revenue the country would raise through boosting economic growth. In many ways, the basic income would just be a version of Keynesian economics on steroids. It would cost the American taxpayer a lot, but it would also inject that money directly back into our economy, dramatically boosting sales for a wide variety of goods and supporting the bottom line of corporations everywhere. Additionally, more money in the hands of middle-class Americans would mean a huge new pool of invested capital available to the credit markets.

Not only would more Americans have the flexibility to consider starting a small business because of the basic income, but they would potentially have a much easier time getting the loans they need to get it off the ground and a lot more potential business waiting for them once they’re up and running.

The precise econometrics here are a matter of considerable debate. Supply-side economists have long argued that reducing tax rates can actually increase revenues by boosting economic activity, but there’s virtually no agreement on the numbers. However, just as a thought experiment, I took the rate of GDP growth during the Clinton administration and compared it to the increases in tax revenue over that same period.2

The results would seem to indicate that for every 1% in GDP growth in the 1990s, there was about $30 billion more dollars raised in tax revenues. The degree to which that figure is at all meaningful is hard to say, but it did average out to about 1.5% in revenue growth for every 1% in GDP growth, so maybe it’s not totally useless.

So, how much economic growth are we talking? Again, that’s something economists could debate for years without making much headway, but it does look like it would be a lot. One initial consideration is what is referred to as a “fiscal multiplier,” which is a way of asking how much additional GDP growth will be created by spending money.

What sort of multiplier would a UBI have? Likely pretty significant. Economist Mark Zandi, in his testimony before congress in 2008 as to the most efficient use of funds to stimulate the economy, revealed that his findings showed that the highest result came for food stamps, probably the closest comparison to a UBI or our current spending programs, as a 1.72 multiplier. Meanwhile, a CBO estimate from February of 2015 found that the range of estimated multipliers for transfer payments to individuals between 0.4 and 2.1.

I would have to assume that those multiplier effects would have diminishing returns as more and more people were raised from poverty, but it would still indicate that even double-digit GDP growth in the early years of a UBI may not be as crazy as it sounds. I mean, pretty crazy, to be sure, but again, we’re already firmly planted in la-la land with all this, so let’s get nuts. Even if you decide to go with what would be a really modest figure, let’s say an additional 2-3% in GDP growth, you’re still talking about one of the biggest spikes in American economic growth since World War II.

Additionally, we should consider just how valuable it would be to our economy in the long run to invite a long-neglected segment of American society back into the fold. With a UBI, the nearly 50 million Americans living in poverty, many trapped in neighborhoods with little to no economic or educational opportunities that create a reinforced cycle of poverty that ripples across generations, would suddenly have a real opportunity to get their feet under them and enter life as productive citizens, attending schools, finding work, and spending money on basic goods and services.

A society with a clearly defined social safety net like the basic income is one where those cycles of poverty would be broken. A UBI would create a clear economic opportunity for businesses like banks and grocery stores to return to these communities where the majority of residents are living in poverty, helping erase the cruel “ghetto tax” that actually makes it more expensive to be poor. One study from the Center for American Progress cites the cost of child poverty being as much as 4% of GDP, with reduced productivity costing 1.3%, the cost of crime an additional 1.3%, and increases in health expenditures another 1.2%.

It’s impossible to say for sure by how much, so we won’t try to apply a number to it, but tax revenues are likely to increase significantly because of economic growth.

A Major Overhaul That Still Leaves Us Among the Least Taxed Nations

So, despite all of this, even after cutting redundant government programs, increasing tax revenues both through expanding economic growth and by increasing people’s incomes with the UBI, and reducing long-term social costs, we would still be looking at $2 trillion in additional government expenditures. Which is a lot. A whole, whole lot. That would have to come by raising taxes enough to produce an 80% increase in tax revenues, which would represent a massive shift in American policy.

But how massive, really? If you look at tax revenues in 2015 as a percentage of GDP, we’re currently raising about 19.1% of GDP. Add $2 trillion to that and it jumps all the way to 31%. That would be historic — 20% has remained a pretty hard ceiling for tax revenues as a percentage of GDP.

However, compare it to the rest of the world and it’s actually a pretty reasonable number. The United States remains one of the countries with the lowest rates of taxation in the world. Taxing our citizens at 31% of GDP would actually be lower than the OECD average of 34.8%, and way below Denmark, the world’s highest level of 49%.

Now, you don’t have to tell me that we’re not Denmark, but it is worth noting that there’s ample proof that a modern, post-industrial economy like ours can be taxed at rates nearly double our current rate without serious consequence. Germany, with its solid economy and similar levels of GDP growth, is currently sitting a little over 40% of GDP. The United Kingdom is at 39%.

So taxing the American people to the tune of 31% of GDP would be a big change, but it would still leave the United States as a relatively low-tax environment while still funding the most comprehensive social safety net in human history.

And this is all assuming we stick with the initial figures from above. Those were pretty much shooting from the hip, and you could easily explore a wide variety of options that would drastically reduce the cost. Say, making the UBI $12,000 a person. That alone would shave $1 trillion off of the price tag right away. Cut that $5,000 per child payment too and you’re already $1.5 trillion cheaper. You could also implement it as a negative income tax rate so that it would phase out as people started making their own income, or limit it to one UBI per household.

Each of these would eliminate some of the benefits, but they would drastically reduce the cost while keeping the core gain - the near total elimination of poverty - still in place.

Act III: But is There Any Actual Evidence Something Like This Would Even Work?

So even if you could convince the American public to pay an additional 80% or so in taxes, what would they be getting for that? What sort of real-world evidence is there that any of this would work?

Plenty of labor economists might observe that a labor force without fear of poverty might result in a massive decline in productivity. The specter of millions of Americans refusing to work and simply living off their bimonthly checks is one that will get the blood flowing for more than a few conservatives.

Look, let’s be clear, given the chance, there are no doubt plenty of people who would abuse the privilege of not necessarily having to work and use a UBI to support a drug habit or even just sit around all day watching paint dry. But just how many? Fortunately, there have been cash-transfer pilot programs around the world, and they have demonstrated that many of these fears may be unfounded.

If New Jersey Could Make it Work, I Have Faith the Rest of Us Can, Too

Let’s start right here in the United States. It may come as a real shock to those of us raised post-Reagan, but the idea of a negative income tax actually had some traction in the 1970s, with even Richard Nixon supporting experimenting with the concept. The result was that there were several negative income tax pilots attempted in America between 1968 and 1972 in New Jersey, Pennsylvania, Iowa, North Carolina, Denver, and Seattle. The results were illuminating. There was a loss in productivity, but at relatively marginal levels. Men saw a 7% decline in work effort while women saw a 17% decrease.

And, as Dylan Matthews of Vox details, none of the experiments actually observed any sort of mass exodus from the labor force or reduction in work hours. Rather, people continued to work but were more selective of jobs they would accept. What’s more, much of the loss of productivity was in the form of people who really shouldn’t have been working anyway, like teenagers who were missing school to help their family pay bills. That’s part of why one of the most consistent results for these communities was improvements in school attendance and graduation rates.

Reductions in Crime, Increases in Education Levels

Those improved educational outcomes were also found in similar programs conducted all over the world since the 1960s. The results are frequently pretty impressive, showing a rapid and significant easing of some of the most destructive social pressures.

The MINCOME experiment conducted in Manitoba, Canada from 1974-1979, for example, found that the only people who worked substantially less were teenagers and new mothers. That study also had an 8.5% reduction in hospital visits along with improved test scores among teens, higher graduation rates from high school, and more adults pursuing continued education.

A program in Uganda applied specifically to those between ages 15 and 35 saw business assets increase by 57%, work hours increase by 17%, and earnings boosted by 38%. The pilot in Namibia mentioned above, in addition to that 42% reduction in crime, also saw similar results in terms of increased economic activity. There, the portion of the population above the age of 15 participating in income-generating activities actually climbed from 44% to 55%. The program slashed the portion of residents living below the food poverty line from 76% to 37% in just a year, and school dropout rates went from 40% at the program’s start to just 5% seven months in and 0% a full year later with twice as many parents opting to pay school fees.

The Next Google is Worth a Few Lazy Leeches

Now, these studies were all relatively small, so it’s likely a mistake to simply extrapolate out their results, but they do seem to indicate a basic truth: people mostly want to do something with their lives. Overall, when freed from the need to work simply to fulfill basic necessities, most people in these studies tended to still find ways to be productive. Not everyone, to be sure, but a pretty solid majority. In many cases, they pursue things like a better education or job that will greatly increase productivity over the course of their lifetimes.

If, for every person out there who decides to blow their income checks on booze and cigarettes, there’s at least one or two kids who stay in school and finish their studies, the overall economic impact is likely positive on the whole. That’s doubly true for a country with a service economy where the most productive labor is increasingly happening in fields that require education. Projecting that even further, if even one of those teenagers who finishes school goes on to found the next Google (GOOG) in their garage, the net economic benefit is huge.

Push comes to shove, unlocking the enormous human potential that currently resides in our growing minimum-wage workforce could be transformational. People left to their own devices will likely produce a wide variety of results, but if even a handful wind up being hidden geniuses, it pretty much makes it worth letting the least productive members of society get by without a job. Either way, based on these pilot programs, the cost of a poverty-free society likely isn’t the sort of dystopian vision some would have you believe.

Epilogue: Wait, Could This Actually Happen?

Well, short answer: no. Long answer: certainly not any time soon, but eventually...maybe?

I’m not naive enough to believe the UBI, or even the negative income tax, is anything more than a wildly unrealistic pipe dream in today’s political climate. Hell, a pretty simple budget compromise seems like a wildly unrealistic pipe dream these days. But in the long term? If the income and wealth gap keeps growing as computers and robots replace wave after wave of American workers? The world where we’re really willing to consider this as a viable option may be sneaking up on us.

There’s a lot to be said for basic income from a conservative perspective. It could hypothetically dismantle huge sections of bureaucracy in favor of a sublime simplicity in government while liberating businesses to operate freely. If they can get past the initial objection to a nation-wide handout, plenty of conservatives may come to see a basic income as an injection of free-market principles that would also reduce the size of government bureaucracy. Which is why it’s worth noting that even Friedrich Hayek, the patron saint of conservative, supply-side economics, supported the concept.

And it’s not just Friedrich Hayek. There’s a growing chorus of voices, from Silicon Valley tech billionaires concerned about increasing automation to libertarians excited by the idea of removing the bureaucracy of the modern welfare state to, well, Thomas Paine, that nominally support a UBI. Already, several countries around the world are seriously considering offering benefits like this, including a ballot initiative in Switzerland and legislation in Finland. So, prior to a country as big as the United States taking the plunge, there’s likely going to be some clear examples of how it works on a larger scale.

So, as ridiculous as it may sound on the surface, simply giving people money might just be the best way to build the sort of society that’s beneficial for all of us: low wage, middle income, and top earning workers alike. And with our society rapidly shifting into a place where the need for labor productivity appears to be falling, such a move might be precisely the way to share the considerable prosperity built by our decades of innovation while also building an economy that’s ready to supply the globe with a future stocked with even more brilliance.

So yeah, who knows? Maybe Dire Straits was bizarrely prescient in their own way. Crazier things have happened. At the very least, this is an idea that would have been just as appealing to late-teens me as it is to over-30 me, which is saying something.

1 Killing Medicaid in favor of the Obamacare exchanges would undoubtedly create a lot of new costs in terms of insurance subsidies, particularly when you consider how many states ultimately refused the Medicaid expansion. A more complete look at these calculations would need to work that into any projections, but since this is still in the back-of-the-envelope realm, I decided to skip that because it seems really complicated. So sue me.

2 During this period, you have consistent economic growth and, from the Omnibus Budget Act of 1993 through the Bush Tax Cuts in 2001, tax rates that are about the same throughout.

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