Creative citizen, creative state
By: The Rsa
Tags: Economics, Welfare, Economy, Basic Income

j. Basic Income — the principled case

The idea of a Basic Income is far from new. In fact, it has been around for many centuries. It can be found in the ideas of Thomas Paine in his notion of endowment funded by land rents. JS Mill articulated a similar idea though funded from productive assets. The liberal peer Juilet Rhys-Williams proposed a conditional Basic Income (conditional on availability to work) as an alternative to the Beveridgean system in 1942. The economist James Meade and the historian and political economist GDH Cole advocated a ‘social dividend’. Cole may have coined the phrase ‘Basic Income’. Cole’s justification relies on the social basis of current production as a common inheritance:

“Social heritage of inventiveness and skill incorporated in the stage of advancement and education reached in the arts of production.”

The American writer and entrepreneur, Peter Barnes, deploys a similar argument when he advocates taxing use of common assets such as the environment (the air), financial infrastructure, intellectual property protection, and electromagnetic spectrum to fund a US Basic Dividend.

In the post-war era, the idea of a Basic Income re-emerged across the political spectrum. Liberal economists such as James Tobin and JK Galbraith advocated it on the basis that it was less likely to create welfare dependency than means-tested systems. Milton Friedman advocated a ‘negative income tax’ which works, in theory, in a similar way to a Basic Income. Friedman advocated a low level of income as did Friedrich Hayek. The socially conservative right as opposed to the economic-focused free market right have also supported the idea of a Basic Income. Charles Murray advocates a Basic Income on the grounds that:

“It offers smaller government in terms of the state’s power to control people’s lives.”

The Republican notion of liberty as based on non-domination is important in Basic Income thinking. Republican liberty contrasts with natural liberty that, in the arresting phrase of Phillip Pettit, constitutes a ‘freedom of the heath’, ie it exists beyond society. Republican freedom instead is the ‘freedom of the city’ and so is concerned with freedom in a complex, social setting. Basic Income is one safeguard against domination.

As Stuart White argues, a Basic Income gives people the ability to act without interference of others. The choices he or she makes are based on their own agency rather than the state or, indeed, an employer. It is a wedge of freedom.

This argument also has a Feminist dimension in that Basic Income frees women to make choices about their lives in an independent fashion and provides a greater degree of economic security for those in unwaged labour – often women. So arguments from a Feminist perspective emphasise its equal treatment of genders in the labour market and outside, its recognition of unpaid work, economic independence within the family, and its potential to encourage a more equal division of labour within the family.

Finally, there is the economic case for a Basic Income. On the macro-economic front, it becomes a very efficient means of stimulating the economy at times of heightened demand stress, ie deep recession. A simple way to increase demand is to top up the Basic Income for a period of time. Rather than quantitative easing supporting financial institutions, central banks can increase the money supply by funding government bonds to finance an increased Basic Income. So-called ‘overt monetary finance’ (OMF), which this would be a form of, has been advocated by Adair Turner and others, albeit with some provisos on management of banking credit to avoid unsustainable credit multipliers. This policy could have been very useful in 2008-09 (and something akin to it was attempted in the Australian ‘cash splash’).

On the micro-economic front, there are grounds to believe that Basic Income could increase productivity. This mechanism would work in a number of ways. Firstly, rather than workers being forced into the first job that comes along as some conditional systems do, Basic Income enables a little more time to search for the right job. As an evaluation of a highly conditional Department for Work and Pensions scheme showed, hard conditionality does little to increase medium term employment rates and only increases number of days in work marginally in a two year period. So the benefits are minimal yet the UK suffers from endemic skills mismatch and this impacts productivity. For example, 58 percent of graduates are in non-graduate level jobs. The Basic Income would not resolve this issue, as there are strong structural factors, but could mitigate it somewhat by giving more secure breathing space to individuals.

Secondly, if workers have the ability to withdraw their labour, it provides more of an incentive for employers of low pay, low quality jobs to improve those jobs either by increasing pay, providing better conditions or additional support such as for training. Thirdly, there is a possible motivation effect. Workers would be in a particular workplace because they want to be, not simply because they feel coerced to be. This is a healthier basis on which to develop intra-firm productivity. Finally, the Basic Income facilitates short-term withdrawal from the labour market to improve formal skills and qualifications. This could increase potential productivity. Basic Income is not an economic magic bullet but it is possible to see significant potential macro and micro economic benefits.

Thus, many different perspectives provide support for considering the introduction of a Basic Income. There is also a body of practical knowledge which, whilst not complete, provides some useful pointers.

k. Basic Income in practice

Between 1968 and 1980, the US and Canadian Governments conducted five experiments into negative income tax. These pilots have some significant limitations. The data was not always of high quality. They were designed to separate control and treatment groups in areas so the impact on demand for labour is impossible to measure (if there was withdrawal of some labour, economic theory suggests that wages may be increased). Finally, the pilots were far more generous than the then existing Assistance for Families with Dependent Children programme so its impact was to introduce an additional scheme as opposed to a scheme that embodied a different set of principles.

“Where Basic Incomes or similar have been introduced they have had notably positive social effects overall.”

Evidence suggests the pilots had a generally positive impact on health, school performance, home ownership, and low birthweight. However, there was some reduction in employment hours. Marginal withdrawal rates of the benefit were up to 80 percent which is likely to create a high disincentive to earn at the margins (in this regard the impacts of many of the pilots were more akin to Universal Credit than Basic Income). Despite this, there was absolutely no evidence that individuals withdraw from the labour market completely. The experiments found that men worked between 0.5 hours and four hours less per week. However, given the system design and their limited size (so negligible labour market impacts on the demand side through, for example, increased wages), it’s impossible to draw any conclusion. Impacts on wives and single mothers were larger, potentially up to 166 hours per year. Some women were choosing to spend more time with their families or in a period of maternity. Is that something that should greatly concern us?

The experiments compare the effects of having any system of social security with no system rather than comparing one system with another. The data should be treated with significant caveats though, nonetheless, it is still of interest.

There were positive results in the Canadian town of Dauphin in Manitoba province. A guaranteed income was provided to those who had fallen out of work with a 50 percent marginal withdrawal rate per C$1 earned on returning to work. It ran from 1974 to 1979. A recent survey of the data as it related to other services in Dauphin came to the conclusion:

“We found a significant reduction in hospitalization, especially for admissions related to mental health and to accidents and injuries, relative to the matched comparison group. Physician contacts for mental health diagnoses fell relative to the comparison group. A greater proportion of high school students continued on to grade 12. We found no increase in fertility, no increase in family dissolution rates and no improvement in birth outcomes.”

A set of randomised control trials in Madhya Pradesh state in India from 2011 to 2013, also produced positive results. In the three year period 5,850 individuals received payments for more than a year. Whilst there are limitations in reading across from the different institutional environment in India, the outcomes are worth reporting nonetheless. Investment in housing increased. There was improved nutrition, partly as purchases shifted from ration shops to markets. School attendance and performance increased. There were positive equity effects as marginalised people had improved their bargaining position. The Basic Income grants led to small-scale investments — more and better seeds, sewing machines, establishment of little shops, repairs to equipment, and so on. This was associated with more production, and thus higher incomes. The grants led to more labour and work. Women gained more than men. Debt declined.

Similar results were seen in Namibia. The percentage of those falling below the food poverty line (N$152 per month; the Basic Income Guarantee (BIG) was N$100 per month) dropped from 76 percent to 37 percent. The percentage of those being able to get a job or become successfully self- employed increased from 44 percent to 55 percent, and the amount of non-BIG income per capita rose from N$118 to N$152 indicating a virtuous economic growth cycle.

Today, the US provides the most applicable Basic Income scheme in operation — the Alaska Permanent Fund Dividend. It is funded from oil and gas returns and pays out, on an annual basis, between $878 and $3,269 for each Alaskan. There is no reason why the funding basis of a scheme has to be oil and gas — it could equally be land or simply funded out of general taxation. Alaska is the tenth wealthiest US state so it is not unusually wealthy. There are number of notable impacts of the dividend. Firstly, it has enormous political support. It has been described as the ‘third rail of Alaskan politics’ — any politician who touches this electrified rail will die (it enjoys 80 percent support). Secondly, Alaska has one of the lowest poverty rates in the US, it is one of the most equal states and inequality actually decreased during the 1990s and 2000s (the Fund was introduced in 1982) – the only state where this was the case.

What do these case studies tell us? Given institutional differences, data issues, comparability factors, none of these case studies is conclusive. We can say that where Basic Incomes or similar have been introduced they have had notably positive social effects overall. The impact on work incentives is inconclusive. Where some small negative labour market impacts have been observed, they are counter-balanced by social benefits such as mothers taking slightly extended periods of maternity leave. But neutral and positive work incentive impacts have also been reported. The knock-on impact on entrepreneurial activity in Madhya Pradesh is noteworthy from a freedom and creativity perspective.

This is the best real world data we have available to us. It is all useful and indeed suggests a social policy that is likely to be positive on balance. At least, a robust and positive hypothesis can be formed on that basis. More pertinently, as Karl Widerquist states, reflected on the US trials:

“Reichauer asked what would have happened if the introduction of Social Security had been preceded by a similar experiment? It would certainly have shown that people saved less for their retirement, retired sooner than they otherwise would have, and relied less on traditional feelings of family responsibility for elders. Such findings would have challenged prevailing norms and would have given considerable ammunition to Social Security opponents.”

The point is that any major reform of welfare comes with some downsides. Basic Income would be no exception. There is plenty of evidence to suggest, however, that the benefits significantly outweigh the costs.